Exhibit 4.2





Exhibit 4.2




AMENDED AND RESTATED SENIOR SECURED CONVERTIBLE NOTE




THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY
REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.



Image Entertainment, Inc.




Amended and Restated Senior Secured Convertible Note




	 	 	 	 	 	 	 
	Issuance Date:

	 	August 30, 2006
	 	Amended Principal Amount:
	 	U.S.$15,700,972.60
	Amendment Date:

	 	July 30, 2009	 	 	 	 






FOR VALUE RECEIVED, Image Entertainment, Inc., a Delaware corporation (the “Company”), hereby
promises to pay to the order of PORTSIDE GROWTH AND OPPORTUNITY FUND or registered assigns
(“Holder”) the amount set out above as the Amended Principal Amount (as reduced pursuant to the
terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), on any Installment Date with respect to the Installment
Amount due on such Installment Date (each, as defined herein), acceleration, redemption or
otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on
any outstanding Principal at the Interest Rate (as defined below), from the date set out above as
the Issuance Date (the “Issuance Date”) until the same becomes due and payable, whether upon an
Interest Date (as defined below), any Installment Date, the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms hereof). This
Amended and Restated Senior Secured Convertible Note amends, supplements, modifies and completely
restates and supersedes the Senior Secured Convertible Note, with an original principal amount as
of the Issuance Date of U.S. $17,000,000.00 and an outstanding principal amount as of the calendar
day immediately preceding the Amendment Date of U.S. $13,000,000, dated as of the Issuance Date
(the “Existing Note”), issued pursuant to the Securities Purchase Agreement (as defined below), but
shall not, except as specifically amended hereby or as set forth in the Amendment and Exchange
Agreement (as defined below), constitute a release, satisfaction or novation of any of the
obligations under the Existing Note or any other Transaction Document (as defined in the Securities
Purchase Agreement). This Amended and Restated Senior Secured Convertible Note (including all
Amended and Restated Senior Secured Convertible Notes issued in exchange, transfer or replacement
hereof, this “Note”) is one of an issue of Amended and Restated Senior Secured Convertible Notes
(collectively, the “Notes” and such other Amended and Restated Senior Secured Convertible Notes,
the “Other Notes”) amending and restating the terms of the Existing Note pursuant to the Amendment
and Exchange Agreement, dated as of the date set out above as the Amendment Date (the “Amendment
Date”), by and between the holder of the


 


 









 






Existing Note as of the Amendment Date and the Company (the “Amendment and Exchange
Agreement”). Certain capitalized terms used herein are defined in Section 28.



(1) PAYMENTS OF PRINCIPAL. On the Maturity Date, the Company shall pay to the Holder
an amount in cash representing all outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges, if any, on such Principal and Interest. The “Maturity Date” shall be
August 30, 2011, as may be extended at the option of the Holder (i) in the event that, and for so
long as, an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing on
the Maturity Date (as may be extended pursuant to this Section 1) or any event that shall have
occurred and be continuing that with the passage of time and the failure to cure would result in an
Event of Default and (ii) through the date that is ten (10) Business Days after the consummation of
a Change of Control in the event that a Change of Control is publicly announced or a Change of
Control Notice (as defined in Section 5(b)) is delivered prior to the Maturity Date. On each
Installment Date, if the Holder should deliver an Installment Notice, the Company shall pay to the
Holder an amount equal to the Installment Amount due on such Installment Date in accordance with
Section 8. Other than as specifically permitted by the Note, the Company may not prepay any
portion of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid Late
Charges, if any, on Principal and Interest.



(2) INTEREST; INTEREST RATE. (a) Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 365-day year and actual days elapsed and
shall be payable in arrears for each Calendar Quarter on the first day of the succeeding Calendar
Quarter during the period beginning on the Issuance Date and ending on, and including, the Maturity
Date (each, an “Interest Date”) with the first Interest Date after the Amendment Date being October
1, 2009. Interest shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in shares of Common Stock (“Interest Shares”) so long as there has been
no Equity Conditions Failure; provided however, that the Company may, at its option following
notice to the Holder, pay Interest on any Interest Date in cash (“Cash Interest”) or in a
combination of Cash Interest and Interest Shares. The Company shall deliver a written notice
(each, an “Interest Election Notice”) to each holder of the Notes on or prior to the Interest
Notice Due Date (the date such notice is delivered to all of the holder, the “Interest Notice
Date”) which notice (i) either (A) confirms that Interest to be paid on such Interest Date shall be
paid entirely in Interest Shares or (B) elects to pay Interest as Cash Interest or a combination of
Cash Interest and Interest Shares and specifies the amount of Interest that shall be paid as Cash
Interest and the amount of Interest, if any, that shall be paid in Interest Shares and (ii)
certifies that there has been no Equity Conditions Failure. If any portion of Interest for a
particular Interest Date shall be paid in Interest Shares, then the Company shall pay to the
Holder, in accordance with Section 2(b), a number of shares of Common Stock equal to (x) the amount
of Interest payable on the applicable Interest Date in Interest Shares divided by (y) the
applicable Interest Conversion Price. Interest to be paid on an Interest Date in Interest Shares
shall be paid in a number of fully paid and nonassessable shares of Common Stock (rounded to the
nearest whole share). If the Equity Conditions are not satisfied as of the Interest Notice Date,
then unless the Company has elected to pay such Interest in cash, the Interest Notice shall
indicate that unless the Holder waives the Equity Conditions, the Interest shall be paid in cash.
If the Equity Conditions were satisfied as of the Interest Notice Date but the Equity Conditions
are no longer satisfied at any time prior to the Interest Date, the Company shall


 


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provide the Holder a subsequent notice to that effect indicating that unless the Holder waives
the Equity Conditions, the Interest shall be paid in cash. Interest to be paid on an Interest Date
in Interest Shares shall be paid in a number of fully paid and nonassessable shares (rounded to the
nearest whole share in accordance with Section 3(a)) of Common Stock equal to the quotient of (1)
the amount of Interest payable on such Interest Date less any Cash Interest paid and (2) the
Interest Conversion Price in effect on the applicable Interest Date.



(a) When any Interest Shares are to be paid on an Interest Date, the Company shall (i) (X)
provided that the Company’s transfer agent (the “Transfer Agent”) is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program and such action is not
prohibited by applicable law or regulation or any applicable policy of DTC, credit such aggregate
number of Interest Shares to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the
foregoing shall not apply, issue and deliver on the applicable Interest Date, to the address set
forth in the register maintained by the Company for such purpose pursuant to the Securities
Purchase Agreement or to such address as specified by the Holder in writing to the Company at least
two (2) Business Days prior to the applicable Interest Date, a certificate, registered in the name
of the Holder or its designee, for the number of Interest Shares to which the Holder shall be
entitled and (ii) with respect to each Interest Date, pay to the Holder, in cash by wire transfer
of immediately available funds, the amount of any Cash Interest. Notwithstanding the foregoing,
the Company shall not be entitled to pay Interest in Interest Shares and shall be required to pay
such Interest in cash as Cash Interest on the applicable Interest Date if, unless waived in writing
by the Holder, there has been an Equity Conditions Failure. If an Event of Default or Equity
Conditions Failure occurs during the Interest Measuring Period, then on the Interest Date, at the
Holder’s option, the Holder may require the Company to pay all or any specified portion of the
Interest due on the applicable Interest Date as Cash Interest.



(b) Prior to the payment of Interest on an Interest Date, Interest on this Note shall accrue
at the Interest Rate and be payable by way of inclusion of the Interest in the Conversion Amount in
accordance with Section 3(b)(i). From and after the occurrence and during the continuance of an
Event of Default, the Interest Rate shall be increased to twelve percent (12.0%). In the event
that such Event of Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that the Interest as
calculated and unpaid at such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of such Event of Default
through and including the date of cure of such Event of Default. The Company shall pay any and all
taxes that may be payable with respect to the issuance and delivery of Interest Shares;
provided that the Company shall not be required to pay any tax that may be payable in
respect of any issuance of Interest Shares to any Person other than the Holder or with respect to
any income tax due by the Holder with respect to such Interest Shares.


 


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(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’s
common stock, par value $0.0001 per share (the “Common Stock”), on the terms and conditions set
forth in this Section 3.



(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times
on or after the Issuance Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable
shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below).
The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall
round such fraction of a share of Common Stock up to the nearest whole share. The Company shall
pay any and all taxes that may be payable with respect to the issuance and delivery of Common Stock
upon conversion of any Conversion Amount; provided that the Company shall not be required
to pay any tax that may be payable in respect of any issuance of Common Stock to any Person other
than the converting Holder or with respect to any income tax due by the Holder with respect to such
Common Stock.



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



(i) “Conversion Amount” means the sum of (A) the portion of the Principal to be converted,
redeemed or otherwise with respect to which this determination is being made, (B) accrued and
unpaid Interest with respect to such Principal and (C) accrued and unpaid Late Charges with respect
to such Principal and Interest.



(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other date of
determination, $4.25, subject to adjustment as provided herein.



(c) Mechanics of Conversion.



(i) Optional Conversion. To convert any Conversion Amount into shares of Common Stock
on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to
the Company and (B) if required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or destruction). On or before
the first (1st) Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the
Holder and the Transfer Agent. On or before the second (2nd) Trading Day following the
date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (X) provided
that the Transfer Agent is participating in the DTC Fast Automated Securities Transfer Program,
credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the
Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission
system or (Y) if the Transfer Agent is not


 


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participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the
address as specified in the Conversion Notice, a certificate, registered in the name of the Holder
or its designee, for the number of shares of Common Stock to which the Holder shall be entitled.
If this Note is physically surrendered for conversion as required by Section 3(c)(iii) and the
outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount
being converted, then the Company shall as soon as practicable and in no event later than three (3)
Business Days after receipt of this Note and at its own expense, issue and deliver to the holder a
new Note (in accordance with Section 18(d)) representing the outstanding Principal not converted.
The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.



(ii) Company’s Failure to Timely Convert. If the Company shall fail to issue a
certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares
of Common Stock to which the Holder is entitled upon conversion of any Conversion Amount on or
prior to the date which is five (5) Trading Days after the Conversion Date (a “Conversion Failure
”), then (A) the Company shall pay damages in cash to the Holder for each date of such Conversion
Failure in an amount equal to 1.0% of the product of (I) the sum of the number of shares of Common
Stock not issued to the Holder on or prior to the Share Delivery Date and to which the Holder is
entitled, and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date and (B)
the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and
retain or have returned, as the case may be, any portion of this Note that has not been converted
pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall
not affect the Company’s obligations to make any payments which have accrued prior to the date of
such notice pursuant to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if
within three (3) Trading Days after the Company’s receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue and deliver a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is
entitled upon such holder’s conversion of any Conversion Amount, and if on or after such Trading
Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then the Company shall, within five (5)
Business Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the
Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions and
other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the “Buy-In
Price"), at which point the Company’s obligation to deliver such certificate (and to issue such
Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of
Common Stock, times (B) the Closing Bid Price on the Conversion Date.



(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice)


 


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requesting reissuance of this Note upon physical surrender of this Note. The Holder and the
Company shall maintain records showing the Principal, Interest and Late Charges converted and the
dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and
the Company, so as not to require physical surrender of this Note upon conversion.



(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company
can convert some, but not all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted
on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based
on the principal amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such date. In the event of
a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section 23.



(v) Company’s Right of Mandatory Conversion.




(A) Mandatory Conversion. If at any time from and after the one (1) year
anniversary of the Issuance Date (the “Mandatory Conversion Eligibility Date”), (i) (A) from
the period beginning from the Mandatory Conversion Eligibility Date until the two (2) year
anniversary of the Issuance Date, the Closing Sale Price of the Common Stock exceeds for
each of any twenty (20) consecutive Trading Days following the Mandatory Conversion
Eligibility Date (the “Mandatory Conversion Measuring Period”) 150% of the Conversion Price
on the Issuance Date (as adjusted for any stock splits, stock dividends, recapitalizations,
combinations, reverse stock splits or other similar events during such period) and (B) on
and after the two (2) year anniversary of the Issuance Date, the Closing Sale Price of the
Common Stock exceeds for each of any twenty (20) consecutive Trading Days 180% of the
Conversion Price on the Issuance Date (as adjusted for any stock splits, stock dividends,
recapitalizations, combinations, reverse stock splits or other similar events during such
period) and (ii) there shall not have been any Equity Conditions Failure, the Company shall
have the right to require the Holder to convert all, or any portion, of the Conversion
Amount then remaining under this Note into fully paid, validly issued and nonassessable
 shares of Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of
the Mandatory Conversion Date (as defined below) with respect to the Conversion Amount (a
“Mandatory Conversion”). The Company may exercise its right to require conversion under
this Section 3(c)(v)(A) by delivering within not more than two (2) Trading Days following
the end of any such Mandatory Conversion Measuring Period a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders of Notes and
the Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders
received such notice is referred to as the “Mandatory Conversion Notice Date”). The
Mandatory Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall
state (1) the Trading Day selected for the Mandatory Conversion in accordance herewith,
which Trading Day shall be at least twenty (20) Trading Days but not more than sixty (60)
Trading Days following the Mandatory Conversion Notice


 


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Date (the “Mandatory Conversion Date”), (2) the aggregate Conversion Amount of the
Notes subject to mandatory conversion from all of the holders of the Notes pursuant hereto
(and analogous provisions under the Other Notes) and (3) the number of shares of Common
Stock to be issued to. All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Note required to be
converted on the Mandatory Conversion Date. The mechanics of conversion set forth in
Section 3(c) shall apply to any Mandatory Conversion as if the Company and the Transfer
Agent had received from the Holder on the Mandatory Conversion Date a Conversion Notice with
respect to the Conversion Amount being converted pursuant to the Mandatory Conversion.




(B) Pro Rata Conversion Requirement. If the Company elects to cause a
conversion of any Conversion Amount of this Note pursuant to Section 3(c)(v)(A), then it
must simultaneously take the same action in the same proportion with respect to the Other
Notes. If the Company elects a Mandatory Conversion of this Note pursuant to Section
3(c)(v)(A) (or similar provisions under the Other Notes) with respect to less than all of
the Conversion Amounts of the Notes then outstanding, then the Company shall require
conversion of a Conversion 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 to cause to be
converted pursuant to Section 3(c)(v)(A), multiplied by (II) the fraction, the numerator of
which is the sum of the aggregate Amended Principal Amount of the Notes purchased by such
holder of outstanding Notes and the denominator of which is the sum of the aggregate Amended
Principal Amount of the Notes purchased by all holders holding outstanding Notes (such
fraction with respect to each holder is referred to as its “Conversion Allocation
Percentage,” and such amount with respect to each holder is referred to as its “Pro Rata
Conversion Amount”); provided, however, that in the event that any holder’s Pro Rata
Conversion Amount exceeds the outstanding Principal amount of such holder’s Note, then such
excess Pro Rata Conversion Amount shall be allocated amongst the remaining holders of Notes
in accordance with the foregoing formula. In the event that the initial holder of any Notes
shall sell or otherwise transfer any of such holder’s Notes, the transferee shall be
allocated a pro rata portion of such holder’s Conversion Allocation Percentage and the Pro
Rata Conversion Amount.



(d) Limitations on Conversions.



(i) Beneficial Ownership. The Company shall not effect any conversion of this Note,
and the Holder of this Note shall not have the right to convert any portion of this Note pursuant
to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together
with the Holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”)
of the number of shares of Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Note with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this Note beneficially owned
by the Holder or any of its affiliates and


 


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(B) exercise or conversion of the unexercised or nonconverted portion of any other securities
of the Company (including, without limitation, any Other Notes or warrants) subject to a limitation
on conversion or exercise analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For purposes of this Section
3(d)(i), in determining the number of outstanding shares of Common Stock, the Holder may rely on
the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form
10-K, Form 10-Q or Form 8-K, as the case may be, (y) a more recent public announcement by the
Company or (z) any other notice by the Company or the Transfer Agent setting forth the number of
shares of Common Stock outstanding. For any reason at any time, upon the written or oral request
of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Note, by the Holder or its affiliates since
the date as of which such number of outstanding shares of Common Stock was reported. By written
notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other
percentage not in excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is delivered to
the Company, and (ii) any such increase or decrease will apply only to the Holder and not to any
other holder of Notes.



(ii) Principal Market Regulation. The Company shall not be obligated to issue any
shares of Common Stock upon conversion of this Note, and the Holder of this Note shall not have the
right to receive upon conversion of this Note any shares of Common Stock, if the issuance of such
shares of Common Stock would exceed the aggregate number of shares of Common Stock which the
Company may issue upon conversion or exercise, as applicable, of the Notes and Warrants without
breaching the Company’s obligations under the rules or regulations of the 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 of the Principal
Market for issuances of Common Stock in excess of such amount or (B) obtains a written opinion from
outside counsel to the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Required Holders. Until such approval or written opinion is
obtained, no purchaser of the Notes pursuant to the Securities Purchase Agreement (the
"Purchasers”) shall be issued in the aggregate, upon conversion or exercise, as applicable, of
Notes or Warrants, shares of Common Stock in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the principal amount of Notes issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Closing Date and the denominator of
which is the aggregate principal amount of all Notes issued to the Purchasers pursuant to the
Securities Purchase Agreement on the Closing Date (with respect to each Purchaser, the “Exchange
Cap Allocation”). In the event that any Purchaser shall sell or otherwise transfer any of such
Purchaser’s Notes, the transferee shall be allocated a pro rata portion of such Purchaser’s
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee
with respect to the portion of the Exchange Cap Allocation allocated to such transferee. In the
event that any holder of Notes shall convert all of such holder’s Notes into a number of shares of
Common Stock which, in the aggregate, is less than such holder’s Exchange Cap Allocation, then


 


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the difference between such holder’s Exchange Cap Allocation and the number of shares of
Common Stock actually issued to such holder shall be allocated to the respective Exchange Cap
Allocations of the remaining holders of Notes on a pro rata basis in proportion to the aggregate
principal amount of the Notes then held by each such holder.



(4) RIGHTS UPON EVENT OF DEFAULT.



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



(i) the failure of the applicable Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is
sixty (60) days after the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without limitation, the issuance of a stop
order) or is unavailable to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10)
consecutive days or for more than an aggregate of thirty (30) days in any 365-day period (other
than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));



(ii) the suspension from trading or failure of the Common Stock to be listed on an Eligible
Market for a period of five (5) consecutive Trading Days or for more than an aggregate of ten (10)
Trading Days in any 365-day period;



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



(iv) at any time following the tenth (10th) consecutive Business Day that the
Holder’s Authorized Share Allocation is less than the number of shares of Common Stock that the
Holder would be entitled to receive upon a conversion of the full Conversion Amount of this Note
(without regard to any limitations on conversion set forth in Section 3(d) or otherwise);



(v) the Company’s failure to pay to the Holder any amount of Principal (including, without
limitation, any redemption payments), Interest, Late Charges or other amounts when and as due under
this Note or any other Transaction Document (as defined in the Securities Purchase Agreement) or
any other agreement, document, certificate or other instrument delivered in connection with the
transactions contemplated hereby and thereby to which the Holder is a party, except, in the case of
a failure to pay Interest and Late Charges when


 


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and as due, in which case only if such failure continues for a period of at least five (5)
Business Days;



(vi) any default under, redemption of or acceleration prior to maturity of any Indebtedness of
the Company or any of its Subsidiaries (as defined in Section 3(a) of the Securities Purchase
Agreement) other than with respect to any Other Notes;



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



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



(ix) a final judgment or judgments for the payment of money aggregating in excess of $500,000
are rendered against the Company or any of its Subsidiaries and which judgments are not, within
sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy party shall not be
included in calculating the $500,000 amount set forth above so long as the Company provides the
Holder a written statement from such insurer or indemnity provider (which written statement shall
be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance
or an indemnity and the Company will receive the proceeds of such insurance or indemnity within
thirty (30) days of the issuance of such judgment;



(x) the Company breaches any representation, warranty, covenant or other term or condition of
any Transaction Document, except, in the case of a breach of a covenant which is curable, only if
such breach continues for a period of at least ten (10) consecutive Business Days;



(xi) the Company’s failure to deliver shares of Common Stock to the Holder upon the Conversion
of any Conversion Amount due to the limitation on conversion set forth in Section 3(d)(ii);



(xii) any breach or failure in any respect to comply with either of Section 8 or Section 14 of
this Note or Section 4(p)(ii) of the Securities Purchase Agreement; or



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


 


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(b) Redemption Right. Upon the occurrence of an Event of Default with respect to this
Note or any Other Note, the Company shall within (1) Business Day deliver written notice thereof
via facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any time
after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming
aware of an Event of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption Notice”) to the
Company, which Event of Default Redemption Notice shall indicate the portion of this Note the
Holder is electing to redeem. Each portion of this Note subject to redemption by the Company
pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to the greater of
(i) the Conversion Amount to be redeemed and (ii) the product of (A) the Conversion Rate with
respect to such Conversion Amount in effect at such time as the Holder delivers an Event of Default
Redemption Notice and (B) the greater of (1) the Closing Sale Price of the Common Stock on the date
immediately preceding such Event of Default, (2) the Closing Sale Price of the Common Stock on the
date immediately after such Event of Default and (3) the Closing Sale Price of the Common Stock on
the date the Holder delivers the Event of Default Redemption Notice (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 12. To the extent redemptions required by this Section 4(b) are deemed or
determined by a court of competent jurisdiction to be prepayments of the Note by the Company, such
redemptions shall be deemed to be voluntary prepayments. The parties hereto agree that in the
event of the Company’s redemption of any portion of the Note under this Section 4(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder.



(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.



(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless the Successor Entity assumes in writing all of the obligations of the Company
under this Note and the other Transaction Documents in accordance with the provisions of this
Section 5(a) pursuant to written agreements in form and substance satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental Transaction, including
agreements to deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form and substance to
the Notes, including, without limitation, having a principal amount and interest rate equal to the
principal amounts then outstanding and the interest rates of the Notes held by such holder, having
similar conversion rights as the Notes, and satisfactory to the Required Holders; provided that the
provisions of Section 14 need not be included in the security of the Successor Entity. Upon the
occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental Transaction, the provisions of
this Note referring to the “Company” shall refer instead to the Successor Entity), and may exercise
every right and power of the Company and shall assume all of the obligations of the Company under
this Note with the same effect as if such Successor Entity had been named as the Company herein.
Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of this Note at any time
after the consummation of the


 


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Fundamental Transaction, in lieu of the shares of the Company’s Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion or redemption of the Notes
prior to such Fundamental Transaction, such shares of the publicly traded common stock (or their
equivalent) of the Successor Entity (including its Parent Entity) or if the Successor Entity
(including its Parent Entity) is a privately held company, the common equity of the Successor
Entity, as adjusted in accordance with the provisions of this Note. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and shall be applied
without regard to any limitations on the conversion or redemption of this Note.



(b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10) days
prior to the consummation of a Change of Control, but not prior to the public announcement of such
Change of Control, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). At any time during the period beginning
after the Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading Days after
the consummation of such Change of Control, the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (“Change of Control Redemption Notice”)
to the Company, which Change of Control Redemption Notice shall indicate the Conversion Amount the
Holder is electing to redeem. The portion of this Note subject to redemption pursuant to this
Section 5 shall be redeemed by the Company in cash at a price equal to the greater of (i) the
product of (x) the Conversion Amount being redeemed and (y) the quotient determined by dividing (A)
the greater of the Closing Sale Price of the Common Stock immediately prior to the consummation of
the Change of Control, the Closing Sale Price immediately following the public announcement of such
proposed Change of Control and the Closing Sale Price of the Common Stock immediately prior to the
public announcement of such proposed Change of Control by (B) the Conversion Price and (ii) the
Conversion Amount being redeemed (the “Change of Control Redemption Price”). Notwithstanding the
foregoing, if the Successor Entity (including its Parent Entity) is a privately held company, at
any time during the period beginning after the Holder’s receipt of a Change of Control Notice and
ending twenty (20) Trading Days after the consummation of such Change of Control, the Company may
require the Holder to redeem all of this Note by delivering written notice thereof (“Company Change
of Control Redemption Notice”) to the Holder. The Note shall be redeemed in such case by the
Company in cash at a price equal to the greater of (i) the product of (x) the Conversion Amount
being redeemed and (y) the quotient determined by dividing (A) the greater of the Closing Sale
Price of the Common Stock immediately prior to the consummation of the Change of Control, the
Closing Sale Price immediately following the public announcement of such proposed Change of Control
and the Closing Sale Price of the Common Stock immediately prior to the public announcement of such
proposed Change of Control by (B) the Conversion Price and (ii) 105% of the Conversion Amount being
redeemed (the “Company Change of Control Redemption Price”). Redemptions required by this Section
5 shall be made in accordance with the provisions of Section 12 and shall have priority to payments
to stockholders in connection with a Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the
Note by the Company, such redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 5, but subject to Section 3(d), until the Change of
Control Redemption Price or the Company Change of Control Redemption Price, as applicable, is paid
in full, the Conversion Amount submitted for redemption under this Section 5(c) may be converted,
in whole or in part, by the Holder into


 


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Common Stock pursuant to Section 3. The parties hereto agree that in the event of the
Company’s redemption of any portion of the Note under this Section 5(b), the Holder’s damages would
be uncertain and difficult to estimate because of the parties’ inability to predict future interest
rates and the uncertainty of the availability of a suitable substitute investment opportunity for
the Holder. Accordingly, any redemption premium due under this Section 5(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not as a penalty.



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



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



(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of shares of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, (i) in addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder would have been entitled with
respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon
the consummation of such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares of Common Stock
otherwise receivable upon such conversion, such securities or other assets received by the holders
of shares of Common Stock in connection with the consummation of such Corporate Event in such
amounts as the Holder would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a
conversion rate for such consideration commensurate with the Conversion Rate. Provision made
pursuant to the preceding sentence shall be in a form and substance satisfactory to the Required
Holders. The provisions of this Section shall apply similarly and equally to successive Corporate
Events and shall be applied without regard to any limitations on the conversion or redemption of
this Note.



(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.



(a) Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on
or after the Subscription Date through the first (1st) anniversary of the Issuance Date,
the Company issues or sells, or in accordance with this Section 7(a) is deemed to


 


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



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



(ii) Issuance of Convertible Securities. If the Company in any manner issues or sells
any Convertible Securities and the lowest price per share for which one share of Common Stock is
issuable upon such conversion or exchange or exercise thereof is less than the Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 7(a)(ii), the “lowest price per share for which one
share of Common Stock is issuable upon such conversion


 


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or exchange or exercise” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of Common Stock upon the
issuance or sale of the Convertible Security and upon the conversion or exchange or exercise of
such Convertible Security. No further adjustment of the Conversion Price shall be made upon the
actual issuance of such share of Common Stock upon conversion or exchange or exercise of such
Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustment of the Conversion Price had been or are to be made
pursuant to other provisions of this Section 7(a), no further adjustment of the Conversion Price
shall be made by reason of such issue or sale.



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



(iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued for a consideration of $.01. If
any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to be the net amount
received by the Company therefor. If any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of receipt. If any Common
Stock, Options or Convertible Securities are issued to the stockholders of the non-surviving entity
in connection with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the Required Holders. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation
(the “Valuation Event”), the fair value of such consideration will be determined, at the Company’s
expense, within five (5) Business Days after the tenth (10th) day following the
Valuation Event by an independent, reputable appraiser jointly


 


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selected by the Company and the Required Holders. The determination of such appraiser shall
be deemed binding upon all parties absent manifest error.



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



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



(c) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 7 but not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 7.



(8) INSTALLMENT AMOUNTS. As of the thirty (30) month anniversary of the Issuance Date
(the “Initial Installment Date”) and on each Installment Date thereafter, the Holder shall have the
right, in its sole discretion, to require that the Company amortize on such Installment Date a
portion of this Note (an “Installment Payment”) up to the Available Installment Amount by
delivering written notice thereof (an “Installment Notice”) to the Company at least five (5)
Trading Days prior to such Installment Date; provided, however, that the Holder shall not have the
option to require the Company to make any Installment Payment on the Initial Installment Date if
the Closing Sale Price of the Common Stock equals or exceeds $4.00 (as adjusted for any stock
splits, stock dividends, recapitalizations, combinations, reverse stock splits or other similar
events during such period) for each of the twenty (20) consecutive Trading Days immediately prior
to such Initial Installment Date. The Installment Notice shall indicate the Principal amount (plus
the sum of any accrued and unpaid Interest on such Principal amount and any accrued and unpaid Late
Charges with respect to such Principal amount and Interest as of such Installment Date) of the
Available Installment Amount the Holder is electing to have redeemed (the “Installment Amount”).
The portion of this Note subject to amortization pursuant to this Section 8 shall be paid by the
Company in cash at a price equal to 100% of the Installment Amount (the “Installment Price”).
Payments required by this Section 8 shall be made in accordance with the provisions of Section 12.
Notwithstanding anything to the contrary


 


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in this Section 8, but subject to Section 3(d), until the Holder receives the Installment
Price, the Installment Amount may be converted, in whole or in part, by the Holder into Common
Stock pursuant to Section 3, and any such conversion shall reduce the Installment Amount in the
manner set forth by the Holder in the applicable Conversion Notice.



(9) SECURITY. This Note and the Other Notes shall be secured at such time, to the
extent and in the manner as set forth in the Security Documents (as defined in the Amendment and
Exchange Agreement).



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



(11) RESERVATION OF AUTHORIZED SHARES.



(a) Reservation. The Company shall initially reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 150% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of the Amendment Date.
So long as any of the Notes are outstanding, the Company shall take all action necessary to reserve
and keep available out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Notes, 150% of the number of shares of Common Stock as shall from
time to time be necessary to effect the conversion of all of the Notes then outstanding; provided
that at no time shall the number of shares of Common Stock so reserved be less than the number of
shares required to be reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of Common Stock
reserved for conversions of the Notes and each increase in the number of shares so reserved shall
be allocated pro rata among the holders of the Notes based on the principal amount of the Notes
held by each holder at the Closing (as defined in the Securities Purchase Agreement) or increase in
the number of reserved shares, as the case may be (the “Authorized Share Allocation”). In the
event that a holder shall sell or otherwise transfer any of such holder’s Notes, each transferee
shall be allocated a pro rata portion of such holder’s Authorized Share Allocation. Any shares of
Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be allocated
to the remaining holders of Notes, pro rata based on the principal amount of the Notes then held by
such holders.



(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share
Failure”), then the Company shall immediately take all action necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the
Required Reserve Amount for the Notes then


 


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outstanding. Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but in no event later
than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall hold
a meeting of its stockholders for the approval of an increase in the number of authorized shares of
Common Stock. In connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of directors to recommend to
the stockholders that they approve such proposal.



(12) HOLDER’S REDEMPTIONS AND AMORTIZATIONS.



(a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Business Days after the Company’s receipt of the Holder’s Event
of Default Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(b), the Company shall deliver the applicable Change of Control Redemption
Price to the Holder concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five (5) Business Days
after the Company’s receipt of such notice otherwise. The Company shall deliver the Installment
Price on the applicable Installment Date. In the event of a redemption or amortization of less
than all of the Conversion Amount of this Note, the Company shall promptly cause to be issued and
delivered to the Holder a new Note (in accordance with Section 18(d)) representing the outstanding
Principal which has not been redeemed or amortized. In the event that the Company does not pay the
applicable Redemption Price to the Holder within the time period required, at any time thereafter
and until the Company pays such unpaid Redemption Price in full, the Holder shall have the option,
in lieu of redemption or amortization, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was submitted for redemption or
required to be amortized and for which the applicable Redemption Price (together with any Late
Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the Redemption
Notice shall be null and void with respect to such Conversion Amount, (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with Section 18(d)) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this Note or such new Notes
shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the
Redemption Notice is voided and (B) the lowest Closing Bid Price of the Common Stock during the
period beginning on and including the date on which the Redemption Notice is delivered to the
Company and ending on and including the date on which the Redemption Notice is voided. The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its rights following such
notice shall not affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount subject to such
notice.



(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b) or Section 5(b) or
amortization pursuant to Section 8 (each, an “Other Redemption Notice”), the Company shall
immediately, but no later than one (1) Business Day of its receipt thereof, forward to the Holder
by facsimile a copy of such notice. If the Company receives a Redemption


 


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Notice and one or more Other Redemption Notices, during the seven (7) Business Day period
beginning on and including the date which is three (3) Business Days prior to the Company’s receipt
of the Holder’s Redemption Notice and ending on and including the date which is three (3) Business
Days after the Company’s receipt of the Holder’s Redemption Notice and the Company is unable to
redeem all principal, interest and other amounts designated in such Redemption Notice and such
Other Redemption Notices received during such seven (7) Business Day period, then the Company shall
redeem a pro rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such
Other Redemption Notices received by the Company during such seven Business Day period.



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



(14) COVENANTS.



(a) Rank. All payments due under this Note (A) shall rank pari passu with all Other
Notes and (B) shall be senior to all other Indebtedness of the Company and its Subsidiaries other
than the Permitted Senior Indebtedness and the Sonopress Indebtedness.



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



(c) Existence of Liens. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by the Company or any of
its Subsidiaries (collectively, “Liens”) other than Permitted Liens.



(d) Restricted Payments. The Company shall not, and the Company shall not permit any
of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any
payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by
way of open market purchases, tender offers, private transactions or otherwise), all or any portion
of any Permitted Indebtedness (other than this Note, the Other Notes and the Permitted Senior
Indebtedness), whether by way of payment in respect of principal of (or premium, if any) or
interest on such Indebtedness, if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage of time and without
being cured would constitute, an Event of Default has occurred and is continuing; provided that
notwithstanding the foregoing, no principal (or any portion thereof) of any Subordinated
Indebtedness may be paid (whether upon maturity, redemption, acceleration or otherwise) so long as
this Note is outstanding.



(e) Restriction on Redemption and Cash Dividends. Until all of the Notes have been
converted, redeemed or otherwise satisfied in accordance with their terms, the


 


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Company shall not, directly or indirectly, redeem, repurchase or declare or pay any cash
dividend or distribution on its capital stock without the prior express written consent of the
Required Holders.



(15) PARTICIPATION. The Holder, as the holder of this Note, shall be entitled to
receive such dividends paid and distributions made to the holders of Common Stock to the same
extent as if the Holder had converted this Note into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the
record date for such dividends and distributions. Payments under the preceding sentence shall be
made concurrently with the dividend or distribution to the holders of Common Stock.



(16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting
duly called for such purpose or the written consent without a meeting of the Required Holders shall
be required for any change or amendment to this Note or the Other Notes.



(17) TRANSFER. This Note may be offered, sold, assigned or transferred by the Holder
without the consent of the Company, subject only to the provisions of Section 2(f) of the
Securities Purchase Agreement.



(18) REISSUANCE OF THIS NOTE.



(a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder
a new Note (in accordance with Section 18(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 18(d)) to the Holder
representing the outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(iii) following conversion or redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal stated on the face of this Note.



(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.



(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 18(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time of such surrender.


 


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(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 18(a) or Section 18(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note, which is the same as the Issuance Date of this Note and an
amendment date, as indicated on the face of such new Note, which is the same as the Amendment Date
of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent
accrued and unpaid Interest and Late Charges on the Principal and Interest of this Note, if any,
from the Issuance Date.



(19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of showing economic loss
and without any bond or other security being required.



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



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



(22) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a


 


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waiver thereof, nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or privilege.



(23) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Business Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within one (1) Business Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one Business
Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the Closing Sale
Price or the Weighted Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder or (b) the disputed arithmetic calculation of the Conversion
Rate or any Redemption Price to the Company’s independent, outside accountant. The Company, at the
Company’s expense, shall cause the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the Holder of the results no
later than five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.



(24) NOTICES; PAYMENTS.



(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.



(b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to
the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash
via wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due


 


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on any day which is not a Business Day, the same shall instead be due on the next succeeding
day which is a Business Day and, in the case of any Interest Date which is not the date on which
this Note is paid in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount of Principal or
other amounts due under the Transaction Documents which is not paid when due shall result in a late
charge being incurred and payable by the Company in an amount equal to interest on such amount at
the rate of fifteen percent (15%) per annum from the date such amount was due until the same is
paid in full (“Late Charge”).



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



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



(27) GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL. This Note shall be
construed and enforced in accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal laws of the State of
New York, without giving effect to any choice of law or conflict of law provision or rule (whether
of the State of New York or any other jurisdictions) that would cause the application of the laws
of any jurisdictions other than the State of New York. The Company hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough
of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not
to assert in any suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient
forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner permitted by law. In
the event that any provision of this Note is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision of this Note. Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action against the Company
in any other jurisdiction to collect on the Company’s obligations to the Holder, to realize on any
collateral or any other security for such obligations, or to enforce a judgment or other court
ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.



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


 


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



(b) “Available Installment Amount” means for any Installment Date, an amount equal to the
lesser of (A) the product of (i) $4,000,000, multiplied by (ii) Holder Pro Rata Amount
(plus the sum of any accrued and unpaid Interest on such Principal amount and any accrued and
unpaid Late Charges with respect to such Principal amount and Interest as of such Installment Date)
and (B) the outstanding Conversion Amount under this Note as of such Installment Date. For the
avoidance of doubt, any accrued and unpaid Interest which may be paid pursuant to this definition
shall be deducted from the total interest to be paid on any subsequent Interest Payment Date.



(c) “Bloomberg” means Bloomberg Financial Markets.



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



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



(f) “Change of Control” means any Fundamental Transaction other than (A) any reorganization,
recapitalization or reclassification of Common Stock, in which holders of the Company’s voting
power immediately prior to such reorganization, recapitalization or reclassification continue after
such reorganization, recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.



(g) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as


 


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reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is
reported for such security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases,
the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date
shall be the fair market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.



(h) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement,
which date is the date the Company initially issued Notes pursuant to the terms of the Securities
Purchase Agreement.



(i) “Common Stock Deemed Outstanding” means, at any given time, the number of shares of Common
Stock outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, but excluding any Common Stock owned or held by
or for the account of the Company or issuable upon conversion or exercise, as applicable, of the
Notes and the Warrants.



(j) “Contingent Installment Date” means (x) if the Company has entered into a written
agreement with a bone fide purchaser prior to October 30, 2009 that, upon consummation of the
transaction contemplated thereby, would result in a Change of Control of the Company and its
Subsidiaries, November 30, 2009 (or such earlier date such agreement has been terminated or
otherwise ceases to be in full force and effect, solely to the extent such date is after October
30, 2009) or (y) otherwise, October 30, 2009.



(k) “Contingent Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the obligee of such liability
that such liability will be paid or discharged, or that any agreements relating thereto will be
complied with, or that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.



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



(m) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., the
American Stock Exchange, The Nasdaq Global Select Market or The Nasdaq Capital Market.


 


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



(o) “Equity Conditions Failure” means that (i) on any day during the period commencing ten
(10) Trading Days prior to the applicable Interest Notice Date through the applicable Interest Date
and (ii) on any day during the period commencing ten (10) Trading Days prior to the applicable
Mandatory Conversion Notice Date through the applicable Mandatory Conversion Date, the Equity
Conditions have not been satisfied (or waived in writing by the Holder).


 


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(p) “Excluded Securities” means any Common Stock issued or issuable: (i) in connection with
any Approved Stock Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
in connection with the payment of any Interest Shares on the Notes; (iv) pursuant to a bona fide
firm commitment underwritten public offering with a nationally recognized underwriter which
generates gross proceeds to the Company in excess of $20,000,000 (other than an “at-the-market
offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”); (v) to Relativity
Media, LLC pursuant to a distribution agreement dated as of August 11, 2006 between the Company and
Relativity Media, LLC in an aggregate amount not to exceed 3,400,000 shares of Common Stock on such
terms and conditions set forth in the Company’s Form 10-Q for the quarterly period ended June 30,
2006 and (vi) upon conversion of any Options or Convertible Securities which are outstanding on the
day immediately preceding the Subscription Date, provided that the terms of such Options or
Convertible Securities are not amended, modified or changed on or after the Subscription Date.



(q) “Foothill Loan Agreement” means the Indebtedness incurred pursuant to the Amended and
Restated Loan and Security Agreement, dated August 10, 2005, between the Company and Wells Fargo
Foothill, Inc.; provided, however, that the aggregate outstanding amount of any
such Indebtedness does not as of any date exceed (i) $26,000,000 or (ii) in the event that the
Company has complied with the terms and conditions set forth in Section 4(p) of the Securities
Purchase Agreement, if greater, an amount equal to 60% of the value of the Company’s “Eligible
Accounts” (as defined in the Foothill Loan Agreement).



(r) “Fundamental Transaction” means that (A) the Company or any of its Subsidiaries shall,
directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into
(whether or not the Company or any of its Subsidiaries is the surviving corporation) another Person
or Persons, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of the Company or any of its “significant subsidiaries” (as defined in
Rule 1-02 of Regulation S-X) to another Person, or (iii) allow another Person to make a purchase,
tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares
of Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the
Person or Persons making or party to, or associated or affiliated with the Persons making or party
to, such purchase, tender or exchange offer), or (iv) consummate a stock purchase agreement or
other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Voting Stock of the Company (not including any shares of
Voting Stock of the Company held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock purchase agreement
or other business combination), or (v) reorganize, recapitalize or reclassify the Voting Stock of
the Company or (B) any “person” or “group” (as these terms are used for purposes of Sections 13(d)
and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock of the
Company.



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


 


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(t) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Principal
amount of this Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the Securities Purchase
Agreement on the Closing Date.



(u) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with generally
accepted accounting principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness, and (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to
in clauses (i) through (vii) above.



(v) “Installment Date” means each of the following dates: (i) January 30, 2009; (ii) the
Contingent Installment Date, (iii) January 30, 2010, (v) January 30, 2011, and (vi) July 30, 2011.



(w) “Interest Conversion Price” means, with respect to any Interest Date that price which
shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as 90% of the
arithmetic average of the Weighted Average Price of the Common Stock on each of the ten (10)
consecutive Trading Days ending on the Trading Day immediately preceding the applicable Interest
Date (each, an “Interest Measuring Period”). All such determinations to be appropriately adjusted
for any stock split, stock dividend, stock combination or other similar transaction during such
period.



(x) “Interest Notice Due Date” means the fifteenth (15th) Trading Day prior to the
applicable Interest Date.



(y) “Interest Rate” means, (i) during the period commencing on the Issuance Date and ending on
the calendar day immediately preceding the Amendment Date, seven and seven-eighths percent (7.875%)
per annum and (ii) during the period commencing on the Amendment Date and ending on the Maturity
Date, eight and seven-eighths percent (8.875%) per annum, in each case, subject to adjustment as
set forth in Section 2.


 


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



(aa) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.



(bb) “Permitted Indebtedness” means (i) Permitted Senior Indebtedness; (ii) Indebtedness
incurred by the Company that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the Holder and approved
by the Holder in writing, and which Indebtedness does not provide at any time for (1) the payment,
prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (2) total
interest and fees at a rate in excess of eight and seven-eighths percent (8.875%) per annum (such
Indebtedness, the “Subordinated Indebtedness”), (iii) Indebtedness secured by Permitted Liens, (iv)
Indebtedness to trade creditors incurred in the ordinary course of business, (v) Indebtedness under
this Note and the Other Notes, (vi) extensions, refinancings and renewals of any items in clauses
(i) through (iii) above, provided that (A) the principal amount is not increased or the terms
modified to impose more burdensome terms upon the Company or its Subsidiary, as the case may be,
and (B) with respect to the Permitted Senior Indebtedness, the Company has complied with the terms
and conditions set forth in Section 4(p), and (vii) the Sonopress Indebtedness.



(cc) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not
yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv)
Liens securing the Company’s obligations under the Notes; (v) Liens (A) upon or in any equipment
(as defined in the Security Agreement) acquired or held by the Company or any of its Subsidiaries
to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of
financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment; (vi) Liens securing the Permitted Senior
Indebtedness; (vii) Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) and (vi) above, provided that
any extension, renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced
does not increase, (vii) Liens securing the Sonopress Indebtedness in existence as of the date
hereof; (viii) leases or subleases and licenses and sublicenses granted to others in the ordinary
course of the Company’s business, not interfering in any material respect with the business of the
Company and its Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue
authorities arising as a matter of law to


 


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secure payments of custom duties in connection with the importation of goods, and (x) Liens
arising from judgments, decrees or attachments in circumstances not constituting an Event of
Default under Section 4(a)(ix).



(dd) “Permitted Senior Indebtedness” the principal of (and premium, if any), interest on, and
all fees and other amounts (including, without limitation, any reasonable out-of-pocket costs,
enforcement expenses (including reasonable out-of-pocket legal fees and disbursements), collateral
protection expenses and other reimbursement or indemnity obligations relating thereto) payable by
Company and/or its Subsidiaries under or in connection with the Foothill Loan Agreement.



(ee) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a government
or any department or agency thereof.



(ff) “Principal Market” means The Nasdaq Global Market.



(gg) “Redemption Notices” means, collectively, the Event of Default Redemption Notices, the
Change of Control Redemption Notices, the Company Change of Control Redemption Notice and the
Installment Notice, each of the foregoing, individually, a Redemption Notice.



(hh) “Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price, Company Change of Control Redemption Price and the Installment Price and,
each of the foregoing, individually, a Redemption Price.



(ii) “Registration Rights Agreement” means that certain registration rights agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable upon conversion of
the Notes and exercise of the Warrants and as Interest Shares under the Notes.



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



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



(ll) “Securities Purchase Agreement” means that certain securities purchase agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes, as amended from time to time, including, without limitation,
pursuant to the Amendment and Exchange Agreement.



(mm) “Sonopress Indebtedness” means the “Advance” incurred under (and as defined in) the
Replication Agreement dated as of June 30, 2006 by and between the Company and Sonopress LLC;
provided, however, that (i) the Company shall not be permitted to extend, refinance or renew such
Advance, (ii) the Company shall not be permitted to increase the


 


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outstanding amount of such Advance as of the Subscription Date or to reborrow any portion of
such Advance once it has been repaid thereunder and (iii) such Advance may not be repaid by the
payment of greater than $0.20 per each “DVD Product” purchased under (and as defined in) the
Replication Agreement.



(nn) “Subscription Date” means August 30, 2006.



(oo) “Successor Entity” means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
stock or equivalent equity security is quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.



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



(qq) “Voting Stock” of a Person means capital stock of such Person of the class or classes
pursuant to which the holders thereof have the general voting power to elect, or the general power
to appoint, at least a majority of the board of directors, managers or trustees of such Person
(irrespective of whether or not at the time capital stock of any other class or classes shall have
or might have voting power by reason of the happening of any contingency).



(rr) “Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement,
and shall include all warrants issued in exchange therefor or replacement thereof.



(ss) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National


 


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Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on
a particular date on any of the foregoing bases, the Weighted Average Price of such security on
such date shall be the fair market value as mutually determined by the Company and the Holder. If
the Company and the Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.



(29) DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or
delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, nonpublic
information, relating to the Company or its Subsidiaries, the Company shall indicate to the Holder
contemporaneously with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.



[Signature Page Follows]



 


- 32 -









 





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



	 	 	 	 	 
	 	IMAGE ENTERTAINMENT, INC.

 	 
	 	By:  	/s/ JEFF M. FRAMER
 	 
	 	 	Name:  	Jeff M. Framer 	 
	 	 	Title:  	President and CFO 	 
	 



 


 









 





EXHIBIT I




IMAGE ENTERTAINMENT, INC.




CONVERSION NOTICE




Reference is made to the Amended and Restated Senior Secured Convertible Note (the “Note”) issued
to the undersigned by Image Entertainment, Inc. (the “Company”). In accordance with and pursuant
to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the
Note) of the Note indicated below into shares of Common Stock par value $0.0001 per share (the
"Common Stock”) of the Company, as of the date specified below.




			
	Date of Conversion:	 	 
 








			
	Aggregate Conversion Amount to be converted:	 	 
 







Please confirm the following information:




			
	Conversion Price:	 	 
 








			
	Number of shares of Common Stock to be issued:	 	 
 







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




			
	Issue to:	 	 
 


	 	 	 
 


	 	 	 
 








			
	Facsimile Number:	 	 
 








			
	Authorization:	 	 
 








			
	By:	 	 
 








			
	Title:	 	 
 








			
	Dated:	 	 
 







	 	 	 	 	 
	 

	 	Account Number:
	 	 
	 	 	 	 	 
	 	 	(if electronic book entry transfer)






	 	 	 	 	 
	 

	 	Transaction Code Number:
	 	 
	 	 	 	 	 
	 	 	(if electronic book entry transfer)





 


 









 





ACKNOWLEDGMENT




The Company hereby acknowledges this Conversion Notice and hereby directs the Computershare
Investor Services to issue the above indicated number of shares of Common Stock in accordance with
the Transfer Agent Instructions dated July 30, 2009 from the Company and acknowledged and agreed to
by Computershare Investor Services.



	 	 	 	 	 
	 	IMAGE ENTERTAINMENT, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title: