**Exhibit 4.5**

 

**Unless this certificate is presented by anauthorized representative of The Depository Trust Company, a New Yorkcorporation (“DTC”), to the issuer or its agent for registration of transfer,exchange or payment, and any certificate issued is registered in the name ofCede & Co. or in such other name as is requested by an authorizedrepresentative of DTC (and any payment is made to Cede & Co. or to suchother entity as is requested by an authorized representative of DTC), ANYTRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSONIS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has aninterest herein.**

 

**NEITHER THE ISSUANCE AND SALE OF THE SECURITIESREPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIESARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, ASAMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFEREDFOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVEREGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, ASAMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THATREGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TORULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THESECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OROTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREEOF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS3(c)(iii) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND,ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THANTHE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THISNOTE.**

 

**CONTINGENT CONVERTIBLESUBORDINATED NOTE**

 
| Date: December 15, 2005 |   | Principal: Up to an Aggregate Amount of U.S. $50,000,000 |
|-------------------------|--------|----------------------------------------------------------|

 

**CUSIP: 26882D AB 5**

 

**FOR VALUERECEIVED,** EPIQSYSTEMS, INC., a Missouri corporation (the **“Company”**),hereby promises to pay to the order of CEDE & CO. 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

 

1

----

 

Maturity Date (as defined below), acceleration, redemption or otherwise(in each case in accordance with the terms hereof) and to pay interest (**“Interest”**) on any outstanding Principal atthe rate of 4.00% per annum, subject to periodic adjustment pursuant to Section2 (the **“Interest Rate”**), from thedate set out above as the Issuance Date (the **“IssuanceDate”**) until the same becomes due and payable, whether upon anInterest Date (as defined below), the Maturity Date, acceleration, conversion,redemption or otherwise (in each case in accordance with the terms hereof). ThisContingent Convertible Subordinated Note (including all Contingent ConvertibleSubordinated Notes issued in exchange, transfer or replacement hereof, this **“Note”**) is one of an issue of ContingentConvertible Subordinated Notes (collectively, the **“Notes”** and such other Contingent Convertible SubordinatedNotes, the **“Other Notes”**) issuedon the Issuance Date pursuant to the Securities Purchase Agreement (as definedbelow). Certain capitalized terms are defined in Section 29.

 

(1)           MATURITY. On 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, accrued and unpaidInterest and accrued and unpaid Late Charges, if any. The **“Original Maturity Date”** shall be June 15,2007, as may be extended in accordance with Section 8 hereof or as extended atthe option of the Holder (i) in the event that, and for so long as, an Event ofDefault (as defined in Section 4(a)) shall have occurred and be continuing orany event shall have occurred and be continuing which with the passage of timeand the failure to cure would result in an Event of Default and (ii) throughthe date that is ten days after the consummation of a Change of Control (asdefined in Section 5(a)) in the event that a Change of Control is publiclyannounced or a Change of Control Notice (as defined in Section 5(a)) isdelivered prior to the Maturity Date (as may be extended, the **“Maturity Date”**).

 

(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 July 1, 2004. Interest shall be payable oneach Interest Date in cash. From and after the occurrence of an Event ofDefault, the Interest Rate shall be increased to 11%. In the event that suchEvent of Default is subsequently cured, the adjustment referred to in thepreceding sentence shall cease to be effective as of the date of such cure;provided that the Interest as calculated at such increased rate during thecontinuance of such Event of Default shall continue to apply to the extentrelating to the days after the occurrence of such Event of Default through andincluding the date of cure of such Event of Default.

 

(3)           CONVERSION OF NOTES. This Note shall be convertibleinto shares of the Company’s common stock, par value $0.01 per share (the **“Common Stock”**), on the terms andconditions set forth in this Section 3.

 

(a)           Conversion Right. (i)  Subject to the provisions of Section 3(d), atany time or times on or after the Issuance Date, the Holder shall be entitledto convert any portion of the outstanding and unpaid Conversion Amount (asdefined below) in increments of at least $100,000 of Principal (or such lesseramount if such amount represents the remaining

 

2

----

 

Principal amount) into fully paid and nonassessable shares of CommonStock in accordance with Section 3(c), at the Conversion Rate (as definedbelow). The Company shall not issue any fraction of a share of Common Stockupon any conversion. If the issuance would result in the issuance of a fractionof a share of Common Stock, the Company shall round such fraction of a share ofCommon Stock up to the nearest whole share. The Company shall pay any and alltransfer, stamp or similar taxes that may be payable with respect to theissuance and delivery of Common Stock upon conversion of any Conversion Amount.

 

(b)           Conversion Rate. The number of shares of CommonStock issuable upon conversion of any Conversion Amount pursuant to Section3(a) shall be determined by dividing (x) such Conversion Amount by (y) theConversion Price (as defined below) (the **“ConversionRate”**).

 

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

 

(ii)           **“Conversion Price”**means, as of any Conversion Date (as defined below) or other date ofdetermination, and subject to adjustment as provided herein, $17.50.

 

(c)           Mechanics of Conversion.

 

(i)            Optional Conversion. To convert any ConversionAmount into shares of Common Stock on any date (a **“Conversion Date”**), the Holder shall (A) transmit by facsimile(or otherwise deliver), for receipt on or prior to 4:59 p.m., New York Time, onsuch date, a copy of a duly executed and completed notice of conversion in goodorder in the form attached hereto as Exhibit I (the **“Conversion Notice”**) to the Company and (B)if required by Section 3(c)(iii), surrender this Note to a common carrier fordelivery to the Company as soon as practicable on or following such date (or anindemnification undertaking in form and substance reasonably acceptable to theCompany with respect to this Note in the case of its loss, theft ordestruction). On or before the first Business Day following the date of receiptof a Conversion Notice, the Company shall transmit by facsimile a confirmationof receipt of such Conversion Notice to the Holder and the Company’s transferagent (the “**Transfer Agent**”). Onor before the third Business Day following the date of receipt of a ConversionNotice (the **“Share Delivery Date”**),the Company shall (X) credit such aggregate number of shares of Common Stock towhich the Holder shall be entitled to the Holder’s or its designee’s balanceaccount with Depository Trust Company (“**DTC**”)through its Deposit Withdrawal Agent Commission system or (Y) if the TransferAgent is not participating in DTC Fast Automated Securities Transfer Program,issue and deliver to the address as specified in the Conversion Notice, acertificate, registered in the name of the Holder or its designee, for thenumber of shares of Common Stock to which the Holder shall be entitled. If thisNote is physically surrendered for conversion as required by Section 3(c)(iii)and the outstanding Principal of this Note is greater than the Principalportion of the Conversion Amount being converted, then the Company shall assoon as practicable and in no event later than three Business Days afterreceipt of this Note and at its own expense, issue and deliver to the holder anew Note (in accordance with Section 19(d)) representing the outstanding

 

3

----

 

Principal not converted. ThePerson or Persons entitled to receive the shares of Common Stock issuable upona conversion of this Note shall be treated for all purposes as the recordholder or holders of such shares of Common Stock on the Conversion Date.

 

(ii)           Company’s Failure to Timely Convert. If the Companyshall fail to issue a certificate to the Holder or credit the Holder’s balanceaccount with DTC for the number of shares of Common Stock to which the Holderis entitled upon conversion of any Conversion Amount on or prior to the datewhich is three Trading Days after the Conversion Date, and if after suchthird Trading Day the Holder purchases (in an open market transaction orotherwise) shares of Common Stock to deliver in satisfaction of a sale by theHolder of the shares of Common Stock that the Holder anticipated receiving fromthe Company pursuant hereto (a “**Buy-In”**),then the Company shall, within three Trading Days after the Holder’s requestand in the Holder’s discretion, either (i) pay cash to the Holder in an amountequal to the Holder’s total purchase price (including brokerage commissions, ifany) for the shares of Common Stock so purchased (the “**Buy-In Price”**), at which point the Company’sobligation to deliver such certificate (and to issue such Common Stock) shallterminate, or (ii) promptly honor its obligation to deliver to the Holder acertificate or certificates representing such Common Stock and pay cash to theHolder in an amount equal to the excess (if any) of the Buy-In Price over theproduct of (A) such number of shares of Common Stock, times (B) the ClosingSale Price on the date of the event giving rise to the Company’s obligation todeliver such certificate. 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) the Companyshall pay damages to the Holder for each date of such Conversion Failure in anamount equal to 1.0%****of theproduct of (I) the sum of the number of shares of Common Stock not issued tothe Holder on or prior to the Share Delivery Date and to which the Holder isentitled, and (II) the Closing Sale Price of the Common Stock on the ShareDelivery Date and (B) the Holder, upon written notice to the Company, may voidits Conversion Notice with respect to, and retain or have returned, as the casemay be, any portion of this Note that has not been converted pursuant to suchConversion Notice; provided that the voiding of a Conversion Notice shall notaffect the Company’s obligations to make any payments which have accrued priorto the date of such notice pursuant to this Section 3(c)(ii) or otherwise.

 

(iii)          Book-Entry. Notwithstanding anything to the contraryset forth herein, upon conversion of any portion of this Note in accordancewith the terms hereof, the Holder shall not be required to physically surrenderthis Note to the Company unless (A) the full Conversion Amount represented bythis Note is being converted or (B) the Holder has provided the Company withprior written notice (which notice may be included in a Conversion Notice)requesting physical surrender and reissue of this Note. The Holder and theCompany shall maintain records showing the Principal, Interest and Late Chargesconverted and the dates of such conversions or shall use such other method,reasonably satisfactory to the Holder and the Company, so as not to requirephysical surrender of this Note upon conversion.

 

4

----

 

(iv)          Pro Rata Conversion; Disputes. In the event that theCompany receives a Conversion Notice from more than one holder of Notes for thesame Conversion Date and the Company can convert some, but not all, of suchportions of the Notes submitted for conversion, the Company, subject to Section3(d), shall convert from each holder of Notes electing to have Notes convertedon such date a pro rata amount of such holder’s portion of its Notes submittedfor conversion based on the principal amount of Notes submitted for conversionon such date by such holder relative to the aggregate principal amount of allNotes submitted for conversion on such date. In the event of a dispute as tothe number of shares of Common Stock issuable to the Holder in connection witha conversion of this Note, the Company shall issue to the Holder the number ofshares of Common Stock not in dispute and resolve such dispute in accordancewith Section 24.

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership. The Company shall not effectany conversion of this Note, and the Holder of this Note shall not have theright to convert any portion of this Note pursuant to Section 3(a), to theextent that after giving effect to such conversion, the Holder (together withthe 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 the foregoing sentence, the number of sharesof Common Stock beneficially owned by the Holder and its affiliates shallinclude the number of shares of Common Stock issuable upon conversion of thisNote with respect to which the determination of such sentence is being made,but shall exclude the number of shares of Common Stock which would be issuableupon (A) conversion of the remaining, nonconverted portion of this Notebeneficially owned by the Holder or any of its affiliates and (B) exercise orconversion of the unexercised or nonconverted portion of any other securitiesof the Company (including, without limitation, any Other Notes or warrants)subject to a limitation on conversion or exercise analogous to the limitationcontained herein beneficially owned by the Holder or any of its affiliates. Exceptas set forth in the preceding sentence, for purposes of this Section 3(d)(i),beneficial ownership shall be calculated in accordance with Section 13(d) ofthe Securities Exchange Act of 1934, as amended. For purposes of this Section3(d)(i), in determining the number of outstanding shares of Common Stock, theHolder may rely on the number of outstanding shares of Common Stock as reflectedin (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a more recentpublic announcement by the Company or (z) any other notice by the Company orthe Transfer Agent setting forth the number of shares of Common Stockoutstanding. For any reason at any time, upon the written or oral request ofthe Holder, the Company shall within one Business Day confirm orally and inwriting to the Holder the number of shares of Common Stock then outstanding. Inany case, the number of outstanding shares of Common Stock shall be determinedafter giving effect to the conversion or exercise of securities of the Company,including this Note, by the Holder or its affiliates since the date as of whichsuch number of outstanding shares of Common Stock was reported.

 

5

----

 

(ii)           Principal Market Regulation. The Company shall notbe obligated to issue any shares of Common Stock upon conversion of this Noteif the issuance of such shares of Common Stock would exceed that number of sharesof Common Stock which the Company may issue upon conversion of the Noteswithout breaching the Company’s obligations under the rules or regulations ofthe Principal Market (the **“Exchange Cap”**),except that such limitation shall not apply in the event that the Company (A)obtains the approval of its stockholders as required by the applicable rules ofthe Principal Market for issuances of Common Stock in excess of such amount or(B) obtains a written opinion from outside counsel to the Company that suchapproval is not required, which opinion shall be reasonably satisfactory to theholders of the Notes representing at least a majority of the principal amountsof the Notes then outstanding. Until such approval or written opinion isobtained, no purchaser of the Notes pursuant to the Securities PurchaseAgreement (the **“Purchasers”**) shallbe issued, upon conversion of Notes, shares of Common Stock in an amountgreater than the product of the Exchange Cap multiplied by a fraction, thenumerator of which is the principal amount of Notes issued to such Purchaserpursuant to the Securities Purchase Agreement on the Issuance Date and thedenominator of which is the aggregate principal amount of all Notes issued tothe Purchasers pursuant to the Securities Purchase Agreement on the IssuanceDate (with respect to each Purchaser, the **“ExchangeCap Allocation”**). In the event that any Purchaser shall sell orotherwise transfer any of such Purchaser’s Notes, the transferee shall beallocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, andthe restrictions of the prior sentence shall apply to such transferee withrespect to the portion of the Exchange Cap Allocation allocated to suchtransferee. In the event that any holder of Notes shall convert all of suchholder’s Notes into a number of shares of Common Stock which, in the aggregate,is less than such holder’s Exchange Cap Allocation, then the difference betweensuch holder’s Exchange Cap Allocation and the number of shares of Common Stockactually issued to such holder shall be allocated to the respective ExchangeCap Allocations of the remaining holders of Notes on a pro rata basis inproportion to the aggregate principal amount of the Notes then held by eachsuch holder.

 

(iii)          Contingent Convertibility. Notwithstanding theforegoing, this Note shall only be convertible: (v) during the periodcommencing on the Issuance Date and terminating on January 14, 2005, at anytime after the arithmetic average of the Weighted Average Price of the CommonStock equals or exceeds 110% of the then applicable Conversion Price for ten(10) consecutive Trading Days; (w) from and after January 15, 2005, if theWeighted Average Price of the Common Stock equals or exceeds 110% of the thenapplicable Conversion Price on any five (5) consecutive Trading Days during anycalendar year; (x) from and after the Issuance Date, if the Weighted AveragePrice of the Common Stock is less than $10.75 (the “**Minimum Price**”) (subject to adjustment as provided herein) onany five (5) consecutive Trading Days; (y) if there shall have occurred (A) thepublic announcement of a pending, proposed or intended Change of Control thathas not been abandoned, terminated or consummated, (B) an Event of Default or(C) an event that with the passage of time or giving of notice, and assuming itwere not cured, would constitute an Event of Default; or (z) upon receipt of aMandatory Conversion Notice.

 

6

----

 

(4)           RIGHTS UPON EVENT OF DEFAULT.

 

(a)           Event of Default. Each of the following eventsshall constitute an **“Event of Default”**:

 

(i)            the failure of the applicable Registration Statementrequired to be filed pursuant to the Registration Rights Agreement to bedeclared effective by the SEC on or prior to the date that is 60 days after theapplicable Effectiveness Deadline (as defined in the Registration RightsAgreement), or, while the applicable Registration Statement is required to bemaintained effective pursuant to the terms of the Registration Rights Agreement,the effectiveness of the applicable Registration Statement lapses for anyreason (including, without limitation, the issuance of a stop order) or isunavailable to any holder of the Notes for sale of all of such holder’sRegistrable Securities (as defined in the Registration Rights Agreement) inaccordance with the terms of the Registration Rights Agreement, and such lapseor unavailability continues for a period of 10 consecutive Trading Days or formore than an aggregate of 30 Trading Days in any 365-day period (other thandays during an Allowable Grace Period (as defined in the Registration RightsAgreement));

 

(ii)           the suspension from trading or failure of the Common Stockto be listed on the Principal Market or The New York Stock Exchange, Inc. for aperiod of five consecutive Trading Days or for more than an aggregate of sevenTrading Days in any 365-day period;

 

(iii)          the Company’s (A) failure to cure a Conversion Failure bydelivery of the required number of shares of Common Stock within ten (10)Business Days after the applicable Conversion Date or (B) notice, written ororal, to any holder of the Notes, including by way of public announcement orthrough any of its agents, at any time, of its intention not to comply with arequest for conversion of any Notes into shares of Common Stock that istendered in accordance with the provisions of the Notes;

 

(iv)          at any time following the tenth consecutive Business Daythat the Holder’s Authorized Share Allocation is less than the number of sharesof Common Stock that the Holder would be entitled to receive upon a conversionof the full Conversion Amount of this Note (without regard to any limitationson conversion set forth in Section 3(d) or otherwise);

 

(v)           the Company’s failure to pay to the Holder any amount ofPrincipal, Interest, Late Charges or other amounts when and as due under thisNote, the Securities Purchase Agreement, the Registration Rights Agreement orany other agreement, document, certificate or other instrument delivered inconnection with the transactions contemplated hereby and thereby to which theHolder is a party, except, in the case of a failure to pay Interest, LateCharges or amount other than Principal when and as due, in which case only ifsuch failure continues for a period of at least five Business Days;

 

7

----

 

(vi)          any default under or acceleration prior to maturity of anyIndebtedness (as defined below) of the Company or any of its Subsidiaries (asdefined in Section 3(a) of the Securities Purchase Agreement) with an unpaidprincipal amount in excess of $1,000,000 at the time of such acceleration otherthan with respect to any Other Notes; provided that in the case of a paymentdefault of such Indebtedness, such default is not cured within applicable cureperiods; further provided that in the case of a non-payment default of suchIndebtedness that has not resulted in an acceleration of such Indebtednessprior to its maturity, only upon acceleration of such Indebtedness;

 

(vii)         the Company or any of its Subsidiaries, pursuant to orwithin the meaning of Title 11, U.S. Code, or any similar Federal or state lawfor the relief of debtors (collectively, **“BankruptcyLaw”**), (A) commences a voluntary case, (B) consents to the entry ofan order for relief against it in an involuntary case, (C) consents to theappointment of a receiver, trustee, assignee, liquidator or similar official (a**“Custodian”**),  (D) makes a general assignment for thebenefit of its creditors or (E) admits in writing that it is generally unableto pay its debts as they become due;

 

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

 

(ix)           a final judgment or judgments for the payment of moneyaggregating in excess of $1,000,000 are rendered against the Company or any ofits Subsidiaries and which judgments are not, within 60 days after the entrythereof, bonded, discharged or stayed pending appeal, or are not dischargedwithin 60 days after the expiration of such stay; provided, however, that anyjudgment which is covered by insurance or an indemnity from a credit worthyparty shall not be included in calculating the $1,000,000 amount set forthabove so long as the Company provides the Holder a written statement from suchinsurer or indemnity provider (which written statement shall be reasonablysatisfactory to the Holder) to the effect that such judgment is covered byinsurance or an indemnity and the Company will receive the proceeds of suchinsurance or indemnity within 30 days of the issuance of such judgment;

 

(x)            the Company materially breaches any representation,warranty, covenant or other term or condition of the Securities PurchaseAgreement, the Registration Rights Agreement, this Note, the Other Notes, orany other agreement, document, certificate or other instrument delivered inconnection with the transactions contemplated thereby and hereby to which theHolder is a party, except, in the case of a breach of a covenant or other termor condition which is curable, only if such breach continues for a period of atleast ten (10) consecutive Business Days;

 

(xi)           any breach or failure in any respect to comply withSection 15 of this Note;

 

(xii)          any Event of Default (as defined in the Other Notes) occurswith respect to any Other Notes; or

 

8

----

 

(xiii)         either of (x) the Total Debt to TotalCapitalization Ratio shall exceed .60:1.00 or (y) the Total Debt to EBITDARatio shall exceed 4.00:1.00.

 

(b)           Redemption Right. Promptly after the occurrence ofan Event of Default with respect to this Note or any Other Note, the Companyshall deliver written notice thereof via facsimile and overnight courier (an **“Event of Default Notice”**) to the Holder. Atany time after the earlier of the Holder’s receipt of an Event of DefaultNotice and the Holder becoming aware of an Event of Default, the Holder mayrequire the Company to redeem all or any portion of this Note by deliveringwritten notice thereof (the **“Event of DefaultRedemption Notice”**) to the Company, which Event of DefaultRedemption Notice shall indicate the portion of this Note the Holder iselecting to redeem. Each portion of this Note subject to redemption by theCompany pursuant to this Section 4(b) shall be redeemed by the Company at aprice equal to the greater of (i) the product of (x) the Conversion Amount tobe redeemed and (y) the Redemption Premium and (ii) the product of (A) theConversion Rate with respect to such Conversion Amount in effect at such timeas the Holder delivers an Event of Default Redemption Notice and (B) theClosing Sale Price of the Common Stock on the date immediately preceding suchEvent of Default (the **“Event of DefaultRedemption Price”**). Redemptions required by this Section 4(b) shallbe made in accordance with the provisions of Section 12.

 

(5)           RIGHTS UPON CHANGE OF CONTROL.

 

(a)           Change of Control. Each of the following eventsshall constitute a **“Change of Control”**:

 

(i)            the consolidation, merger or other business combination(including, without limitation, a reorganization or recapitalization) of theCompany with or into another Person (other than (A) a consolidation, merger,stock transaction or other business combination (including, without limitation,reorganization or recapitalization) in which holders of the Company’s voting powerimmediately prior to the transaction continue after the transaction to hold,directly or indirectly, the voting power of the surviving entity or entitiesnecessary to elect a majority of the members of the board of directors (ortheir equivalent if other than a corporation) of such entity or entities, or(B) pursuant to a migratory merger effected solely for the purpose of changingthe jurisdiction of incorporation of the Company (any of the foregoing (A) and(B), a “**Surviving Change**”));

 

(ii)           the sale or transfer of all or substantially all of theCompany’s assets; or

 

(iii)          a purchase, tender or exchange offer made to and acceptedby the holders of more than the 50% of the outstanding shares of Common Stock.

 

No sooner than 15 days nor later than 10 days prior to the consummationof a Change of Control, but not prior to the public announcement of such Changeof Control, the Company shall deliver

 

9

----

 

written notice thereof via facsimile and overnight courier to theHolder (a **“Change of Control Notice”**).

 

(b)           Assumption. Prior to the consummation of any Changeof Control, 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 each holder of Notes in exchange for suchNotes, a security of the Acquiring Entity evidenced by a written instrumentsubstantially similar in form and substance to the Notes, including, withoutlimitation, having a principal amount and interest rate equal to the principalamounts and the interest rates of the Notes held by such holder, andsatisfactory to the holders of Notes representing at least a majority of theprincipal amount of the Notes then outstanding. In the event that an AcquiringEntity is directly or indirectly controlled by a company or entity whose commonstock or similar equity interest is listed, designated or quoted on asecurities exchange or trading market, the holders of Notes representing atleast a majority of the aggregate principal amount of the Notes thenoutstanding may elect to treat such Person as the Acquiring Entity for purposesof this Section 5(b). In the event of a Surviving Change, the entity resultingfrom or succeeding to the Company in such Surviving Change shall assume theobligations under the Notes on the same terms and conditions as the Notes andhaving a principal amount and interest rate equal to the principal amounts andthe interest rates of the Notes.

 

(c)           Redemption Right. At any time during the periodbeginning after the Holder’s receipt of a Change of Control Notice and endingon the date of the consummation of such Change of Control (or, in the event aChange of Control Notice is not delivered at least 10 days prior to a Change ofControl, at any time on or after the date which is 10 days prior to a Change ofControl and ending 10 days after the consummation of such Change of Control),the Holder may require the Company to redeem all or any portion of this Note 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 underany obligation to redeem all or any portion of this Note or to deliver theapplicable Change of Control Redemption Price unless and until the applicableChange of Control is consummated. The portion of this Note subject toredemption pursuant to this Section 5(c) shall be redeemed by the Company at aprice equal to the greater of (i) the product of (x) the ConversionAmount being redeemed and (y) the quotient determined by dividing (A) theClosing Sale Price of the Common Stock immediately following the publicannouncement of such proposed Change of Control by (B) the Conversion Price and(ii) 110% of the Conversion Amountbeing redeemed (the **“Change of ControlRedemption Price”**). Redemptions required by this Section 5(c) shallbe made in accordance with the provisions of Section 12 and shall have priorityto payments to stockholders in connection with a Change of Control.

 

10

----

 

(6)           RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHERCORPORATE EVENTS.

 

(a)           Purchase Rights. If at any time the Company grants,issues or sells any Options, Convertible Securities or rights to purchasestock, warrants, securities or other property pro rata to the all orsubstantially all record holders 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 consummationof any recapitalization, reorganization, consolidation, merger, spin-off orother business combination (other than a Change of Control) pursuant to whichall or substantially all holders of Common Stock are entitled to receivesecurities or other assets with respect to or in exchange for Common Stock (a **“Corporate Event”**), the Company shall makeappropriate provision to insure that the Holder will thereafter have the rightto receive upon a conversion of this Note, (i) in addition to the shares ofCommon Stock receivable upon such conversion, such securities or other assetsto which the Holder would have been entitled with respect to such shares ofCommon Stock had such shares of Common Stock been held by the Holder upon theconsummation of such Corporate Event or (ii) in lieu of the shares of CommonStock otherwise receivable upon such conversion, such securities or otherassets received by the holders of Common Stock in connection with theconsummation of such Corporate Event in such amounts as the Holder would havebeen entitled to receive had this Note initially been issued with conversionrights for the form of such consideration (as opposed to shares of CommonStock) at a conversion rate for such consideration commensurate with theConversion Rate. Provision made pursuant to the preceding sentence shall be ina form and substance satisfactory to the holders of Notes representing at leasta majority of the aggregate principal amount of the Notes then outstanding.

 

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)           Adjustment of Conversion Price and Minimum 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 and Minimum Price in effect immediatelyprior to such subdivision will be proportionately reduced. If the Company atany time combines (by combination, reverse stock split or otherwise) one ormore classes of its outstanding shares of Common Stock into a smaller number ofshares, the Conversion Price and Minimum Price in effect immediately prior tosuch combination will be proportionately increased.

 

(b)           Other Events. If any event occurs of the typecontemplated by the provisions of this Section 7 but not expressly provided forby such provisions (including, without

 

11

----

 

limitation, the granting of stock appreciation rights, phantom stockrights or other rights with equity features), then the Company’s Board ofDirectors will make an appropriate adjustment in the Conversion Price andMinimum Price so as to protect the rights of the Holder under this Note;provided that no such adjustment will increase the Conversion Price or MinimumPrice as otherwise determined pursuant to this Section 7.

 

(8)           EXTENSION OF MATURITY DATE AT HOLDER’S OPTION. Theholders of Notes representing at least a majority of the aggregate principalamount of the Notes then outstanding shall have the right, in their solediscretion, to require that the Original Maturity Date of all then outstandingNotes be extended for a period not to exceed three years from the OriginalMaturity Date, without the action of any other Person, by delivering writtennotice thereof (a “**Holder Maturity DateExtension Notice**”) to the Company at any time prior to the OriginalMaturity Date, which Holder Maturity Date Extension Notice shall indicate theMaturity Date, as so extended, of this Note. Within two Business Days ofreceipt of a Holder Maturity Date Extension Notice, the Company shall informall other holders of Notes that such a notice has been received by the Company.

 

(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION AND OPTIONALREDEMPTION. (a) Mandatory Conversion. If at any time from andafter June 10, 2007, the Weighted Average Price of the Common Stock exceeds 200%of the Conversion Price as of the Issuance Date (subject to appropriateadjustments for stock splits, stock dividends, stock combinations and othersimilar transactions after the Issuance Date) for each of any 20 consecutiveTrading Days (the **“Mandatory ConversionMeasuring Period”**) and the Conditions to Mandatory Conversion (asset forth in Section 9(c)) are satisfied or waived in writing by the Holder,the Company shall have the right to require the Holder to convert all or anysuch portion of the Conversion Amount of this Note designated in the MandatoryConversion Notice into fully paid, validly issued and nonassessable shares ofCommon Stock in accordance with Section 3(c) hereof at the Conversion Rateas of the Mandatory Conversion Date (as defined below) (a “**Mandatory Conversion**”). The Company mayexercise its right to require conversion under this Section 9(a) by deliveringwithin not more than two Trading Days following the end of such MandatoryConversion Measuring Period a written notice thereof by facsimile and overnightcourier to all, but not less than all, of the holders of Notes and the TransferAgent (the **“Mandatory Conversion Notice”**and the date all of the holders received such notice (or are deemed to havereceived such notice in accordance with Section 9(f) of the Securities PurchaseAgreement) is referred to as the “**MandatoryConversion Notice Date**”). The Mandatory Conversion Notice shall beirrevocable.

 

(b)           Pro Rata Conversion Requirement. If the Companyelects to cause a conversion of all or any portion of the Conversion Amount ofthis Note pursuant to Section 9(a), then it must simultaneously take the sameaction with respect to the Other Notes. If the Company elects to cause theconversion of this Note pursuant to Section 9(a) (or similar provisions underthe Other Notes) with respect to less than all of the Conversion Amounts of theNotes then outstanding, then the Company shall require conversion of aConversion Amount from each of the holders of the Notes equal to the product of(I) the aggregate Conversion Amount of Notes which the Company has elected tocause to be converted pursuant to Section 9(a), multiplied by (II) thefraction, the numerator of which is the sum of the aggregate principal

 

12

----

 

amount of the Notes purchased by such holder pursuant to the SecuritiesPurchase Agreement and the denominator of which is the sum of the aggregateprincipal amount of the Notes and purchased by all holders pursuant to theSecurities Purchase Agreement (such fraction with respect to each holder isreferred to as its “**Allocation Percentage**,”and such amount with respect to each holder is referred to as its “**Pro Rata Conversion Amount**”). In the eventthat the initial holder of any Notes shall sell or otherwise transfer any ofsuch holder’s Notes, the transferee shall be allocated a pro rata portion ofsuch holder’s Allocation Percentage. The Mandatory Conversion Notice shallstate (i) the Trading Day selected for the Mandatory Conversion in accordancewith Section 9(a), which Trading Day shall be at least 15 Business Days but notmore than 60 Business Days following the Mandatory Conversion Notice Date (the “**Mandatory Conversion Date**”), (ii) the aggregate Conversion Amount of theNotes which the Company has elected to be subject to mandatory conversion fromall of the holders of the Notes pursuant to this Section 9 (and analogousprovisions under the Other Notes), (iii) each holder’s Pro Rata ConversionAmount of the Conversion Amount of the Notes the Company has elected to causeto be converted pursuant to this Section 9 (and analogous provisions under theOther Notes) and (iv) the number of shares of Common Stock to be issuedto such Holder as of the Mandatory Conversion Date. All Conversion Amounts converted by the Holder after the MandatoryConversion Notice Date shall reduce the Conversion Amount of this Note requiredto be converted on the Mandatory Conversion Date. If the Company haselected a Mandatory Conversion, the mechanics of conversion set forth inSection 3(c) shall apply, to the extent applicable, as if the Company and theTransfer Agent had received from the Holder on the Mandatory Conversion Date aConversion Notice with respect to the Conversion Amount being convertedpursuant to the Mandatory Conversion.

 

(c)           Conditionsto Mandatory Conversion. For purposes of this Section 9, “**Conditions to Mandatory Conversion**” means****the following conditions: (i) during the period beginning on the datethat is three months prior to the Mandatory Conversion Date and ending on andincluding the Mandatory Conversion Date, the Company shall have deliveredshares of Common Stock upon any conversion of Conversion Amounts on a timelybasis as set forth in Section 3(c)(i); provided, however, that the Companyshall be deemed to have satisfied the conditions set forth in this clause (i)if on not more than two occasions prior to the delivery of the Company’sMandatory Conversion Notice the Company has failed to meet the requirements setforth in Section 3(c)(i) hereof by no more than three days; (ii) on each day during the periodbeginning on the date that is six months prior to the Mandatory Conversion Dateand ending on and including the Mandatory Conversion Date (the **“Notice Measuring Period”**), the Common Stockshall be listed on the Principal Market or The New York Stock Exchange, Inc.and delisting or suspension by such market or exchange shall not have beenthreatened either (A) in writing by such market or exchange or (B) by fallingbelow the minimum listing maintenance requirements of such market or exchange;(iii) during the period beginning on the first Trading Day of the NoticeMeasuring Period and ending on and including the Mandatory Conversion Date,there shall not have occurred (x) the public announcement of a pending,proposed or intended Change of Control which has not been abandoned, terminatedor consummated, (y) an Event of Default or (z) an event that with the passageof time or giving of notice, and assuming it were not cured, would constitutean Event of Default if such event has not been cured prior to the MandatoryConversion Notice Date; (iv) on each day of the period beginning on the date ofdelivery of the Mandatory Conversion Notice and ending on the MandatoryConversion Date

 

13

----

 

either (x) the Registration Statement or Registration Statementsrequired pursuant to 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; and (v) on each day of the period beginning on theMandatory Conversion Date and ending thirty (30) Trading Days thereafter either(x) the Registration Statements required pursuant to the Registration RightsAgreement shall be expected to be effective and available for the sale of atleast all of the Registrable Securities in accordance with the terms of theRegistration Rights Agreement or (y) all shares of Common Stock issuable uponconversion of the Notes shall be eligible for sale without restriction andwithout the need for registration under any applicable federal or statesecurities laws.

 

(d)           Limitations. If the Company is unable to deliverConversion Shares pursuant to a Mandatory Conversion under this Section 9 (suchundeliverable Conversion Shares, the “**BlockedShares**”) as a result of the provisions of Section 3(d)(i) hereof,then notwithstanding the provisions of Section 3(d)(i) hereof Company shall beentitled to deliver the Blocked Shares (without being subject to any conditionshereunder including the Conditions to Mandatory Conversion and the provisionsof Section 3(d)(i) hereof) ninety (90) days after the Mandatory Conversion Date.The Holder shall inform the Company of the number of Blocked Shares applicableto such Holder within one Business Day after the Mandatory Conversion NoticeDate. If the Company receives no written notice from the Holder of the numberof Blocked Shares applicable to such Holder by the end of the Business Dayafter the Mandatory Conversion Notice Date, the Company may conclusivelyconclude that there are no Blocked Shares for such Holder.

 

(e)           CompanyOptional Redemption Right.

 

(i)            CompanyOptional Redemption. If at any time from and after the aggregate Principal amount of the thenoutstanding Notes is equal to or less than $6,000,000, the Conditions toCompany Redemption (as set forth below) are satisfied or waived in writing bythe Holder, the Company shall have the right to redeem all but not less thanall Notes then outstanding (a **“CompanyOptional Redemption”**). The Company may exercise its right ofredemption under this Section 9(e)(i) by delivering a written notice thereof byfacsimile and overnight courier to all of the holders of Notes and the TransferAgent (the **“Company Optional Redemption Notice”**). The Company Optional RedemptionNotice shall be irrevocable. This Note shall be redeemed by the Companypursuant to this Section 9(e)(i) at a price equal to 110% of the ConversionAmount (the **“Company Optional Redemption Price”**). Notwithstanding the foregoing, theHolder may continue to convert this Note into Common Stock pursuant to Section3(a) on or prior to the date immediately preceding the Company OptionalRedemption Date. Redemptions required by this Section 9(e) shall be made inaccordance with the provisions of Section 12.

 

(ii)           CompanyOptional Redemption Notice. If the Company elects to cause a redemption ofall of the Conversion Amount of this Note pursuant to Section 9(e)(i), then itmust simultaneously take the similar action with respect to the Other Notes. The

 

14

----

 

Company OptionalRedemption Notice shall state (A) the Trading Day selected for the CompanyOptional Redemption in accordance with Section 9(e)(i), which Trading Day shallbe at least 20 Business Days but not more than 60 Business Days following theCompany Optional Redemption Notice Date (the **“CompanyOptional Redemption Date”**), (B) that all outstanding Notes have beencalled for optional redemption pursuant to this Section 9(e) (and analogousprovisions under the Other Notes), and (C) the Company Optional RedemptionPrice to be paid to such Holder as of the Company Optional Redemption Date. AllConversion Amounts converted by the Holder after delivery of the CompanyOptional Redemption Notice Date shall reduce the Conversion Amount of this Noterequired to be redeemed on the Company Optional Redemption Date.

 

(iii)          Conditionsto Company Redemption. For purposes of this Section 9(e), **“Conditions to Company Redemption”** means the Conditions toMandatory Conversion with the term “Mandatory Conversion Notice” being replacedby “Company Optional Redemption Notice” and the term “Mandatory Conversion Date”being replaced by “Company Optional Redemption Date”.

 

(10)         NONCIRCUMVENTION. The Company hereby covenants andagrees that the Company will not, by amendment of its Articles of Incorporationor through 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 OF AUTHORIZED SHARES.

 

(a)           Reservation. The Company shall initially reserveout of its authorized and unissued Common Stock a number of shares of CommonStock for each of the Notes equal to 100% of the Conversion Rate with respectto the Conversion Amount of each such Note as of the Issuance Date. Thereafter,the Company, so long as any of the Notes are outstanding, shall take all actionnecessary to reserve and keep available out of its authorized and unissuedCommon Stock, solely for the purpose of effecting the conversion of the Notes,100% of the number of shares of Common Stock as shall from time to time benecessary to effect the conversion of all of the Notes then outstanding;provided that at no time shall the number of shares of Common Stock so reservedbe less than the number of shares required to be reserved by the previoussentence (without regard to any limitations on conversions) (the **“Required Reserve Amount”**). The initialnumber of shares of Common Stock reserved for conversions of the Notes and eachincrease in the number of shares so reserved shall be allocated pro rata amongthe holders of the Notes based on the principal amount of the Notes held byeach holder at the time of Issuance Date or increase in the number of reservedshares, as the case may be (the **“AuthorizedShare 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. Anyshares of Common Stock reserved and allocated to any Person which ceases tohold any Notes shall be allocated to the remaining holders of Notes, pro ratabased on the principal amount of the Notes then held by such holders.

 

15

----

 

(b)           Insufficient Authorized 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 tosatisfy its obligation to reserve for issuance upon conversion of the Notes atleast a number of shares of Common Stock equal to the Required Reserve Amount(an **“Authorized Share Failure”**),then the Company shall as soon as practicable take all action reasonablynecessary to increase the Company’s authorized shares of Common Stock to anamount sufficient to allow the Company to reserve the Required Reserve Amountfor the Notes then outstanding. Without limiting the generality of theforegoing sentence, as soon as practicable after the date of the occurrence ofan Authorized Share Failure, but in no event later than 60 days after theoccurrence of such Authorized Share Failure, the Company shall hold a meetingof its stockholders for the approval of an increase in the number of authorizedshares of Common Stock. In connection with such meeting, the Company shallprovide each stockholder with a proxy statement and shall use its best effortsto solicit its stockholders’ approval of such increase in authorized shares ofCommon Stock and to cause its board of directors to recommend to thestockholders that they approve such proposal.

 

(12)         HOLDER’S REDEMPTIONS.

 

(a)           Mechanics. In the event that the Holder has sent anEvent of Default Redemption Notice or a Change of Control Redemption Notice tothe Company pursuant to Section 4(b) or Section 5(c), or has received aCompany Optional Redemption Notice pursuant to Section 9(b), then the Holdershall promptly after receipt of the applicable Redemption Price submit thisNote to the Company (each, a **“Redemption Notice”**). The Company shalldeliver the applicable Event of Default Redemption Price to the Holder withinfive Business Days after the Company’s receipt of the Holder’s Event of DefaultRedemption Notice. If the Holder has submitted a Change of Control RedemptionNotice in accordance with Section 5(c), the Company shall deliver theapplicable Change of Control Redemption Price to the Holder concurrently withthe consummation of such Change of Control if such notice is received prior tothe consummation of such Change of Control and within five Business Days afterthe Company’s receipt of such notice otherwise. The Company shalldeliver the Company Optional Redemption Amount to the Holder on the CompanyOptional Redemption Date. In the eventof a redemption of less than all of the Conversion Amount of this Note, theCompany shall promptly cause to be issued and delivered to the Holder a newNote (in accordance with Section 19(d)) representing the outstanding Principalwhich has not been redeemed. In the event that the Company does not pay theEvent of Default Redemption Price, the Change of Control Redemption Price orthe Company Optional Redemption Price (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) (together with any Late Chargesthereon) 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 new Note

 

16

----

 

(in accordance with Section 19(d)) to the Holder representing suchConversion Amount and (z) the Conversion Price of this Note or such new Notesshall be adjusted to the lesser of (A) the Conversion Price as in effect on thedate on which the Redemption Notice is voided and (B) the lowest Closing BidPrice during the period beginning on and including the date on which theRedemption Notice is delivered to the Company and ending on and including thedate on which the Redemption Notice is voided. The Holder’s delivery of anotice voiding a Redemption Notice and exercise of its rights following suchnotice shall not affect the Company’s obligations to make any payments of LateCharges which have accrued prior to the date of such notice with respect to theConversion Amount subject to such notice.

 

(b)           Redemption by Other Holders. Upon the Company’sreceipt of 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) or the Company’sdelivery of a Company Optional Redemption Notice pursuant to Section 9(e)(each, an **“Other Redemption Notice”**),the Company shall immediately forward to the Holder by facsimile a copy of suchnotice. If the Company receives a Redemption Notice and one or more OtherRedemption Notices during the seven Business Day period beginning on andincluding the date which is three Business Days prior to the Company’s receiptof the Holder’s Redemption Notice and ending on and including the date which isthree 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)           Subordination. The indebtedness represented by thisNote and the payment of the principal amount and interest and Late Chargesthereon, any redemption amount, liquidated damages, fees, expenses or any otheramounts in respect of this Note are hereby expressly made subordinate andjunior and subject in right of payment (to the extent expressly set forth inclause (b) below) to the prior payment in full in cash of all SeniorIndebtedness of the Company now outstanding or hereinafter incurred.

 

(b)           Payment upon Dissolution, Etc. In the event of anybankruptcy, insolvency, reorganization, receivership, composition, assignmentfor benefit of creditors or other similar proceeding initiated by or againstthe Company or any dissolution or winding up or total or partial liquidation orreorganization of the Company (being hereinafter referred to as a “**Proceeding**”), all principal and interestdue upon any Senior Indebtedness shall first be paid in full before the Holdershall be entitled to receive or, if received, to retain any payment ordistribution on account of this Note, and upon any such Proceeding, any paymentor distribution of assets of the Company of any kind or character, whether incash, property or securities, to which the Holder would be entitled except forthe provisions of this Section 13 shall be paid by the Company or by anyreceiver, trustee in bankruptcy, liquidating trustee, agent or other Person

 

17

----

 

making such payment or distribution, or by the Holder who shall havereceived such payment or distribution, directly to the holders of the SeniorIndebtedness (pro rata to each such holder on the basis of the respectiveamounts of such Senior Indebtedness held by such holder) or theirrepresentatives to the extent necessary to pay all such Senior Indebtedness infull after giving effect to any concurrent payment or distribution to or forthe holders of such Senior Indebtedness, before any payment or distribution ismade to the Holder or any holders of the Notes; provided, however, thatnotwithstanding anything to the contrary, in any event the Holder shall beentitled to receive and retain all Junior Securities (as defined below).

 

(c)           Certain Rights. Nothing contained in this Section13 or elsewhere in this Note is intended to or shall impair, as among theCompany, its creditors including the holders of Senior Indebtedness and theHolder, the right, which is absolute and unconditional, of the Holder toconvert this Note in accordance herewith.

 

(d)           Rights of Holders Unimpaired. The provisions ofthis Section 13 are and are intended solely for the purposes of defining therelative rights of the Holder and the holders of Senior Indebtedness andnothing in this Section 13 shall impair, as between the Company and the Holder,the obligation of the Company, which is unconditional and absolute, to pay tothe Holder the principal thereof (and premium, if any) and interest thereon, inaccordance with the terms of this Note.

 

(e)           JuniorSecurities. As used herein, “**Junior Securities**”means debt or equity securities of the Company as reorganized or readjusted, ordebt or equity securities of the Company or any other Person provided for by aplan of reorganization or readjustment authorized by an order or decree of acourt of competent jurisdiction in a Proceeding under any applicable law, solong as in the case of debt securities, such Junior Securities are subordinatedin right of payment to all Senior Indebtedness and to whatever is issued to theholders of the Senior Indebtedness on account of the Senior Indebtedness, tothe same extent as, or to a greater extent than, the Subordinated Indebtednessis so subordinated as provided for herein.

 

(14)         VOTING RIGHTS; RESTRICTION ON DIVIDENDS. The Holdershall have no voting rights as the holder of this Note, except as required bylaw, including but not limited to the General and Business Corporation Law ofMissouri, and as expressly provided in this Note. Until the DividendEligibility Date, the Company shallnot, directly or indirectly, declare or pay any dividend or distribution on itscapital stock, other than stock dividends in accordance with Section 7(a).

 

(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

## **(a)          **Rank. Allpayments due under this Note (a) shall rank *paripassu* with all Other Notes and (b) shall be senior to all otherIndebtedness of the Company and its Subsidiaries, other than PermittedIndebtedness (as defined below).

## ** **

## **(b)           Incurrence of Indebtedness.**So long as this Note is outstanding, the Companyshall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, incur or guarantee, assume or suffer to exist anyIndebtedness, other than (i) the Indebtedness evidenced by this Note and theOther Notes and (ii) Permitted Indebtedness. As

 

18

----

 

## **used herein,**“Permitted Indebtedness”means (A) Senior Indebtedness; and (B) Permitted Subordinated Indebtedness.

## ** **

## **(c)           Existence of Liens.**So long as this Note is outstanding, the Companyshall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest orother encumbrance upon or in any property or assets (including accounts andcontract rights) owned by the Company or any of its Subsidiaries(collectively, “Liens”)other than Permitted Liens. As used herein, “Permitted Liens” means (i) Liens incurred to secure SeniorIndebtedness, (ii) Liens on fixed or capital assets acquired, constructed orimproved by the Company or any Subsidiary, to the extent of Indebtednessincurred within thirty days for such acquisition, construction or improvementand incurred within thirty days of such acquisition, construction orimprovement, (iii) purchase money Liens, (iv) carriers’, warehousemen’s,mechanics’, materialmen’s, repairmen’s and other similar Liens imposed by law,so long as payment on such Lines is not more than 30 days past due, or (v)other Liens permitted by the Company’s senior credit agreement in existence onthe date hereof as filed as an exhibit to the Company’s current report on Form8-K filed with the SEC on February 13, 2004, and without giving effect tofuture amendments to or the termination of the credit agreement.

## ** **

## **(d)           Restricted Payments.**The Company shall not, and the Company shall notpermit any of its Subsidiaries to, directly or indirectly, redeem, defease,repurchase, repay or make any payments in respect of, by the payment of cash orcash equivalents (in whole or in part, whether by way of open market purchases,tender offers, private transactions or otherwise), all or any portion of anyIndebtedness, other than Senior Indebtedness or Pari Passu Indebtedness,whether by way of payment in respect of principal of (or premium, if any) orinterest on, such Indebtedness if at the time such payment is due or isotherwise made or, after giving effect to such payment, an event constituting,or that with the passage of time and without being cured would constitute, anEvent of Default has occurred and is continuing.

## ** **

(16)         PARTICIPATION. Until the Dividend Eligibility Date,the Holder shall have no right to participate in any dividends paid ordistributions made to the holders of Common Stock. From and after the DividendEligibility Date, the Holder, as theholder of this Note, shall be entitled to such dividends paid and distributionsmade to the holders of Common Stock to the same extent 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 under the precedingsentence shall be made concurrently with the dividend or distribution to theholders of Common Stock.

 

(17)         VOTE TO ISSUE, OR CHANGE 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 in the sole discretion of the Company. Any change oramendment to this Note or the Other Notes so approved upon written notice bythe Company of such change or amendment shall be binding upon the Holder andholders, present and future, of

 

19

----

 

this Note and the Other Notes without regard to whether the terms ofsuch change or amendment are reflected in this Note or the Other Notes.

 

(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(c) of the Securities Purchase Agreement, providedthat this Note may be offered, sold, assigned or transferred only in Principalamounts of $5,000,000 (or the entire remaining Principal amount if less) or incrementsof $100,000 in excess thereof.

 

(19)         REISSUANCE OF THIS NOTE.

 

(a)           Transfer. If this Note is to be transferred, theHolder shall surrender this Note to the Company, whereupon the Company willforthwith issue and deliver upon the order of the Holder a new Note (inaccordance with Section 19(d)), registered as the Holder may request,representing the outstanding Principal being transferred by the Holder and, ifless then the entire outstanding Principal is being transferred, a new Note (inaccordance with Section 19(d)) to the Holder representing the outstandingPrincipal not being transferred. The Holder and any assignee, by acceptance ofthis Note, acknowledge and agree that, by reason of the provisions of Section3(c)(iii) and this Section 19(a), following conversion or redemption of anyportion of this Note, the outstanding Principal represented by this Note may beless than the Principal stated on the face of this Note.

 

(b)           Lost, Stolen or Mutilated Note. Upon receipt by theCompany of evidence reasonably satisfactory to the Company of the loss, theft,destruction or mutilation of this Note, and, in the case of loss, theft ordestruction, of any indemnification undertaking by the Holder to the Company incustomary form and, in the case of mutilation, upon surrender and cancellationof this Note, the Company shall execute and deliver to the Holder a new Note(in accordance with Section 19(d)) representing the outstanding Principal.

 

(c)           Note Exchangeable for Different Denominations. 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 Section19(d) and in principal amounts of at least $100,000) representing in theaggregate the outstanding Principal of this Note, and each such new Note willrepresent such portion of such outstanding Principal as is designated by theHolder at the time of such surrender.

 

(d)           Issuance of New Notes. Whenever the Company isrequired to issue a new Note pursuant to the terms of this Note, such new Note(i) shall be of like tenor with this Note, (ii) shall represent, as indicatedon the face of such new Note, the Principal remaining outstanding (or in thecase of a new Note being issued pursuant to Section 19(a) or Section 19(c), thePrincipal 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)

 

20

----

 

shall represent accrued Interest and Late Charges on the Principal andInterest of this Note, from the Issuance Date.

 

(20)         REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHESAND INJUNCTIVE RELIEF. The remedies provided in this Note shall becumulative and in addition to all other remedies available under this Note, theSecurities Purchase Agreement and the Registration Rights Agreement, at law orin equity (including a decree of specific performance and/or other injunctiverelief), and nothing herein shall limit the Holder’s right to pursue actual andconsequential damages for any failure by the Company to comply with the termsof this Note. Amounts set forth or provided for herein with respect topayments, conversion and the like (and the computation thereof) shall be theamounts to be received by the Holder and shall not, except as expresslyprovided herein, be subject to any other obligation of the Company (or theperformance thereof). The Company acknowledges that a breach by it of itsobligations hereunder will cause irreparable harm to the Holder and that theremedy at law for any such breach may be inadequate. The Company thereforeagrees that, in the event of any such breach or threatened breach, the Holdershall be entitled, in addition to all other available remedies, to aninjunction restraining any breach, without the necessity of showing economicloss and without any bond or other security being required.

 

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

 

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

 

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

 

(24)         DISPUTE RESOLUTION. In the case of a dispute as tothe determination of the Redemption Price or the arithmetic calculation of theConversion Rate or the Redemption Price, the Company shall submit the disputeddeterminations or arithmetic calculations via facsimile within one Business Dayof receipt of the Conversion Notice or Redemption Notice or other event givingrise to such dispute, as the case may be, to the Holder. If the Holder and the Companyare unable to agree upon such determination or calculation within one BusinessDay of such disputed determination or arithmetic calculation being submitted tothe Holder, then the

 

21

----

 

Company shall, within one Business Day submit via facsimile (a) thedisputed determination of the Closing Bid Price or the Closing Sale Price to anindependent, reputable investment bank selected by the Company and approved bythe Holder or (b) the disputed arithmetic calculation of the Conversion Rate orthe Redemption Price to the Company’s independent, 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 or accountant’s determination orcalculation, as the case may be, shall be binding upon all parties absentdemonstrable error.

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices. Whenever notice is required to be givenunder this Note, unless otherwise provided herein, such notice shall be givenin accordance with Section 9(f) of the Securities Purchase Agreement. TheCompany shall provide the Holder with prompt written notice of all actionstaken pursuant to this Note, including in reasonable detail a description ofsuch action and the reason therefore. Without limiting the generality of theforegoing, the Company will give written notice to the Holder (i) immediatelyupon any adjustment of the Conversion Price, setting forth in reasonabledetail, and certifying, the calculation of such adjustment and (ii) at leasttwenty (20) days prior to the date on which the Company closes its books ortakes a record (A) with respect to any dividend or distribution upon the CommonStock, (B) with respect to any pro rata subscription offer to holders of CommonStock or (C) for determining rights to vote with respect to any Change ofControl, dissolution or liquidation, provided in each case that suchinformation shall be made known to the public prior to or in conjunction withsuch notice being provided to the Holder. Notwithstanding the foregoing, Section4(i) of the Securities Purchase Agreement shall apply to all notices givenpursuant to this Note.

 

(b)           Payments. Whenever any payment of cash is to bemade by the Company to any Person pursuant to this Note, such payment shall bemade in lawful money of the United States of America by a check drawn on theaccount of the Company and sent via overnight courier service to such Person atsuch address as previously provided to the Company in writing (which address,in the case of each of the Purchasers, shall initially be as set forth on theSchedule of Buyers attached to the Securities Purchase Agreement); providedthat the Holder may elect to receive a payment of cash via wire transfer to aU.S. bank or the domestic branch of a foreign bank of immediately availablefunds by providing the Company with prior written notice setting out suchrequest and the Holder’s wire transfer instructions. 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. Any amount of Principal or other amounts due under theTransaction Documents (as defined in the Securities Purchase Agreement) whichis not paid when due shall result in a late charge being incurred and payableby the Company in an amount equal to interest

 

22

----

 

on such amount at the rate of 15% per annum from the date such amountwas due until the same is paid in full (**“LateCharge”**).

 

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

 

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

 

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

 

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

 

(a)           **“Approved Stock Plan”**means any employee benefit, option or incentive plan which has been approved bythe Board of Directors of the Company, pursuant to which the Company’ssecurities may be issued to any employee, consultant, officer or director forservices provided to the Company.

 

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

 

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

 

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

 

(e)           **“Closing Bid Price”**and **“Closing Sale Price”** means,for any security as of any date, the last closing bid price and last closingtrade price, respectively, for such security on the Principal Market, asreported 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 4:00:00 p.m., New York Time, asreported 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

 

23

----

 

exchange or trading market where such security is listed or traded asreported by Bloomberg, or if the foregoing do not apply, the last closing bidprice or last trade price, respectively, of such security in theover-the-counter market on the electronic bulletin board for such security asreported by Bloomberg, or, if no closing bid price or last trade price,respectively, is reported for such security by Bloomberg, the average of thebid prices, or the ask prices, respectively, of any market makers for suchsecurity as reported in the “pink sheets” by Pink Sheets LLC (formerly theNational Quotation Bureau, Inc.). If the Closing Bid Price or the Closing SalePrice cannot be calculated for a security on a particular date on any of theforegoing bases, the Closing Bid Price or the Closing Sale Price, as the casemay be, of such security on such date shall be the fair market value asmutually determined by the Company and 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 determinationsto be appropriately adjusted for any stock dividend, stock split, stockcombination or other similar transaction during the applicable calculation period.

 

(f)            **“Contingent Obligation”**means, as to any Person, any direct or indirect liability, contingent orotherwise, of that Person with respect to any indebtedness, lease, dividend orother obligation of another Person if the primary purpose or intent of thePerson incurring such liability, or the primary effect thereof, is to provideassurance to the obligee of such liability that such liability will be paid ordischarged, or that any agreements relating thereto will be complied with, orthat the holders of such liability will be protected (in whole or in part)against loss with respect thereto.

 

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

 

(h)           **“****Dividend Eligibility Date”** means the laterof (x) January 1, 2006, or (y) the date specified in a written notice deliveredno later than December 1, 2005, to the Holder by the Company.

 

(i)            **“EBITDA”**means, for any four Calendar Quarter period for any Person, the net income (ornet loss) of such Person and its consolidated Subsidiaries, determined inaccordance with GAAP, plus (i) any provision for (or less any benefit from)income taxes, (ii) any deduction for interest expense, net of interest income(iii) depreciation and amortization expense, (iv) the non-cash portion ofcompensation expense related to the grant of stock options, restricted stock,and stock appreciation rights, (v) any other components of net income (or netloss) which are non-cash and will not convert to cash prior to the finalmaturity of this Note, and (vi) costs, fees and expenses incurred in connectionwith any acquisition transaction, and as adjusted for the following items (tothe extent that they are reflected in net income or net loss): elimination of:(v) any net income (or net loss) from discontinued operations as determined inaccordance with GAAP (w) all extraordinary gains and losses determined inaccordance with GAAP, (x) gains and losses from sales or dispositions ofproperty and equipment or other fixed assets, (y) all non-recurring income andexpense items not incurred in the ordinary course of business to the extentincluded in the determination of net income for the relevant determinationperiod and (z) foreign currency transaction gains and losses, to the extentincluded in the determination of net income for the relevant determinationperiod; provided, however, that if,

 

24

----

 

during the fourCalendar Quarter period for which the EBITDA of a Person is being calculated,such Person has completed an acquisition of an on-going business (a “Target”),the EBITDA of such Person shall be recalculated to include the EBITDA of suchTarget as if such acquisition (including any acquisition completed prior to thedate of this Note but within the applicable period for which EBITDA is beingcalculated) had been completed on the first day of the relevant measuringperiod. To the extent applicable, all determinations of the components ofEBITDA shall be derived from the Company’s then most recently filed AnnualReport on Form 10-K or Quarterly Report on Form 10-Q, as applicable.

 

(j)            **“Excluded Securities”**means any shares of Common Stock issued or issuable: (i) in connection with anyApproved Stock Plan; (ii) upon conversion of the Notes and the Other Notes; and(iii) upon conversion of any Options or Convertible Securities which areoutstanding on the day immediately preceding the Issuance Date, provided thatthe terms of such Options or Convertible Securities are not amended, modifiedor changed on or after the Issuance Date.

 

(k)           **“GAAP”**means United States generallyaccepted accounting principles, consistently applied.

 

(l)            **“Indebtedness”**of any Person means, withoutduplication (A) all indebtedness for borrowed money, (B) all obligationsissued, undertaken or assumed as the deferred purchase price of property orservices (other than trade payables entered into in the ordinary course ofbusiness), (C) all reimbursement or payment obligations with respect to lettersof credit, surety bonds and other similar instruments, (D) all obligationsevidenced by notes, bonds, debentures or similar instruments, includingobligations so evidenced incurred in connection with the acquisition of property,assets or businesses, (E) all indebtedness created or arising under anyconditional sale or other title retention agreement, or incurred as financing,in either case with respect to any property or assets acquired with theproceeds of such indebtedness (even though the rights and remedies of theseller or bank under such agreement in the event of default are limited torepossession or sale of such property), (F) all monetary obligations under anyleasing or similar arrangement which, in connection with generally acceptedaccounting principles, consistently applied for the periods covered thereby, isclassified as a capital lease, (G) off-balance sheet liabilities retained inconnection with asset securitization programs, synthetic leases, sale and leasebacktransactions or other similar obligations arising with respect to any othertransaction which is the functional equivalent of or takes the place ofborrowing but which does not constitute a liability on the consolidated balancesheet of such Person and its subsidiaries, and (H) all indebtedness referred toin clauses (A) through (G) above secured by (or for which the holder of suchIndebtedness has an existing right, contingent or otherwise, to be secured by)any mortgage, lien, pledge, charge, security interest or other encumbrance uponor in any property or assets (including accounts and contract rights) owned byany Person, even though the Person which owns such assets or property has notassumed or become liable for the payment of such indebtedness, and (I) allContingent Obligations in respect of indebtedness or obligations of others ofthe kinds referred to in clauses (A) through (H) above.

 

(m)          **“Issuance Date”**means June 10, 2004.

 

25

----

 

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

 

(o)           **“PermittedSubordinated Indebtedness”** means Indebtedness that (x) is madeexpressly subordinate in right of payment to the Indebtedness evidenced by thisNote and the Other Notes on terms reasonably satisfactory to the holders of Notes representing not less than amajority of the aggregate principal amount of the then outstanding Notes and(y) does not provide at any time for the payment, prepayment, repayment,repurchase or defeasance, directly or indirectly, of any principal or premium,if any, thereon until at least 91 days after the Maturity Date.

 

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

 

(q)           “**Principal Market**”means the Nasdaq National Market.

 

(r)            “**Redemption Premium**” means (i) in the caseof the Events of Default described in Section 4(a)(i) - (vi) and (ix) - (xiii),120% or (ii) in the case of the Events of Default described in Section4(a)(vii) - (viii), 100%.

 

(s)           **“Registration Rights Agreement”** means thatcertain registration rights agreement between the Company and the initialholders of the Notes relating to the registration of the resale of the sharesof Common Stock issuable upon conversion of the Notes.

 

(t)            **“SEC”** means the United States Securitiesand Exchange Commission.

 

(u)           **“Securities PurchaseAgreement”** means that certain securities purchase agreement betweenthe Company and the initial holders of the Notes pursuant to which the Companyissued the Notes.

 

(v)           **“Senior Indebtedness”**means the principal of (and premium, if any), interest on, and all fees andother amounts (including, without limitation, any reasonable costs, enforcementexpenses (including reasonable legal fees and disbursements), collateralprotection expenses and other reimbursement or indemnity obligations relatingthereto) payable under the agreements or instruments evidencing, anyunaffiliated, third-party Indebtedness of the Company and its Subsidiaries,whether now existing or hereafter arising (together with any renewals,refundings, refinancings or other extensions thereof), which is not madeexpressly subordinate in right of payment to the Indebtedness evidenced by thisNote and the Other Notes, provided that the aggregate amount of such SeniorIndebtedness (taking into account the maximum amounts which may be advancedunder the loan documents evidencing such Senior Indebtedness) does not as ofthe date on which such Senior Indebtedness is incurred exceed the product of(i) 3.0 and (ii) EBITDA (the “**SeniorIndebtedness Cap**”). Without limitation of the generality of theforegoing and subject to the Senior Indebtedness Cap, Senior Indebtedness shallinclude the obligations of the Company to its current senior secured lender,LaSalle Bank, N.A. and any participants with LaSalle Bank, N.A. in suchIndebtedness (the “**Senior Bank Obligations**”),and the Senior Bank Obligations are designated as Senior Indebtedness. TheCompany may

 

26

----

 

from time to timedesignate by written notice to the Holder the obligations, in addition to theSenior Bank Obligations, which constitute Senior Indebtedness, and, providedthat, at the time that the Senior Indebtedness is incurred (or a commitment tolend any Senior Indebtedness is made), the aggregate Senior Indebtedness of theCompany does not exceed the Senior Indebtedness Cap, Senior Indebtedness sodesignated shall continue to be Senior Indebtedness notwithstanding anysubsequent decline in the Company’s EBITDA.

 

(w)          **“Total Capitalization”**means, at any time, the sum of (i) the sum of all amounts (without duplication)which, in accordance with GAAP, would be included in the Company’s stockholders’equity (excluding unrealized gains or losses pursuant to GAAP) as required tobe reported in the Company’s then most recent consolidated balance sheet, (ii)Total Debt and (iii) the cumulative (subsequent to issuance of this Note)non-cash portion of compensation expense related to the grant of stockoptions, restricted stock, and stock appreciation rights.

 

(x)            **“Total Debt”**means, on any date, the outstanding principal amount of all Indebtedness of theCompany and its Subsidiaries of the type referred to in clauses (A), (C), (D),(F) and (G) of the definition of “Indebtedness” along with any ContingentObligation in respect of any of the foregoing.

 

(y)           **“Total Debt to EBITDARatio”** means, as of the last day of any Calendar Quarter, the ratioof (i) Total Debt outstanding on such day to (ii) EBITDA on such day.

 

(z)            **“Total Debt to TotalCapitalization Ratio”** means, as of the last day of any CalendarQuarter, the ratio of (i) Total Debt outstanding on such day to (ii) TotalCapitalization on such day.

 

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

 

(bb)         **“Weighted Average Price”**means, for any security as of any date, the dollar volume-weighted averageprice for such security on the Principal Market during the period beginning at9:30:01 a.m., New York Time (or such other time as the Principal Marketpublicly announces is the official open of trading), and ending at 4:00:00p.m., New York Time (or such other time as the Principal Market publiclyannounces is the official close of trading) as reported by Bloomberg throughits “Volume at Price” functions, or, if the foregoing does not apply, thedollar volume-weighted average price of such security in the over-the-countermarket on the electronic bulletin board for such security during the periodbeginning at 9:30:01 a.m., New York Time (or such other time as such marketpublicly announces is the official open of

 

27

----

 

trading), and ending at 4:00:00 p.m., New York Time (or such other timeas such market publicly announces is the official close of trading) as reportedby Bloomberg, or, if no dollar volume-weighted average price is reported forsuch security by Bloomberg for such hours, the average of the highest closingbid price and the lowest closing ask price of any of the market makers for suchsecurity as reported in the “pink sheets” by Pink Sheets LLC (formerly theNational 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 theCompany and the Holder are unable to agree upon the fair market value of suchsecurity, then such dispute shall be resolved pursuant to Section 24. All suchdeterminations to be appropriately adjusted for any stock dividend, stocksplit, stock combination or other similar transaction during the applicablecalculation period.

 

**[Signature Page Follows]**

 

28

----

 

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

 
|   | **EPIQ SYSTEMS, INC.** |
|--------|------------------------|
|   |                   |
|   |                   |
|   | By:                    |   |   |
|   |                   | Name: | Elizabeth M. Braham |
|   |                   | Title: | Executive Vice President and Chief |
|   |                   |   | Financial Officer |
|        |                        |  |  |  |  |

 

 
| Dated:                                  |
|-----------------------------------------|
|                                    |
| Countersigned:                          |
|                                    |
| Wells Fargo Bank, National Association, |
| as Transfer Agent                       |
|                                    |
|                                    |
| By:                                     |   |   |
|                                    | Authorized Signatory |
|                                         |  |  |  |

 

29

----

 

**EXHIBIT I**

 

**EPIQ SYSTEMS, INC.****CONVERSION NOTICE**

 

Reference is madeto the Contingent Convertible Subordinated Note (the **“Note”**) issued to the undersigned by EPIQ Systems, Inc. (the **“Company”**). In accordance with and pursuantto the Note, the undersigned hereby elects to convert the Conversion Amount (asdefined in the Note) of the Note indicated below into shares Common Stock, parvalue $0.01 per share, of the Company (the **“CommonStock”**) as of the date specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount to be converted:

 

The undersignedhereby certifies to the Company that the Company’s conversion of the amount setforth above in accordance with Section 3(a) of the Note will not directlyresult in the undersigned (together with the undersigned’s affiliates)beneficially owning in excess of 9.99% of the number of shares of Common Stockoutstanding immediately after giving effect to such conversion, calculated inaccordance with Section 3(d)(i) of the Note.

 

Please confirm thefollowing information:

 

Conversion Price:

 

Number of shares of Common Stock to be issued:

 

Please issue theCommon Stock into which the Note is being converted in the following name andto the following address:

 

Name/Address for Issuance:

 

 

 

U.S. Tax Identification Number, if applicable:

 

Broker/Dealer Information for DWAC:

 

Brokerage Name & DTC Participant #

 

Settlement Date                         BrokerContact                                  Phone#                       

 

Facsimile Number:

 

30

----

 

Authorization:

 
| By:    |   |   |
|--------|--------|--------|
| Title: |   |
|        |        |        |  |

                

 
| Dated: |   |
|--------|--------|

Account Number:

(if electronic DWAC/book entry transfer)

 

Transaction Code Number:

(if electronic DWAC/book entry transfer)

 

31

----

 

**CONVERSIONACKNOWLEDGMENT**

 

**&**

 

**TRANSFERAGENT INSTRUCTION**

 

The Company hereby acknowledges this Conversion Noticeand hereby directs Wells Fargo Bank, N.A. to issue the above indicated numberof shares of Common Stock in accordance with the Transfer Agent Instructionsdated June 10, 2004 from the Company and acknowledged and agreed to by WellsFargo Bank, N.A.

 

 
|   | **EPIQ SYSTEMS, INC.** |
|--------|------------------------|
|   |                   |
|   |                   |
|   | By:                    |   |
|   |                   | Name: |
|   |                   | Title: |
|        |                        |  |  |

 

32

----