**Exhibit 10.1**

 

**NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTEDBY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARECONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,OR APPLICABLE STATE SECURITIES LAWS.  THESECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED INTHE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIESUNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OFCOUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIREDUNDER SAID ACT.  ANY TRANSFEREE OF THISNOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND19(a) HEREOF.  THE PRINCIPAL AMOUNTREPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPONCONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACEHEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.**

 

**CONVERTIBLESUBORDINATED NOTE**

 
| Issuance  Date: April 1, 2008 |   | Principal:  U.S. $[ | ] |
|------------------------------------|--------|---------------------|---|

 

**FOR VALUERECEIVED,** LIQUIDMETALTECHNOLOGIES, INC., a Delaware corporation (the **“Company”**), hereby promises to pay to the order of [INSERTHOLDER]****or registered assigns (**“Holder”**) the amount set out above as thePrincipal (as reduced pursuant to the terms hereof pursuant to redemption,conversion or otherwise, the **“Principal”**)when due, whether upon the Maturity Date (as defined below), 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 **“Issuance Date”**) until the same becomes dueand payable, whether upon an Interest Date (as defined below), the MaturityDate, acceleration, conversion, redemption or otherwise (in each case inaccordance with the terms hereof).  ThisConvertible Subordinated Note (including all Convertible Subordinated Notesissued in exchange, transfer or replacement hereof, this **“Note”**) is one of an issue of ConvertibleSubordinated Notes issued on January 3, 2007 (the “**OriginalDate**”) pursuant to the Securities Purchase Agreement (the “**Original Notes**”) or issued after January 3, 2007 insatisfaction of interest and/or other amounts owing by the Company to the holdersof the Original Notes (the “**Interest Notes**”)(the Original Notes and Interest Notes are collectively referred to as the “**Notes**” herein, and any Notes other than this Note arecollectively referred to as the “**Other Notes**”).  This Note is deemed to be issued pursuant to Section 2of the Holder’s Original Note and is subject to the terms and provisions of theSecurities Purchase Agreement.  Certaincapitalized terms are defined in Section 29.

 

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(1)           MATURITYAND 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 day of the eighteenth(18th) calendar month following the calendar month in which theOriginal Date occurs, the Company may, upon thirty (30) calendar days priorwritten notice to Holder and at the sole election of the Company, prepay thisNote in whole or in part for a cash redemption price equal to One Hundred FivePercent (105%) of the the portion of the principal amount being redeemed plusall accrued and unpaid interest on the portion of the principal amount beingredeemed, provided that following such notice the Holder may convert all or anypart of the portion of the Note to be redeemed so long as the Company receivesa duly executed Conversion Notice pursuant to Section 3 of this Note priorto the date on which prepayment is actually made.  Notwithstanding the foregoing, in the eventthat prior to the Maturity Date the Company completes a public or privateequity or debt offering or an Asset Sale pursuant to which the Company receivesaggregate cash proceeds (net of placement agent fees, underwriter’s discouns,and other similar fees or commissions, and net of transaction fees) in excessof Five Million Dollars ($5,000,000), but excluding financings for the purposeof purchasing capital assets, then any net proceeds from such transaction afterpayment in full of transaction expenses and the full payment of the Company’s8% Unsecured Subordinated Notes Due 2007 shall, within five (5) BusinessDays of the Company’s receipt of such net proceeds, be paid to reduce thePrincipal and accrued but unpaid interest under this Note and the otherInterest Notes (and if such net proceeds are insufficient to pay the InterestNotes in full, then such net proceeds will be paid to the holders of theInterest Notes on a pro rata basis in accordance with the then-outstandingPrincipal under the Interest Notes held by them).  For this purpose, an “Asset Sale” means anysale of assets by the Company in a single transaction or series of relatedtransactions, other than (i) sales of inventory or other assets in theordinary course of the Company’s business, (ii) sale of obsolete equipment.

 

(b)           AmortizationPayments.  Beginning on July 31,2008 and at the end of each month thereafter (each, an “**AmortizationDate**”) until there is no outstanding Principal of this Note, theCompany shall redeem $[            ] [*1/36th of the original Principal amount of this Note*] ofthis Note (each, an “**Amortization RedemptionAmount**”).  If the Company isunable to redeem all Principal and Interest with respect to all AmortizationRedemption Amounts on this Note and the Other Notes, then the Company shallredeem a pro rata amount from each holder of the Notes (including the Holder)based on the principal amount of the Notes subject to payment of anAmortization Redemption Amount on such Amortization Date pursuant to this Noteand the Other Notes.

 

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(c)           Payment ofAmortization Redemption Amount.  TheCompany shall pay the Amortization Redemption Amount in cash in accordance withthe provisions of Section 12; provided, however, that if the Conditions toAmortization Conversion (as defined below) are satisfied or waived in writingby the Holder and the Company provides the Amortization Conversion Notice (asdefined below), then the Company shall have the right to require the Holder toconvert all or any such portion of the Amortization Redemption Amountdesignated in the Amortization Conversion Notice into fully paid, validlyissued and nonassessable shares of Common Stock in accordance with theapplicable 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 “**AmortizationConversion Notice Date**”).  TheAmortization Conversion Notice shall be irrevocable; provided; that ifany of the Conditions to Amortization Conversion is not satisfied on theapplicable Amortization Date or waived by the Holder, the Company willnotwithstanding delivery of the Amortization Conversion Notice be required topay 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 Rights Agreement shall be effective and available for the sale forall of the Registrable Securities (as defined in the Registration RightsAgreement) then outstanding, together with the Common Stock to be issued onsuch Amortization Date, in accordance with the terms of the Registration RightsAgreement or (y) all shares of Common Stock issuable upon conversion ofthe Notes shall be eligible for sale without restriction and without the needfor registration 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.

 

(d)           SpecialRedemption Right.  Within two (2) tradingdays after the closing of one or more Qualified Transactions resulting in$25,000,000 (Twenty Five Million Dollars) in aggregate proceeds aftertransaction expenses and placement agent or broker commissions or fees, theCompany will notify the Holder of said closing (a “**Transaction Notice**”).  Upon the closing of the QualifiedTransaction, the Holder may elect to have all or part of the outstandingprincipal amount of this Note and all accrued but unpaid interest thereunderredeemed within five (5) Trading Days of the Company’s receipt of writtennotice of the Holder’s election to effect such redemption.  In order toelect such redemption, the Holder must deliver written notice of redemption tothe Company within twenty (20) Trading Days after its receipt of theTransaction Notice, and such written notice must be accompanied by thesurrender of the originally executed Note, which must be marked “cancelled”(provided that in lieu of 

 

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surrenderingthe Notes (if not fully redeemed), the Holder may deliver a certification tothe Company affirming that the requisite principal amount of Notes is beingforfeited as a result of such redemption, in which case the change in the Noteswill be noted by book entry by the Company).  For purposes hereof, theterm “**Qualified Transactions**”means (A) the sale of Liquidmetal Korea’s manufacturing facility inPyong-Taek, Republic of Korea and that the appropriate authorities or banks inthe Republic of Korea approve the transfer of such proceeds from LiquidmetalKorea to the Company and/or (B) the raising of capital in a debt or equityoffering after the date hereof (subject to any restrictions or limitationsthereon set forth in the Purchase Agreement or the Notes).

 

(2)           INTEREST;INTEREST RATE.  Interest on this Noteshall commence accruing on the Issuance Date and shall be computed on the basisof a 365-day year and actual days elapsed and shall be payable in arrears onthe first day of each Calendar Quarter and on the Maturity Date during theperiod beginning on the Issuance Date and ending on, and including, theMaturity Date (each, an **“Interest Date”**)with the first Interest Date being January 1, 2008.  Interest shall be payable on each InterestDate in cash at the rate of 8.00% per annum (the **“Interest Rate”**).  Priorto the payment of Interest on an Interest Date, Interest on this Note shallaccrue at the Interest Rate and be payable by way of inclusion of the Interestin the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event ofDefault, the Interest Rate shall be increased so that the Interest Rate shallbe twelve percent (12.00%) per annum.  Inthe event that such Event of Default is subsequently cured, the adjustmentreferred to in the preceding sentence shall cease to be effective as of thedate of such cure; provided that the Interest as calculated at such increasedrate during the continuance of such Event of Default shall continue to apply tothe extent relating to the days after the occurrence of such Event of Defaultthrough and including the date of cure of such Event of Default.

 

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

 

(a)           Conversion Right. Subject to the provisions of Section 3(d), at any time or times onor after the Issuance Date, the Holder shall be entitled to convert any portionof the outstanding and unpaid Conversion Amount (as defined below) in incrementsof at least $50,000 of Principal (or such lesser amount if such amountrepresents the remaining Principal amount) into fully paid and nonassessableshares of Common Stock in accordance with Section 3(c), at the ConversionRate (as defined below).  The Companyshall not issue any fraction of a share of Common Stock upon anyconversion.  If the issuance would resultin the issuance of a fraction of a share of Common Stock, the Company shallround such fraction of a share of Common Stock up to the nearest wholeshare.  The Company shall pay any and alltaxes that may be payable with respect to the issuance and delivery of CommonStock upon conversion of any Conversion Amount.

 

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

 

(i)            **“Conversion Amount”** means the sum of (A) theportion of the Principal to be converted, redeemed or otherwise with respect towhich this determination is being made, plus (B) accrued and unpaidInterest with respect to such Principal.

 

(ii)           **“Conversion Price”** means, as of anyConversion Date (as defined below) or other date of determination, and subjectto adjustment as provided herein, $1.10.

 

(c)           Mechanics ofConversion.

 

(i)            OptionalConversion.  To convert anyConversion Amount into shares of Common Stock on any date (a **“Conversion Date”**), the Holder shall (A) transmitby facsimile (or otherwise 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 theform attached hereto as Exhibit I (the **“Conversion Notice”**) to the Company and (B) if requiredby Section 3(c)(iii), surrender this Note to a common carrier for deliveryto the Company as soon as practicable on or following such date (or anindemnification undertaking with respect to this Note in the case of its loss,theft or destruction).  On or before thefirst Business Day following the date of receipt of a Conversion Notice, theCompany shall transmit by facsimile a confirmation of receipt of suchConversion Notice to the Holder and the Company’s transfer agent (the “**Transfer Agent**”).  On or before the second Business Dayfollowing the date of receipt of a Conversion Notice (the **“Share Delivery Date”**), the Company shall (X) creditsuch aggregate number of shares of Common Stock to which the Holder shall beentitled to the Holder’s or its designee’s balance account with DepositoryTrust Company (“**DTC**”) through itsDeposit Withdrawal At Custodian system or (Y) if the Transfer Agent is notparticipating in DTC Fast Automated Securities Transfer Program, issue anddeliver to the address as specified in the Conversion Notice, a certificate,registered in the name of the Holder or its designee, for the number of sharesof Common Stock to which the Holder shall be entitled.  If this Note is physically surrendered forconversion as required by Section 3(c)(iii) and the outstandingPrincipal of this Note is greater than the Principal portion of the ConversionAmount being converted, then the Company shall as soon as practicable and in noevent later than five Business Days after receipt of this Note and at its ownexpense, issue and deliver to the holder a new Note (in accordance with Section 19(d))representing the outstanding Principal not converted.  The Person or Persons entitled to receive theshares of Common Stock issuable upon a conversion of this Note shall be treatedfor all purposes as the record holder or holders of such shares of Common Stockon the Conversion Date.

 

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(ii)           Company’sFailure to Timely Convert.  If theCompany shall fail to issue a certificate to the Holder or credit the Holder’sbalance account with DTC for the number of shares of Common Stock to which theHolder is entitled upon conversion of any Conversion Amount on or prior to thedate which is five Business Days after the Conversion Date (a **“Conversion Failure”**), then (A) theCompany shall pay liquidated damages to the Holder for each day of suchConversion Failure in an amount equal to 1.0%****of the product of (I) the sum of the number of shares of CommonStock not issued to the Holder on or prior to the Share Delivery Date and towhich the Holder is entitled, and (II) the Closing Sale Price of theCommon Stock on the Share Delivery Date and (B) the Holder, upon writtennotice to the Company, may void its Conversion Notice with respect to, andretain or have returned, as the case may be, any portion of this Note that hasnot been converted pursuant to such Conversion Notice; provided that thevoiding of a Conversion Notice shall not affect the Company’s obligations tomake any payments which have accrued prior to the date of such notice pursuantto this Section 3(c)(ii) or otherwise.  In addition to the foregoing, if within three(3) Trading Days after the Company’s receipt of the facsimile copy of aConversion Notice the Company shall fail to issue and deliver a certificate tothe Holder or credit the Holder’s balance account with DTC for the number ofshares of Common Stock to which the Holder is entitled upon such holder’sconversion of any Conversion Amount, and if on or after such Trading Day theHolder purchases (in an open market transaction or otherwise) Common Stock todeliver in satisfaction of a sale by the Holder of Common Stock issuable uponsuch conversion that the Holder anticipated receiving from the Company (a “**Buy-In**”), then the Company shall, withinfive (5) Business Days after the Holder’s request and in the Holder’sdiscretion, either (i) pay cash to the Holder in an amount equal to theHolder’s total purchase price (including brokerage commissions and otherout-of-pocket expenses, if any) for the shares of Common Stock so purchased(the **“Buy-In Price”**), at whichpoint the Company’s obligation to deliver such certificate (and to issue suchCommon Stock) shall terminate, or (ii) promptly honor its obligation todeliver to the Holder a certificate or certificates representing such CommonStock and pay cash to the Holder in an amount equal to the excess (if any) ofthe Buy-In Price over the product of (A) such number of shares of CommonStock, times (B) the Closing Bid Price on the Conversion Date.

 

(iii)          Book-Entry.Notwithstanding anything to the contrary set forth herein, upon conversion ofany portion of this Note in accordance with the terms hereof, the Holder shallnot be required to physically surrender this Note to the Company unless (A) thefull Conversion Amount represented by this Note is being converted or (B) theHolder has provided the Company with prior written notice (which notice may beincluded in a Conversion Notice) requesting physical surrender and reissue ofthis Note.  The Holder and the Companyshall maintain records showing the Principal and Interest converted and thedates of such conversions or shall use such other method, reasonablysatisfactory to the Holder and the Company, so as not to require physicalsurrender of this Note upon conversion.

 

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

 

(d)           Limitations onConversions.

 

(i)            BeneficialOwnership.  Unless waived by theHolder upon no less than sixty one (61) days prior written notice to theCompany, the Company shall not 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 Holderwaives the limitation set forth in the preceding sentence, the Company shall inno event effect any conversion of this Note, and the Holder of this Note shallnot have the right to convert any portion of this Note pursuant to Section 3(a),to the extent that after giving effect to such conversion, the Holder (togetherwith the Holder’s affiliates) would beneficially own in excess of 9.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion.  For purposes of theforegoing sentences, the number of shares of Common Stock beneficially owned bythe Holder and its affiliates shall include the number of shares of CommonStock issuable upon conversion of this Note with respect to which thedetermination of such sentence is being made, but shall exclude the number ofshares of Common Stock which would be issuable upon (A) conversion of theremaining, nonconverted portion of this Note beneficially owned by the Holderor any of its affiliates and (B) exercise or conversion of the unexercisedor nonconverted portion of any other securities of the Company (including,without limitation, any Other Notes or warrants) subject to a limitation onconversion or exercise analogous to the limitation contained hereinbeneficially owned by the 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.  Forpurposes of this Section 3(d)(i), in determining the number of outstandingshares of Common Stock, the Holder may rely on the number of outstanding sharesof Common Stock as reflected in (x) the Company’s most recent Form 10-Qor Form 10-K, (y) a more recent public announcement by the Company or(z) any other notice by the Company or the Transfer Agent setting forththe number of shares of Common Stock outstanding.  For any reason at any time, upon the writtenor oral request of the Holder, the Company shall within two Business Daysconfirm orally and in writing to the Holder the number of shares of CommonStock then outstanding.  In any case, thenumber of outstanding shares of Common Stock shall be determined after givingeffect to the conversion or exercise of securities of the Company, includingthis Note, by the Holder or its affiliates since the date as of which suchnumber of outstanding shares of Common Stock was reported.

 

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(ii)           Principal MarketRegulation.  The Company shall not beobligated to issue any shares of Common Stock upon conversion of this Note ifthe issuance of such shares of Common Stock would exceed that number of sharesof Common Stock that the Company may issue upon conversion of the Notes withoutbreaching the Company’s obligations under the rules or regulations of thePrincipal Market (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 orwritten opinion is obtained, no holders of Notes (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 Original 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 Original Notes issued to thePurchasers pursuant to the Securities Purchase Agreement on the Issuance Date(with respect to each Purchaser, the **“ExchangeCap Allocation”**).  In theevent that any Purchaser shall sell or otherwise transfer any of such Purchaser’sNotes, the transferee shall be allocated a pro rata portion of such Purchaser’sExchange Cap Allocation, and the restrictions of the prior sentence shall applyto such transferee with respect to the portion of the Exchange Cap Allocationallocated 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.

 

(4)           RIGHTS UPON EVENT OF DEFAULT.

 

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

 

(i)            the Company’sfailure to pay to the Holder any amount of Principal or Interest when and asdue under this Note if such failure continues for a period of at least fiveBusiness Days;

 

(ii)           the Company’sfailure to pay to the Holder any amounts other than Principal or Interest whenand as due under this Note, the Securities Purchase Agreement, or the 

 

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Registration Rights Agreement, which failure is not cured within fiveBusiness Days after notice of such default sent by the Holder to the Company;

 

(iii)          any default under, redemption of or acceleration prior to maturity ofany Indebtedness (as defined below) of the Company or any of its Subsidiaries(as defined in the Securities Purchase Agreement) other than with respect toany Other Notes and the Senior Indebtedness; provided that in the case of apayment default of such Indebtedness, such default is not cured withinapplicable cure periods; further provided that in the case of a non-paymentdefault of such Indebtedness that has not resulted in an acceleration orredemption of such Indebtedness prior to its maturity, only upon accelerationor redemption of such Indebtedness;

 

(iv)          the Company shallfail to observe or perform any other material covenant or agreement containedin the Securities Purchase Agreement, which failure is not cured within tenBusiness Days after notice of such default sent by the Holder to the Company;

 

(v)           the Company or anyof its Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code,or any similar Federal 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 competentjurisdiction enters an order or decree under any Bankruptcy Law that (A) isfor relief against the Company or any of its Subsidiaries in an involuntarycase that remains undismissed for a period of 90 days, (B) appoints aCustodian of the Company or any of its Subsidiaries that remains undischargedor unstayed for a period of 90 days, or (C) orders the liquidation of theCompany or any of its Subsidiaries;

 

(vii)         a final judgment orjudgments for the payment of money aggregating in excess of $500,000 arerendered against the Company or any of its Subsidiaries and which judgments arenot, within 60 days after the entry thereof, bonded, discharged or stayedpending appeal, or are not discharged within 60 days after the expiration ofsuch stay; provided, however, that any judgment which is covered by insuranceor an indemnity from a credit worthy party shall not be included in calculatingthe $500,000 amount set forth above;

 

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

 

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

 

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(b)           Redemption Right.  Promptly after the occurrence of an Event ofDefault with respect to this Note or any Other Note, the Company shall deliverwritten notice thereof via facsimile and overnight courier (an **“Event of Default Notice”**) to theHolder.  At any time after the earlier ofthe Holder’s receipt of an Event of Default Notice and the Holder becomingaware of an Event of Default, the Holder may require the Company to redeem allor any portion of this Note by delivering written notice thereof (the **“Event of Default Redemption Notice”**) tothe Company, which Event of Default Redemption Notice shall indicate the portionof this Note the Holder is electing to redeem. Each portion of this Note subject to redemption by the Company pursuantto this Section 4(b) shall be redeemed by the Company at a priceequal to the greater of (i) the Conversion Amount to be redeemed and (ii) theproduct of (A) the Conversion Rate with respect to such Conversion Amountin effect at such time as the Holder delivers an Event of Default RedemptionNotice and (B) the Closing Sale Price of the Common Stock on the dateimmediately preceding such Event of Default (the **“Event of Default Redemption Price”**).  Redemptions required by this Section 4(b) shallbe made in accordance with the provisions of Section 12.

 

(5)           RIGHTS UPONCHANGE OF CONTROL.

 

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

 

(i)            the consolidation,merger or other business combination (including, without limitation, areorganization or recapitalization) of the Company with or into another Person(other than (A) a consolidation, merger or other business combination(including, without limitation, reorganization or recapitalization) in whichholders of the Company’s voting power immediately prior to the transactioncontinue after the transaction to hold, directly or indirectly, the votingpower of the surviving entity or entities necessary to elect a majority of themembers of the board of directors (or their equivalent if other than acorporation) of such entity or entities, or (B) pursuant to a migratorymerger effected solely for the purpose of changing the jurisdiction ofincorporation of the Company);

 

(ii)           the sale ortransfer of all or substantially all of the Company’s assets; or

 

(iii)          a purchase, tenderor exchange offer made to and accepted by the holders of more than the 50% ofthe outstanding shares of Common Stock.

 

Nosooner than 15 days nor later than 10 days prior to the consummation of aChange of Control, but not prior to the public announcement of such Change ofControl, the Company shall deliver written notice thereof via facsimile andovernight courier to the Holder (a **“Change ofControl Notice”**).

 

(b)           Assumption.  Prior to the consummation of any Change ofControl, the Company will secure from any Person purchasing the Company’sassets or Common Stock or any successor resulting from such Change of Control(in each case, an **“Acquiring Entity”**)a written agreement (in form and substance satisfactory to the holders of Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding) to deliver to 

 

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each holder of Notes in exchange for such Notes, a security of theAcquiring Entity evidenced by a written instrument substantially similar inform and substance to the Notes, including, without limitation, having aprincipal amount and interest rate equal to the principal amounts and theinterest rates of the Notes held by such holder, and satisfactory to theholders of Notes representing at least a majority of the principal amount ofthe Notes then outstanding.  In the eventthat an Acquiring Entity is directly or indirectly controlled by a company orentity whose common stock or similar equity interest is listed, designated orquoted on a securities exchange or trading market, the holders of Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding 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 beginning afterthe Holder’s receipt of a Change of Control Notice and ending on the date ofthe 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), theHolder may 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.  Theportion of this Note subject to redemption pursuant to this Section 5shall be redeemed by the Company in cash at a price equal to the greater of (i) thesum of (x) the product of (A) the Applicable Percentage (as definedbelow) and (B) the Conversion Amount being redeemed and (y) theamount of any accrued but unpaid Interest on such Conversion Amount being redeemedthrough the date of such redemption payment and (ii) the product of (x) theApplicable Percentage and (y) the sum of (1) the product of (A) theConversion Amount being redeemed multiplied by (B) the quotient determinedby dividing (I) the aggregate cash consideration and the aggregate cashvalue of any non-cash consideration per Common Share to be paid to the holdersof the Common Shares upon consummation of the Change of Control (any suchnon-cash consideration in the form of securities to be valued at the higher ofthe 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) theConversion Price plus (2) the amount of any accrued but unpaid Interest onsuch Conversion Amount being redeemed through the date of such redemptionpayment, (the “**Change of Control RedemptionPrice**”).  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 ofControl.  For purposes of this Note, theterm “**Applicable Percentage**” means 120% ifthe 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.

 

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(6)           RIGHTS UPONISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

 

(a)           Purchase Rights.  Ifat any time the Company grants, issues or sells any Options, ConvertibleSecurities or rights to purchase stock, warrants, securities or other propertypro rata to the record holders of any class of Common Stock (the **“Purchase Rights”**), then the Holder will beentitled to acquire, upon the terms applicable to such Purchase Rights, theaggregate Purchase Rights which the Holder could have acquired if the Holderhad held the number of shares of Common Stock acquirable upon completeconversion of this Note (without taking into account any limitations orrestrictions on the convertibility of this Note) immediately before the date onwhich a record is taken for the grant, issuance or sale of such PurchaseRights, or, if no such record is taken, the date as of which the record holdersof Common Stock are to be determined for the grant, issue or sale of suchPurchase 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 would have been entitled to receive had this Note initially been issuedwith conversion rights for the form of such consideration (as opposed to sharesof Common Stock) at a conversion rate for such consideration commensurate withthe Conversion Rate.  Provision madepursuant to the preceding sentence shall be in a form and substancesatisfactory to the holders of Notes representing at least a majority of theaggregate principal amount of the Notes then outstanding.

 

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)           Adjustment ofConversion Price upon Issuance of Common Stock.  If and whenever on or after the IssuanceDate, the Company issues or sells, or in accordance with this Section 7(a) isdeemed to have issued or sold, any shares of Common Stock (including theissuance or sale of shares of Common Stock owned or held by or for the accountof the Company, but excluding shares of Common Stock deemed to have been issuedor sold by the Company in connection with any Excluded Security) for aconsideration per share (the **“New SecuritiesIssuance Price”**) less than a price (the **“Applicable Price”**) equal to the Conversion Price in effectimmediately prior to such issue or sale (the foregoing a **“Dilutive Issuance”**),

 

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thenimmediately after such Dilutive Issuance, the Conversion Price then in effectshall be reduced to an amount (rounded to the nearest cent) equal to the NewSecurities Issuance Price.  For purposesof determining the adjusted Conversion Price under this Section 7(a), thefollowing shall be applicable:

 

(i)            Issuance ofOptions.  If the Company in anymanner grants or sells any Options and the lowest price per share for which oneshare of Common Stock is issuable upon the exercise of any such Option or uponconversion or exchange or exercise of any Convertible Securities issuable uponexercise of such Option is less than the Applicable Price, then such share ofCommon Stock shall be deemed to be outstanding and to have been issued and soldby the Company at the time of the granting or sale of such Option for suchprice per share.  For purposes of this Section 7(a)(i),the “lowest price per share for which one share of Common Stock is issuableupon the exercise of any such Option or upon conversion or exchange or exerciseof any Convertible Securities issuable upon exercise of such Option” shall beequal to the sum of the lowest amounts of consideration (if any) received orreceivable by the Company with respect to any one share of Common Stock upongranting or sale of the Option, upon exercise of the Option and upon conversionor exchange or exercise of any Convertible Security issuable upon exercise ofsuch Option.  No further adjustment ofthe Conversion Price shall be made upon the actual issuance of such CommonStock or of such Convertible Securities upon the exercise of such Options orupon the actual issuance of such Common Stock upon conversion or exchange orexercise of such Convertible Securities.

 

(ii)           Issuance ofConvertible Securities.  If the Companyin any manner issues or sells any Convertible Securities and the lowest priceper share for which one share of Common Stock is issuable upon such conversionor exchange or exercise thereof is less than the Applicable Price, then suchshare of Common Stock shall be deemed to be outstanding and to have been issuedand sold by the Company at the time of the issuance of sale of such ConvertibleSecurities for such price per share.  Forthe purposes of this Section 7(a)(ii), the “price per share for which oneshare of Common Stock is issuable upon such conversion or exchange or exercise”shall be equal to the sum of the lowest amounts of consideration (if any)received or receivable by the Company with respect to any one share of CommonStock upon the issuance or sale of the Convertible Security and upon theconversion or exchange or exercise of such Convertible Security.  No further adjustment of the Conversion Priceshall be made upon the actual issuance of such Common Stock upon conversion orexchange or exercise of such Convertible Securities, and if any such issue orsale of such Convertible Securities is made upon exercise of any Options forwhich adjustment of the Conversion Price had been or are to be made pursuant toother provisions of this Section 7(a), no further adjustment of theConversion Price shall be made by reason of such issue or sale.  Notwithstanding anything in this Note to thecontrary, in the event that the Company agrees to decrease the conversion priceof any of its 7% Convertible Secured Promissory Notes due August 2007 inconnection 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.

 

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(iii)          Change in OptionPrice or Rate of Conversion.  If thepurchase price provided for in any Options, the additional consideration, ifany, payable upon the issue, conversion, exchange or exercise of anyConvertible Securities, or the rate at which any Convertible Securities areconvertible into or exchangeable or exercisable for Common Stock changes at anytime, the Conversion Price in effect at the time of such change shall beadjusted to the Conversion Price which would have been in effect at such timehad such Options or Convertible Securities provided for such changed purchaseprice, additional consideration or changed conversion rate, as the case may be,at the time initially granted, issued or sold.

 

(iv)          Calculation ofConsideration Received.  In case anyOption is issued in connection with the issue or sale of other securities ofthe Company, together comprising one integrated transaction in which nospecific consideration is allocated to such Options by the parties thereto, theOptions will be deemed to have been issued 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 anyCommon Stock, Options or Convertible Securities are issued or sold for aconsideration other than cash, the amount of the consideration other than cashreceived by the Company will be the fair value of such consideration, exceptwhere such consideration consists of securities, in which case the amount ofconsideration received by the Company will be the Closing Sale Price of suchsecurities 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, Options orConvertible Securities, as the case may be. The fair value of any consideration other than cash or securities willbe determined jointly by the Company and the holders of Notes representing atleast a majority of the principal amounts of the 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.  The determination of such appraiser shall bedeemed binding upon all parties absent manifest error and the fees and expensesof such appraiser shall be borne equally by the Company, on the hand, and theholders of the Notes, on the other hand.

 

(v)           Record Date.  If the Company takes a record of the holdersof Common Stock for the purpose of entitling them (A) to receive adividend or other distribution payable in Common Stock, Options or inConvertible Securities or (B) to subscribe for or purchase 

 

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Common Stock, Options or Convertible Securities, then such record datewill be deemed to be the date of the issue or sale of the shares of CommonStock deemed to have been issued or sold upon the declaration of such dividendor the making of such other distribution or the date of the granting of suchright 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 timesubdivides (by any stock split, stock dividend, recapitalization or otherwise)one or more classes of its outstanding shares of Common Stock into a greaternumber of shares, the Conversion Price in effect immediately prior to suchsubdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock splitor otherwise) one or more classes of its outstanding shares of Common Stockinto a smaller number of shares, the Conversion Price in effect immediatelyprior to such combination will be proportionately increased.

 

(c)           Other Events.  Ifany event occurs of the type contemplated by the provisions of this Section 7but not expressly provided for by such provisions (including, withoutlimitation, the granting of stock appreciation rights, phantom stock rights orother rights with equity features), then the Company’s Board of Directors willmake an appropriate adjustment in the Conversion Price so as to protect therights of the Holder under this Note; provided that no such adjustment willincrease the Conversion Price as otherwise determined pursuant to this Section 7.

 

(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION.  (a) MandatoryConversion.  If at any time from andafter the Issuance Date, the Weighted Average Price of the Common Stock exceeds250% of the conversion price of the Original Notes 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 (the **“MandatoryConversion Measuring Period”**) and the Conditions to MandatoryConversion (as set forth in Section 9(c)) are satisfied or waived inwriting by the Holder, the Company shall have the right to require the Holderto convert all or any such portion of the Conversion Amount of this Notedesignated in the Mandatory Conversion Notice into fully paid, validly issuedand nonassessable shares of Common Stock in accordance with Section 3(c) hereofat the Conversion Rate as of the Mandatory Conversion Date (as defined below)(a “**Mandatory Conversion**”).  The Company may exercise its right to requireconversion under this Section 9(a) by delivering within not more thanfive Trading Days following the end of such Mandatory Conversion MeasuringPeriod a written notice thereof by facsimile and overnight courier to all, butnot less than all, of the holders of Notes and the Transfer Agent (the **“Mandatory Conversion Notice”** and the dateall of the holders received such notice is referred to as the “**Mandatory Conversion Notice Date**”).  The Mandatory Conversion Notice shall beirrevocable.

 

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(b)           Pro Rata Conversion Requirement.  Ifthe Company elects to cause a conversion of all or any portion of theConversion Amount of this Note pursuant to Section 9(a), then it mustsimultaneously take the same action with respect to the Other Notes (exceptthat the Company is not required to take the same action with respect to theOther Notes to the extent limited by Section 3(d) in this Note orsimilar provisions under the Other Notes). If the Company elects to 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 whichthe Company 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 Original Notes purchased by such holderpursuant to the Securities Purchase Agreement and the denominator of which isthe sum of the aggregate principal amount of the Original Notes purchased byall holders pursuant to the Securities Purchase Agreement (except to the extentlimited by Section 3(d) in this Note or similar provisions under theOther Notes) (such fraction with respect to each holder is referred to as its “**Allocation Percentage**,” and such amountwith respect to each holder is referred to as its “**Pro Rata Conversion Amount**”). In the event that the initial holder of any Notes shall sell orotherwise transfer any of such holder’s Notes, the transferee shall beallocated a pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state (i) theTrading Day selected for the Mandatory Conversion in accordance with Section 9(a),which Trading Day shall be at least 10 Business Days but not more than 60Business Days following the Mandatory Conversion Notice Date (the “**Mandatory Conversion Date**”), (ii) theaggregate Conversion Amount of the Notes which the Company has elected to besubject to mandatory conversion from all of the holders of the Notes pursuantto this Section 9 (and analogous provisions under the Other Notes), (iii) eachholder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes theCompany has elected to cause to be converted pursuant to this Section 9(and analogous provisions under the Other Notes) and (iv) the number ofshares of Common Stock to be issued to such Holder as of the MandatoryConversion Date.  All Conversion Amountsconverted by the Holder after the Mandatory Conversion Notice Date shall reducethe Conversion Amount of this Note required to be converted on the MandatoryConversion 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 toMandatory Conversion.  For purposesof this Section 9, “**Conditions toMandatory Conversion**” means****thefollowing conditions: (i) during the period beginning on the date that issix months prior to the Mandatory Conversion Date and ending on and includingthe Mandatory Conversion Date, the Company shall have delivered shares ofCommon Stock upon any conversion of Conversion Amounts as set forth in Section 3(c)(i);(ii) on each day during the period beginning on the first Trading Day ofthe Mandatory Conversion Measuring Period and ending on and including theMandatory Conversion Date, the Common Stock shall be traded on the PrincipalMarket, the NASDAQ Global Market or Global Select Market, the NASDAQ CapitalMarket, the New York Stock Exchange, or the American Stock Exchange; (iii) onthe Mandatory Conversion Date either (x) the Registration Statement or 

 

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Registration Statementscontemplated by the Registration Rights Agreement shall be effective andavailable for the sale for all of the Registrable Securities in accordance withthe 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, an AuthorizedShare Failure shall not be in effect; and (v) any such payment of theConversion Amount in Common Stock shall not consist of more than 20% of thetotal dollar volume traded in the Common Stock for the 20 Trading Days prior tothe Mandatory Conversion Date.

 

(10)         NONCIRCUMVENTION.  The Company hereby covenants and agrees thatthe 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 of theHolder of this Note.

 

(11)         RESERVATION OFAUTHORIZED SHARES.

 

(a)           Reservation.  The Company shall initially reserve out ofits authorized and unissued Common Stock a number of shares of Common Stock foreach of the Notes equal to 100% of the Conversion Rate with respect to theConversion Amount of each such Note as of the Issuance Date.  Thereafter, the Company, so long as any ofthe Notes are outstanding, shall use commercially reasonable efforts to reserveand keep available out of its authorized and unissued Common Stock, solely forthe purpose of effecting the conversion of the Notes, 100% of the number ofshares of Common Stock as shall from time to time be necessary to effect theconversion of all of the Notes then outstanding (without regard to anylimitations on conversions) (the **“RequiredReserve Amount”**).  The numberof shares of Common Stock reserved for conversions of the Notes shall beallocated pro rata among the holders of the Notes based on the principal amountof the Notes held by each holder at the time of Issuance Date or increase inthe number of reserved shares, as the case may be (the **“Authorized Share Allocation”**).  In the event that a holder shall sell orotherwise transfer any of such holder’s Notes, each transferee shall beallocated a pro rata portion of such holder’s Authorized Share Allocation.  Any shares of Common Stock reserved andallocated to any Person which ceases to hold any Notes shall be allocated tothe remaining holders of Notes, pro rata based on the principal amount of theNotes then held by such holders.

 

(b)           InsufficientAuthorized Shares.  If at any timewhile any of the Notes remain outstanding the Company does not have asufficient number of authorized and unreserved shares of Common Stock to satisfyits obligation to reserve for issuance upon conversion of the Notes at least anumber of shares of Common Stock equal to the Required Reserve Amount (an **“Authorized Share Failure”**), then theCompany shall as soon as practicable use commercially reasonable efforts toincrease the Company’s authorized shares of Common Stock to an amountsufficient to allow the Company to reserve the Required Reserve Amount for theNotes then outstanding.

 

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(12)         HOLDER’S REDEMPTIONS.

 

(a)           Mechanics.  In the event that the Holderhas sent an Event of Default Redemption Notice or a Change of ControlRedemption Notice to the Company pursuant to Section 4(b) or Section 5(c),respectively (each, a **“Redemption Notice”**),the Holder shall promptly submit this Note to the Company.  If the Holder has submitted an Event ofDefault Redemption Notice in accordance with Section 4(b), the Companyshall deliver the applicable Event of Default Redemption Price to the Holderwithin five Business Days after the Company’s receipt of the Holder’s Event ofDefault Redemption Notice.  If the Holderhas 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.  With respect to an Amortization Redemption,the Company shall deliver the applicable Amortization Redemption Amount to theHolder within five Business Days after the end of the applicable month for suchAmortization Redemption.  In the event ofa 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 the event that the Company does not paythe Event of Default Redemption Price, the Change of Control Redemption Price,or the Amortization Redemption Amount (each, the **“Redemption Price”**), as applicable, to the Holder (or deliverany Common Stock to be issued pursuant to a Redemption Notice) within the timeperiod required, at any time thereafter and until the Company pays such unpaidRedemption Price (and issues any Common Stock required pursuant to a RedemptionNotice) in full, the Holder shall have the option, in lieu of redemption, torequire the Company to promptly return to the Holder all or any portion of thisNote representing the Conversion Amount that was submitted for redemption andfor which the applicable Redemption Price (or any Common Stock required to beissued pursuant to a Redemption Notice) has not been paid.  Upon the Company’s receipt of such notice, (x) theRedemption Notice shall be null and void with respect to such ConversionAmount, (y) the Company shall immediately return this Note, or issue a newNote (in accordance with Section 19(d)) to the Holder representing suchConversion 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 byOther Holders.  Upon the Company’s receiptof notice from any of the holders of the Other Notes for redemption orrepayment as a result of an event or occurrence substantially similar to theevents or occurrences described in Section 4(b) or Section 5(c) (each,an **“Other Redemption Notice”**), theCompany shall immediately forward to the Holder by facsimile a copy of suchnotice.  If the Company receives aRedemption Notice and one or more Other Redemption Notices during the sevenBusiness Day period beginning on and including the date which is three BusinessDays prior to the Company’s receipt of the 

 

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Holder’s Redemption Notice and ending on and including the date whichis three Business Days after the Company’s receipt of the Holder’s RedemptionNotice and the Company is unable to redeem all principal, interest and otheramounts designated in such Redemption Notice and such Other Redemption Noticesreceived during such seven Business Day period, then the Company shall redeem apro rata amount from each holder of the Notes (including the Holder) based onthe principal 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 Holdercovenant and agree that this Note shall be subject to the provisions of this Section 13and to the extent and in the manner set forth in this Section 13, theindebtedness represented by this Note and the payment of Principal, Interest,the Redemption Price, and any redemption amount, liquidated damages, fees,expenses, or any other amounts in respect of this Note are hereby expresslymade subordinate and junior and subject in right of payment to the priorpayment in full in cash of all Senior Indebtedness of the Company nowoutstanding or hereinafter incurred.

 

(b)           No Payment if Default Under SeniorIndebtedness.

 

(i)            [Intentionally left blank]

 

(ii)           No cash payment on account of Principal or Redemption Price of, orInterest on, this Note or any other payment payable with respect to this Noteshall be made, and no portion of this Note shall be redeemed or purchaseddirectly or indirectly by the Company, if at the time of such payment orpurchase or immediately after giving effect thereto, (A) a default in thepayment of principal, premium, if any, interest or other obligations in respectof any 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, but onlyfor 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 Companyshall resume payments on and distributions in respect of this Note, includingany past scheduled payments of the principal of (and premium, if any) andinterest on this Note to which the 

 

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Holder would have 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 date uponwhich 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).  Inaddition, notwithstanding clauses (A) and (B) of this subsection(ii), unless the holders of Designated Senior Debt shall have accelerated thematurity of such Designated Senior Debt or there is a Payment Default, theCompany shall resume payments on this Note within (5) Business Days after theend 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 uponDissolution, Etc.  In the event ofany bankruptcy, insolvency, reorganization, receivership, composition,assignment for benefit of creditors or other similar proceeding initiated by oragainst the Company or any dissolution or winding up or total or partialliquidation or reorganization of the Company (being hereinafter referred to asa “**Proceeding**”), the Holder agreesthat such Holder shall, upon request of a holder of Senior Indebtedness, and atsuch holder of Senior Indebtedness’ own expense, take all reasonable actions(including but not limited to the execution and filing of documents and thegiving of testimony in any Proceeding, whether or not such testimony could havebeen compelled by process) necessary to prove the full amount of all its claimsin any Proceeding, and the Holder shall not waive any claim in any Proceedingwithout the written consent of such holder. If the Holder does not file a proper proof of claim or proof of debt inthe form required in any Proceeding at least thirty (30) days before theexpiration of the time to file such claim, the holders of any SeniorIndebtedness are hereby authorized to file an appropriate claim for and onbehalf of the Holder.

 

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 

 

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provisionsof this Section 13 shall be paid by the Company or by any receiver,trustee in bankruptcy, liquidating trustee, agent or other Person making suchpayment or distribution, or by the Holder who shall have received such paymentor distribution, directly to the holders of the Senior Indebtedness (pro ratato each such holder on the basis of the respective amounts of such SeniorIndebtedness held by such holder) or their representatives to the extentnecessary to pay all such Senior Indebtedness in full after giving effect toany concurrent payment or distribution to or for the holders of such SeniorIndebtedness, before any payment or distribution is made to the Holder or anyholders 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.

 

(g)           Rights of HoldersUnimpaired.  The provisions of this Section 13are and are intended solely for the purposes of defining the relative rights ofthe Holder 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 SeniorIndebtedness.  These provisionsregarding subordination will constitute a continuing offer to all Persons who,in reliance upon such provisions, become holders of, or continue to hold,Senior Indebtedness; such provisions are made for the benefit of the holders ofSenior Indebtedness, and such holders are hereby made obligees under suchprovisions to the same extent as if they were named therein, and they or any ofthem may proceed to enforce such subordination and no amendment or modificationof the provisions contained herein shall diminish the rights of such holdersunless such holders have 

 

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agreed in writing thereto.  Theholders of Senior Indebtedness may, at any time and from time to time, withoutthe consent 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 inTrust.  In the event thatnotwithstanding the foregoing, any payment or distribution of assets of theCompany of any kind or character, whether in cash, property or securities(including, without limitation, by way of setoff or otherwise) prohibited bythe provisions hereof shall be received by the Holder before all SeniorIndebtedness if paid in full in cash, such payment or distribution shall beheld in trust for the benefit of and shall be paid over or delivered to theholders of Senior Indebtedness, as their respective interests may appear, ascalculated by the Company, for application to, or to be held as collateral for,the payment of any Senior Indebtedness remaining unpaid to the extent necessaryto pay all Senior Indebtedness in full in cash after giving effect to anyconcurrent payment or distribution to or for the holders of such SeniorIndebtedness.

 

(j)            Blockage ofRemedies.  During any Payment Defaultor any Payment Blockage Period, if an Event of Default has occurred and iscontinuing under this Note, the Holder will not commence or join with anycreditor of the Company in asserting or commencing any proceedings to collector enforce its rights hereunder or take any action to foreclose or realize uponthe indebtedness 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 date that the holders of the Senior Indebtedness are notified ofsuch Event of Default or (ii) the date such Payment Default is cured,waived or ceases to exist or the date such Payment Blockage Period ends, as thecase may be; provided, however, that until all of the SeniorIndebtedness shall have been paid in full in cash, any payments, distributionsor proceeds received by the Holder resulting from the exercise of any action tocollect or enforce any right or remedy available to the Holder shall be subjectto the terms of this Note.

 

(k)           Subsequent SeniorIndebtedness Requested Modifications. In connection with the incurrence of any future Senior Indebtedness, theHolder agrees 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.

 

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(l)            Failure to MakePayment.  In the event that theCompany is prohibited or restricted from making any payment required underunder this Note by reason of the provisions of this Section 13, such prohibitionor restriction shall not preclude the failure to make such payment from beingan Event of Default 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 tothe Delaware General Corporation Law, and as expressly provided in this Note.

 

(15)         RANK; ADDITIONALINDEBTEDNESS; LIENS.

 

(a)           Rank.      All payments due under this Note (a) shall rank *pari passu* with all Other Notes (**“Pari Passu Indebtedness”**), (b) shallbe subordinate in right of payment to the prior payment of all existing andfuture Senior Indebtedness and (c) shall be senior to all otherIndebtedness of the Company and its Subsidiaries, other than SeniorIndebtedness and Pari Passu Indebtedness.

##  

(b)           Incurrenceof Senior Indebtedness.  So long asthis Note is outstanding, the Company shall not, and the Company shall notpermit any of its Subsidiaries to, directly or indirectly, incur or guarantee,assume or suffer to exist any Indebtedness which shall rank senior to the Notesother than Senior Indebtedness.

##  

(c)           Existenceof Liens.  So long as this Note isoutstanding, the Company shall not, and the Company shall not permit any of itsSubsidiaries to, directly or indirectly, allow or suffer to exist any mortgage,lien, pledge, charge, security interest or other encumbrance upon or in anyproperty or assets (including accounts and contract rights) owned by theCompany or any of its Subsidiaries (collectively, “**Liens**”) other than Permitted Liens.  As used herein, “**Permitted Liens**” means (i) Liens incurred to secureSenior Indebtedness, (ii) Liens on fixed or capital assets acquired,constructed or improved by the Company or any 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)           RestrictedPayments.  The Company shall not, andthe Company shall not permit any of its Subsidiaries to, directly orindirectly, redeem, defease, repurchase, repay or make any payments in respectof, by the payment of cash or cash equivalents (in whole or in part, whether byway of open market purchases, tender offers, private transactions orotherwise), all or any portion of any Indebtedness, other than SeniorIndebtedness or Pari Passu Indebtedness, whether by way of payment in respectof principal of (or premium, if any) or interest on, such Indebtedness if atthe time such payment is due or is otherwise made or, after giving effect tosuch payment, an event constituting an Event of Default has occurred and is continuing.

 

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(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, ORCHANGE THE TERMS OF, NOTES.  Theaffirmative vote at a meeting duly called for such purpose or the writtenconsent without a meeting, of the holders of Notes representing not less than amajority of the aggregate principal amount of the then outstanding Notes, shallbe required for any change or amendment to this Note or the Other Notesprovided such change or amendment is consented to by the Company, which suchconsent may be granted or withheld in 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 THISNOTE.

 

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

 

(b)           Lost, Stolen or Mutilated Note.  Uponreceipt by the Company of evidence reasonably satisfactory to the Company ofthe loss, theft, destruction or mutilation of this Note, and, in the case ofloss, theft or destruction, of any indemnification undertaking by the Holder tothe Company in customary form and, in the case of mutilation, upon surrenderand cancellation of this Note, the Company shall execute and deliver to theHolder a new Note (in accordance with Section 19(d)) representing theoutstanding Principal.

 

(c)           Note Exchangeable for Different Denominations.  ThisNote is exchangeable, upon the surrender hereof by the Holder at the principaloffice of 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.

 

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(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, asindicated on the face of such new Note, which is the same as the Issuance Dateof this Note, (iv) shall have the same rights and conditions as this Note, and (v) shallrepresent accrued Interest on the Principal and Interest of this Note, from theIssuance Date.

 

(20)                            REMEDIES, CHARACTERIZATIONS, OTHEROBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in thisNote shall be cumulative and in addition to all other remedies available underthis Note, the Securities Purchase Agreement and the Registration RightsAgreement, at law or in equity (including a decree of specific performance and/orother injunctive relief), and nothing herein shall limit the Holder’s right topursue actual and consequential damages for any failure by the Company tocomply with the terms of this Note. Amounts set forth or provided for herein with respect to payments,conversion and the like (and the computation thereof) shall be the amounts tobe received by the Holder and shall not, except as expressly provided herein,be subject to any other obligation of the Company (or the performance thereof).  The Company acknowledges that a breach by 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.

 

(21)                            PAYMENT OF COLLECTION, ENFORCEMENT AND OTHERCOSTS.  If (a) this Note is placed in the handsof an attorney for collection or enforcement or is collected or enforcedthrough any legal proceeding or the Holder otherwise takes action to collectamounts due under this Note or to enforce the provisions of this Note or (b) thereoccurs any bankruptcy, reorganization, receivership of the Company or otherproceedings affecting Company creditors’ rights and involving a claim underthis Note, then the Company shall pay the costs incurred by the Holder for suchcollection, enforcement or action or in connection with such bankruptcy,reorganization, receivership or other proceeding, including, but not limitedto, attorneys’ fees and disbursements.

 

(22)                            CONSTRUCTION; HEADINGS.  ThisNote shall be deemed to be jointly drafted by the Company and all thePurchasers and shall not be construed against any person as the drafterhereof.  The headings of this Note arefor convenience of reference and shall not form part of, or affect theinterpretation of, this Note.

 

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(23)                            FAILURE OR INDULGENCE NOT WAIVER.  Nofailure or delay on the part of the Holder in the exercise of any power, rightor privilege hereunder shall operate as a waiver thereof, nor shall any singleor partial exercise of any such power, right or privilege preclude other orfurther exercise thereof or of any other right, power or privilege.

 

(24)                            DISPUTE RESOLUTION.  Inthe case of a dispute as to the determination of the Redemption Price or thearithmetic calculation of the Conversion Rate or the Redemption Price, theCompany shall submit the disputed determinations or arithmetic calculations viafacsimile within one Business Day of receipt of the Conversion Notice orRedemption Notice or other event giving rise to such dispute, as the case maybe, to the Holder.  If the Holder and theCompany are unable to agree upon such determination or calculation within oneBusiness Day of such disputed determination or arithmetic calculation being submittedto the Holder, then the Company shall, within one Business Day submit viafacsimile (a) the disputed determination of the Closing Bid Price or theClosing Sale Price to an independent, reputable investment bank selected by theCompany and approved by the Holder or (b) the disputed arithmeticcalculation of the Conversion Rate or the Redemption Price to the Company’sindependent, outside accountant.  TheCompany, at the Company’s expense, shall cause the investment bank or theaccountant, as the case may be, to perform the determinations or calculationsand notify the Company and the Holder of the results no later than fiveBusiness Days from the time it receives the disputed determinations orcalculations.  Such investment bank’s oraccountant’s determination or calculation, as the case may be, shall be bindingupon all parties absent demonstrable error.

 

(25)                            NOTICES; PAYMENTS.

 

(a)           Notices.  Whenever notice is required tobe given under this Note, unless otherwise provided herein, such notice shall begiven in accordance 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 such action and the reasontherefore.  Without limiting thegenerality of the foregoing, the Company will give written notice to the Holder(i) immediately upon any adjustment of the Conversion Price, setting forthin reasonable detail, and certifying, the calculation of such adjustment and (ii) atleast twenty days prior to the date on which the Company closes its books ortakes a record (A) with respect to any dividend or distribution upon theCommon Stock, (B) with respect to any pro rata subscription offer toholders of Common Stock or (C) for determining rights to vote with respectto any Change of Control, dissolution or liquidation, provided in each casethat such information shall be made known to the public prior to or inconjunction with such notice being provided to the Holder.  Notwithstanding the foregoing, Section 4(i) ofthe Securities Purchase Agreement shall apply to all notices given pursuant tothis Note.

 

(b)           Payments.  Whenever any payment of cashis to be made by the Company to any Person pursuant to this Note, such paymentshall be made in lawful money of the United States of America by a check drawnon the account of the Company and sent via overnight courier service to suchPerson at such address as previously provided to the Company 

 

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inwriting (which address, in the case of each of the Purchasers, shall initiallybe as set forth on the Schedule of Buyers attached to the Securities PurchaseAgreement); provided that the Holder may elect to receive a payment of cash viawire transfer of immediately available funds by providing the Company withprior written notice setting out such request and the Holder’s wire transferinstructions.  Whenever any amountexpressed to be due by the terms of this Note is due on any day which is not aBusiness Day, the same shall instead be due on the next succeeding day which isa Business Day and, in the case of any Interest Date which is not the date onwhich this Note is paid in full, the extension of the due date thereof shallnot be taken into account for purposes of determining the amount of Interestdue on such date.

 

(26)                            CANCELLATION. After all Principal, accrued Interest and other amounts at any time owedon this Note has been paid in full, this Note shall automatically be deemedcanceled, shall be surrendered to the Company for cancellation and shall not bereissued.

 

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

 

(28)                            GOVERNING LAW.  ThisNote shall be construed and enforced in accordance with, and all questionsconcerning the construction, validity, interpretation and performance of thisNote shall be governed by, the internal laws of the State of New York, withoutgiving effect to any choice of law or conflict of law provision or rule (whetherof the State of New York or any other jurisdictions) that would cause theapplication of the laws of any jurisdictions other than the State of New York.

 

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

 

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

 

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

 

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

 

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

 

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(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 closingbid price 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]

 

(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 the Notesand the Other Notes; (iii) upon conversion of any Options or ConvertibleSecurities which are outstanding on the Issuance Date, (iv) pursuant to orin connection with commercial credit arrangements, equipment lease financings,acquisitions of other assets or businesses, strategic transactions notprimarily for financing purposes, or similar transactions into which theCompany may enter with a non-affiliate.

 

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(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.

 

(k)           **“IssuanceDate”** means October 1, 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 any department 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 theInterest Notes.

 

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(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 Original Notes pursuant to which the Company issued the OriginalNotes.

 

(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 Common Stock is then traded; provided that “TradingDay” shall not include any day on which the Common Stock is scheduled to tradeon such exchange or market for less than 4.5 hours or any day that the CommonStock is suspended from trading during the final hour of trading on suchexchange or market (or if such exchange or market does not designate in advancethe closing time of trading on such exchange or market, then during the hourending at 4:00:00 p.m., New York Time).

 

(u)           [intentionally left blank]

 

(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 

 

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announcesis the official close of trading) as reported by Bloomberg, or, if no dollarvolume-weighted average price is reported for such security by Bloomberg forsuch hours, the average of the highest closing bid price and the lowest closingask price of any of the market makers for such security as reported in the “pinksheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot becalculated for a security on a particular date on any of the foregoing bases,the Weighted Average Price of such security on such date shall be the fairmarket value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable toagree upon the fair market value of such security, then such dispute shall beresolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stockdividend, stock split, stock combination or other similar transaction duringthe applicable calculation period.

 

**[Signature Page Follows]**

 

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

 
| ** ** | ** ** | **LIQUIDMETAL TECHNOLOGIES, INC.** |
|------------|------------|------------------------------------|
|       |       |                               |
|       |       |                               |
|       |       | By:                                |   |
|       |       |                               | Name: | Gerald  E. Morrow |
|       |       |                               | Title: | Chief  Financial Officer |
|            |            |                                    |  |  |  |

 

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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 the Company that the undersigned’s conversionof the amount set forth above in accordance with Section 3(a) of theNote will not directly result in the undersigned (together with the undersigned’saffiliates) beneficially owning in excess of 4.99% 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; providedthat if the undersigned has previously waived the 4.99% beneficial ownershiplimitation upon no less than sixty one (61) days prior written notice, theundersigned certifies to the Company that the undersigned’s conversion of theamount set forth above will not directly result in the undersigned (togetherwith the undersigned’s affiliates) beneficially owning in excess of 9.99% ofthe number of shares of Common Stock outstanding immediately after givingeffect to such conversion, calculated in accordance with Section 3(d)(i) ofthe 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: |   |
|--------|--------|

 

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|   | 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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