Document:

Exhibit 10.4

 

EXECUTION COPY

 

GUARANTY AGREEMENT

 

THIS GUARANTY AGREEMENT (this “Guaranty”) is made as of the 28 day of September, 2005, by COMSTOCK HOMEBUILDING COMPANIES, INC., a Delaware
corporation (the “ Guarantor”) in favor of BANK OF AMERICA, N.A.,
a national banking association (the “Lender”), and its successors and assigns.

 

R E C I T A L S:

 

WHEREAS,
Lender has made an acquisition and development loan to Comstock Bellemeade,
L.C. (“Borrower”) in the maximum principal amount of $46,725,000.00 (or so much
thereof as shall be advanced) and/or may issue letters of credit for the
Borrower’s account in connection therewith, including, without limitation, a
$1,000,000.00 letter of credit (such extensions of credit being herein
sometimes called individually and/or collectively the “Loan”);

 

WHEREAS, as a
condition precedent to making the Loan, the Lender has required, among other
things, the execution and delivery of this Guaranty by Guarantor;

 

WHEREAS, the
Loan shall be made in accordance with the terms and conditions of a Loan
Agreement of even date herewith, between the Lender and Borrower (as amended,
modified or supplemented from time to time, the “Loan Agreement”);

 

WHEREAS, the
Loan shall be evidenced by certain notes, applications or agreements for the
issuance of a letter or letters of credit, including, without limitation, that
certain Deed of Trust Note of even date herewith, from Borrower payable to the
order of the Lender in the maximum principal amount of $46,725,000.00, or so
much thereof as shall be advanced, that certain Letter of Credit Note in the
principal amount of $1,000,000.00 of even date herewith, from Borrower payable
to the order of the Lender, and any other instrument or agreement executed from
time to time by the Borrower in favor of the Lender, as any of the same may
from time to time be amended, modified, replaced or supplemented (collectively,
the “Note”);

 

WHEREAS, the
Guaranty is or shall be secured by one or more Credit Line Deed(s) of Trust and
Security Agreements now or hereafter executed and delivered by the Borrower to
certain trustees for the benefit of the Lender, including, without limitation,
that certain Credit Line Deed of Trust and Security Agreement of even date
herewith, from Borrower as grantor, to certain trustees for the benefit of the
Lender (as amended, modified or supplemented from time to time, collectively,
the “Deeds of Trust”), covering certain real property as more particularly
described therein, as well as all improvements located thereon;

 

WHEREAS, it is
intended that this Guaranty extend to the Loan and all other amounts owing
under any of the “Loan Documents” (hereinafter defined), without any need for
any notice to the Guarantor of the making of the Loan or advances thereunder 

 

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and without any need for any supplements or
amendments to this Guaranty or any other documentation to be executed by the
Guarantor; and

 

WHEREAS,
unless otherwise defined herein, all capitalized terms used herein shall have
the meanings assigned to them in the Loan Agreement.

 

W I T N E S S E T H:

 

For good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and as a material inducement to the
Lender to extend credit to the Borrower from time to time, the Guarantor hereby
guarantees to the Lender the prompt and full payment and performance of the
Indebtedness and the other obligations in connection with the Loan as defined
and described below in this Guaranty (hereinafter sometimes collectively called
the “Obligations”), upon the following terms and conditions:

 

1.             Guaranty of
Payment.  The Guarantor hereby unconditionally and
irrevocably guarantees to the Lender the punctual payment when due, whether by
scheduled payment date, upon maturity, lapse of time, by acceleration of
maturity, or otherwise, and at all times thereafter, of all principal, interest
(including interest accruing after the commencement of any bankruptcy or
insolvency proceeding by or against the Borrower, whether or not allowed in
such proceeding), fees, late charges, costs, expenses, indemnification
indebtedness (including, without limitation, indemnification for environmental
matters), and other sums of money now or hereafter due and owing pursuant to (a) the
terms of the Note, the Loan Agreement, the Deed(s) of Trust, and any and all
other documents executed by the Borrower in connection with the Loan (the “Loan
Documents”), now or hereafter existing, and specifically including any and all
advances made by the Lender under the Loan Documents from sources other than
the Loan, and interest on such advances, and (b) all renewals, extensions,
increases, refinancings, modifications, supplements or amendments to such
indebtedness, or any of the Loan Documents, or any part thereof (such
indebtedness being hereinafter collectively called the “Indebtedness”).  This Guaranty covers the Indebtedness,
whether presently outstanding or arising subsequent to the date hereof, whether
or not presently contemplated by the Guarantor, the Borrower or the Lender, and
whether or not the same shall be incurred after satisfaction, payment or
reduction of any previous Indebtedness, including all amounts advanced and/or
readvanced by the Lender in stages or installments.  The guaranty of the Guarantor as set forth in
this Section is a continuing guaranty of payment and not a guaranty of
collection.

 

2.             Guaranty of
Performance.  The Guarantor additionally hereby
unconditionally and irrevocably guarantees to the Lender the timely performance
of all other obligations of the Borrower under all of the Loan Documents,
including without limitation, completion of the Improvements and compliance
with all covenants regarding environmental matters.

 

3.             Primary
Liability of the Guarantor.  This Guaranty is an absolute,
irrevocable and unconditional guaranty of payment and performance.  The Guarantor shall be liable for the payment
and performance of the Obligations, as set forth in this

 

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Guaranty, as a primary obligor.  This Guaranty shall be effective as a waiver
of, and the Guarantor hereby expressly waives any and all rights to which the
Guarantor may otherwise have been entitled under any suretyship laws in effect
from time to time, including any right or privilege, whether existing under
statute, at law or in equity, to require the Lender to take prior recourse or
proceedings against any collateral, security or Person (hereinafter defined)
whatsoever.  Upon the occurrence of:  (i) any Default under the Loan, (ii) any
reasonable determination by the Lender that a material adverse change has
occurred in the financial condition of the Guarantor, (iii) the
dissolution or insolvency of Guarantor, subject to the provisions of Section 4
below, or (iv) any transfer of assets of Guarantor without receiving fair
value in exchange therefor, the Indebtedness shall be deemed immediately due
and payable at the election of the Lender, and the Guarantor shall, on demand
and without presentment, protest, any notice whatsoever, pay the amount due
thereon to the Lender or perform or observe the agreement, covenant, term or
condition, as the case may be, and it shall not be necessary for the Lender, in
order to enforce such payment or performance by Guarantor, first to institute
suit or pursue or exhaust any rights or remedies against the Borrower or others
liable on the Obligations or for such performance, or to institute suit or
pursue or exhaust any rights or remedies against the Borrower or Guarantor or
other sureties of the Obligations as contemplated by applicable law or to
enforce any rights against any security that shall ever have been given to
secure the Obligations, or to join the Borrower or any others liable for the
payment or performance of the Obligations or any part thereof in any action to
enforce this Guaranty, or to resort to any other means of obtaining payment or
performance of the Obligations.  The term
“Person” as used herein shall mean all of the Borrower and the Guarantor.

 

4.             Representations,
Warranties, and Covenants of the Guarantor. 
Guarantor hereby represents, warrants, and covenants that: (a) Guarantor
will derive substantial benefit, directly or indirectly, from the making of the
Loan to the Borrower and from the making of this Guaranty by the Guarantor; (b) this
Guaranty is duly authorized and valid, and is binding upon and enforceable
against the Guarantor; (c) the Guarantor is not, and the execution,
delivery and performance by the Guarantor of this Guaranty will not cause the
Guarantor to be, in violation of or in default with respect to any law or in
default (or at risk of acceleration of indebtedness) under any agreement or
restriction by which the Guarantor is bound or affected; (d) Guarantor is
a duly organized, validly existing limited liability company in good standing
under the laws of the Commonwealth of Virginia, is lawfully doing business in
the jurisdiction where it operates, and has full power and authority to enter
into and perform this Guaranty; (e) except as may have been disclosed to
the Lender in writing, there is not now pending against or affecting the
Guarantor, nor, to the knowledge of the Guarantor, is there threatened, any
action, investigation, suit or proceeding by or before any administrative
agency which if adversely determined would materially impair or affect the
Guarantor’s financial condition (f) all financial statements and
information heretofore furnished to the Lender by the Guarantor do, and all
financial statements and information hereafter furnished to the Lender by the Guarantor
will, fully and accurately present the financial condition of the Guarantor as
of their dates and the results of the Guarantor’s operations for the periods
therein specified, and, since the date of the most recent financial statements
of the Guarantor heretofore furnished to the Lender, no material adverse change
has occurred in the financial condition of the Guarantor, nor, except as

 

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heretofore disclosed in writing to the
Lender, has the Guarantor incurred any material liability, direct or indirect,
fixed or contingent; (g) after giving effect to this Guaranty, the
Guarantor is solvent, is not engaged or about to engage in business or a
transaction for which the property of the Guarantor is an unreasonably small
capital, and does not intend to incur or believes that it will incur debts that
will be beyond its ability to pay as such debts mature; (h) the Lender has
no duty at any time to investigate or inform the Guarantor of the financial or
business condition or affairs of the Borrower or any change therein, and the
Guarantor will keep fully appraised of the Borrower’s financial and business
condition; (i) the Guarantor acknowledges and agrees that the Guarantor
may be required to pay and perform the Obligations in full without assistance
or support from the Borrower or any other Person; and (j) the Guarantor has
read and fully understand the provisions contained in the Loan Agreement, the
Deed(s) of Trust, and the other Loan Documents, each of which may be modified,
extended, supplemented or extended from time to time without notice to or
consent from the Guarantor and without affecting the obligations of the
Guarantor under this Guaranty.

 

In addition, during the term of the Loan, Lender
must be satisfied that Guarantor’s financial condition meets the following
requirements:

 

(i) Adjusted Tangible Net Worth (ATNW) shall be
at least $65,000,000 for fiscal year 2005, increasing by 50% of consolidated
after tax net earnings for each year thereafter.   Adjusted Tangible Net Worth is defined as
GAAP net worth plus subordinated debt approved by Agent less any goodwill,
organizational costs, leasehold improvements and Affiliate and/or stockholder
receivables and investments in joint ventures; and

 

(ii) Debt to Tangible Net Worth (“Leverage
Ratio”) shall be 3.50:1.  Leverage Ratio
is the total Adjusted Liabilities to Adjusted Tangible Net Worth (ATNW).  Adjusted Liabilities is defined as GAAP total
liabilities less Variable Interest Entities, less subordinated debt due to
related parties and investments in affiliates and joint ventures that are not
co-borrowers (“Related Venturer Subordinated Debt”), less subordinated debt (“Direct
Subordinated Debt”), plus any other debt guaranteed by Borrower.  For purposes hereof, a “Variable Interest
Entity” is either: (A) an entity that is consolidated for financial
statement purposes when (1) the equity investment at risk is not
sufficient to permit the entity from financing its activities without
additional subordinated financial support from other parties or (2) equity
holders either (a) lack direct or indirect ability to make decisions about
the entity (b) are not obligated to absorb expected losses of the entity
or (c) do not have the right to receive expected residual returns of the
entity if they occur or (B) a “variable interest entity” as defined in
Guarantor’s SEC-filed financial statements and as the definition of such term
is amended from time to time based upon guidance from the Financial Accounting
Standards Board.   For purposes of
clarity, the primary beneficiary of a Variable Interest Entity is the party
that absorbs a majority of the Variable Interest Entity’s expected losses,
receives a majority of the entity’s expected residual returns, or both, as a
result of ownership, contractual or other financial interests in the entity.

 

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The Guarantor’s representations, warranties and
covenants are a material inducement to the Lender to enter into the other Loan
Documents and shall survive the execution hereof and any bankruptcy,
foreclosure, transfer of security or other event affecting the Borrower, the
Guarantor, any other party, or any security for all or any part of the
Obligations.

 

5.             Financial
Information.  The Guarantor shall furnish or cause to be
furnished to the Lender upon request any financial statements for Guarantor and
any entity related to the Guarantor containing such information and in such
form as Lender may from time to time reasonably determine, provided the
obligations of the Guarantor hereunder have not already terminated.

 

Without limiting the generality of the foregoing,
the Guarantor shall furnish to the Lender financial statements as follows:

 

(a)           as
soon as available, but in no event later than ninety (90) days after the close
of its fiscal year (but in no event earlier than the date such financial
statements must be submitted to governmental authorities), financial statements
(all of which financial statements may include, as requested by the Lender, a
balance sheet, income statement, sources and uses of funds for such fiscal
and/or calendar year, projected sources and uses of funds for the coming year,
detailed listing and description of all contingent liabilities, tax returns,
written verification of liquidity and such other supporting schedules and
documentation which the Lender may request). 
All such financial statements shall be audited by a certified public
accountant acceptable to the Lender in all respects; and

 

(b)           if
requested by the Lender, within forty-five (45) days after the close of its
quarterly business period (but in no event earlier than the date such financial
statements must be submitted to governmental authorities), the financial
statements to be filed with applicable governmental authorities.

 

6.             Certain
Agreements and Waivers by the Guarantor.

 

(a)           The
Guarantor hereby waives the benefits of Va. Code Ann. § 49-25 and § 49-26
as amended and agrees that neither the Lender’s rights or remedies nor the
Obligations shall be released, diminished, impaired, reduced or affected by any
one or more of the following events, actions, facts, or circumstances, and the
liability of the Guarantor under this Guaranty shall be absolute and
unconditional irrespective of:

 

(i)            any
limitation of liability or recourse in any other Loan Document or arising under
any law;

 

(ii)           any claim or defense that this Guaranty was made without
consideration or is not supported by adequate consideration;

 

(iii)          the taking or accepting of any other security or guaranty
for, or right of recourse with respect to, any or all of the Obligations;

 

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(iv)          any homestead exemption or other exemption under applicable
law;

 

(v)           any release, surrender, abandonment, exchange, alteration,
sale or other disposition, subordination, deterioration, waste, failure to
protect or preserve, impairment, or loss of, or any failure to create or
perfect any lien or security interest with respect to, or any other dealings
with, any collateral or security at any time existing or purported, believed or
expected to exist in connection with any or all of the Obligations, including
any impairment of the Guarantor’ s recourse against any Person or collateral;

 

(vi)          whether express or by any operation of law, any full or
partial release of the liability of the Guarantor, the Borrower or any other
party hereunder or under any of the other Loan Documents;

 

(vii)         the
death, insolvency, bankruptcy, disability, dissolution, liquidation,
termination, receivership, reorganization, merger, consolidation, change of
form, structure or ownership, sale of all assets, or lack of corporate,
partnership or other power of the Borrower, the Guarantor or any other party at
any time liable for the payment or performance of any or all of the
Obligations;

 

(viii)        either
with or without notice to or consent of the Guarantor, any renewal, extension,
modification or rearrangement of the terms of any or all of the Obligations
and/or any of the Loan Documents, including, without limitation, material
alterations of the terms of payment (including changes in maturity date(s),
interest rate(s) and amortization) or performance or any other terms thereof,
or any waiver, termination, or release of, or consent to departure from, any of
the Loan Documents or any other guaranty of any or all of the Obligations, or
any adjustment, indulgence, forbearance, or compromise that may be granted from
time to time by the Lender to the Borrower, the Guarantor, and/or any other
Person at any time liable for the payment or performance of any or all of the
Obligations;

 

(ix)           any
neglect, lack of diligence, delay, omission, failure, or refusal of the Lender
to take or prosecute (or in taking or prosecuting) any action for the
collection or enforcement of any of the Obligations, or to foreclose or take or
prosecute any action to foreclose (or in foreclosing or taking or prosecuting
any action to foreclose) upon any security therefor, or to exercise (or in
exercising) any other right or power with respect to any security therefor, or to take or
prosecute (or in taking or prosecuting) any action in connection with any Loan
Document, or any failure to sell or otherwise dispose of in a commercially
reasonable manner any collateral securing any or all of the Obligations;

 

(x)            any failure of the Lender to notify the Guarantor of any
creation, renewal, extension, rearrangement, modification, supplement,
subordination, or assignment of the Obligations or any part thereof, or of any
Loan Document, or of any release of or change in any security, or of any other action taken or refrained from being
taken by the Lender against the Borrower or any security or other recourse, or
of any new agreement between the Lender and the Borrower,

 

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it being understood that the Lender shall not be
required to give the Guarantor any notice of any kind under any circumstances
with respect to or in connection with the Obligations, any and all rights to
notice that the Guarantor may have otherwise had being hereby waived by the
Guarantor;

 

(xi)           any refund of any payment by the Borrower or any other
party liable for the payment or performance of any or all of the Obligations;

 

(xii)          the
existence of any claim, set-off, or other right that the Guarantor may at any
time have against the Borrower, the Lender (other than pursuant to a final
judgment), or any other Person, whether or not arising in connection with this
Guaranty or any other Loan Document;

 

(xiii)         the
unenforceability of all or any part of the Obligations against the Borrower,
whether because the Obligations exceed the amount permitted by law or violate
any usury law, or because the act of creating the Obligations, or any part
thereof, is beyond the scope of powers granted, or because the officers or Persons creating same
acted in excess of their authority, or because of a lack of validity or
enforceability of or defect or deficiency in any of the Loan Documents, or
because the Borrower has any valid defense, claim or offset with respect
thereto, or because the Borrower’s obligation ceases to exist by operation of
law, or because of any other reason or circumstance, it being agreed that the
Guarantor shall remain liable hereunder regardless of whether the Borrower or
any other Person are found not liable on the Obligations, or any part thereof,
for any reason (and regardless of any joinder of the Borrower or any other
party in any action to obtain payment or performance of any or all of the
Obligations);

 

(xiv)        any order, ruling or plan of reorganization emanating from
proceedings under Title 11 of the United States Code with respect to the
Borrower or any other Person, including any extension, reduction,
composition, or other alteration of the Obligations, whether or not consented to
by the Lender; or

 

(xv)         any
failure to notify the Guarantor of, or obtain the Guarantor’s consent to, the
making of the Loan or any advances thereunder.

 

(b)           In
the event that any payment by the Borrower or any other Person to the Lender is
held to constitute a preference, fraudulent transfer or other voidable payment
under any bankruptcy, insolvency or similar law, or if for any other reason the
Lender is required to refund such payment or pay the amount thereof to any
other party, such payment by the Borrower or any other party to the Lender
shall not constitute a release of the Guarantor from any liability hereunder,
and this Guaranty shall continue to be effective or shall be reinstated
(notwithstanding any prior release, surrender or discharge by the Lender of
this Guaranty or of the Guarantor), as the case may be, with respect to, and
this Guaranty shall apply to, any and all amounts so refunded by the Lender or
paid by the Lender to another Person (which amounts shall constitute part of
the Obligations), and any interest paid by the Lender and any reasonable
attorneys’ fees, costs and expenses paid or incurred by the Lender in
connection with any such event.  It is
the intent of the Guarantor and the Lender that

 

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the
obligations and liabilities of the Guarantor hereunder are absolute and
unconditional under any and all circumstances and that until the Obligations
are fully and finally paid and performed, and not subject to refund or
disgorgement, the obligations and liabilities of the Guarantor hereunder shall
not be discharged or released, in whole or in part, by any act or occurrence
that might, but for the provisions of this Guaranty, be deemed a legal or
equitable discharge or release of any of the Guarantor except as otherwise set
forth herein.  The Lender shall be
entitled to continue to hold this Guaranty in its possession for a period of
one year from the date the Obligations are paid and performed in full and for
so long thereafter as may be necessary to enforce any obligation of the
Guarantor hereunder and/or to exercise any right or remedy of the Lender
hereunder.

 

(c)           If
acceleration of the time for payment of any amount payable by the Borrower
under the Note or any other Loan Document is stayed or delayed by any law or
tribunal, all such amounts shall nonetheless be payable by the Guarantor on
demand by the Lender.

 

7.             Waiver of Trial
by Jury; Consent to Jurisdiction.   WITHOUT
INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO ARBITRATE ANY “DISPUTE”
(FOR PURPOSES OF THIS SECTION, AS DEFINED IN THE “DISPUTE RESOLUTION” SECTION)
AS SET FORTH IN THIS NOTE,  AGREEMENT, OR
GUARANTY, AS APPLICABLE, TO THE EXTENT ANY “DISPUTE” IS NOT SUBMITTED TO
ARBITRATION OR IS DEEMED BY THE ARBITRATOR OR BY ANY COURT WITH JURISDICTION TO
BE NOT ARBITRABLE OR NOT REQUIRED TO BE ARBITRATED, BORROWER AND LENDER WAIVE
TRIAL BY JURY IN RESPECT OF ANY SUCH “DISPUTE” AND ANY ACTION ON SUCH “DISPUTE.”  THIS WAIVER IS KNOWINGLY, WILLINGLY AND
VOLUNTARILY MADE BY BORROWER AND LENDER, AND BORROWER AND LENDER HEREBY
REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY
PERSON OR ENTITY TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY
OR NULLIFY ITS EFFECT.  THIS PROVISION IS
A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THE LOAN DOCUMENTS.  BORROWER AND LENDER ARE EACH HEREBY
AUTHORIZED TO FILE A COPY OF THIS SECTION IN ANY PROCEEDING AS CONCLUSIVE
EVIDENCE OF THIS WAIVER OF JURY TRIAL. 
BORROWER FURTHER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN
THE SIGNING OF THIS NOTE, AGREEMENT, OR GUARANTY, AS APPLICABLE, AND IN THE
MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY
TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL,
AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

 

The Guarantor irrevocably submits to the
nonexclusive jurisdiction of any state or federal court sitting in the
Jurisdiction of Choice over any suit, action or proceeding arising out of, or
relating to, this Guaranty, and irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such

 

8

 

state
or federal court.  The Guarantor irrevocably
waives, to the fullest extent permitted by law, any objection that the
Guarantor may now or hereafter have to the laying of venue of any such suit,
action or proceeding brought in any such court, and any claims that any such
suit, action or proceeding is brought in an inconvenient forum.  Final judgment in any such suit, action or
proceeding brought in any such court shall be conclusive and binding upon the
Guarantor and may be enforced in any court in which the Guarantor are subject
to jurisdiction, by a suit upon such judgment provided that service of process
is effected upon the Guarantor as provided in the Loan Documents or as
otherwise permitted by applicable law.

 

8.             Dispute Resolution.

 

(a)           Arbitration.  Except to the extent expressly provided below,
any Dispute shall, upon the request of either party, be determined by binding
arbitration in accordance with the Federal Arbitration Act, Title 9, United
States Code (or if not applicable, the applicable state law), the then-current rules for
arbitration of financial services disputes of the American Arbitration
Association, or any successor thereof (“AAA”) and the “Special Rules” set forth
below.  “Dispute” means any controversy,
claim or dispute between or among the parties to this Note, Agreement, or
Guaranty,  as applicable, including any
controversy, claim or dispute arising out of or relating to (a) this Note,
Agreement, or Guaranty, as applicable, (b) any other Loan Documents, (c) any
related agreements or instruments, or (d) the transaction contemplated
herein or therein (including any claim based on or arising from an alleged
personal injury or business tort). In the event of any inconsistency, the
Special Rules shall control.  The
filing of a court action is not intended to constitute a waiver of the right of
Borrower or Lender, including the suing party, thereafter to require submittal
of the Dispute to arbitration.  Any party
to this Note, Agreement, or Guaranty, as applicable, may bring an action, including
a summary or expedited proceeding, to compel arbitration of any Dispute in any
court having jurisdiction over such action. 
For the purposes of this Dispute Resolution Section only, the terms
“party” and “parties” shall include any
parent corporation, subsidiary or affiliate of Lender involved in the
servicing, management or administration of any obligation described in or
evidenced by this Note, Agreement, or Guaranty, as applicable, together with
the officers, employees, successors and assigns of each of the foregoing.

 

(b)           Special
Rules.

 

(i)            The arbitration shall be conducted in any U.S. state
where real or tangible personal property collateral is located, or if there is
no such collateral, in the City and County where Lender is located pursuant to
its address for notice purposes in this Note, Agreement, or Guaranty, as
applicable.

 

(ii)           The arbitration shall be administered by AAA, who will
appoint an arbitrator.  If AAA is
unwilling or unable to administer or legally precluded from administering the
arbitration, or if AAA is unwilling or unable to enforce or legally precluded
from enforcing any and all provisions of this Dispute Resolution Section, the
any party to this Note, Agreement, or Guaranty, as applicable, may substitute
another arbitration organization that has similar procedures to AAA and that
will observe and enforce any and all provisions of this Dispute

 

9

 

Resolution Section. 
All Disputes shall be determined by one arbitrator; however, if the
amount in controversy in a Dispute exceeds Five Million Dollars ($5,000,000),
upon the request of any party, the Dispute shall be decided by three
arbitrators (for purposes of this Note, Agreement, or Guaranty, as applicable,
referred to collectively as the “arbitrator”).

 

(iii)          All arbitration hearings will be commenced within ninety
(90) days of the demand for arbitration and completed within ninety (90) days
from the date of commencement; provided, however, that upon a showing of good
cause, the arbitrator shall be permitted to extend the commencement of such
hearing for up to an additional sixty (60) days.

 

(iv)          The judgment and the award, if any, of the arbitrator shall
be issued within thirty (30) days of the close of the hearing.  The arbitrator shall provide a concise
written statement setting forth the reasons for the judgment and for the award,
if any.  The arbitration award, if any,
may be submitted to any court having jurisdiction to be confirmed and enforced,
and such confirmation and enforcement shall not be subject to arbitration.

 

(v)           The arbitrator will give effect to statutes of limitations
and any waivers thereof in determining the disposition of any Dispute and may
dismiss one or more claims in the arbitration on the basis that such claim or
claims is or are barred.  For purposes of
the application of the statute of limitations, the service on AAA under
applicable AAA rules of a notice of Dispute is the equivalent of the
filing of a lawsuit.

 

(vi)          Any dispute concerning this arbitration provision,
including any such dispute as to the validity or enforceability of this
provision, or whether a Dispute is arbitrable, shall be determined by the
arbitrator; provided, however, that the arbitrator shall not be permitted to
vary the express provisions of these Special Rules or the Reservations of
Rights in subsection (c) below.

 

(vii)         The arbitrator shall have the power to award legal fees and
costs pursuant to the terms of this Note, Agreement, or Guaranty, as
applicable.

 

(viii)   The arbitration will take place on an
individual basis without reference to, resort to, or consideration of any form
of class or class action.

 

(c)           Reservations
of Rights.  Nothing in this Note,
Agreement, or Guaranty, as applicable, shall be deemed to (i) limit the
applicability of any otherwise applicable statutes of limitation and any
waivers contained in this Note, Agreement, or Guaranty, as applicable, or (ii) apply
to or limit the right of Lender (A) to exercise self help remedies such as
(but not limited to) setoff, or (B) to foreclose judicially or nonjudicially
against any real or personal property collateral, or to exercise judicial or
nonjudicial power of sale rights, (C) to obtain from a court provisional
or ancillary remedies such as (but not limited to) injunctive relief, writ of
possession, prejudgment attachment, or the appointment of a receiver, or (D) to
pursue rights against a party to this Note, Agreement, or Guaranty, as
applicable, in a third-party proceeding in any action brought against Lender in
a state, federal or international court, tribunal or hearing body

 

10

 

(including
actions in specialty courts, such as bankruptcy and patent courts).  Lender may exercise the rights set forth in
clauses (A) through (D), inclusive, before, during or after the pendency
of any arbitration proceeding brought pursuant to this Note, Agreement, or
Guaranty, as applicable.  Neither the
exercise of self help remedies nor the institution or maintenance of an action
for foreclosure or provisional or ancillary remedies shall constitute a waiver
of the right of any party, including the claimant in any such action, to
arbitrate the merits of the Dispute occasioning resort to such remedies.  No provision in the Loan Documents regarding
submission to jurisdiction and/or venue in any court is intended or shall be
construed to be in derogation of the provisions in any Loan Document for
arbitration of any Dispute.

 

(d)           Conflicting
Provisions for Dispute Resolution. 
If there is any conflict between the terms, conditions and provisions of
this Section and those of any other provision or agreement for arbitration
or dispute resolution, the terms, conditions and provisions of this Section shall
prevail as to any Dispute arising out of or relating to (i) this Note,
Agreement, or Guaranty, as applicable, (ii) any other Loan Document, (iii) any
related agreements or instruments, or (iv) the transaction contemplated
herein or therein (including any claim based on or arising from an alleged
personal injury or business tort).  In any
other situation, if the resolution of a given Dispute is specifically governed
by another provision or agreement for arbitration or dispute resolution, the
other provision or agreement shall prevail with respect to said Dispute.

 

(e)           Jury Trial Waiver in Arbitration.  By
agreeing to this Section, the parties irrevocably and voluntarily waive any
right they may have to a trial by jury in respect of any Dispute.

 

9.             Attorneys’ Fees
and Costs of Collection.  The Guarantor shall pay on
demand all attorneys’ fees and all other costs and expenses incurred by the
Lender in the enforcement of or preservation of the Lender’s rights under this
Guaranty.  The Guarantor’s obligations
and liabilities under this Section 9 shall survive any payment or
discharge in full of the Obligations.

 

10.          Term of Guaranty.  This
Guaranty shall continue in effect until such time as the Obligations have been
fully and finally paid and performed, except that, and notwithstanding any
return of this Guaranty to the Guarantor, this Guaranty shall continue in
effect (a) with respect to any of the Obligations that survive after
expiration or termination of the Loan, (b) with respect to all obligations
and liabilities of the Guarantor for indemnification and for the payment of all
costs and expenses, as provided herein, and (c) as provided herein with
respect to preferential, fraudulent or other voidable payments or other
transfers.

 

11.          Subordination.  If,
for any reason whatsoever, the Borrower is now or hereafter becomes indebted to
the Guarantor:

 

(a)           such
indebtedness and all interest thereon and all liens, security interests and
rights now or hereafter existing with respect to property of the Borrower
securing same shall, at all times, be subordinate in all respects to the
Obligations and to all liens, security interests and rights now or hereafter
existing to secure the Obligations; and

 

11

 

(b)           The
Guarantor shall not be entitled to enforce or receive payment, directly or
indirectly, of any such indebtedness of the Borrower to the Guarantor until the
Obligations have been fully and finally paid and performed.  Notwithstanding the foregoing, the Guarantor
may receive payments upon close-out of any Project with regard to loans made by
the Guarantor to the owner of any such Project, or with regard to loans made to
Borrower on behalf of the owner of any such Project.  Notwithstanding the foregoing, the Guarantor
may receive payments from Borrower in the form of salaries or shareholder or
member dividends.

 

12.          Subrogation. 
Notwithstanding anything to the contrary contained herein (a) the
Guarantor shall not have any right of subrogation in or under any of the Loan
Documents or to participate in any way therein, or in any right, title or
interest in and to any security or right of recourse for the Indebtedness,
until the later of the date on which the Indebtedness has been fully and
finally paid, or the Loan has expired or been terminated, and (b) if the
Guarantor is or becomes an “insider” (as defined in Section 101 of the
United States Bankruptcy Code) with respect to the Borrower, then the Guarantor
hereby irrevocably and absolutely waives any and all rights of contribution,
indemnification, reimbursement or any similar rights against the Borrower with
respect to this Guaranty (including any right of subrogation, except to the
extent of collateral held by the Lender), whether such rights arise under an
express or implied contract or by operation of law.  It is the intention of the parties that the
Guarantor shall not be deemed to be a “creditor” (as defined in Section 101
of the United States Bankruptcy Code) of the Borrower by reason of the
existence of this Guaranty in the event that the Borrower or the Guarantor
becomes a debtor in any proceeding under the United States Bankruptcy code.

 

13.          Notices. 
Unless specifically provided otherwise, any notice for purposes of this
Guaranty shall be given in writing or by telecopier transmission and shall be
addressed or delivered to the respective addresses set forth at the end of this
Guaranty, or to such other address as may have been previously designated by
the intended recipient by notice given in accordance with this Section. If sent
by prepaid, registered or certified mail (return receipt requested), the notice
shall be deemed effective when the receipt is signed or when the attempted
initial delivery is refused or cannot be made because of a change in address of
which the sending party has not been notified; and if transmitted by telecopier
or personal delivery, the notice shall be effective when received.  No notice of change of address shall be
effective except upon actual receipt.

 

14.          Cumulative Rights.  The
exercise by the Lender of any right or remedy hereunder or under any other Loan
Document, or at law or in equity, shall not preclude the concurrent or
subsequent exercise of any other right or remedy.  The Lender shall have all rights, remedies
and recourses afforded to the Lender by reason of this Guaranty or any other
Loan Document or by law or equity or otherwise, and the same shall be
cumulative and concurrent and are intended to be, and shall be,
nonexclusive.  No waiver of any default
on the part of the Guarantor or of any breach of any of the provisions of this
Guaranty or of any other document shall be considered a waiver of any other or
subsequent default or breach, and no delay or omission in exercising or
enforcing the rights and powers granted herein or in any other document shall
be

 

12

 

construed
as a waiver of such rights and powers, and no exercise or enforcement of any
rights or powers hereunder or under any other document shall be held to exhaust
such rights and powers, and every such right and power may be exercised from
time to time.  No provision of this
Guaranty or any right, remedy or recourse of the Lender with respect hereto, or
any default or breach, can be waived, nor can this Guaranty or the Guarantor be
released or discharged in any way or to any extent, except specifically in each
case by a writing intended for that purpose (and which refers specifically to
this Guaranty) executed, and delivered to the Guarantor, by the Lender, except
as otherwise provided herein.

 

15.          Disclosure of
Information.  The Lender may sell or offer to sell the Loan
or an interest in the Loan to one or more assignees or participants and may
disclose to any such assignee or participant or prospective assignee or
participant any information the Lender has pertaining to the Loan, the
Obligations, this Guaranty, or the Guarantor. 
The Lender also may disclose any such information to any regulatory body
having jurisdiction over the Lender and to any agent or attorney of the Lender
and in such other circumstances and to such other parties as necessary or
appropriate in the Lender’s reasonable judgment.

 

16.          Governing Law;
Forum.  This Guaranty is an agreement executed under
seal, and its validity, enforcement, and interpretation, shall for all purposes
be governed by and construed in accordance with the laws of the Jurisdiction of
Choice and applicable United States federal law, and is intended to be
performed in accordance with, and only to the extent permitted by, such
laws.  If the Guarantor is a corporation,
the designation “(SEAL)” on this Guaranty shall be effective as the affixing of
Guarantor’s corporate seal physically to this Guaranty.  All obligations of the Guarantor hereunder
are payable and performable at the place or places where the Obligations are
payable and performable.  The Guarantor
hereby irrevocably submits generally and unconditionally for the Guarantor and
in respect of the Guarantor’ respective property to the jurisdiction of any
state court, or any United States federal court, sitting in the state in which
any of the Land is located, over any suit, action or proceeding arising out of
or relating to this Guaranty or the Obligations.  The Guarantor hereby irrevocably waives, to
the fullest extent permitted by law, any objection that the Guarantor may now
or hereafter have to the laying of venue in any such court and any claim that
any such court is an inconvenient forum.

 

17.          Counterparts.  This
Guaranty may be executed in multiple counterparts, each of which, for all
purposes, shall be deemed an original, and all of which together shall
constitute one and the same agreement.

 

18.          Miscellaneous.  This
Guaranty embodies the entire agreement between the Lender and the Guarantor
with respect to the guaranty by the Guarantor of the Obligations.  This Guaranty supersedes all prior agreements
and understandings, if any, with respect to guaranty by the Guarantor of the
Obligations.  This Guaranty may not be
modified, amended or superseded except in a writing signed by the Lender and
the Guarantor referencing this Guaranty by its date and specifically
identifying the portions hereof that are to be modified, amended or
superseded.  This Guaranty is binding not
only on the Guarantor, but also on the Guarantor’s heirs, personal
representatives, successors and assigns. 
If any provision of this Guaranty or the

 

13

 

application thereof to any Person or
circumstance shall, for any reason and to any extent, be declared to be invalid
or unenforceable, neither the remaining provisions of this Guaranty nor the
application of such provision to any other Person or circumstance shall be
affected thereby, and the remaining provisions of this Guaranty, or the
applicability of such provision to other Persons or circumstances, as
applicable, shall remain in effect and be enforceable to the maximum extent
permitted by applicable law.

 

 

[SIGNATURES ON THE FOLLOWING
PAGE]

 

14

 

IN WITNESS WHEREOF, the Guarantor duly executed and delivered this Guaranty, intending
that it be an instrument under seal, as of the date first written above.

 

	
  WITNESS:

  	
  GUARANTOR:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  COMSTOCK HOMEBUILDING COMPANIES,

  
	
   

  	
  INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Jubal R. Thompson

  	
   

  	
   

  	
  By:

  	
  /s/ Christopher Clemente

  	
   

  
	
   

  	
  Name:

  	
  Jubal R. Thompson

  	
   

  	
   

  	
  Christopher Clemente,

  
	
   

  	
  Title:

  	
  General Counsel

  	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
  (Seal)

  	
  Address:

  	
  11465 Sunset Hills Road

  
	
   

  	
   

  	
  5th Floor

  
	
   

  	
   

  	
  Reston, Virginia 20190

  
													

 

ADDRESS OF LENDER:

 

BANK OF AMERICA, N.A.

8300
Greensboro Drive

Suite 300

McLean,
Virginia 22102-3604

Attention:  Homebuilder Division

Fax
No:  (703) 761-8160

 

15Exhibit 4.10

 

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

 

RAINING DATA CORPORATION

 

5% CONVERTIBLE
SUBORDINATED NOTE DUE 2008

 

	
  No.   -   

  	
   

  	
  $                     

  

 

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

 

1.  Redemption.  This Security is subject
to redemption, as a whole or from time to time in part (in any amount that is
an integral multiple of $1,000), upon not less than 30 nor more than 60 

 

 

days’ notice in the manner
provided in Section 9(b) (provided that any conditions set forth
below in this Section 1 are satisfied), at the election of the Company, at
a redemption price of 100% of the principal amount thereof, together with accrued
interest to the redemption date, but interest installments whose stated
maturity is on or prior to such redemption date will be payable to the holder
of this Security, or one or more predecessor Securities, of record at the close
of business on the relevant record dates referred to on the face hereof.

 

2.  Conversion.

 

(a)  (1) The holder of this Security is entitled at any
time and from time to time on or after              ,
200   and before the close of business on May 29, 2008 (or,
in case this Security is called for redemption or the holder hereof has
exercised his right to require the Company to repurchase this Security or a
portion hereof pursuant to Section 3 hereof, then in respect of this
Security or such portion hereof, as the case may be, until and including, but
(unless the Company defaults in making the payment due upon redemption or
repurchase) not after, 5:00 p.m., California time, on the Business Day
prior to the redemption date or the Repurchase Date, as the case may be), to
convert this Security (or any portion of the principal amount hereof that is an
integral multiple of $1,000), into fully paid and nonassessable Common Stock
(as hereinafter defined) (calculated as to each conversion to the nearest 1/100
of a share) of the Company at the rate (or at the then current adjusted rate if
an adjustment has been made as provided below) of 200 shares of Common Stock
for each $1,000 principal amount of Security (the “Conversion Rate”) by
surrender of this Security, duly endorsed or assigned to the Company or in
blank to the Company at the Designated Office, accompanied by written notice to
the Company that the holder hereof elects to convert this Security (or if less
than the entire principal amount hereof is to be converted, specifying the portion
hereof to be converted).  
Notwithstanding the foregoing, such holder shall be deemed for all
purposes to have converted this Security against delivery of the Common Stock
and cash payable for fractional shares upon such conversion (which surrender
may take place before or after the date of such deemed conversion, without
affecting the validity thereof), immediately prior to the close of business on
the redemption date, if this Security is redeemed pursuant to Section 1
hereof, if the Closing Price of the Common Stock for at least 20 Trading Days
within a period of any 30 consecutive Trading Days ending on the date prior to
the date of sending of the notice of redemption exceeds 150% of the Conversion
Price.  The term “Conversion Price” on
any day shall equal $1,000 divided by the Conversion Rate in effect on such
day.

 

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

 

2

 

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

 

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

 

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

 

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

 

(3)                                  In case outstanding Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Rate
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be 

 

3

 

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

 

(4)                                  In case the Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock evidences of its
indebtedness, shares of any class of capital stock, or other property
(including securities, but excluding (i) any rights, options or warrants
referred to in paragraph (2) of this Section 2(b), (ii) any
dividend or distribution paid exclusively in cash, (iii) any dividend or
distribution referred to in paragraph (1) of this Section 2(b) and
(iv) any merger or consolidation to which Section 2(h) applies
(the “Distributed Property”)), the Conversion Rate shall be adjusted so
that the same shall equal the rate determined by dividing the Conversion Rate
in effect immediately prior to the close of business on the Determination Date
for such distribution by a fraction of which the numerator shall be the current
market price per share (determined as provided in paragraph (8) of this Section 2(b))
of the Common Stock on such Determination Date less the then fair market value
(as determined in good faith by the Board of Directors of the Company in
accordance with the provisions of this paragraph (4) of Section 2(b))
of the portion of the assets, shares or evidences of indebtedness so
distributed applicable to one share of Common Stock and the denominator shall
be such current market price per share of the Common Stock, such adjustment to
become effective immediately prior to the opening of business on the day
following such Determination Date; provided, however, that if the Distributed
Property consists of shares of capital stock of a Subsidiary, the Company may,
at its option and in lieu of the foregoing adjustment to the Conversion Rate,
elect to make adequate provision so that the holder of this Security shall have
the right to receive upon conversion the amount of such shares of capital stock
that such holder of this Security would have received if such holder of this
Security had converted such Security on the record date.  If the Board of Directors determines the fair
market value of any distribution for purposes of this paragraph (4) by
reference to the actual or when issued trading market for any securities
constituting such distribution, it must in doing so consider the prices in such
market over the same period used in computing the current market price per
share pursuant to paragraph (8) of this Section 2(b).

 

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

 

Rights or warrants
distributed by the Company to all holders of Common Stock entitling the holders
thereof to subscribe for or purchase shares of the Company’s capital stock
(either initially or under certain circumstances), which rights or warrants,
until the occurrence of a specified event or events (“Trigger  Event”):  (i) are deemed to be transferred with
such shares of Common Stock; (ii) are not exercisable; and (iii) are
also issued in respect of future issuances of Common Stock, shall be 

 

4

 

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

 

(5)                                  In
case the Company shall, by dividend or otherwise, distribute to all holders of
its Common Stock cash (excluding any cash that is distributed as part of a
distribution referred to in paragraph (4) of Section 2(b)) in
aggregate amount that, combined together with (I) the aggregate amount of any
other cash distributions to all holders of its Common Stock made exclusively in
cash within the twelve (12) months preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to this
paragraph (5) of Section 2(b) has been made and (II) the
aggregate of any cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a board
resolution) of consideration payable in respect of any tender offer by the
Company or any of its subsidiaries for all or any portion of the Common Stock
concluded within the twelve (12) months preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to paragraph (6) of
Section 2(b) has been made (the “combined cash and tender amount”),
exceeds ten percent (10%) of the product of the current market price per share
of the Common Stock (determined as provided in paragraph (7) of this Section 2(b))
on the date for the determination of holders of shares of Common Stock entitled
to receive such distribution times the number of shares of Common Stock
outstanding on such date (the “aggregate current market price”), then, and in
each such case, immediately after the close of business on such date for
determination, the Conversion Rate shall be adjusted so that the same shall
equal the rate determined by dividing the Conversion Rate in effect immediately
prior to the close of business on the date fixed for determination of the
stockholders entitled to receive such distribution by a fraction (i) the
numerator of which shall be equal to the current market price per share of the
Common Stock on the date fixed for such determination less an amount equal to
the quotient of (x) the excess of such combined cash and tender amount over ten
percent (10%) of such 

 

5

 

aggregate current market
price divided by (y) the number of shares of Common Stock outstanding on such
date for determination and (ii) the denominator of which shall be equal to
the current market price per share of the Common Stock on such date for
determination.

 

(6)                                  In case of a tender offer made by the
Company or any Subsidiary of the Company for all or any portion of the Common
Stock shall expire and such tender offer or exchange (as amended upon the
expiration thereof) shall require the payment to stockholders (based on the
acceptance (up to any maximum specified in the terms of the tender offer) of
Purchased Shares (as defined below)) of an aggregate consideration having a
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a board resolution), that combined
together with (I) the aggregate of the cash plus the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a board resolution), as of the expiration of such tender or
exchange offer, of consideration payable in respect of any other tender or
exchange offer by the Company or any Subsidiary of the Company for all or any
portion of the Common Stock expiring within the 12 months preceding the
expiration of such tender or exchange offer and in respect of which no
adjustment pursuant to this paragraph (6) of Section 2(b) has
been made and (II) the aggregate amount of any cash distributions to all
holders of the Company’s Common Stock within twelve (12) months preceding the expiration
of such tender or exchange offer and in respect of which no adjustment pursuant
to paragraph (5) of Section 2(b) has been made (the “combined
tender and cash amount”) exceeds ten percent (10%) of the product of the
current market price per share of the Common Stock (determined as provided in
paragraph (7) of this Section 2(b)) as of the last time (the “Expiration
Time”) tenders or exchange could have been made pursuant to such tender
or exchange offer (as it may be amended) times the number of shares of Common
Stock outstanding (including any tendered or exchange shares) as of the
Expiration Time, then, and in each such case, immediately prior to the opening
of business on the day after the date of the Expiration Time, the Conversion
Rate shall be adjusted so that the same shall equal the rate determined by
dividing the Conversion Rate immediately prior to close of business on the date
of the Expiration Time by a fraction (i) the numerator of which shall be
equal to (A) the product of (I) the current market price per share of
Common Stock on the date of the Expiration Time multiplied by (II) the number
of shares of Common Stock outstanding (including any tendered or exchanged
shares) on the date of the Expiration Time less (B) the combined tender
and cash amount, and (ii) the denominator of which shall be equal to the
product of (A) the current market price per share of the Common Stock as
of the Expiration Time multiplied by (B) the number of shares of Common
Stock outstanding (including any tendered or exchanged shares) as of the
Expiration Time less the number of all shares validly tendered or exchanged and
not withdrawn as of the Expiration Time (the shares deemed so accepted up to
and any such maximum, being referred to as the “Purchased  Shares”).

 

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

 

6

 

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

 

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

 

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

 

(d)  In case:

 

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

 

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

 

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

 

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

 

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

 

then the Company shall cause to be delivered to the
holder of this Security, at least twenty (20) days (or ten (10) days in
any case specified in clause (1) or (2) above) prior to the
applicable record, expiration or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights, options or warrants, or, if a record is 

 

7

 

not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution, rights,
options or warrants are to be determined, (y) the date on which the right to
make tenders under such tender offer expires or (z) the date on which such
reclassification, consolidation, merger, conveyance, transfer, sale, lease,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, sale, lease, dissolution, liquidation or winding up.  Neither the failure to give such notice nor
any defect therein shall affect the legality or validity of the proceedings
described in clauses (1) through (5) of this Section 2(d).

 

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

 

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

 

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

 

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

 

8

 

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

 

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

 

3.  Right to Require Repurchase.

 

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

 

(b)  To exercise a repurchase
right, the holder shall deliver to the Company on or before the 5th day prior
to the Repurchase Date, together with this Security, written notice of the
holder’s exercise of such right, which notice shall set forth the name of the
holder, the principal 

 

9

 

amount
of this Security to be repurchased (and, if this Security is to be repurchased
in part, the portion of the principal amount thereof to be repurchased) and a statement
that an election to exercise the repurchase right is being made thereby.  Such written notice shall be irrevocable,
except that the right of the holder to convert this Security (or the portion
hereof with respect to which the repurchase right is being exercised) shall
continue until the close of business on the Trading Day prior to the Repurchase
Date.

 

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

 

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

 

(e)  For purposes of this Section 3:

 

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

 

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

 

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

 

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

 

10

 

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

 

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

 

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

 

4.  Certain Covenants.

 

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

 

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

 

11

 

5.  Events of Default.

 

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

 

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

 

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

 

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

 

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

 

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

 

(6)                                  the entry by a court having jurisdiction in the
premises of (A) a decree or order for relief in respect of the Company in
an involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or (B) a
decree or order approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company under
any applicable Federal or State law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar 

 

12

 

official
of the Company or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and the continuance of any such
decree or order for relief or any such other decree or order unstayed and in
effect for a period of 60 consecutive days; or

 

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

 

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

 

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

 

6.  Consolidation, Merger, Etc.

 

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

 

13

 

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

 

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

 

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

 

7.  Subordination.

 

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

 

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

 

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

 

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

 

14

 

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

 

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

 

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

 

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

 

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

 

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

 

(c)  Bankruptcy and Dissolution, Etc. 
Upon any payment by the Company, or distribution of assets of the Company of
any kind or character, whether in cash, property or securities, to creditors
upon any dissolution, winding-up, liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other 

 

15

 

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

 

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

 

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

 

16

 

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

 

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

 

Upon any payment or
distribution of assets of the Company referred to in this Section 7, the
holder of this Security shall be entitled to rely upon any order or decree made
by any court of competent jurisdiction in which such bankruptcy, dissolution,
winding-up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making such payment or distribution, delivered to the holder of
this Security, for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Section 7.

 

17

 

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

 

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

 

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

 

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

 

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

 

18

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Common
Stock” means the Common Stock, par value $0.10 per share, of the Company
authorized at the date of this instrument as originally executed.  Subject to the provisions of Section 2,
shares issuable on conversion of this Security shall include only Common Stock
or shares of any class or classes of common stock resulting from any
reclassification or reclassifications 

 

19

 

thereof; provided, however,
that if at any time there shall be more than one such resulting class, the
shares so issuable on conversion of this Security shall include shares of all
such classes, and the shares of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of shares
of all such classes resulting from all such reclassifications.

 

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

 

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

 

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

 

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

 

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

 

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

 

“Indebtedness”
means, with respect to any Person:

 

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

 

20

 

obligations of
such Person under such lease or related document to purchase or to cause a
third party to purchase such leased property; or (iv) in respect of
letters of credit (including reimbursement obligations with respect thereto),
local guarantees or bankers’ acceptances;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Securities” means the 5%
Convertible Subordinated Note due 2008 issued by the Company pursuant to the
Agreement and such other securities that are issued upon transfer or exchange
or replacement thereof (or successive transfers, exchanges or replacements)
pursuant to Section 9 hereof and any PIK Notes, as amended, modified or
supplemented from time to time.

 

 “Securities Act” means the Securities Act of
1933, as amended.

 

 “Senior Indebtedness” means the principal of,
premium, if any, interest on (including any interest accruing after the filing
of a petition by or against the Company under any bankruptcy law, whether or
not allowed as a claim after such filing in any proceeding under such
bankruptcy law) and any other payment due pursuant to, any Indebtedness,
whether outstanding on the date of this 

 

21

 

Security
or thereafter incurred or created; provided that
Senior Indebtedness shall not include (i)  any indebtedness of any kind of
the Company to any Subsidiary of the Company, a majority of the voting stock of
which is owned, directly or indirectly, by the Company, (ii) indebtedness
for trade payables or constituting the deferred purchase price of assets or
services incurred in the ordinary course of business, or (iii) any
indebtedness which by its terms is pari passu in
right of payment with or subordinate in right of payment to this Security.

 

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

 

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

 

9.  Other.

 

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

 

(b)  The Company will give prompt
written notice to the holder of this Security of any change in the location of
the Designated Office.  Any notice to the
Company or to the holder of this Security shall be given in the manner set
forth in the Note Exchange Agreement, dated as of January 30, 2003, among
the Company and the initial holder of this Security (the “Agreement”), provided
that the holder of this Security, if not a party to the Agreement, may specify alternative
notice instructions to the Company.

 

(c)  The transfer of this Security
is registrable on the register maintained by the Company upon surrender of this
Security for registration of transfer at the Designated Office, duly endorsed
by, or accompanied by a written instrument of transfer in form satisfactory to
the Company duly executed by, the holder hereof or such holder’s attorney duly
authorized in writing, and thereupon one or more new Securities, of authorized
denominations and for the same aggregate principal amount, will be issued to
the designated transferee or transferees. 
Such Securities are 

 

22

 

issuable
only in registered form without coupons in denominations of $1,000 and any
integral multiple thereof.  No service
charge shall be made for any such registration of transfer, but the Company may
require payment of a sum sufficient to recover any tax or other governmental
charge payable in connection therewith. 
Prior to due presentation of this Security for registration of transfer,
the Company and any agent of the Company may treat the Person in whose name
this Security is registered as the owner thereof for all purposes, whether or
not this Security be overdue, and neither the Company nor any such agent shall
be affected by notice to the contrary.

 

(d)  This Security and the Common Stock issuable
upon conversion of this Security have not been registered under the Securities
Act, or the securities laws of any state or other jurisdiction.  Neither this Security nor the Common Stock
issuable upon conversion of this Security nor any interest or participation
herein may be reoffered, sold, assigned, transferred, pledged, encumbered or
otherwise disposed of (a “Transfer”) in the absence of such registration or
unless such transaction is exempt from, or not subject to, registration.  The holder by its acceptance of this Security
or the Common Stock issuable upon conversion of this Security agrees that it
shall not offer, sell, assign, transfer, pledge, encumber or otherwise dispose
of this Security or any portion thereof or interest therein other than (i) in a
minimum denomination of $250,000 in principal amount if the holder is Astoria
Capital Partners, L.P. and (ii) in a minimum denomination equal to the lesser
of (A) $5,000,000 in principal amount and (B) the entire aggregate principal
amount of this Security and all PIK Notes held by the holder if the holder is
not Astoria Capital Partners, L.P., and then in each case (other than with
respect to a Transfer pursuant to a registration statement that is effective at
the time of such Transfer) only (a) to the Company, or (b) to a person it
reasonably believes to be an institutional “accredited investor” within the
meaning of Rule (501(a)(1)(2)(3) or (7) under the Securities Act or a qualified
institutional buyer (as defined in Rule 144A under the Securities Act), and, in
the case of (b) above, the transferor shall furnish the Company with such
certifications, legal opinions or other information as the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act.  In
addition to the restrictions set forth above in this Section 9(d), Transfers
permitted hereunder are further limited so that at no time may the number of
holders of Securities and PIK Notes on the register of the Company maintained
pursuant to Section 9(c) hereof exceed 40.

 

(e)  Upon presentation of this Security for
registration of transfer at the office of the Company specified herein
accompanied by (i) certification by the transferor that such transfer is
in compliance with the terms hereof and (ii) by a written instrument of
transfer in a form approved by the Company executed by the registered holder,
in person or by such holder’s attorney thereunto duly authorized in writing,
and including the name, address and telephone and fax numbers of the transferee
and name of the contact person of the transferee, such Security shall be
transferred on the Security register, and a new Security of like tenor and
bearing the same legends shall be issued in the name of the transferee and sent
to the transferee at the address and c/o the contact person so indicated.  Transfers and exchanges of Securities shall
be subject to such additional restrictions as are set forth in the legends on
the Securities and to such additional reasonable regulations as may be
prescribed by the Company as specified in Section 9(d) hereof.  Subject to Section 9(d), successive
registrations of transfers as aforesaid may be made from time to time as
desired, and each such registration shall be noted on the Security register.

 

23

 

(f)  Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Security, and in the case of loss, theft or destruction, receipt of
indemnity or security reasonably satisfactory to the Company, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of such Security, if mutilated, the Company
will deliver a new Security of like tenor and dated as of such cancellation, in
lieu of such Security.

 

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

 

(h)  Neither this Security nor any term hereof may
be amended or waived orally or in writing, except that any term of the
Securities may be amended and the observance of any term of the Securities may
be waived (either generally or in a particular instance and either
retroactively or prospectively), and such amendment or waiver shall be applicable
to all of the Securities, upon the approval of the Company and the holders of
fifty percent (50%) or more of the outstanding principal amount of all then
outstanding Securities; provided, however, that any amendment
that would (i) reduce the outstanding principal amount or premium (if any)
of the Securities, (ii) reduce the rate of interest borne by the
Securities, (iii) change the date of maturity or interest payment dates of
the Securities, (iv) reduce any amount payable upon repurchase of the Securities,
(v) impair the right of any holder of this Security to institute suit for
the payment thereof, (vi) make the principal, premium (if any) or interest
payable on the Securities in a coin or currency other than as set forth in the
Securities, (vii) modify the provisions of the Securities with respect to
subordination or seniority of the Securities in a manner adverse to the holders
of the Securities in any material respect, (viii) change in any respect
the obligation of the Company to repurchase the Securities, (ix) impair
the right of the holders of the Securities to convert the Securities into
Common Stock or (x) modify this Section 9(h) shall require the
approval of the holder of each Security to which such amendment shall apply.
The Company will not amend any provision of any other Security in a manner
favorable to any holder thereof unless a similar amendment is made or offered
with respect to all of the Securities. 
Each holder of this Security by its acceptance hereof acknowledges and
agrees that the subordination provisions of this instrument are for the benefit
of the holders of the Senior Indebtedness and that, accordingly, no provision
of Section 7 hereof may be amended or otherwise modified without the prior
written consent of each holder of Senior Indebtedness at such time outstanding.

 

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

 

[Remainder of page intentionally
left blank.]

 

24

 

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

 

Dated:                   ,
200  

 

	
   

  	
  RAINING DATA CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Brian C. Bezdek

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  
					

 

25

 

ELECTION OF HOLDER
TO REQUIRE REPURCHASE

 

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

 

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

 

	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [Holder]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
						

 

[Number of shares
of Common Stock owned by the holder and its affiliates:                                           ]

 

Principal amount to be repurchased (an integral multiple
of $1,000):                                         

 

Remaining principal amount following such repurchase
(not less than $1,000):                              

 

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

 

26

 

CONVERSION NOTICE

 

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

 

	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [Holder]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
						

 

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

 

	
   

  	
   

  
	
  Name

  
	
   

  
	
   

  	
   

  
	
  Address

  
	
   

  
	
   

  	
   

  
	
  Social Security or other Taxpayer Identification
  Number, if any

  

 

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

 

1. Principal amount to be converted: $                  

 

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

 

Amount: $                  

 

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

 

27

 

Schedule of
Holders of 5% Convertible Subordinated Note due 2008

 

	
  Name

  	
   

  	
  Amount

  	
   

  
	
  Astoria
  Capital Partners, L.P.

  	
   

  	
  $

  	
  20,749,581

  	
   

  
	
  CAM
  Small Cap Fund L.P.

  	
   

  	
  862,979

  	
   

  
	
  GFAM
  Hedge Partnership

  	
   

  	
  888,853

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00093-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00093-of-00352.parquet"}]]