Document:

Exhibit 10.42

 

*000000002000209914095510212008*

PROMISSORY NOTE

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No.

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  104,800.04

  	
   

  	
  10-21-2008

  	
   

  	
  11-01-2013

  	
   

  	
  2000209914

  	
   

  	
  7100

  	
   

  	
  379885

  	
   

  	
  1106

  	
   

  	
   

  	
   

  
																	

 

References in the boxes above are for Lender’s use only and do not limit
the applicability of this document to any particular loan or item.

Any item above containing “ ‘ ‘ ‘ “ has been omitted due to text length
limitations,

 

	
  Borrower:

  	
   

  	
  LIOUIDMETAL
  COATINGS, LLC

  	
   

  	
  Lender:

  	
   

  	
  Bank
  Midwest N.A.

  
	
   

  	
   

  	
  LIGUIDMETAL
  COATINGS SOLUTIONS, LLC

  	
   

  	
   

  	
   

  	
  Town
  Pavilion Facility

  
	
   

  	
   

  	
  1525
  LAKESVILLE DRIVE, SUITE 114

  	
   

  	
   

  	
   

  	
  1111
  Main Street

  
	
   

  	
   

  	
  KINGWOOD
  , TX 77339

  	
   

  	
   

  	
   

  	
  Kansas
  City, MO 64105

  

 

	
  Principal
  Amount: $104,800.04

  	
  Date
  of Note. October 21, 2008

  

 

PROMISE
TO PAY. LIOUIDMETAL COATINGS, LLC; and UOUIDMETAL COATINGS SOLUTIONS, LLC (“Borrower”)
jointly and severally promise to pay to Bank Midwest N.A. (“Lender”|, or order,
In lawful money of the United States of America, the principal amount One
Hundred Four Thousand Eight Hundred & 04/100 Dollars ($104,800.04),
together with interest on the unpaid principal balance from October 21, 2008,
calculated as described in the “INTEREST CALCULATION METHOD” paragraph using an
interest rate of 8.250% per annum based on a year of 360 days, until paid in
full. The interest rate may change under the terms and conditions of the “INTEREST
AFTER DEFAULT” section.

 

PAYMENT.
Borrower will pay this loan in 60 payments of $2,148.51 each payment.
Borr0wer`s first payment is due December 1, 2008, and all subsequent payments
are due on the same day of each month after that. Borrower’s final payment will
be due on November 1, 2013, and will be for all principal and all accrued
Interest not yet paid. Payments include principal and Interest. Unless
otherwise agreed or required by applicable law, payments will be applied first
to any accrued unpaid interest; then to principal; then to any late charges;
and then to any unpaid collection costs. Borrower will pay Lender at Lender’s
address shown above or at such other place as Lender may designate in writing.

 

INTEREST
CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that
is, by applying the ratio of the interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. All interest payable under
this Note is computed using this method.

 

PREPAYMENT.
Borrower agrees that all loan fees and other prepaid finance charges arc earned
fully as of the date of the loan and will not be subject to refund upon early
payment (whether voluntary or as a result of default), except as otherwise
required by law. Except for the foregoing, Borrower may pay without penalty all
or a portion of the amount owed earlier than it is due. Early payments will
not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s
obligation to continue to make payments under the payment schedule. Rather,
early payments will reduce the principal balance due and may result in Borrower’s
making fewer payments. Borrower agrees not to send Lender payments marked “paid
in full”, “without recourse”, or similar language. lf Borrower sends such a
payment, Lender may accept it without losing any of Lenders rights under this
Note, and Borrower will remain obligated to pay any further amount owed to
Lender. All written communications concerning disputed amounts, including any
check or other payment instrument that indicates that the payment constitutes “payment
in full” of the amount owed or that is tendered with other conditions or
limitations or as full satisfaction of a disputed amount must be mailed or
delivered to: Bank Midwest N.A., Town Pavilion Facility, 1111 Main Street,
Kansas City, MO 64105.

 

LATE
CHARGE. If a payment is more than 10 days late, Borrower will be charged 5.000%
of the unpaid portion of the regularly scheduled payment.

 

INTEREST
AFTER DEFAULT, Upon default, including failure to pay upon final maturity, the
interest rate on this Note shall be increased by 5.000 percentage points.
However, in no event will the interest rate exceed the maximum interest rate
limitations under applicable law.

 

DEFAULT.
Each of the following shall constitute an event of default (“Event of Default”)
under this Note:

 

Payment
Default. Borrower fails to make any payment when due under this Note.

 

Other
Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Note or in any of the
related documents or to comply with or to perform any term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.

 

Default
in Favor of Third Parties. Borrower or any Grantor defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower’s property or Borrower’s ability to repay this Note or
perform Borrower’s obligations under this Note or any of the related documents.

 

False
Statements. Any warranty, representation or statement made or furnished to
Lender by Borrower or on Borrower’s behalf under this Note or the related
documents is false or misleading in any material respect, either now or at the
time made or furnished or becomes false or misleading at any time thereafter.

 

Death
or Insolvency. The dissolution of Borrower (regardless of whether election to
continue is made}, any member withdraws from Borrower, or any other termination
of Borrower’s existence as a going business or the death of any member, the
insolvency of Borrower, the appointment of a receiver for any part of Borrower’s
property, any assignment for the benefit of creditors, any type of creditor
workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.

 

Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower or by any governmental agency against
any collateral securing the loan. This includes a garnishment of any of
Borrower’s accounts, including deposit accounts, with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Borrower
as to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Borrower gives Lender written notice
of the creditor or forfeiture proceeding and deposits with Lender monies or a
Surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.

 

Events
Affecting Guarantor. Any of the preceding events occurs with respect to any
guarantor, endorser, surety, or accommodation party of any of the indebtedness
or any guarantor, endorser, surety, or accommodation party dies or becomes
incompetent, or revokes or disputes the validity of, or liability under. any
guaranty of the indebtedness evidenced by this Note.

 

Adverse
Change. A material adverse change occurs in Borrowers financial condition, or
Lender believes the prospect of payment or performance of this Note is
impaired.

 

 

Cure
Provisions. If any default, other than a default in payment is curable and if
Borrower has not been given a notice of a breach of the same provision of this
Note within the preceding twelve (12) months, it may be cured if Borrower,
alter receiving written notice from Lender demanding cure of such default: (1) cures
the default within ten (10) days; or (2) if the cure requires more than ten (10)
days, immediately initiates steps which Lender deems in Lender’s sole
discretion to be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to produce compliance
as soon as reasonably practical.

 

LENDER’S
RIGHTS. Upon default, Lender may declare the entire unpaid principal balance
under this Note and all accrued unpaid interest immediately due, and their
Borrower will pay that amount.

 

ATTORNEYS
FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note
if Borrower dues not pay. Borrower will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s
legal expenses whether or not there is a lawsuit, including attorneys’ fees and
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), and appeals. If not prohibited by applicable
law, Borrower also will pay any court costs, in addition to all other sums
provided by law.

 

GOVERNING
LAW. This Note will be governed by federal law applicable to Lender and, to the
extent not preempted by federal law, the laws of the State of Missouri without
regard to its conflicts of law provisions. This Note has been accepted by
Lender in the State of Missouri.

 

CHOICE
OF VENUE. It there is a lawsuit, Borrower agrees upon Lender’s request to
submit to the jurisdiction of the courts of Jackson County, State of Missouri.

 

DISHONORED
ITEM FEE. Borrower will pay a lee to Lender of $15.00 if Borrower makes a
payment on Borrower’s loan and the check or preauthorized charge with which
Borrower pays is later dishonored.

 

RIGHT
OF SETOFF. To the extent permitted by applicable law, Lender reserves a right
of setoff in all Borrower’s accounts with Lender (whether checking, savings, or
some other account). This includes all accounts Borrower holds jointly with
someone else and all accounts Borrower may open in the future. However, this
does not include any IRA or Keogh accounts, or any trust accounts for which
setoff would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
indebtedness against any and all such accounts.

 

COLLATERAL.
Borrower acknowledges this Note is secured by A COMMERCIAL SECURITY AGREEMENT
DATED OCTOBER 21, 2008.

 

LINE
OF CREDIT. This Note evidences a straight line of credit. Once the total amount
of principal has been advanced, Borrower is not entitled to further loan
advances. Advances under this Note may be requested orally by Borrower or as
provided in this paragraph. All oral requests shall be confirmed in writing on
the day of the request. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender’s office shown
above. The following persons currently are authorized, except as provided in
this paragraph, to request advances and authorize payments under the line of
credit until Lender receives from Borrower, at Lender’s address shown above,
written notice of revocation of their authority: LARRY BUFFINGTON, PRESIDENT &
CEO of LIOUIDMETAL COATINGS, LLC; and LARRY BUFFINGION, PRESIDENT & CEO of
LIOUIDMETAL COATINGS, LLC, Member of LIOUIDIVIETAL COATINGS SOLUTIONS, LLC.
FUNDS ARE TO BE DISEIURSED AT BORROWER’S REQUEST AND LOAN OFFICERS APPROVAL.
Borrower agrees to be liable for all sums either: (A) advanced in accordance
with the instructions of an authorized person or (B) credited to any of the
Borrower’s accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender’s
internal records, including daily computer printouts. Lender will have no
obligation to advance funds under this Note if: (AS) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or
any guarantor has with Lender, including any agreement made in connection with
the signing of this Note; (B) Borrower or any guarantor ceases doing business
or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such guarantor’s guarantee of this Note or any other
loan with Lender; or (D) Borrower has applied funds provided pursuant to this
Note for purposes other than those authorized by Lender.

 

SUCCESSOR
INTERESTS. The terms of this Note shall be binding upon Borrower, and upon
Borrower’s heirs, personal representatives, successors and assigns, and shall
inure to the benefit of Lender and its successors and assigns.

 

GENERAL
PROVISIONS. lf any part of this Note cannot be enforced, this fact will not
affect the rest of the Note. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Each Borrower
understands and agrees that, with or without notice to Borrower, Lender may
with respect to any other Borrower (a) make one or more additional secured or
unsecured loans or otherwise extend additional credit; (b) alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of any indebtedness, including increases and decreases
of the rate of interest on the indebtedness; (c) exchange, enforce, waive,
subordinate, fail or decide not to perfect, and release any security. with or
without the substitution of new collateral; (d) apply such security and direct
the order or manner of sale thereof, including without limitation, any
non-judicial sale permitted by the terms of the controlling security
agreements, as Lender in its discretion may determine; (e) release, substitute,
agree not to sue, or deal with any one or more of Borrower’s sureties,
endorsers, or other guarantors on any terms or in any manner Lender may choose;
and (f) determine how, when and what application of payments and credits shall
be made on any other indebtedness owing by such other Borrower. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly
stated in writing. no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender’s security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made. The obligations under this Note are joint and several.

 

ORAL
AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FOREBEAR FROM
ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT
ARE NOT ENFORCEABLE, REGARDLESS OF THE LEGAL THEORY UPON WHICH IT IS BASED THAT
IS IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO PROTECT YOU (BORROWER(S)) AND
US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH
COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND
EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE
IN WRITING TO MODIFY IT.

 

2

 

JURY
WAIVER. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower
against the other.

 

PRIOR
TO SIGING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE.  EACH BRRROWER AGREES TO THE
TERMS OF THE NOTE.

 

BORROWER
ACKNOWLEDGES RECEIPT OF A COMPLTETED COPY OF THIS PROMISSORY NOTE.

 

 

BRORROWER:

 

LIQUIMDETAL
COATINGS, LLC

 

	
  By:
  

  	
  /s/
  Larry Buffington

  	
   

  
	
   

  	
  LARRY BUFFINGTON, PRESIDENT & CEO of

  	
   

  
	
   

  	
  LIQUIDMETAL COATINGS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LIQUIDMETAL
  COATINGS SOLUTIONS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
  LIQUIDMETAL
  COATINGS, LLC, Member of LIQUIDMETAL COATINGS SOLUTIONS, LLC

  
	
   

  
	
   

  	
   

  	
   

  
	
  By:
  

  	
  /s/
  Larry Buffington

  	
   

  
	
   

  	
  LARRY BUFFINGTON, PRESIDENT & CEO of

  	
   

  
	
   

  	
  LIQUIDMETAL COATINGS, LLC

  	
   

  

 

3

 

*000000002000209914095510212008*

BUSINESS LOAN AGREEMENT

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No.

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  104,800.04

  	
   

  	
  10-21-2008

  	
   

  	
  11-01-2013

  	
   

  	
  2000209914

  	
   

  	
  7100

  	
   

  	
  379885

  	
   

  	
  1106

  	
   

  	
   

  	
   

  
																	

 

References in the boxes above are for Lender’s use only and do not limit
the applicability of this document to any particular loan or item.

Any item above containing “ ‘ ‘ ‘ “ has been omitted due to text length
limitations,

 

	
  Borrower:

  	
   

  	
  LIOUIDMETAL
  COATINGS, LLC

  	
   

  	
  Lender:

  	
   

  	
  Bank
  Midwest N.A.

  
	
   

  	
   

  	
  LIGUIDMETAL
  COATINGS SOLUTIONS, LLC

  	
   

  	
   

  	
   

  	
  Town
  Pavilion Facility

  
	
   

  	
   

  	
  1525
  LAKESVILLE DRIVE, SUITE 114

  	
   

  	
   

  	
   

  	
  1111
  Main Street

  
	
   

  	
   

  	
  KINGWOOD
  , TX 77339

  	
   

  	
   

  	
   

  	
  Kansas
  City, MO 64105

  

 

THIS
BUSINESS LOAN AGREEMENT dated October 21, 2008, is made and executed between
LIQUIDMETAL COATINGS, LLC; and LIOUIDMETAL COATINGS SOLUTIONS, LLC (“Borrower”)l
and Bank Midwest N.A. (“Lender”) on the following terms and conditions.
Borrower has received prior commercial loans from Lender or has applied to
Lender for a commercial loan or loans or other financial accommodations, including
those which may be described on any exhibit or schedule attached to this
Agreement. Borrower understands and agrees that; (A) in granting, renewing, or
extending any Loan. Lender is relying upon Borrower’s representations,
warranties, and agreements as set forth in this Agreement; (B) the granting,
renewing, or extending of any Loan by Lender at all times shall be subject to
Lender’s sole judgment and discretion; and (C) all such Loans shall be and
remain subject to the terms and conditions of this Agreement.

 

TERM.
This Agreement shall be effective as of October 21, 2008, and shall continue in
full force and effect until such time as all of Borrower’s Loans in favor of
Lender have been paid in full, including principal, interest, costs, expenses,
attorneys’ fees, and other fees and charges, or until November 1, 2013.

 

ADVANCE
AUTHORITY. The following person or persons are authorized to request advances
and authorize payments under the loan until Lender receives from Borrower, at
Lender’s address shown above, written notice of revocation of such authority:
LARRY BUFFINGTON, PRESIDENT & CEO of LIOUIDMETAL COATINGS, LLC; and LARRY
BUFFINGTON, PRESIDENT & CEO of LIQUIDMETAL COATINGS, LLC, Member of
LIOUIDMETAL COATINGS SOLUTIONS, LLC.

 

CONDITIONS
PRECEDENT T0 EACH ADVANCE. Lender’s obligation to make the initial Advance and
each subsequent Advance under this Agreement shall be subject to the
fulfillment to Lender’s satisfaction of all of the conditions ser forth in this
Agreement and in the Related Documents.

 

Loan
Documents. Borrower shall provide to Lender the following documents for the
Loan: (1) the Note; (2) Security Agreements granting to Lender security
interests in the Collateral; (3) financing statements and all other documents
perfecting Lender’s Security Interests; (4) evidence of insurance ns required
below; (5) together with all such Related Documents as Lender may require for
the Loan; all in form and substance satisfactory to Lender and Lender’s
counsel.

 

Borrower’s
Authorization. Borrower shall have provided in form and substance satisfactory
to Lender properly certified resolutions, duly authorizing the execution and
delivery of this Agreement, the Note and the Relaxed Documents. In addition,
Borrower shall have provided such other resolutions, authorizations, documents
and instruments as Lender or its counsel, may require.

 

Payment
of Fans and Expenses. Borrower shall have paid to Lender all fees, charges. and
other expenses which are then due and payable as specified in this Agreement or
any Related Document.

 

Representations
and Warranties. The representations and warranties set forth in this Agreement,
in the Related Documents, and in any document or certificate delivered to
Lender under this Agreement are true and correct.

 

No
Event of Default. There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement or under any
Related Document.

 

MULTIPLE
BORRDWERS. This Agreement has been executed by multiple obligors who are
referred to in this Agreement individually, collectively and interchangeably as
“Borrower.” Unless specifically stated to the contrary, {he word “Borrower” as
used in this Agreement, including without limitation all representations,
warranties and covenants. shall include all Borrowers. Borrower understands and
agrees that, with or without notice to any one Borrower, Lender may (A) make
one or more additional secured or unsecured loans or otherwise extend
additional credit with respect to any other Borrower; (B) with respect to any
other Borrower alter. compromise, renew, extend, accelerate, or otherwise
change one or more times the time for payment or other terms of any
indebtedness, including increases and decreases of the rate of interest on the
indebtedness; (C) exchange, enforce, waive, subordinate, foil or decide not to
perfect, and release any security, with or without the substitution of new
collateral; (D) release, substitute. agree not to sue, or deal with any one or
more of Borrower’s or any other Borrower’s sureties, endorsers. or other
guarantors on any terms or in any manner Lender may choose: (E) determine how,
when and what application of payments and credits shall be made on any
indebtedness; (F) apply such security and direct the order or manner of sale of
any Collateral, including without limitation, any non-judicial sale permitted
by the terms of the controlling security agreement or deed of trust. as Lender
in its discretion may determine; (G) sell, transfer, assign or grant
participations in all or any part of the Loan; (H) exercise or refrain from
exercising any rights against Borrower or others, or otherwise act or refrain
from acting; (I) settle or compromise any indebtedness; and (J) subordinate me
payment of all or any part of any of Borrower’s indebtedness to Lender to the
payment of any liabilities which may be due Lender or others.

 

REPRESENTATIONS
AND WARRANTIES. Borrower represents and warrants to Lender. as of the date of
this Agreement, as of the date of each disbursement of loan proceeds, as of the
date of any renewal, extension or modification of any Loan, and at all times
any Indebtedness exists:

 

Organization.
LIQUIDMETAL COATINGS, LLC is a limited liability company which is, and at all
times shall be, duly organized, validly existing, and in good standing under
and by virtue of the laws of the State of Delaware. LIOUIDMETAL COATINGS. LLC
is duly authorized to transact business in all other states in which
LIQUIDMETAL COATINGS. LLC is doing business, having obtained all necessary
filings, governmental licenses and approvals for each state in which
LIOUIDMETAL COATINGS, LLC is doing business. Specifically, LIOUIDMETAL
COATINGS, LLC is, and at all times shall be, duly qualified as a foreign
limited liability company in all states in which the failure to so qualify
would have a material adverse effect on its business or financial condition.
LIQUIDMETAL COATINGS, LLC has the full power and authority to own its
properties and to transact the business in which it is presently engaged or
presently proposes to engage. LIOUIDMETAL COATINGS, LLC maintains on office at
1525 LAKESVILLE DRIVE, SUITE 114, KINGWOOD , TX 77339. Unless LIOUIDMETAL
COATINGS, LLC has designated otherwise in writing, the principal office is the
office at which LIOUIDMETAL COATINGS, LLC keeps its books and records including
its records concerning the Collateral. LIOUIDMETAL COATINGS, LLC will notify
Lender prior to

 

 

any
change in the location of LIQUIDMETAL COATINGS, LLC’s state of organization or
any change in LIQUIDMETAL COATINGS, LLC’s name. LIQUIDMETAL COATINGS, LLC shall
do all things necessary to preserve and to keep in full force and effect its
existence, rights and privileges, and shall comply with all regulations, rules,
ordinances, statutes, orders and decrees of any governmental or
quasi-governmental authority or court applicable to LIQUIDMETAL COATINGS, LLC
and LIQUIDMETAL COATINGS, LLC’s business activities.

 

LIGLIIDMETAL
COATINGS SOLUTIONS, LLC is a limited liability company which is, and at all
times shell be, duly organized, validly existing, and in good standing under
and by virtue of the laws of the State of Delaware. LIQUIDMETAL COATINGS
SOLUTIONS, LLC is duly authorized to transact business in all other states in
which LIQUIDMETAL COATINGS SOLUTIONS, LLC Is doing business, having obtained
all necessary filings, governmental licenses and approvals for each state in
which LIQUIDMETAL COATINGS SOLUTIONS, LLC is doing business. Specifically,
LIQUIDMETAL COATINGS SOLUTIONS, LLC is, and at all times shall be, duly qualified
as a foreign limited liability company in all states in which the failure to so
qualify would have a material adverse affect on its business or financial
condition. LIOUIDMETAL COATINGS SOLUTIONS, LLC has the full power and authority
to own its properties and to transact the business in which it is presently
engaged or presently proposes to engage. LIOUIDMETAL COATINGS SOLUTIONS. LLC
maintains an office at 1525 LAKESVILLE DRIVE, SUITE 114, KINGWOOD , TX 77339.
Unless LIOUIDMETAL COATINGS SOLUTIONS. LLC has designated otherwise in writing,
the principal office is the office at which LIQUIDMETAL COATINGS SOLUTIONS, LLC
keeps its books and records including its records concerning the Collateral.
LIGUIDMETAL COATINGS SOLUTIONS, LLC will notify Lender prior to any change in
the location of LIQUIDMETAL COATINGS SOLUTIONS, LLC’s state of organization or
any change in LIQUIDMETAL COATINGS SOLUTIONS, LLC’s name. LIQUIDMETAL COATINGS
SOLUTIONS, LLC shall do all things necessary to preserve and to keep in full
force and effect its existence, rights and privileges, and shall comply with
all regulations, rules, ordinances, statutes, orders and decrees of any
governmental or quasigovernmental authority or court applicable to LIQUIDMETAL
COATINGS SOLUTIONS, LLC and LIQUIDMETAL COATINGS SOLUTIONS, LLC’s business
activities.

 

Assumed
Business Names. Borrower has filed or recorded all documents or filings
required by law relating to all assumed business names used by Borrower.
Excluding the name of Borrower. the following is u complete list of all assumed
business names under which Borrower does business: None.

 

Authorization.
Borrower’s execution, delivery, and performance of this Agreement and all the
Related Documents have been duly authorized by all necessary action by Borrower
and do not conflict with, result in a violation of. or constitute a default
under (1) any provision of (a) Borrower’s articles of organization or
membership agreements, or (b) any agreement or other instrument binding upon
Borrower or (2) any law, governmental regulation, court decree, or order
applicable to Borrower or to Borrower’s properties.

 

Financial
Information. Each of Borrower’s financial statements supplied to Lender truly
and completely disclosed Borrower’s financial condition as of the date of the
statement, and there has been no material adverse change in Borrower’s
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.

 

Legal
Effect. This Agreement constitutes, and any instrument or agreement Borrower is
required to give under this Agreement when delivered will constitute legal,
valid. and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.

 

Properties.
Except as contemplated by this Agreement or as previously disclosed in
Borrowers financial statements or in writing to Lender and as accepted by
Lender, and except for property tax liens for taxes not presently due and
payable, Borrower owns and has good title to all of Borrower’s properties free
and clear of all Security Interests, and has not executed any security
documents or financing statements relating to such properties. All of Borrower’s
properties are titled in Borrower’s legal name, and Borrower has not used or
filed a financing statement under any other name for at least the last live (5)
years.

 

Hazardous
Substances. Except as disclosed to and acknowledged by Lender in writing,
Borrower represents and warrants that: (1) During the period of Borrower’s
ownership of the Collateral, there has been no use. generation, manufacture,
storage, treatment, disposal, release or threatened release of any Hazardous
Substance by any person on, under, about or from any of the Collateral. (2) Borrower
has no knowledge of, or reason to believe that there has been (a) any breach or
violation of any Environmental Laws; (b) any use. generation, manufacture,
storage, treatment, disposal, release or threatened release of any Hazardous
Substance on, under, about or from the Collateral by any prior owners or
occupants of any of the Collateral; or (c) any actual or threatened litigation
or claims of any kind by any person relating to such matters. (3) Neither Borrower
nor any tenant, contractor, agent or other authorized user or any of the
Collateral shall use, generate, manufacture, store, treat. dispose of or
release any Hazardous Substance on, under. about or from any of the Collateral;
and any such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including without
limitation all Environmental Laws. Borrower authorizes Lender and its agents to
enter upon the Collateral to make such inspections and tests as Lender may deem
appropriate to determine compliance of the Collateral with this section of the
Agreement. Any inspections or tests made by Lender shall be at Borrower’s
expense and for Lender’s purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any other
person. The representations and warranties contained herein are based an
Borrower’s due diligence in investigating the Collateral for hazardous waste
and Hazardous Substances, Borrower hereby (1) releases and waives any future
claims against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (2) agrees
to indemnify, defend, and hold harmless Lender against any and all claims,
losses. liabilities, damages, penalties, and expenses which Lender may directly
or indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release of a hazardous waste or substance on
the Collateral. The provisions of this section of the Agreement, including the
obligation to indemnify and defend, shall survive the payment of the
indebtedness and the termination, expiration or satisfaction of this Agreement
and shall not be affected by Lender’s acquisition of any interest in any of the
Collateral, whether by foreclosure or otherwise.

 

Litigation
and Claims. No litigation, claim, investigation, administrative proceeding or
similar action {including those for unpaid taxes) against Borrower is pending
or threatened, and no other event has occurred which may materially adversely
affect Borrower’s financial condition or properties, other than litigation, claims,
or other events, if any. that have been disclosed to and acknowledged by Lender
in writing.

 

Taxes.
To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports
that are or were required to be filed, have been filed, and all taxes, assessments
and other governmental charges have been paid in full, except those presently
being or to be contested by Borrower in good faith in the ordinary course of
business and for which adequate reserves have been provided.

 

Lien
Priority. Unless otherwise previously disclosed to Lender in writing, Borrower
has not entered into or granted any Security Agreements, or permitted the
filing or attachment of any Security interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower’s Loan and
Note, that would be prior or that may in any way be superior to Lender’s
Security Interests and rights in and to such Collateral. `

 

Binding
Effect. This Agreement, the Note, all Security Agreements (if any). and all
Related Documents are binding upon the signers

 

2

 

thereof,
as well as upon their successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms.

 

AFFIRMATIVE
COVENANTS. Borrower covenants and agrees with Lender that, so long as this
Agreement remains in effect, Borrower will:

 

Notices
of Claims and Litigation. Promptly inform Lender in writing of (1) all material
adverse changes in Borrower’s financial condition, and (2) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.

 

Financial
Records. Maintain its books and records in accordance with GAAP, applied on a
consistent basis. and permit Lender to examine and audit Borrower’s books and
records at all reasonable times.

Financial
Statements. Furnish Lender with the following:

 

Annual
Statements. As soon as available after the and of each fiscal year, Borrower’s
balance sheet and income statement for the year ended, prepared by Borrower In
form satisfactory to Lender.

 

Tax
Returns. As soon as available after the applicable filing date for the tax
reporting period ended, Federal and other governmental tax returns, prepared by
a tax professional satisfactory to Lender.

 

All
financial reports required to be provided under this Agreement shall be
prepared in accordance with GAAP, applied on a consistent basis, and certified
by Borrower as being true and correct.

 

Additional
information. Furnish such additional information and statements. as Lender may
request from time to time.

insurance.
Maintain fire and other risk insurance. public liability insurance, and such
other insurance as Lender may require with respect to Borrower’s properties and
operations, in form, amounts, coverages and with insurance companies acceptable
to Lender. Borrower, upon request of Lender, will deliver to Lender from time
to time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days prior written notice to Lender. Each
insurance policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person, In connection with all policies covering
assets in which Lender holds or is offered a security interest for the Loans,
Borrower will provide Lender with such Iender’s loss payable or other
endorsements as Lender may require.

 

Insurance
Reports. Furnish to Lender, upon request of Lender, reports on each existing
insurance policy showing such information as  Lender may reasonably
request. including without limitation the following: (1) the name of the
insurer; (2) the risks insured; I3) the  amount of the policy; (4) the
properties insured; i5) the then current property values on the basis of which
insurance has been obtained,  and the manner
of determining those values; and (6) the expiration date of the policy. In
addition, upon request of Lender (however not  more often than annually),
Borrower will have an Independent appraiser satisfactory to Lender determine,
as applicable. the actual cash  value or replacement cost of
any Collateral. The cost of such appraisal shall be paid by Borrower.

 

Other
Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any
other such agreements.

 

Loan
Proceeds, Use all Loan proceeds solely for Borrower’s business operations,
unless specifically consented to the contrary by Lender in writing.

 

Taxes.
Charges and Liens. Pay and discharge when due all of its indebtedness and
obligations, including without limitation all assessments,  taxes, governmental charges,
levies and liens, of every kind and nature, imposed upon Borrower or its
properties, income, or profits, prior  to the data on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower’s  properties, income. or
profits. Provided however, Borrower will not be required to pay and discharge
any such assessment, tax, charge,  levy, lien or claim so long
as (1) the legality of the same shall be contested in good faith by appropriate
proceedings, and (2) Borrower  shall have established on Borrower’s
books adequate reserves with respect to such contested assessment, tax, charge,
levy, lien, or claim  in accordance with GAAP.

 

Performance.
Perform and comply, in a timely manner, with all terms, conditions, and
provisions set forth in this Agreement, in the Related  Documents. and
in all other instruments and agreements between Borrower and Lender. Borrower
shall notify Lender immediately in  writing of any default in
connection with any agreement.

 

Operations.
Maintain executive and management personnel with substantially the same
qualifications and experience as the present  executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its  business affairs in a
reasonable and prudent manner.

 

Environmental
Studies. Promptly conduct and complete, at Borrowers expense, all such
investigations, studies, samplings and tastings as  may be requested by Lender or
any governmental authority relative to any substance. or any waste or by-product
of any substance defined  as toxic or a hazardous substance under
applicable federal, state, or local law, rule, regulation, order or directive,
at or affecting any  property or any facility owned, leased or used
by Borrower.

 

Compliance
with Governmental Requirements. Comply with all laws, ordinances, and
regulations. now or hereafter in effect, of all  governmental authorities
applicable to the conduct of Borrower’s properties, businesses and operations,
and to the use or occupancy of the  Collateral, including without
limitation, the Americans With Disabilities Act. Borrower may contest in good
faith any such law, ordinance,  or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Borrower has notified Lender in  writing prior lo doing so and
so long as, in Lender’s sole opinion, Lenders interests in the Collateral are
not jeopardized. Lender may  require Borrower to poet
adequate security or a surety bond, reasonably satisfactory to Lender, to
protect Lender’s interest.

 

inspection.
Permit employees or agents of Lender at any reasonable time to inspect any and
all Collateral for the Loan or Loans and  Borrowers other properties
and to examine or audit Borrowers books. accounts, and records and to make
copies and memoranda of  Borrower’s books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation  computer generated records and computer software programs for the
generation of such records) in the possession of a third party,  Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such records at
all reasonable times and to  provide Lender with copies of
any records it may request, all at Borrower’s expense.

 

Compliance
Certificates. Unless waived in writing by Lender. provide Lender et least
annually, with a certificate executed by Borrower’s chief financial officer, or
other officer or person acceptable to Lender, certifying that the
representations and warranties set forth to this Agreement are true and correct
as of the date of the certificate and further certifying that, as of the date
of the certificate, no Event of Default exists under this Agreement.

 

Environmental
Compliance and Reports. Borrower shall comply in all respects with any and all
Environmental Laws; not cause or permit to exist, as a result of an intentional
or unintentional action or omission on Borrower’s part

 

3

 

owned
and/or occupied by Borrower, any environmental activity where damage may result
to the environment. unless such environmental  activity is pursuant to and
in compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental  authorities; shall furnish to
Lender promptly and in any event within thirty (30) days after receipt thereof
a copy of any notice, summons,  lien, citation. directive.
letter or other communication from any governmental agency or instrumentality
concerning any Intentional or  unintentional action or
omission on Borrower’s pan in connection with any environmental activity
whether or not there is damage to the  environment and/or other
natural resources.  

 

Additional
Assurances. Make, execute and deliver to Lender such promissory notes, mortgages,
deeds of trust. security agreements,  assignments, financing
statements, instruments. documents and other agreements as Lender or its
attorneys may reasonably request to  evidence and secure the Loans
and to perfect all Security Interests.

 

LENDEFVS
EXPENDITURES.· If any action or proceeding is commenced that would materially
affect Lender’s interest in the Collateral or if  Borrower tails to comply with
any provision of this Agreement or any Related Documents, including but not
limited to Borrower’s failure to  discharge or pay when due any
amounts Borrower is required to discharge or pay under this Agreement or any
Related Documents, Lender on  Borrowers behalf may (but
shall not be obligated to) take any action that Lender deems appropriate,
including but not limited to discharging or  paying all taxes, liens,
security interests, encumbrances and other claims, at any time levied or placed
on any Collateral and paying all costs for  insuring. maintaining and
preserving any Collateral. All such expenditures incurred or paid by Lender for
such purposes will then bear interest et  the rate charged under the
Note from the date incurred or paid by Lender to the date of repayment by
Borrower. All such expenses will become  a part of the Indebtedness
and, at Lender’s option, will (A) be payable on demand; (B) be added to the
balance of the Note and be  apportioned among and be
payable with any installment payments to become due during either (1) the term
of any applicable insurance policy;  or (2) the remaining term of
the Note; or (C) be treated as a balloon payment which will be due and payable
at the Note’s maturity.

 

NEGATIVE
COVENANTS. Borrower covenants and agrees with Lender that while this Agreement
is in effect, Borrower shall not, without the prior written consent of Lender:

 

Indebtedness
and Lions. (1) Except for trade debt incurred in the normal course of business
and indebtedness to Lender contemplated by this Agreement, create, incur or
assume indebtedness for borrowed money, including capital leases, (2) sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any 01 Borrower’s assets (except as allowed as Permitted Liens), or
l3l sell with recourse any of Borrower’s accounts, except to Lender.

 

Continuity
of Operations. (1) Engage in any business activities substantially different
than those in which Borrower is presently engaged, l2) cease operations,
liquidate, merge, transfer, acquire or consolidate with any other entity,
change its name, dissolve or transfer or sell Collateral out of the ordinary
course of business, or (3) make any distribution with respect to any capital
account, whether by reduction of capital or otherwise.

 

Loans,
Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets to
any other person, enterprise or entity, (2) purchase, create or acquire any
interest in any other enterprise or entity, or (3) incur any obligation as
surety or guarantor other than in the ordinary course of business.

 

Agreements.
Borrower will not enter into any agreement containing any provisions which
would be violated or breached by the performance of Borrower’s obligations
under this Agreement or in connection herewith.

 

CESSATION
OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower,
whether under this Agreement or under any other agreement, Lender shall have no
obligation to make Loan Advances or to disburse Loan proceeds if: (Al Borrower
or any Guarantor is in default under the terms of this Agreement or any of the
Related Documents or any other agreement that Borrower or any Guarantor has
with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes
insolvent, files a petition in bankruptcy or similar proceedings, or is
adjudged a bankrupt; (C) there occurs a materiel adverse change in Borrower’s
financial condition, in the financial condition of any Guarantor, or in the
value of any Collateral securing any Loan; or (Di any Guarantor seeks, claims
or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of
the Loan or any other loan with Lender.

 

RIGHT
OF SETOFF. To the extent permitted by applicable law, Lender reserves a right
of setoff in all Borrower’s accounts with Lender (whether  checking,
savings, or some other account). This includes all accounts Borrower holds
jointly with someone else and all accounts Borrower may  open in the
future, However, this does not include any IRA or Keogh accounts, or any trust
accounts for which setoff would be prohibited by  law Borrower authorizes
Lender, to the extant permitted by applicable law, to charge or setoff all sums
owing on the indebtedness against any  and all such accounts.

 

DEFAULT.
Each of the following shall constitute an Event of Default under this
Agreement:

 

Payment
Default. Borrower fails to make any payment when due under the Loan.

 

Other
Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement  or in any of the
Related Documents or to comply with or to perform any term, obligation,
covenant or condition contained in any other  agreement between Lender and
Borrower.

 

Default
in Favor of Third Parties. Borrower or any Grantor defaults under any loan.
extension of credit, security agreement, purchase or  sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower’s or any  Grantor’s property or Borrower’s or any
Grantor’s ability to repay the Loans or perform their respective obligations
under this Agreement or  any of the Related Documents.

 

False
Statements. Any warranty, representation or statement made or furnished to
Lender by Borrower or on Borrower’s behalf under this  Agreement or the
Related Documents is false or misleading in any material respect, either now or
at the time made or furnished or becomes  false or misleading at any
time thereafter.

 

Death
or Insolvency. The dissolution of Borrower (regardless of whether election to
continue is made), any member withdraws from  Borrower, or any other
termination of Borrower’s existence as a going business or the death of any
member, the insolvency of Borrower,  the appointment of a receiver
for any part of Borrower’s property, any assignment for the benefit of
creditors. any type of creditor workout,  or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.

 

Defective
Collateralization. This Agreement or any of the Related Documents ceases to be
in full force and effect (including failure of any collateral document to
create e valid and perfected security interest or lien) at any time and for any
reason.

 

Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding. sell-help, repossession or any
other method, by any creditor of Borrower or by any governmental agency against
any collateral securing the Loan, This includes a garnishment of any of
Borrower’s accounts, including deposit accounts, with Lender. However. this
Event of Default shall not apply it there is a good faith dispute by Borrower
as to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Borrower gives Lender written notice
of the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate

 

4

 

reserve
or bond for the dispute.

 

Events
Affecting Guarantor. Any of the preceding events occurs with respect to any
Guarantor of any of the indebtedness or any  Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness.

 

Adverse
Change. A material adverse change occurs in B0rrower`s financial condition, or
Lender believes the prospect of payment or performance of the Loan is impaired.

 

Right
to Cure, lf any default, other than a default on Indebtedness. is curable and
if Borrower or Grantor, as the case may be, has not been given a notice of a
similar default within the preceding twelve (12) months, it may be cured if
Borrower or Grantor, as the casa may be. after receiving written notice from
Lander demanding cure of such default: (1) cure the default within ten l10l
days; or (2) if the cure requires more than tan (10) days, immediately initiate
steps which Lender deems in Lender’s sole discretion to be sufficient to cure
the default and thereafter continue and complete all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.

 

EFFECT
OF AN EVENT OF DEFAULT. lf any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related  Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will  terminate (including any
obligation to make further Loan Advances or disbursements). and, at Lender’s
option, all Indebtedness immediately will  become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the  “Insolvency” subsection
above, such acceleration shall be automatic and not optional. In addition,
Lender shall have all the rights and remedies  provided in the Related
Documents or available at law. in equity, or otherwise. Except as may be
prohibited by applicable law, all of Lender’s  rights and remedies shall be
cumulative and may be exercised singularly or concurrently. Election by Lender
to pursue any remedy shall not  exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any  Grantor shall not affect
Lender’s right to declare a default and to exercise its rights and remedies.

 

FINANCIAL
COVENANTS. Minimum Senior Debt Service Coverage Ratio. Borrower shall have. on
a consolidated basis at the end of each fiscal quarter of Borrower, a Senior
Debt Service Coverage Ratio of NOK less than 1.60:1:00.

 

Minimum
Fixed Charge Coverage Ratio. Borrower shall have, on a consolidated basis at
the end of each fiscal quartet of Borrower, a Fixed Charge Coverage Ratio of
not less than 1.10:1.00.

 

Maximum
Senior Funded Debt to EBITDA. Borrower shall have, on a consolidated basis at
the end of each fiscal quarter of Borrower sat forth below, at ratio of (i) Senior
Funded Debt measured as of the last day of such fiscal quarter of Borrower to (ii)
EBITDA for such fiscal quarter of not more than the following:

 

1.50:1.00
for the fiscal quarters ending September 30. 2008, December 31, 2008,

March
31, 2009, and June 30, 2009; and

 

1.25:1.00
for each fiscal quarter ending thereafter,

 

Minimum
Tangible Net Worth. Borrower shall have, on a consolidated basis at the end of
each fiscal quarter of Borrower set forth below, a Tangible Net Worth of not
less than the following:

 

$7,500,000.00
for the fiscal quarters ending December 31, 2008

March
31, 2009, and June 30, 2009;

$8,500,000.00
for the fiscal quarters ending September 30. 2009, December 31, 2009,

March
31, 2010, and June 30, 2010;

$9,000,000.00
for the fiscal quarters ending September 30, 20lO, December 31, 2010,

March
31, 2011, and June 30, 2011;

$9,500,000.00
for each fiscal quarter ending thereafter.

 

Excess
Cash Flow Payments to Lender,

Within
ninety l90I days after the end of Borrower’s fiscal year ending December 31.
2008 and each fiscal year thereafter, Borrower shall pay Lender the lesser of (i)
Excess Cash Flow, provided Excess Cash Flow for purposes of this Section shall
nut be less than zero, or (ii) $256,000.00.

 

MISCELLANEOUS
PROVISIONS. The following miscellaneous provisions are a part of this
Agreement:

 

Amendments.
This Agreement, together with any Related Documents, constitutes the entire
understanding and agreement of the parties  as to the matters set forth
in this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing  and signed by the party or
parties sought to be charged or bound by the alteration or amendment.

 

Attorneys’
Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and
expenses, including Lender’s attorneys’ fees  and Lender’s legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may hire
or pay someone else to help  enforce this Agreement, and
Borrower shall pay the costs and expenses of such enforcement. Costs end
expenses include Lender’s  attorneys fees and legal
expenses whether or not there is a lawsuit, including attorneys’ fees and legal
expenses for bankruptcy  proceedings (including efforts to modify or
vacate any automatic stay or injunction), and appeals. Borrower also shell pay
all court costs  and such additional fees as may be directed by
the court.

 

Caption
Headings. Caption headings in this Agreement are for convenience purposes only
and are not to be used to interpret or define the provisions of this Agreement.

 

Consent
to Loan Participation. Borrower agrees and consents to Lender’s sale or
transfer, whether now or later, of one or more  participation interests in
the Loan to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any  limitation whatsoever, to any
one or more purchasers, or potential purchasers, any information or knowledge
Lender may have about  Borrower or about any other matter relating to
the Loan, and Borrower hereby waives any rights to privacy Borrower may have
with respect  to such matters. Borrower additionally waives
any and all notices of sale of participation interests, as well as all notices
of any repurchase  of such participation interests. Borrower also
agrees that the purchasers of any such participation interests will be
considered as the  absolute owners of such interests in the Loan
and will have all the rights granted under the participation agreement or
agreements  governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later  against Lender
or against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may  enforce Borrower’s obligation
under the Loan irrespective of the failure or insolvency of any holder of any
interest in the Loan. Borrower  

 

5

 

further
agrees that the purchaser of any such participation interests may enforce its
interests irrespective of any personal claims or defenses that Borrower may
have against Lender,

 

Governing
Law. This Agreement will he governed by federal law applicable to Lender and.
to the extent not preempted by federal law. the laws of the State of Missouri
without regard to its conflicts of law provisions. This Agreement has been
accepted by Lender in the State of Missouri.

Choice
of Venue. lf there is e lawsuit, Borrower agrees upon Lender’s request to
submit to the jurisdiction of the courts of Jackson

County.
State of Missouri.

 

Joint
and Several Liability. All obligations of Borrower under this Agreement shall
be joint and several. and all references to Borrower shall mean each and every
Borrower, This means that each Borrower signing below is responsible for all
obligations in this Agreement. Where any one or more of the parties is a
corporation. partnership. limited liability company or similar entity, it is
not necessary for Lender to inquire into the powers of any of the officers,
directors. partners. members, or other agents acting or purporting to act on
the entity’s behalf. and any obligations made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Agreement.

 

No
Waiver by Lender. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing  and signed by
Lender. No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any  other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender’s right otherwise to  demand strict compliance with
that provision or any other provision of this Agreement. No prior waiver by
Lender. nor any course of  dealing between Lander and
Borrower. or between Lender and any Grantor, shell constitute a waiver of any
of Lender’s rights or of any of  Borrower’s or any Grantor’s
obligations as to any future transactions. Whenever the consent of Lender is
required under this Agreement,  the granting of such consent
by Lender in any instance shall not constitute continuing consent to subsequent
instances where such consent  is required and in all cases
such consent may be granted or withheld in the sole discretion of Lender.

 

Notices,
Any notice required to be given under this Agreement shall be given in writing,
end shall be effective when actually delivered.  when actually received by
telefacsimile (unless otherwise required by law), when deposited with a
nationally recognized overnight courier,  or, if mailed, when deposited
in the United States mail, as first class, certified or registered mail postage
prepaid. directed to the addresses  shown near the beginning of
this Agreement. Any party may change its address for notices under this
Agreement by giving formal written  notice to the other parties,
specifying that the purpose of the notice is to change the party’s address. For
notice purposes, Borrower  agrees to keep Lender
informed at all times of Borrower’s current address. Unless otherwise provided
or required by law, if there is more  than one Borrower, any notice
given by Lender to any Borrower is deemed to be notice given to all Borrowers.  Severability. lf a court of
competent jurisdiction finds any provision of this Agreement to be illegal,
invalid, or unenforceable as to any  person or circumstance. that
finding shall not make the offending provision illegal, invalid, or
unenforceable as to any other person or  circumstance. lf feasible,
the offending provision shall be considered modified so that it becomes legal.
valid and enforceable. lf the  offending provision cannot be
so modified, it shall be considered deleted from this Agreement. Unless otherwise
required by law. the  illegality, invalidity, or unenforceability of
any provision of this Agreement shall nut affect the legality, validity or
enforceability of any other  provision of this Agreement.

 

Subsidiaries
and Affiliates of Borrower. To the extent the context of any provisions of this
Agreement makes it appropriate, including  without limitation any
representation. warranty or covenant. the word “Borrower” as used in this
Agreement shall include all of Borrower’s  subsidiaries and affiliates.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require  Lender to make any Loan or
other financial accommodation to any of Borrower’s subsidiaries or affiliates.

 

Successors
and Assigns. All covenants and agreements by or on behalf of Borrower contained
in this Agreement or any Related  Documents shall bind Borrower’s
successors and assigns and shall inure to the benefit of Lender and its
successors and assigns. Borrower  shall not, however. have the
right to assign Borrower’s rights under this Agreement or any interest therein,
without the prior written  consent of Lender.

 

Survival
of Representations and Warranties. Borrower understands and agrees that in
making the Loan. Lender is relying on all representations, warranties,
and covenants made by Borrower in this Agreement or in any certificate or other
instrument delivered by  Borrower to Lender under this Agreement or the
Belated Documents. Borrower further agrees that regardless of any investigation
made by  Lender. all such representations, warranties and covenants will survive
the making of the Loan and delivery to Lender of the Related  Documents, shall
be continuing in nature, and shall remain in full force and effect until such
time as Borrower’s Indebtedness shall be paid  in full, or until this
Agreement shall be terminated in the manner provided above, whichever is the
last to occur.

 

Time
is of the Essence. Time is of the essence in the performance of this Agreement.

 

DEFINITIONS.
The following capitalized words and terms shall have the following meanings
when used in this Agreement. Unless specifically  stated to the contrary. all
references to doll r amounts shall mean amounts in lawful money of the United
States of America, Words and terms  used in the singular shall
include the plural, and the plural shall include the singular. as the context
may require. Words and terms not otherwise  defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code. Accounting words and terms not  otherwise defined in this
Agreement shall have the meanings assigned to them in accordance with generally
accepted accounting principles as in  effect on the date of this
Agreement:

 

Advance.
The word “Advance” means a disbursement of Loan funds made. or to be made, to
Borrower or on Borrower’s behalf on a line of credit or multiple advance basis
under the terms and conditions of this Agreement.

 

Agreement.
The word “Agreement” means this Business Loan Agreement. as this Business Loan
Agreement may be amended or modified from time to time. together with all
exhibits and schedules attached to this Business Loan Agreement from time to
time.

 

Borrower.
The word “Borrower” means LIQUIDMETAL COATINGS, LLC; and LIQUIDMETAL COATINGS
SOLUTIONS, LLC and includes all co—signers and co-makers signing the Note and
all their successors and assigns.

 

Collateral.
The word “Collateral” means ell property and assets granted as collateral
security for a Loan. whether real or personal property, whether granted directly
or indirectly, whether granted now or in the future, and whether granted in the
form of a security interest, mortgage. collateral mortgage. deed of trust.
assignment. pledge, crop pledge, chattel mortgage. collateral chattel mortgage,
chattel trust, factor’s lien. equipment trust. conditional sale, trust receipt,
lien, charge, lien or title retention contract. lease or consignment intended
as a security device. or any other security or lien interest whatsoever,
whether created by law. contract, or otherwise.

 

Environmental
Laws. The words “Environmental Laws” mean any and all state. federal and local
statutes, regulations and ordinances relating to the protection of human health
or the environment. including without limitation the Comprehensive Environmental
Response, Compensation. and Liability Act of IQSO. as amended, 42 U.S.C. Section 9501.
et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1985.
Pub. L. No. 99499 (“SARA”), the Hazardous Materials Transportation Act, 49
U,5,C, Section 1801, et seq.,

 

6

 

the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.,
or other applicable state or federal laws, rules, or regulations adopted
pursuant thereto.

 

Event
of Default. The words “Event of Default” mean any of the events of default set
forth in this Agreement in the default section of this Agreement.

 

GAAP.
The word “GAAP” means generally accepted accounting principles.

 

Grantor.
The word “Grantor” means each and all of the persons or entities granting a
Security Interest in any Collateral for the Loan. including without limitation
all Borrowers granting such a Security Interest,

 

Guarantor.
The word “Guarantor” means any guarantor, surety. or accommodation party of any
or all of the Loan.

 

Guaranty.
The word “Guaranty” means the guaranty from Guarantor to Lender, including
without limitation a guaranty of all or part of the Note.

 

Hazardous
Substances. The words “Hazardous Substances” mean materials that, because of
their quantity, concentration or physical, chemical or infectious characteristics,
may cause or pose a present or potential hazard to human health or the
environment when improperly used, treated, stored, disposed of, generated,
manufactured, transported or otherwise handled. The words “Hazardous Substances’
are used in their very broadest sense and include without limitation any and
all hazardous or toxic substances, materials or waste as defined by or listed
under the Environmental Laws. The term “Hazardous Substances” also includes,
without limitation, petroleum and petroleum byproducts or any traction thereof
and asbestos.

 

Indebtedness.
The word “Indebtedness” means the Indebtedness evidenced by the Note or Related
Documents, including all principal and interest together with all other
indebtedness and costs and expenses for which Borrower is responsible under
this Agreement or under any of the Related Documents.

 

Lender.
The word “Lender” means Bank Midwest N.A., its successors and assigns.

 

Loan,
The word “Loan” means any and all loans and financial accommodations from Lender
to Borrower whether now or hereafter  existing, and however
evidenced, including without limitation those loans and financial
accommodations described herein or described on  any exhibit or schedule
attached to this Agreement from time to time.

 

Note.
The word “Note” means the Note executed by LIQUIDMETAL COATINGS, LLC; and
LIOUIDMETAL COATINGS SOLUTIONS, LLC in the principal amount of $104,800.04
dated October 2’I, 2008. together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for the
note or credit agreement.

 

Permitted
Liens. The words “Permitted Liens” mean (1) liens and security interests
securing Indebtedness owed by Borrower to Lender; (2) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or
other like liens arising in the ordinary course of business and securing
obligations which are not yet delinquent; I4) purchase money liens or purchase
money security interests upon or in any property acquired or held by Borrower
in the  ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph of this
Agreement titled “indebtedness and Liens”; I5) liens and security interests
which, as of the date of this Agreement, have been disclosed to and approved by
the Lender in writing; and I6) those liens and security interests which in the
aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower’s assets.

 

Related
Documents. The words ‘Related Documents” mean all promissory notes, credit
agreements, loan agreements, environmental  agreements, guaranties,
security agreements, mortgages, deeds of trust, security deeds, collateral
mortgages, and all other instruments,  agreements and documents,
whether now or hereafter existing, executed in connection with the Loan.  

 

Security
Agreement. The words “Security Agreement” mean and include without limitation
any agreements. promises, covenants,  arrangements, understandings
or other agreements, whether created bylaw, contract, or otherwise. evidencing,
governing, representing, or  creating a Security Interest.

 

Security
Interest. The words ‘Security Interest” mean, without limitation, any and all
types of collateral security. present and future.  whether in the form of a
lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment,
pledge, crop pledge. chattel  mortgage, collateral chattel
mortgage, chattel trust, factor’s lien, equipment trust, conditional sale,
trust receipt, lien or title retention  contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever whether created by law,  contract, or otherwise,

 

ORAL
AGREEMENTS OR COMMITMENTS TO LOAN MONEY. EXTEND CREDIT OR T0 FOREBEAR FROM
ENFORCING REPAYMENT OF A DEBT  INCLUDING PROMISES TO EXTEND
OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. REGARDLESS OF THE LEGAL THEORY UPON
WHICH IT  IS BASED THAT I5 IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO PROTECT
YOU (BORROWER(S)) AND US (CREDITOR) FROM  MISUNDERS-LANDING OR
DISAPPOINTMENT. ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN
THIS  WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT
BETWEEN US. EXCEPT AS WE MAY LATER AGREE  IN WRITINGJO MODIFY IT.

 

WAIVE
JURY. All parties to this Agreement hereby waive the right to any jury trial in
any action, proceeding. or counterclaim brought by any party against any other
party.

 

7

 

BORROWER
ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND
BORROWER AGREES TO ITS TERMS.  THIS
BUSINESS LOAN AGREEMENT IS DATED OCTOBER 21, 2008.

 

 

BRORROWER:

 

	
  LIQUIMDETAL
  COATINGS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
  By:
  

  	
  /s/
  Larry Buffington

  	
   

  
	
   

  	
  LARRY BUFFINGTON, PRESIDENT & CEO of

  	
   

  
	
   

  	
  LIQUIDMETAL COATINGS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LIQUIDMETAL
  COATINGS SOLUTIONS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
  LIQUIDMETAL
  COATINGS, LLC, Member of LIQUIDMETAL COATINGS SOLUTIONS, LLC

  
	
   

  	
   

  	
   

  
	
  By:
  

  	
  /s/
  Larry Buffington

  	
   

  
	
   

  	
  LARRY BUFFINGTON, PRESIDENT & CEO of

  	
   

  
	
   

  	
  LIQUIDMETAL COATINGS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
  LENDER:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  BANK
  MIDWEST N.A.

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signer

  	
   

  

 

8

 

*000000002000209914095510212008*

COMMERCIAL SECURITY AGREEMENT

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No.

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  104,800.04

  	
   

  	
  10-21-2008

  	
   

  	
  11-01-2013

  	
   

  	
  2000209914

  	
   

  	
  7100

  	
   

  	
  379885

  	
   

  	
  1106

  	
   

  	
   

  	
   

  
																	

 

References in the boxes above are for Lender’s use only and do not limit
the applicability of this document to any particular loan or item.

Any item above containing “ ‘ ‘ ‘ “ has been omitted due to text length
limitations,

 

	
  Grantor:

  	
   

  	
  LIOUIDMETAL
  COATINGS, LLC

  	
   

  	
  Lender:

  	
   

  	
  Bank
  Midwest N.A.

  
	
   

  	
   

  	
  LIGUIDMETAL
  COATINGS SOLUTIONS, LLC

  	
   

  	
   

  	
   

  	
  Town
  Pavilion Facility

  
	
   

  	
   

  	
  1525
  LAKESVILLE DRIVE, SUITE 114

  	
   

  	
   

  	
   

  	
  1111
  Main Street

  
	
   

  	
   

  	
  KINGWOOD
  , TX 77339

  	
   

  	
   

  	
   

  	
  Kansas
  City, MO 64105

  

 

THIS
COMMERCIAL SECURITY AGREEMENT dated October 21, 2008, is made and executed
between LIOUIDMETAL COATINGS, LLC; and LIOUIDMETAL COATINGS SOLUTIONS, LLC (“Grantor”)
and Bank Midwest N.A. (“Lender”).

 

GRANT
OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a
security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral. in addition to all other rights which Lender may have by law.

 

COLLATERAL
DESCRIPTION. The word “Collateral” as used in this Agreement means the
following described property whether now owned or hereafter acquired, whether
now existing or hereafter arising, and wherever located, in which Grantor is
giving to Lender a security interest for the payment of the Indebtedness and
performance of all other obligations under the Note and this Agreement:

 

SEE
EXHIBIT “A” Together with all additions. replacements, substitutions.
attachments, accessions, accessories, fittings, increases. tools, parts,
repairs. supplies and commingled goods relating to the foregoing property; all
whether now existing or hereafter arising, whether now owned or hereafter
acquired and whether now hereafter subject to any rights in the foregoing
property; and all products and proceeds (including but not limited to all
insurance payments) of or relating to the foregoing property

 

In
addition, the word “Collateral” also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising and
wherever located:

(A) All
accessions, attachments, accessories, replacements of and additions to any of
the collateral described herein, whether added new or later.

(B) All
products und produce of any of the property described in this Collateral
section.

(C) All
accounts, general intangibles, instruments, rents, monies, payments, and all
other rights. arising out of a sale, lease, consignment or other disposition of
any of the property described in this Collateral section.

(D) All
proceeds (including insurance proceeds) from the sale, destruction, loss, or
other disposition of any of the property described in this Collateral section,
and sums due from a third party who has damaged or destroyed the Collateral or
from that party’s insurer, whether due to judgment, settlement or other
process,

(E) All
records and data relating to any of the property described in this Collateral
section, whether in the form of a writing. photograph, microfilm, microfiche,
or electronic media, together with all of Grantor’s right, title, and interest
in and to all computer software required to utilize, create, maintain, and
process any such records or data on electronic media.

 

CROSS-COLLATERALIZATION.
In addition to the Note, this Agreement secures all obligations, debts and
liabilities, plus interest thereon, of Grantor to Lender, or any one or more of
them, as well as all claims by Lender against Grantor or any one or more of
them, whether new existing or hereafter arising, whether related or unrelated
to the purpose of the Note, whether voluntary or otherwise, whether due or not
due, direct or indirect, determined or undetermined, absolute or contingent,
liquidated or unliquidated, whether Grantor may be liable individually or jointly
with others, whether obligated as guarantor, surety, accommodation party or
otherwise, and whether recovery upon such amounts may be or hereafter may
become barred by any statute of limitations, and whether the obligation to
repay such amounts may be or hereafter may become otherwise unenforceable.

 

RIGHT
OF SETOFF. To the extent permitted by applicable law, Lender reserves a right
of setoff in all Grant0r’s accounts with Lender (whether  checking,
savings, or some other account). This includes all accounts Grantor holds
jointly with someone else and all accounts Grantor may  open in the
future. However, this does not include any IRA or Keogh accounts, or any trust
accounts for which setoff would be prohibited by  law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all sums
owing on the Indebtedness against any  and all such accounts

 

GRANTOR’S
REPRESENTATIONS AND WARRANTIES WITH RESPECT T0 THE COLLATERAL. With respect to
the Collateral, Grantor represents  and promises to Lender that:

 

Perfection
of Security Interest. Grantor agrees to take whatever actions are requested by
Lender to perfect and continue Lender’s security  interest in the Collateral.
Upon request of Lender, Grantor will deliver to Lender any and ell of the
documents evidencing or constituting the  Collateral, and Grantor will
note Lender’s interest upon any and all chattel paper and instruments if not
delivered to Lender for possession  by Lender. This is a
continuing Security Agreement and will continue in effect even though all nr
any part of the Indebtedness is paid in full  and even though for a period
of time Grantor may not be indebted to Lender.

 

Notices
to Lender. Grantor will promptly notify Lender in writing at Lender’s address
shown above for such other addresses as Lender may  designate from time to time)
prior to any (1) change in Grantor’s name; (2) change in Grant0r’s
assumed business name(s); (3) change  in the management or in the
members or managers of the limited liability company Grantor; (4) change
in the authorized signer(s); (5)  change in Grantor’s principal
office address; (6) change in Grantor’s state of organization; (7) conversion
of Grantor to a new or different  type of business entity; or (8) change
many other aspect of Grantor that directly or indirectly relates to any
agreements between Grantor  and Lender. No change in
Grantor’s name or state of organization will take effect until after Lender has
received notice.

 

No
Violation. The execution and delivery of this Agreement will not violate any
law or agreement governing Grantor or to which Grantor is  an party, and
its membership agreement does not prohibit any term or condition of this
Agreement

 

 

Enforceability
of Collateral. To the extent the Collateral consists of accounts, chattel
paper, or general intangibles, as defined by the  Uniform Commercial Code, the
Collateral is enforceable in accordance with its terms, is genuine, and fully
complies with all applicable laws  and regulations concerning
form, content and manner of preparation and execution, and all persons
appearing to be obligated on the  Collateral have authority and
capacity to contract and are in fact obligated as they appear to be on the
Collateral. There shall be no setoffs  or counterclaims against any
of the Collateral, and no agreement shall have been made under which any
deductions or discounts may be  claimed concerning the Collateral
except those disclosed to Lender in writing.

 

Location
of the Collateral. Except in the ordinary course of Grantor’s business, Grantor
agrees to keep the Collateral at Grantor’s address  shown above or at such other
locations as are acceptable to Lender. Upon Lender’s request, Grantor will
deliver to Lender in form  satisfactory to Lender a
schedule of real properties and Collateral locations relating to Grantor’s
operations, including without limitation the  following: (1) all real
property Grantor owns or is purchasing; (2) all real property Grantor is
renting or leasing; (3) all storage facilities  Grantor owns, rents. leases,
or uses; and MI all other properties where Collateral is or may be located.

 

Removal
of the Collateral. Except in the ordinary course of Grantor’s business, Grantor
shall not remove the Collateral from its existing  location without Lender’s
prior written consent, Grantor shall, whenever requested, advise Lender of
exact location of the Collateral.  

 

Transactions
Involving Collateral. Except for inventory sold or accounts collected in the
ordinary course of Grantor’s business, or as  otherwise provided for in
this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral. Grantor  shall not pledge, mortgage,
encumber or otherwise permit the Collateral to be subject to any lien, security
interest, encumbrance, or  charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security  interests even if junior in
right to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any  disposition of the Collateral
(for whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds;  provided however, this
requirement shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall  immediately deliver any such
proceeds to Lender.

 

Title.
Grantor represents and warrants to Lender that Grantor holds good and
marketable title to the Collateral, free and clear of all liens  and encumbrances
except for the lien of this Agreement. No financing statement covering any of
the Collateral is on file in any public  office other than those which
reflect the security interest created by this Agreement or to which Lender has
specifically consented.  Grantor shall
defend Lender’s rights in the Collateral against the claims and demands of all
other persons.

 

Repairs
and Maintenance. Grantor agrees to keep and maintain, and to cause others to
keep and maintain, the Collateral in good order,  repair mid condition at all
times while this Agreement remains in effect, Grantor further agrees to pay
when due all claims for work done  on, or services rendered or
material furnished in connection with the Collateral so that no lien or
encumbrance may ever attach to or be  tiled against the Collateral.

 

Inspection
of Collateral. Lender and Lender’s designated representatives and agents shall
have the right at all reasonable times to examine rind inspect the Collateral
wherever located.

 

Taxes,
Assessments and Liens. Grantor will pay when due all taxes, assessments and
liens upon the Collateral. its use or operation, upon  this Agreement,
upon any promissory note or notes evidencing the Indebtedness, or upon any of
the other Related Documents. Grantor  may withhold any such payment
or may elect to contest any lien it Grantor is in good faith conducting an
appropriate proceeding to contest  the obligation to pay and so
long as Lenders interest in the Collateral is not jeopardized in Lender’s sole
opinion. lf the Collateral is  subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety  bond or other security
satisfactory to Lender in an amount adequate to provide for the discharge of
the lien plus any interest. costs,  reasonable attorneys’ tees or
other charges that could accrue as a result of foreclosure or sale of the
Collateral. In any contest Grantor  shall defend itself and
Lender and shall satisfy any final adverse judgment before enforcement against
the Collateral. Grantor shall name  Lender as an additional
obligee under any surety bond furnished in the contest proceedings. Grantor further
agrees to furnish Lender with  evidence that such taxes,
assessments, and governmental and other charges have been paid in lull and in a
timely manner. Grantor may  withhold any such payment or
may elect to contest any lien if Grantor is in good faith conducting an
appropriate proceeding to contest the  obligation to pay and so long
as Lender’s interest in the Collateral is not jeopardized.

 

Compliance
with Governmental Requirements. Grantor shall comply promptly with all laws,
ordinances, rules and regulations of all  governmental authorities, now
or hereafter in effect, applicable to the ownership, production, disposition.
or use of the Collateral, including  all laws or regulations
relating to the undue erosion of highly-erodible land or relating to the conversion
of wetlands for the production of an  agricultural product or
commodity. Grantor may contest in good faith any such law, ordinance or
regulation and withhold compliance  during any proceeding,
including appropriate appeals, so long as Lender’:: interest in the Collateral,
in Lender’s opinion, is not jeopardized.

 

Hazardous
Substances. Grantor represents and warrants that the Collateral never has bean,
and never will be so long as this Agreement  remains a lien on the
Collateral, used in violation of any Environmental Laws or for the generation,
manufacture, storage, transportation,  treatment, disposal, release
or threatened release of any Hazardous Substance. The representations and
warranties contained herein are  based on Grantor’s due
diligence in investigating the Collateral for Hazardous Substances. Grantor
hereby (1) releases and waives any  future claims against Lender
for indemnity or contribution in the event Grantor becomes liable for cleanup
or other costs under any  Environmental Laws, and (2) agrees to
indemnify, defend, and hold harmless Lender against any and all claims and
losses resulting from a breach of this provision of this Agreement. This
obligation to indemnify and defend shall survive the payment of the
indebtedness and the  satisfaction of this Agreement.

 

Maintenance
at Casualty Insurance. Grantor shall procure and maintain all risks insurance,
including without limitation fire, theft and  liability coverage together
with such other insurance as Lender may require with respect to the Collateral,
in form, amounts, coverages and  basis reasonably acceptable
to Lender and issued by a company or companies reasonably acceptable to Lender,
Grantor, upon request of  Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to Lender,
including stipulations  that coverages will not be cancelled or
diminished without at least ten (TO! days’ prior written notice to Lender and
not including any  disclaimer of the insurer’s liability for
failure to give such a notice. Each insurance policy also shall include an
endorsement providing that  coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor or
any other person. In connection  , with all policies covering
assets in which Lender holds or is offered a security interest, Grantor will
provide Lender with such loss payable  or other endorsements as
Lender may require. lf Grantor at any time falls to obtain or maintain any
insurance as required under this  Agreement, Lender may (but
shall not be obligated to) obtain such insurance as Lender deems appropriate,
including if Lender so chooses  “single interest insurance,”
which will cover only Lender’s interest in the Collateral.

 

Application
of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or
damage to the Collateral. whether or not such  casualty or loss is covered
by insurance. Lender may make proof of loss if Grantor fails to do so within
fifteen (15) days of the casualty.  All proceeds of any insurance
on the Collateral, including accrued proceeds thereon, shall be held by Lender
as part of the Collateral. Il  Lender consents to repair or
replacement of the damaged or destroyed Collateral. Lender shall, upon
satisfactory proof of expenditure, pay  or reimburse Grantor from the
proceeds for the reasonable cost of repair or restoration. lf Lender does not
consent to repair or replacement  of the Collateral, Lender
shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to

 

2

 

Grantor.
Any proceeds which have not been disbursed within six (6) months alter
their receipt and which Grantor has not committed to  the repair or restoration of
the Collateral shall be used to prepay the Indebtedness  

 

Insurance
Reserves. Lender may require Grantor to maintain with Lender reserves for
payment of insurance premiums, which reserves shall be created by monthly
payments from Grantor of a sum estimated by Lender to be sufficient to produce,
at least fifteen (15) days before the premium due date, amounts at least equal
to the insurance premiums to be paid. lf fifteen (15) days before payment is
due, the reserve funds are insufficient, Grantor shall upon demand pay any
deficiency to Lender. The reserve funds shall be held by Lender as a general deposit
and shall constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be pad by Grantor as they become
due. Lender does not hold the reserve funds in trust for Grantor, and Lender is
not the agent of Grantor for payment of the insurance premiums required to be
paid by Grantor, The responsibility for the payment of premiums shall remain Grantor’s
sole responsibility.

 

Insurance
Reports. Grantor, upon request of Lender, shall furnish to Lender reports on
each existing policy of insurance showing such  information as Lender may
reasonably request including the following: (1) the name of the insurer; (2) the
risks insured; (3) the amount  of the policy; (4) the
property insured; (5) the then current value on the basis of which
insurance has been obtained and the manner of  determining that value; and (6) the
expiration date of the policy. In addition, Grantor shall upon request by
Lender (however not more  often than annually) have an independent
appraiser satisfactory to Lender determine, as applicable, the cash value or
replacement cost of  the Collateral.

 

Financing
Statements. Grantor authorizes Lender to file a UCC financing statement, or
alternatively, a copy of this Agreement to perfect  Lenders security interest. At
Lender’s request, Grantor additionally agrees to sign all other documents that
are necessary to perfect,  protect, and
continue Lender’s security interest in the Property, Grantor will pay all
filing fees, title transfer fees, and other fees and costs  involved unless
prohibited by law or unless Lender is required by law to pay such fees and
costs. Grantor irrevocably appoints Lender to  execute documents necessary
to transfer title if there is a default, Lender may file a copy of this
Agreement as a financing statement. lf  Grantor changes Grantor’s
name or address, or the name or address of any person granting a security
interest under this Agreement  changes, Grantor will
promptly notify the Lender of such change.

 

GRANTOR’S
RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible
personal property and beneficial use of all the  Collateral and may use it in
any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor’s right to  possession and beneficial use
shall not apply to any Collateral where possession of the Collateral by Lender
is required by law to perfect  Lender’s security interest in
such Collateral. If Lender at any time has possession of any Collateral,
whether before or alter an Event of Default,  Lender shall be deemed to
have exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that  purpose as Grantor shall
request or as Lender, in Lender’s sole discretion, shall deem appropriate under
the circumstances, but failure to honor  any request by Grantor shall
not of itself be deemed to be a failure to exercise reasonable care, Lender
shall not be required to take any steps  necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure  me Indebtedness.

 

LENDEFTS
EXPENDITURES. lf any action or proceeding is commenced that would materially
affect Lender’s interest in the Collateral or if  Grantor fails to comply with
any provision of this Agreement or any Related Documents, including but not
limited to Grantor’s failure to  discharge or pay when due any
amounts Grantor is required to discharge or pay under this Agreement or any
Related Documents, Lender on  Grantor’s behalf may (but
shall not be obligated to) take any action that Lender deems appropriate,
including but not limited to discharging or  paying all taxes, liens,
security interests, encumbrances and other claims, at any time levied or placed
on the Collateral and paying all costs for  insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender for
such purposes will then bear interest at  the rate charged under the
Nota from the date incurred or paid by Lender to the date of repayment by
Grantor. All such expenses will become a  part of the indebtedness and,
at Lender’s option, will (A) be payable on demand; (B) be added to
the balance of the Note and be apportioned  among and be payable with any
installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the  remaining term of the Note;
or (C) be treated as a balloon payment which will be due and payable at
the Note’s maturity, The Agreement also  will secure payment of these
amounts. Such right shall be in addition to all other rights and remedies to
which Lender may be entitled upon  Default.

 

DEFAULT.
Each of the following shall constitute an Event of Default under this
Agreement:

 

Payment
Default. Grantor fails to make any payment when due under the Indebtedness,

 

Other
Defaults. Grantor fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or  in any of the
Related Documents or to comply with or to perform any term, obligation,
covenant or condition contained in any other  agreement between Lender and
Grantor.

 

Default
in Favor of Third Parties. Grantor defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or  any other
agreement, in favor of any other creditor or person that may materially affect
any of Grantor’s property or ability to perform  Grantor’s obligations under
this Agreement or any of the Related Documents.

 

False
Statements. Any warranty, representation or statement made or furnished to
Lender by Grantor or on Grantor’s behalf under this  Agreement or the Related
Documents is false or misleading in any material respect. either now or at the
time made or furnished or becomes  false or misleading at any
time thereafter.

 

Defective
Collateralization. This Agreement or any of the Related Documents ceases to be
in full force and affect (including failure of any  collateral document to create
a valid and perfected security interest or lien) at any time and for any
reason.

 

Insolvency.
The dissolution of Grantor (regardless of whether election to continue is
made), any member withdraws from the limited  liability company, or any
other termination of Grantor’s existence as a going business or the death of
any member, the insolvency of  Grantor, the appointment of a
receiver for any part of Grantor’s property, any assignment for the benefit of
creditors, any type of creditor  workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Grantor.

 

Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help,  repossession or any other
method, by any creditor of Grantor or by any governmental agency against any
collateral securing the  Indebtedness. This includes a garnishment of
any of Grantor’s accounts, including deposit accounts, with Lender. However,
this Event of  Default shall not apply if there is a good
faith dispute by Grantor as to the validity or reasonableness of the claim
which is the basis of the  creditor or forfeiture
proceeding and if Grantor gives Lender written notice of the creditor or
forfeiture proceeding and deposits with Lender  monies or a surety bond for
the creditor or forfeiture proceeding, in an amount determined by Lender, in
its sole discretion, as being an  adequate reserve or bond for
the dispute.

 

Events
Affecting Guarantor, Any of the preceding events occurs with respect to any
guarantor, endorser, surety, or accommodation party  or any of the Indebtedness or
guarantor, endorser, surety, or accommodation party dies or becomes incompetent
or revokes or disputes the  validity of, or liability
under, any Guaranty of the Indebtedness

 

3

 

Adverse
Change. A material adverse change occurs in Grant0r’s financial condition, or
Lender believes the prospect of payment or performance of the Indebtedness is
impaired,

 

Cure
Provisions. Il any default, other than a default in payment is curable and if
Grantor has not been given a notice of a breach of the same provision of this
Agreement within the preceding twelve (12) months, it may be cured if Grantor,
after receiving written notice from Lender demanding cure of such default: (1) cures
the default within ten (10) days; or (2) if the cure requires more
than ten (10) days, immediately initiates steps which Lender deems in
Lender’s sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to
produce compliance as soon as reasonably practical.

 

RIGHTS
AND REMEDIES ON DEFAULT. lf an Event of Default occurs under this Agreement, at
any time thereafter, Lender shall have all the rights of a secured party under
the Delaware Uniform Commercial Code. In addition and without limitation,
Lender may exercise any one or more of the following rights and remedies:

 

Accelerate
indebtedness. Lender may declare the entire indebtedness, including any
prepayment penalty which Grantor would be required to pay, immediately due and
payable, without notice of any kind to Grantor,

 

Assemble
Collateral. Lender may require Grantor to deliver to Lender all or any portion
of the Collateral and any and all certificates of title and other documents
relating to the Collateral. Lander may require Grantor to assemble the
Collateral and make it available to Lender at a place to be designated by
Lender. Lender also shall have full power to enter upon the property of Grantor
to take possession of and remove the Collateral. lf the Collateral contains
other goods not covered by this Agreement at the time of repossession, Grantor
agrees Lender may take such other goods, provided that Lender makes reasonable
efforts to return them to Grantor after repossession.

 

Sell
the Collateral. Lender shall have full power to sell, lease, transfer, or
otherwise deal with the Collateral or proceeds thereof in Lender’s own name or
that of Grantor. Lender may sell the Collateral at public auction or private
sale. Unless the Collateral threatens to decline  speedily in value or is of a
type customarily sold on a recognized market, Lender will give Grantor, and
other persons as required by law,  reasonable notice of the time
and place of any public sale, or the time after which any private sale or any
other disposition of the Collateral  is to be made. However, no
notice need be provided to any person who, after Event of Default occurs.
enters into and authenticates an  agreement waiving that person’s
right to notification of sale. The requirements of reasonable notice shall be
met if such notice is given at  least ten (10) days
before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without  limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness  secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.

 

Appoint
Receiver. Lender shall have the right to have a receiver appointed to take
possession of all or any part of the Collateral, with the  power to protect
and preserve the Collateral, to operate the Collateral preceding foreclosure or
sale, and to collect the Rents from the  Collateral and apply the
proceeds, over and above the cost of the receivership, against the
Indebtedness. The receiver may serve without  bond it permitted by law.
Lender’s right to the appointment of a receiver shall exist whether or not the
apparent value of the Collateral  exceeds the indebtedness by a
substantial amount. Employment by Lender shall not disqualify a person from
serving as a receiver.

 

Collect
Revenues, Apply Accounts. Lender, either itself or through a receiver, may
collect the payments, rents, income, and revenues from  the Collateral,
Lender may at any time in Lender’s discretion transfer any Collateral into
Lender’s own name or that of Lender’s nominee  and receive the payments,
rents, income, and revenues therefrom and hold the same as security for the
indebtedness or apply it to  payment of the Indebtedness
in such order of preference as Lender may determine. insofar as the Collateral
consists of accounts, general  intangibles, insurance
policies, instruments, chattel paper, choses in action, or similar property,
Lender may demand. collect, receipt for.  settle, compromise, adjust,
sue for, foreclose, or realize on the Collateral as Lender may determine,
whether or not Indebtedness or  Collateral is then doe. For
these purposes, Lender may, on behalf of and in the name of Grantor, receive,
open and dispose of mail  addressed to Grantor; change any address to
which mail and payments are to be sent; and endorse notes, checks, drafts,
money orders,  documents of
title, instruments and items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, Lender  may notify account debtors
and obligors on any Collateral to make payments directly to Lender.

 

Obtain
Deficiency. It Lender chooses to sell any or all of the Collateral, Lender may
obtain a judgment against Grantor for any deficiency  remaining on the Indebtedness
due to Lender after application of all amounts received from the exercise of
the rights provided in this  Agreement. Grantor shall be
liable for a deficiency even if the transaction described in this subsection is
a sale of accounts or chattel  paper

 

Other
Rights and Remedies, Lender shall have all the rights and remedies of a secured
creditor under the provisions of the Uniform Commercial Code, as may be amended
from time to time. In addition, Lender shall have and may exercise any or all
other rights and remedies it may have available at law, in equity, or
otherwise.

 

Election
of Remedies. Except as may be prohibited by applicable law, all of Lender’s
rights and remedies, whether evidenced by this  Agreement, the Related
Documents, or by any other writing, shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor’s failure to perform, shall not affect Lender’s right to declare a
default and exercise its remedies.

 

MISCELLANEOUS
PROVISIONS. The following miscellaneous provisions are a part of this
Agreement:

 

Amendments.
This Agreement, together with any Related Documents, constitutes the entire
understanding and agreement of the parties  as to the matters set forth
in this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing  and signed by the party or
parties sought to be charged or bound by the alteration or amendment.

 

Attorneys’
Fees; Expenses. Grantor agrees to pay upon demand all of Lender’s costs and
expenses, including Lender’s reasonable  attorneys’ fees and Lender’s
legal expenses, incurred in connection with the enforcement of this Agreement.
Lender may hire or pay  someone else to help enforce this Agreement,
and Grantor shall pay the costs and expenses of such enforcement. Costs and
expenses  include Lender’s reasonable attorneys fees and legal expenses whether or
not there is a lawsuit, including reasonable attorneys’ fees and  legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any  anticipated post-judgment
collection services. Lender may also recover from Grantor all court,
alternative dispute resolution or other  collection costs (including,
without limitation, fees and charges of collection agencies) actually incurred
by Lender.

 

Caption
Headings. Caption headings in this Agreement are for convenience purposes only
and are not to be used to interpret or define the provisions of this Agreement.

 

Governing
Law. With respect to procedural matters related to the perfection and
enforcement of Lender’s rights against the Collateral, this Agreement will be
governed by federal law applicable to Lender and to the extent not preempted by
federal law, the laws of the State of Delaware. In all other respects, this
Agreement will be governed by federal law applicable to Lender end, to the
extent not preempted by federal law, the laws of the State of Missouri without
regard to its conflicts of law provisions. However, if there ever is a question
about whether any provision of this Agreement is valid or enforceable, the
provision that is questioned will be governed by whichever state or

 

4

 

federal
law would find the provision to be valid and enforceable. The loan transaction
that is evidenced by the Note and this Agreement has been applied for,
considered, approved and made, and all necessary loan documents have been accepted
by Lender in the State of Missouri.

 

Choice
of Venue. It there is a lawsuit, Grantor agrees upon Lender’s request to submit
to the jurisdiction of the courts of Jackson County. State of Missouri.

 

Joint
and Several Liability. All obligations of Grantor under this Agreement shall be
joint and several, and all references to Grantor shall mean each and every
Grantor. This means that each Grantor signing below is responsible for all
obligations in this Agreement. Where any one or more of the parties is a
corporation, partnership, limited liability company or similar entity, it is
not necessary for Lender to inquire into the powers of any of the officers,
directors, partners, members, or other agents acting or purporting to act on
the entity’s behalf, and any obligations made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Agreement.

 

No
Waiver by Lender. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a provision
of this Agreement shall not prejudice or constitute a waiver of Lenders right
otherwise to demand strict compliance with that provision or any other
provision of this Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Grantor, shall constitute a waiver of any of Lender’s rights
or of any of Grantor’s obligations as Io any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of such
consent by Lender in any instance shall not constitute continuing consent to
subsequent instances where such consent is required and in all cases such
consent may he granted or withheld in the sole discretion of Lender.

 

Notices.
Any notice required to be given under this Agreement shall be given in writing,
and shall be effective when actually delivered. when actually received by
telefacsimile (unless otherwise required by law), when deposited with a
nationally recognized overnight courier, or, if mailed, when deposited in the
United States mail, as first class, certified or registered mall postage
prepaid, directed to the addresses shown near the beginning of this Agreement.
Any party may change its address for notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose of the
notice is to change the party’s address. For notice purposes, Grantor agrees to
keep Lender informed at ell times of Grantor’s current address, Unless
otherwise provided or required by law, if there is more than one Grantor, any
notice given by Lender to any Grantor is deemed to be notice given to all
Grantors.

 

Power
of Attorney. Grantor hereby appoints Lender as Grantor’s irrevocable
attorney-in-fact for the purpose of executing any documents  necessary to
perfect, amend, or to continue the security interest granted in this Agreement
or to demand termination of filings of other  secured parties. Lender may
at any time, and without further authorization from Grantor, file a carbon,
photographic or other reproduction  of any financing statement or
of this Agreement for use as a financing statement. Grantor will reimburse
Lender for all expenses for the  perfection and the
continuation of the perfection of Lender’s security interest in the Collateral.

 

Severability.
lf a court of competent jurisdiction finds any provision of this Agreement to
be illegal, invalid, or unenforceable as to any  person or circumstance, that
finding shall not make the offending provision illegal, invalid, or
unenforceable as to any other person or  circumstance. Il feasible,
the offending provision shall be considered modified so that it becomes legal,
valid and enforceable. lf the  offending provision cannot be
so modified, it shall be considered deleted from this Agreement. Unless
otherwise required by law, the  illegality, invalidity. or
unenforceability of any provision of this Agreement shall not affect the
legality, validity or enforceability of any other  provision of this Agreement.

 

Successors
and Assign:. Subject to any limitations stated in this Agreement on transfer of
Grantor’s interest. this Agreement shall be  binding upon and inure to the
benefit of the parties, their successors and assigns. lf ownership of the
Collateral becomes vested in a person other than Grantor, Lender, without
notice to Grantor, may deal with Grantor’s successors with reference to this
Agreement and the  Indebtedness by way of forbearance or
extension without releasing Grantor from the obligations of this Agreement or
liability under the  Indebtedness.

 

Survival
of Representations and Warranties. All representations. warranties, and
agreements made by Grantor in this Agreement shall survive the execution and
delivery of this Agreement, shall be continuing in nature, and shall remain in
lull force and effect until such time as Grantor’s Indebtedness shall be paid
in full.

 

Time
is of the Essence. Time is of the essence in the performance of this Agreement.

 

Waive
Jury. All parties to this Agreement hereby waive the right to any jury trial in
any action, proceeding, or counterclaim brought by any party against any other
party.

 

DEFINITIONS,
The following capitalized words and terms shall have the following meanings
when used in this Agreement. Unless specifically  slated to the contrary. all
references to dollar amounts shall mean amounts in lawful money of the United
States of America. Words and terms  used in the singular shall
include the plural, and the plural shell include the singular, as the context
may require. Words and terms not otherwise  defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code:

 

Agreement.
The word “Agreement” means this Commercial Security Agreement, as this
Commercial Security Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Commercial Security
Agreement from time to time 

 

Borrower.
The word ‘Borrower” means LIOUIDMETAL COATINGS, LLC; and LIOUIDMETAI. COATINGS
SOLUTIONS, LLC and includes all co-signers and co-makers signing the Note and
all their successors and assigns.

 

Collateral.
The word “Collateral” means all of Grantor’s right, title end interest in and
to all the Collateral as described in the Collateral Description section of
this Agreement.

 

Default.
The word “Default” means the Default set forth in this Agreement in the section
titled “Default’.

 

Environmental
Laws. The words “Environmental Laws” mean any and all state. federal and local
statutes, regulations and ordinances relating to the protection of human health
or the environment, including without limitation the Comprehensive
Environmental Response. Compensation, and Liability Act of 1980, as amended, 42
U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization
Act of 1986. Pub. L. No, 99499 (“SARA”), the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state
or federal laws, rules, or regulations adopted pursuant thereto.

 

Event
of Default. The words “Event of Default” mean any of the events of default set forth
in this Agreement in the default section of this Agreement.

 

Grantor.
The word “Grantor” means LIQUIDMETAL COATINGS, LLC; and LIQUIDMETAL COATINGS
SOLUTIONS, LLC.

 

Guaranty.
The word “Guaranty” means the guaranty from guarantor, endorser, surety, or accommodation
party to Lender, including without limitation a guaranty of all or part of the
Note.

 

5

 

Hazardous
Substances. The words “Hazardous Substances” mean materials that, because of
their quantity, concentration or physical,  chemical or infectious
characteristics, may cause or pose a present or potential hazard to human
health or the environment when  improperly used, treated,
stored, disposed of, generated, manufactured, transported or otherwise handled.
The words “Hazardous  Substances’ are used in their very broadest
sense and include without limitation any and all hazardous or toxic substances,
materials or  waste as defined by or listed under the
Environmental Laws. The term “Hazardous Substances” also includes, without
limitation, petroleum  and petroleum byproducts or any traction
thereof and asbestos.

 

Indebtedness.
The word “Indebtedness” means the Indebtedness evidenced by the Note or Related
Documents, including all principal and interest together with all other
indebtedness and costs and expenses for which Borrower is responsible under
this Agreement or under any of the Related Documents.

 

Lender.
The word “Lender” means Bank Midwest N.A., its successors and assigns.

 

Note.
The word “Note” means the Note executed by LIQUIDMETAL COATINGS, LLC; and
LIOUIDMETAL COATINGS SOLUTIONS, LLC in the principal amount of $104,800.04
dated October 2’I, 2008. together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for the
note or credit agreement.

 

Property.
The word “Property” means all of Grantor’s right, title and interest in and to
all the Property as described in the “Collateral Description” section of this
Agreement.

 

Related
Documents. The words ‘Related Documents” mean all promissory notes, credit
agreements, loan agreements, environmental agreements, guaranties, security
agreements, mortgages, deeds of trust, security deeds, collateral mortgages,
and all other instruments, agreements and documents, whether now or hereafter
existing, executed in connection with the Loan.

 

GRANTER
AHS READ AND UNDERSTOOD ALL THE PROVISION OF THIS COMMERCIAL SECURITY AGREEMENT
AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER 21, 2008.

 

THIS
AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND
SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

 

GRANTOR:

 

	
  LIQUIMDETAL
  COATINGS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   /s/ Larry Buffington

  	
   

  
	
   

  	
  LARRY
  BUFFINGTON, PRESIDENT & CEO of

  	
   

  
	
   

  	
  LIQUIDMETAL
  COATINGS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LIQUIDMETAL
  COATINGS SOLUTIONS, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
  LIQUIDMETAL
  COATINGS, LLC, Member of LIQUIDMETAL COATINGS SOLUTIONS, LLC

  
	
   

  
	
   

  	
   

  	
   

  
	
  By:
  

  	
  /s/
  Larry Buffington

  	
   

  
	
   

  	
  LARRY
  BUFFINGTON, PRESIDENT & CEO of

  	
   

  
	
   

  	
  LIQUIDMETAL
  COATINGS, LLC

  	
   

  
				

 

6Exhibit 10.43

 

NEITHER THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY
REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE
AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF
THIS NOTE.

 

CONVERTIBLE SUBORDINATED NOTE

 

	
  Issuance Date:
  October 1, 2008

  	
  Principal:
  U.S. $ [                     ]

  

 

FOR VALUE RECEIVED, LIQUIDMETAL TECHNOLOGIES,
INC., a Delaware corporation (the “Company”),
hereby promises to pay to the order of [INSERT HOLDER]  or registered assigns (“Holder”) the amount set out above as the
Principal (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on
any outstanding Principal at the rate of interest as determined pursuant to Section 2,
from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due
and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof).  This
Convertible Subordinated Note (including all Convertible Subordinated Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Convertible
Subordinated Notes issued on January 3, 2007 (the “Original
Date”) pursuant to the Securities Purchase Agreement (the “Original Notes”) or issued after January 3, 2007 in
satisfaction of interest and/or other amounts owing by the Company to the
holders of the Original Notes (the “Interest Notes”)
(the Original Notes and Interest Notes are collectively referred to as the “Notes” herein, and any Notes other than this Note are
collectively referred to as the “Other Notes”).  This Note is deemed to be issued pursuant to Section 2
of the Holder’s Original Note and is subject to the terms and provisions of the
Securities Purchase Agreement.  Certain
capitalized terms are defined in Section 29.

 

 

(1)                                  MATURITY AND
AMORTIZATION PAYMENTS.

 

(a)                                  Payment on
Maturity.  On January 3,
2010 (the “Maturity Date”), the
Holder shall surrender this Note to the Company and the Company shall pay to
the Holder an amount in cash representing all outstanding Principal and accrued
and unpaid Interest, and following receipt of such payment, the Holder shall
mark this Note as “Cancelled” and shall surrender such cancelled Note to the
Company by courier, registered mail, or other traceable means.  Beginning on the first day of the eighteenth
(18th) calendar
month following the calendar month in which the Original Date occurs, the
Company may, upon thirty (30) calendar days prior written notice to Holder and
at the sole election of the Company, prepay this Note in whole or in part for a
cash redemption price equal to One Hundred Five Percent (105%) of the the
portion of the principal amount being redeemed plus all accrued and unpaid
interest on the portion of the principal amount being redeemed, provided that
following such notice the Holder may convert all or any part of the portion of
the Note to be redeemed so long as the Company receives a duly executed
Conversion Notice pursuant to Section 3 of this Note prior to the date on
which prepayment is actually made. 
Notwithstanding the foregoing, in the event that prior to the Maturity
Date the Company completes a public or private equity or debt offering or an
Asset Sale pursuant to which the Company receives aggregate cash proceeds (net
of placement agent fees, underwriter’s discouns, and other similar fees or
commissions, and net of transaction fees) in excess of Five Million Dollars
($5,000,000), but excluding financings for the purpose of purchasing capital
assets, then any net proceeds from such transaction after payment in full of
transaction expenses and the full payment of the Company’s 8% Unsecured
Subordinated Notes Due 2007 shall, within five (5) Business Days of the
Company’s receipt of such net proceeds, be paid to reduce the Principal and
accrued but unpaid interest under this Note and the other Interest Notes (and
if such net proceeds are insufficient to pay the Interest Notes in full, then
such net proceeds will be paid to the holders of the Interest Notes on a pro
rata basis in accordance with the then-outstanding Principal under the Interest
Notes held by them).  For this purpose,
an “Asset Sale” means any sale of assets by the Company in a single transaction
or series of related transactions, other than (i) sales of inventory or
other assets in the ordinary course of the Company’s business, (ii) sale
of obsolete equipment.

 

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

 

(c)                                  Payment of
Amortization Redemption Amount.  The Company shall pay the Amortization
Redemption Amount in cash in accordance with the provisions of Section 12;
provided, however, that if the Conditions to Amortization Conversion (as defined

 

2

 

below) are satisfied or waived in writing by
the Holder and the Company provides the Amortization Conversion Notice (as
defined below), then the Company shall have the right to require the Holder to
convert all or any such portion of the Amortization Redemption Amount
designated in the Amortization Conversion Notice into fully paid, validly
issued and nonassessable shares of Common Stock in accordance with the
applicable provisions of Section 3(c)(i). 
The Company may exercise its right to require conversion under this Section 1(c) by
delivering at least 20 Trading Days prior to such Amortization Date a written
notice thereof by facsimile and overnight courier to all, but not less than
all, of the holders of Notes and the Transfer Agent that specifically describes
the portion of the Amortization Redemption Amount for this Note and the Other
Notes that will be paid in Common Stock (the “Amortization
Conversion Notice” and the date all of the holders received such
notice is referred to as the “Amortization
Conversion Notice Date”).  The
Amortization Conversion Notice shall be irrevocable; provided; that if
any of the Conditions to Amortization Conversion is not satisfied on the
applicable Amortization Date or waived by the Holder, the Company will
notwithstanding delivery of the Amortization Conversion Notice be required to
pay the Amortization Redemption Amount in cash. 
The conversion price applicable to an Amortization Conversion (the “Amortization
Price”) that is being paid in Common Stock pursuant to this Section 1(c) shall
be 90% of the Weighted Average Price of the Common Stock for the 20 consecutive
Trading Days immediately preceding the Amortization Date.  For purposes of this Section 1(c), “Conditions to Amortization Conversion”
means  the following conditions: (i) the
Common Stock shall be traded on the Principal Market, the NASDAQ Gobal Market
or NASDAQ Capital Market, or the American Stock Exchange on the applicable
Amortization Date, (ii) on the Amortization Date, either (x) the
Registration Statement or Registration Statements contemplated by the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities (as defined in the Registration Rights
Agreement) then outstanding, together with the Common Stock to be issued on
such Amortization Date, in accordance with the terms of the Registration Rights
Agreement or (y) all shares of Common Stock issuable upon conversion of
the Notes shall be eligible for sale without restriction and without the need
for registration under any applicable federal or state securities laws, (iii) an
Authorized Share Failure shall not be in effect on the Amortization Date; and (iv) any
such payment of the Amortization Redemption Amount in Common Stock shall not
consist of more than 20% of the total dollar volume traded in the Common Stock
for the 20 Trading Days prior to the Amortization Date.

 

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

 

3

 

surrendering the Notes (if not fully
redeemed), the Holder may deliver a certification to the Company affirming that
the requisite principal amount of Notes is being forfeited as a result of such
redemption, in which case the change in the Notes will be noted by book entry
by the Company).  For purposes hereof, the term “Qualified Transactions” means (A) the
sale of Liquidmetal Korea’s manufacturing facility in Pyong-Taek, Republic of
Korea and that the appropriate authorities or banks in the Republic of Korea
approve the transfer of such proceeds from Liquidmetal Korea to the Company
and/or (B) the raising of capital in a debt or equity offering after the
date hereof (subject to any restrictions or limitations thereon set forth in
the Purchase Agreement or the Notes).

 

(2)                                  INTEREST;
INTEREST RATE.  Interest on
this Note shall commence accruing on the Issuance Date and shall be computed on
the basis of a 365-day year and actual days elapsed and shall be payable in
arrears on the first day of each Calendar Quarter and on the Maturity Date
during the period beginning on the Issuance Date and ending on, and including,
the Maturity Date (each, an “Interest Date”)
with the first Interest Date being January 1, 2008.  Interest shall be payable on each Interest
Date in cash at the rate of 8.00% per annum (the “Interest Rate”).  Prior
to the payment of Interest on an Interest Date, Interest on this Note shall
accrue at the Interest Rate and be payable by way of inclusion of the Interest
in the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event of
Default, the Interest Rate shall be increased so that the Interest Rate shall
be twelve percent (12.00%) per annum.  In
the event that such Event of Default is subsequently cured, the adjustment
referred to in the preceding sentence shall cease to be effective as of the
date of such cure; provided that the Interest as calculated at such increased
rate during the continuance of such Event of Default shall continue to apply to
the extent relating to the days after the occurrence of such Event of Default
through and including the date of cure of such Event of Default.

 

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

 

(a)                                  Conversion
Right.  Subject to the provisions of Section 3(d),
at any time or times on or after the Issuance Date, the Holder shall be
entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined below) in increments of at least $50,000 of Principal (or such
lesser amount if such amount represents the remaining Principal amount) into
fully paid and nonassessable shares of Common Stock in accordance with Section 3(c),
at the Conversion Rate (as defined below). 
The Company shall not issue any fraction of a share of Common Stock upon
any conversion.  If the issuance would
result in the issuance of a fraction of a share of Common Stock, the Company
shall round such fraction of a share of Common Stock up to the nearest whole
share.  The Company shall pay any and all
taxes that may be payable with respect to the issuance and delivery of Common
Stock upon conversion of any Conversion Amount.

 

(b)                                 Conversion Rate.  The number of shares of Common Stock 

 

4

 

issuable upon conversion of any Conversion
Amount pursuant to Section 3(a) shall be determined by dividing (x) such
Conversion Amount by (y) the Conversion Price (as defined below) (the “Conversion Rate”).

 

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

 

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

 

(c)                                  Mechanics of
Conversion.

 

(i)                                     Optional
Conversion.  To convert
any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m.,
New York Time, on such date, a copy of an executed notice of conversion in the
form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required
by Section 3(c)(iii), surrender this Note to a common carrier for delivery
to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction).  On or before the
first Business Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such
Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”).  On or before the second Business Day
following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (X) credit
such aggregate number of shares of Common Stock to which the Holder shall be
entitled to the Holder’s or its designee’s balance account with Depository
Trust Company (“DTC”) through its
Deposit Withdrawal At Custodian system or (Y) if the Transfer Agent is not
participating in DTC Fast Automated Securities Transfer Program, issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock to which the Holder shall be entitled.  If this Note is physically surrendered for
conversion as required by Section 3(c)(iii) and the outstanding
Principal of this Note is greater than the Principal portion of the Conversion
Amount being converted, then the Company shall as soon as practicable and in no
event later than five Business Days after receipt of this Note and at its own
expense, issue and deliver to the holder a new Note (in accordance with Section 19(d))
representing the outstanding Principal not converted.  The Person or Persons entitled to receive the
shares of Common Stock issuable upon a conversion of this Note shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on the Conversion Date.

 

(ii)                                  Company’s
Failure to Timely Convert.  If
the Company shall fail to issue a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon conversion of any 

 

5

 

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

 

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

 

(iv)                              Pro Rata
Conversion; Disputes.  In the
event that the Company receives a Conversion Notice from more than one holder
of Notes for the same Conversion Date and the Company can convert some, but not
all, of such portions of the Notes submitted

 

6

 

for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing
to have Notes converted on such date a pro rata amount of such holder’s portion
of its Notes submitted for conversion based on the principal amount of Notes
submitted for conversion on such date by such holder relative to the aggregate
principal amount of all Notes submitted for conversion on such date.  In the event of a dispute as to the number of
shares of Common Stock issuable to the Holder in connection with a conversion
of this Note, the Company shall issue to the Holder the number of shares of
Common Stock not in dispute and resolve such dispute in accordance with Section 24.

 

(d)                                 Limitations on
Conversions.

 

(i)                                     Beneficial
Ownership.  Unless
waived by the Holder upon no less than sixty one (61) days prior written notice
to the Company, the Company shall not effect any conversion of this Note
pursuant to Section 3(a) to the extent that after giving effect to
such conversion the Holder (together with the Holder’s affiliates) would
beneficially own in excess of 4.99% of the number of shares of Common Stock
outstanding immediately after giving effect to such conversion.  Even if the Holder waives the limitation set
forth in the preceding sentence, the Company shall in no event effect any
conversion of this Note, and the Holder of this Note shall not have the right
to convert any portion of this Note pursuant to Section 3(a), to the
extent that after giving effect to such conversion, the Holder (together with
the Holder’s affiliates) would beneficially own in excess of 9.99% of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion.  For purposes of the
foregoing sentences, the number of shares of Common Stock beneficially owned by
the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Note with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Note beneficially owned by the Holder
or any of its affiliates and (B) exercise or conversion of the unexercised
or nonconverted portion of any other securities of the Company (including,
without limitation, any Other Notes or warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 3(d)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended.  For
purposes of this Section 3(d)(i), in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (x) the Company’s most recent Form 10-Q
or Form 10-K, (y) a more recent public announcement by the Company or
(z) any other notice by the Company or the Transfer Agent setting forth
the number of shares of Common Stock outstanding.  For any reason at any time, upon the written
or oral request of the Holder, the Company shall within two Business Days
confirm orally and in writing to the Holder the number of shares of Common Stock
then outstanding.  In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect
to the conversion or exercise of securities of the Company, including this
Note, by the Holder

 

7

 

or its affiliates since the
date as of which such number of outstanding shares of Common Stock was
reported. 

 

(ii)                                  Principal
Market Regulation.  The Company
shall not be obligated to issue any shares of Common Stock upon conversion of
this Note if the issuance of such shares of Common Stock would exceed that
number of shares of Common Stock that the Company may issue upon conversion of
the Notes without breaching the Company’s obligations under the rules or
regulations of the Principal Market (the “Exchange
Cap”), except that such limitation shall not apply in the event that
the Company (A) obtains the approval of its stockholders as required by
the applicable rules of the Principal Market for issuances of Common Stock
in excess of such amount or (B) obtains a written opinion from outside
counsel to the Company that such approval is not required, which opinion shall
be reasonably satisfactory to the holders of the Notes representing at least a
majority of the principal amounts of the Notes then outstanding.  Until such approval or written opinion is
obtained, no holders of Notes (the “Purchasers”)
shall be issued, upon conversion of Notes, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Original Notes issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date
and the denominator of which is the aggregate principal amount of all Original
Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on
the Issuance Date (with respect to each Purchaser, the “Exchange Cap Allocation”).  In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser’s Notes, the transferee shall be
allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee.  In the event that any holder
of Notes shall convert all of such holder’s Notes into a number of shares of
Common Stock which, in the aggregate, is less than such holder’s Exchange Cap
Allocation, then the difference between such holder’s Exchange Cap Allocation
and the number of shares of Common Stock actually issued to such holder shall
be allocated to the respective Exchange Cap Allocations of the remaining
holders of Notes on a pro rata basis in proportion to the aggregate principal
amount of the Notes then held by each such holder.

 

(4)                                  RIGHTS UPON EVENT
OF DEFAULT.

 

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

 

(i)                                     the Company’s
failure to pay to the Holder any amount of Principal or Interest when and as
due under this Note if such failure continues for a period of at least five
Business Days;

 

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

 

8

 

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

 

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

 

(iv)                              the Company
shall fail to observe or perform any other material covenant or agreement
contained in the Securities Purchase Agreement, which failure is not cured
within ten Business Days after notice of such default sent by the Holder to the
Company;

 

(v)                                 the Company or
any of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S.
Code, or any similar Federal or state law for the relief of debtors
(collectively, “Bankruptcy Law”), (A) commences
a voluntary case, (B) consents to the entry of an order for relief against
it in an involuntary case, (C) consents to the appointment of a receiver,
trustee, assignee, liquidator or similar official (a “Custodian”),  or (D) makes
a general assignment for the benefit of its creditors;

 

(vi)                              a court of
competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is
for relief against the Company or any of its Subsidiaries in an involuntary
case that remains undismissed for a period of 90 days, (B) appoints a
Custodian of the Company or any of its Subsidiaries that remains undischarged
or unstayed for a period of 90 days, or (C) orders the liquidation of the
Company or any of its Subsidiaries;

 

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

 

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

 

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

 

(b)                                 Redemption
Right.  Promptly after the occurrence
of an Event of Default with respect to this Note or any Other Note, the Company
shall deliver written notice 

 

9

 

thereof
via facsimile and overnight courier (an “Event
of Default Notice”) to the Holder. 
At any time after the earlier of the Holder’s receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the “Event of Default
Redemption Notice”) to the Company, which Event of Default Redemption
Notice shall indicate the portion of this Note the Holder is electing to
redeem.  Each portion of this Note
subject to redemption by the Company pursuant to this Section 4(b) shall
be redeemed by the Company at a price equal to the greater of (i) the
Conversion Amount to be redeemed and (ii) the product of (A) the
Conversion Rate with respect to such Conversion Amount in effect at such time
as the Holder delivers an Event of Default Redemption Notice and (B) the
Closing Sale Price of the Common Stock on the date immediately preceding such
Event of Default (the “Event of Default
Redemption Price”). 
Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12.

 

(5)                                  RIGHTS UPON
CHANGE OF CONTROL.

 

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

 

(i)                                     the
consolidation, merger or other business combination (including, without
limitation, a reorganization or recapitalization) of the Company with or into
another Person (other than (A) a consolidation, merger or other business
combination (including, without limitation, reorganization or recapitalization)
in which holders of the Company’s voting power immediately prior to the
transaction continue after the transaction to hold, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities, or (B) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company);

 

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

 

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

 

No
sooner than 15 days nor later than 10 days prior to the consummation of a
Change of Control, but not prior to the public announcement of such Change of
Control, the Company shall deliver written notice thereof via facsimile and
overnight courier to the Holder (a “Change of
Control Notice”).

 

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

 

10

 

each
holder of Notes in exchange for such Notes, a security of the Acquiring Entity
evidenced by a written instrument substantially similar in form and substance
to the Notes, including, without limitation, having a principal amount and
interest rate equal to the principal amounts and the interest rates of the
Notes held by such holder, and satisfactory to the holders of Notes
representing at least a majority of the principal amount of the Notes then
outstanding.  In the event that an
Acquiring Entity is directly or indirectly controlled by a company or entity
whose common stock or similar equity interest is listed, designated or quoted
on a securities exchange or trading market, the holders of Notes representing
at least a majority of the aggregate principal amount of the Notes then
outstanding may elect to treat such Person as the Acquiring Entity for purposes
of this Section 5(b).

 

(c)                                  Redemption
Right.  At any time during the period
beginning after the Holder’s receipt of a Change of Control Notice and ending
on the date of the consummation of such Change of Control (or, in the event a
Change of Control Notice is not delivered at least 10 days prior to a Change of
Control, at any time on or after the date which is 10 days prior to a Change of
Control and ending ten days after the consummation of such Change of Control),
the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (“Change of
Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing
to redeem; provided, however, that the Company shall not be under any obligation
to redeem all or any portion of this Note or to deliver the applicable Change
of Control Redemption Price unless and until the applicable Change of Control
is consummated.  The portion of this Note
subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (i) the sum of (x) the
product of (A) the Applicable Percentage (as defined below) and (B) the
Conversion Amount being redeemed and (y) the amount of any accrued but
unpaid Interest on such Conversion Amount being redeemed through the date of
such redemption payment and (ii) the product of (x) the Applicable
Percentage and (y) the sum of (1) the product of (A) the
Conversion Amount being redeemed multiplied by (B) the quotient determined
by dividing (I) the aggregate cash consideration and the aggregate cash
value of any non-cash consideration per Common Share to be paid to the holders
of the Common Shares upon consummation of the Change of Control (any such
non-cash consideration in the form of securities to be valued at the higher of
the Closing Sale Price of such securities as of the Trading Day immediately
prior to the consummation of such Change of Control, the Closing Sale Price on
the Trading Day immediately following the public announcement of such proposed
Change of Control and the Closing Sale Price on the Trading Day immediately
prior to the public announcement of such proposed Change of Control) by (II) the
Conversion Price plus (2) the amount of any accrued but unpaid Interest on
such Conversion Amount being redeemed through the date of such redemption
payment, (the “Change of Control Redemption
Price”).  Redemptions required by this
Section 5(c) shall be made in accordance with the provisions of Section 12
and shall have priority to payments to stockholders in connection with a Change
of Control.  For purposes of this Note,
the term “Applicable Percentage” means 120% if
the Change of Control is consummated on or before the first (1st) anniversary of the
Original Date, 115% if the Change of Control is consummated after the first (1st) anniversary of the
Original Date but on or before the second (2nd) anniversary of the Original Date, and 110% if the
Change

 

11

 

of
Control is consummated at any time after the second (2nd) anniversary of the
Original Date.

 

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

 

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

 

(b)                                 Other Corporate
Events. Prior to the consummation of any recapitalization, reorganization,
consolidation, merger, spin-off or other business combination (other than a
Change of Control) pursuant to which holders of Common Stock are entitled to
receive securities or other assets with respect to or in exchange for Common
Stock (a “Corporate Event”), the
Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon a conversion of this Note, (i) in
addition to the shares of Common Stock receivable upon such conversion, such
securities or other assets to which the Holder would have been entitled with
respect to such shares of Common Stock had such shares of Common Stock been
held by the Holder upon the consummation of such Corporate Event or (ii) in
lieu of the shares of Common Stock otherwise receivable upon such conversion,
such securities or other assets received by the holders of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate.  Provision made
pursuant to the preceding sentence shall be in a form and substance
satisfactory to the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPON
ISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment of
Conversion Price upon Issuance of Common Stock.  If and whenever on or after the Issuance
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
or sold by the Company in connection with any Excluded Security) for a
consideration per share (the “New Securities
Issuance Price”) less than a price (the “Applicable Price”) equal to the Conversion Price in effect
immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”),

 

12

 

then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount (rounded to the nearest cent) equal to the New
Securities Issuance Price.  For purposes
of determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

 

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

 

(ii)                                  Issuance of
Convertible Securities.  If
the Company in any manner issues or sells any Convertible Securities and the
lowest price per share for which one share of Common Stock is issuable upon
such conversion or exchange or exercise thereof is less than the Applicable
Price, then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the issuance of sale of
such Convertible Securities for such price per share.  For the purposes of this Section 7(a)(ii),
the “price per share for which one share of Common Stock is issuable upon such
conversion or exchange or exercise” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange or exercise of such
Convertible Security.  No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such Common Stock upon conversion or exchange or exercise of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is
made upon exercise of any Options for which adjustment of the Conversion Price
had been or are to be made pursuant to other provisions of this Section 7(a),
no further adjustment of the Conversion Price shall be made by reason of such
issue or sale.  Notwithstanding anything
in this Note to the contrary, in the event that the Company agrees to decrease
the conversion price of any of its 7% Convertible Secured Promissory Notes due August 2007
in connection with an agreement by the holder of any such notes to convert the
same, such decrease in the conversion price will not result in any adjustment
to the Conversion Price

 

13

 

pursuant
to this Section 7(a) of this Note.

 

(iii)                               Change in
Option Price or Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion,  exchange or exercise of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable or exercisable for Common Stock changes at any
time, the Conversion Price in effect at the time of such change shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.

 

(iv)                              Calculation of
Consideration Received.  In
case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of
$.01.  If any Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the net amount
received by the Company therefor.  If any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt.  If
any Common Stock, Options or Convertible Securities are issued to the owners of
the non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor will be deemed to be
the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. 
The fair value of any consideration other than cash or securities will
be determined jointly by the Company and the holders of Notes representing at
least a majority of the principal amounts of the Notes then outstanding.  If such parties are unable to reach agreement
within ten days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five Business Days after the tenth day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the holders of Notes representing at least a
majority of the principal amounts of the Notes then outstanding.  The determination of such appraiser shall be
deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne equally by the Company, on the hand, and the
holders of the Notes, on the other hand.

 

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

 

14

 

Common
Stock, Options or Convertible Securities, then such record date will be deemed
to be the date of the issue or sale of the shares of Common Stock deemed to
have been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of subscription
or purchase, as the case may be.

 

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

 

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

 

(9)                                  COMPANY’S RIGHT
OF MANDATORY CONVERSION.  (a) Mandatory
Conversion.  If at any time from and
after the Issuance Date, the Weighted Average Price of the Common Stock exceeds
250% of the conversion price of the Original Notes as of the Original Date
(subject to appropriate adjustments for stock splits, stock dividends, stock
combinations and other similar transactions after the Original Date) for each
of any 20 consecutive Trading Days (the “Mandatory
Conversion Measuring Period”) and the Conditions to Mandatory
Conversion (as set forth in Section 9(c)) are satisfied or waived in
writing by the Holder, the Company shall have the right to require the Holder
to convert all or any such portion of the Conversion Amount of this Note
designated in the Mandatory Conversion Notice into fully paid, validly issued
and nonassessable shares of Common Stock in accordance with Section 3(c) hereof
at the Conversion Rate as of the Mandatory Conversion Date (as defined below)
(a “Mandatory Conversion”).  The Company may exercise its right to require
conversion under this Section 9(a) by delivering within not more than
five Trading Days following the end of such Mandatory Conversion Measuring
Period a written notice thereof by facsimile and overnight courier to all, but not
less than all, of the holders of Notes and the Transfer Agent (the “Mandatory Conversion Notice” and the date
all of the holders received such notice is referred to as the “Mandatory Conversion Notice Date”).  The Mandatory Conversion Notice shall be irrevocable.

 

(b)                                 Pro Rata
Conversion Requirement.  If
the Company elects to cause a conversion of all or any portion of the
Conversion Amount of this Note pursuant to Section 9(a),

 

15

 

then
it must simultaneously take the same action with respect to the Other Notes
(except that the Company is not required to take the same action with respect
to the Other Notes to the extent limited by Section 3(d) in this Note
or similar provisions under the Other Notes). 
If the Company elects to cause the conversion of this Note pursuant to Section 9(a) (or
similar provisions under the Other Notes) with respect to less than all of the
Conversion Amounts of the Notes then outstanding, then the Company shall
require conversion of a Conversion Amount from each of the holders of the Notes
equal to the product of (I) the aggregate Conversion Amount of Notes which
the Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Original Notes purchased by such holder
pursuant to the Securities Purchase Agreement and the denominator of which is
the sum of the aggregate principal amount of the Original Notes purchased by
all holders pursuant to the Securities Purchase Agreement (except to the extent
limited by Section 3(d) in this Note or similar provisions under the
Other Notes) (such fraction with respect to each holder is referred to as its “Allocation Percentage,” and such amount
with respect to each holder is referred to as its “Pro Rata Conversion Amount”). 
In the event that the initial holder of any Notes shall sell or
otherwise transfer any of such holder’s Notes, the transferee shall be
allocated a pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section 9(a),
which Trading Day shall be at least 10 Business Days but not more than 60 Business
Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the
aggregate Conversion Amount of the Notes which the Company has elected to be
subject to mandatory conversion from all of the holders of the Notes pursuant
to this Section 9 (and analogous provisions under the Other Notes), (iii) each
holder’s Pro Rata Conversion Amount of the Conversion Amount of the Notes the
Company has elected to cause to be converted pursuant to this Section 9
(and analogous provisions under the Other Notes) and (iv) the number of
shares of Common Stock to be issued to such Holder as of the Mandatory
Conversion Date.  All Conversion Amounts
converted by the Holder after the Mandatory Conversion Notice Date shall reduce
the Conversion Amount of this Note required to be converted on the Mandatory
Conversion Date.  If the Company has
elected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shall
apply, to the extent applicable, as if the Company and the Transfer Agent had
received from the Holder on the Mandatory Conversion Date a Conversion Notice
with respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.

 

(c)                                  Conditions to
Mandatory Conversion.  For
purposes of this Section 9, “Conditions
to Mandatory Conversion” means  the
following conditions: (i) during the period beginning on the date that is
six months prior to the Mandatory Conversion Date and ending on and including
the Mandatory Conversion Date, the Company shall have delivered shares of
Common Stock upon any conversion of Conversion Amounts as set forth in Section 3(c)(i);
(ii) on each day during the period beginning on the first Trading Day of
the Mandatory Conversion Measuring Period and ending on and including the Mandatory
Conversion Date, the Common Stock shall be traded on the Principal Market, the
NASDAQ Global Market or Global Select Market, the NASDAQ Capital Market, the
New York Stock Exchange, or the American Stock Exchange; (iii) on the
Mandatory Conversion Date either (x) the Registration Statement or

 

16

 

Registration
Statements contemplated by the Registration Rights Agreement shall be effective
and available for the sale for all of the Registrable Securities in accordance
with the terms of the Registration Rights Agreement or (y) all shares of
Common Stock issuable upon conversion of the Notes shall be eligible for sale
without restriction and without the need for registration under any applicable
federal or state securities laws; (iv) on the Mandatory Conversion Date,
an Authorized Share Failure shall not be in effect; and (v) any such
payment of the Conversion Amount in Common Stock shall not consist of more than
20% of the total dollar volume traded in the Common Stock for the 20 Trading
Days prior to the Mandatory Conversion Date.

 

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

 

(11)                            RESERVATION OF
AUTHORIZED SHARES.

 

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

 

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

 

17

 

(12)                            HOLDER’S
REDEMPTIONS.

 

(a)                                  Mechanics.  In the event that the Holder has sent an
Event of Default Redemption Notice or a Change of Control Redemption Notice to
the Company pursuant to Section 4(b) or Section 5(c),
respectively (each, a “Redemption Notice”),
the Holder shall promptly submit this Note to the Company.  If the Holder has submitted an Event of
Default Redemption Notice in accordance with Section 4(b), the Company
shall deliver the applicable Event of Default Redemption Price to the Holder within
five Business Days after the Company’s receipt of the Holder’s Event of Default
Redemption Notice.  If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 5(c),
the Company shall deliver the applicable Change of Control Redemption Price to
the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and
within five Business Days after the Company’s receipt of such notice if such
notice is received after the consummation of such Change of Control.  With respect to an Amortization Redemption,
the Company shall deliver the applicable Amortization Redemption Amount to the
Holder within five Business Days after the end of the applicable month for such
Amortization Redemption.  In the event of
a redemption of less than all of the Conversion Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder, at the
Holder’s request, a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed.  In the event that the Company does not pay
the Event of Default Redemption Price, the Change of Control Redemption Price,
or the Amortization Redemption Amount (each, the “Redemption Price”), as applicable, to the Holder (or deliver
any Common Stock to be issued pursuant to a Redemption Notice) within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price (and issues any Common Stock required pursuant to a Redemption
Notice) in full, the Holder shall have the option, in lieu of redemption, to
require the Company to promptly return to the Holder all or any portion of this
Note representing the Conversion Amount that was submitted for redemption and
for which the applicable Redemption Price (or any Common Stock required to be
issued pursuant to a Redemption Notice) has not been paid.  Upon the Company’s receipt of such notice, (x) the
Redemption Notice shall be null and void with respect to such Conversion
Amount, (y) the Company shall immediately return this Note, or issue a new
Note (in accordance with Section 19(d)) to the Holder representing such
Conversion Amount and (z) the Conversion Price of this Note or such new Notes
shall be adjusted to the lesser of (A) the Conversion Price as in effect
on the date on which the Redemption Notice is voided and (B) the Closing
Bid Price on the date on which the Redemption Notice is voided.

 

(b)                                 Redemption by
Other Holders.  Upon the
Company’s receipt of notice from any of the holders of the Other Notes for
redemption or repayment as a result of an event or occurrence substantially
similar to the events or occurrences described in Section 4(b) or Section 5(c) (each,
an “Other Redemption Notice”), the
Company shall immediately forward to the Holder by facsimile a copy of such
notice.  If the Company receives a
Redemption Notice and one or more Other Redemption Notices during the seven
Business Day period beginning on and including the date which is three Business
Days prior to the Company’s receipt of the

 

18

 

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

 

(13)                            SUBORDINATION
TO SENIOR INDEBTEDNESS.

 

(a)                                  General.  The Company and the Holder covenant and agree
that this Note shall be subject to the provisions of this Section 13 and
to the extent and in the manner set forth in this Section 13, the
indebtedness represented by this Note and the payment of Principal, Interest,
the Redemption Price, and any redemption amount, liquidated damages, fees,
expenses, or any other amounts in respect of this Note are hereby expressly
made subordinate and junior and subject in right of payment to the prior
payment in full in cash of all Senior Indebtedness of the Company now
outstanding or hereinafter incurred.

 

(b)                                 No Payment if
Default Under Senior Indebtedness.

 

(i)                                     [Intentionally
left blank]

 

(ii)                                  No cash payment
on account of Principal or Redemption Price of, or Interest on, this Note or
any other payment payable with respect to this Note shall be made, and no
portion of this Note shall be redeemed or purchased directly or indirectly by
the Company, if at the time of such payment or purchase or immediately after
giving effect thereto, (A) a default in the payment of principal, premium,
if any, interest or other obligations in respect of any Senior Indebtedness
having either an outstanding principal balance or a commitment to lend greater
than $500,000 (“Designated Senior Debt”) occurs
and is continuing (or, in the case of Senior Indebtedness for which there is a
period of grace, in the event of such a default that continues beyond the
period of grace, if any, specified in the instrument evidencing such Senior
Indebtedness) (a “Payment Default”),
unless and until such Payment Default shall have been cured or waived or shall
have ceased to exist or (B) the Company shall have received notice (a “Payment Blockage Notice”) from the holder or holders of
Designated Senior Debt that there exists under such Designated Senior Debt a
default, which shall not have been cured or waived, permitting the holder or
holders thereof to declare such Designated Senior Debt due and payable, but
only for the period (the “Payment Blockage Period”)
commencing on the date of receipt of the Payment Blockage Notice and ending on
the earlier of (a) the date such default shall have been cured or waived,
or (b) the 180th day immediately following the Company’s receipt of such
Payment Blockage Notice.  The Company
shall resume payments on and distributions in respect of this Note, including
any past scheduled payments of the principal of (and premium, if any) and
interest on this Note to which the

 

19

 

Holder would have been
entitled but for the provisions of this Section 13(b)(ii) in the case
of a Payment Default, within five (5) Business Days of the date upon which
such Payment Default is cured or waived or ceases to exist (and if payment is
made within such time period, any Event of Default with respect to such
nonpayment shall be cured).  In addition,
notwithstanding clauses (A) and (B) of this subsection (ii), unless
the holders of Designated Senior Debt shall have accelerated the maturity of
such Designated Senior Debt or there is a Payment Default, the Company shall
resume payments on this Note within (5) Business Days after the end of
each Payment Blockage Period.  In any
consecutive 365-day period, there shall be (i) no more than three Payment
Blockage Notices given in the aggregate on this Note and the Other Notes,
irrespective of the number of defaults with respect to Designated Senior Debt
during such period, and (ii) at least 90 days during which no Payment
Blockage Period shall be in effect.

 

(c)                                  Payment upon
Dissolution, Etc.  In the event
of any bankruptcy, insolvency, reorganization, receivership, composition,
assignment for benefit of creditors or other similar proceeding initiated by or
against the Company or any dissolution or winding up or total or partial
liquidation or reorganization of the Company (being hereinafter referred to as
a “Proceeding”), the Holder agrees
that such Holder shall, upon request of a holder of Senior Indebtedness, and at
such holder of Senior Indebtedness’ own expense, take all reasonable actions
(including but not limited to the execution and filing of documents and the
giving of testimony in any Proceeding, whether or not such testimony could have
been compelled by process) necessary to prove the full amount of all its claims
in any Proceeding, and the Holder shall not waive any claim in any Proceeding
without the written consent of such holder. 
If the Holder does not file a proper proof of claim or proof of debt in
the form required in any Proceeding at least thirty (30) days before the
expiration of the time to file such claim, the holders of any Senior
Indebtedness are hereby authorized to file an appropriate claim for and on
behalf of the Holder.

 

The Holder shall retain the right to vote and
otherwise act with respect to the claims under this Note (including, without
limitation, the right to vote to accept or reject any plan of partial or
complete liquidation, reorganization, arrangement, composition or extension); provided that the Holder shall not vote with
respect to any such plan or take any other action in any way so as to (i) contest
the validity of any Senior Indebtedness or any collateral therefor or
guaranties thereof, (ii) contest the relative rights and duties of any of
the lenders under the Senior Indebtedness established in any instruments or
agreement creating or evidencing the Senior Indebtedness with respect to any of
such collateral or guaranties, or (iii) contest the Holders’ obligations
and agreements set forth in this Section 13.

 

Upon payment or distribution to creditors in
a Proceeding of assets of the Company of any kind or character, whether in
cash, property or securities, all principal and interest due upon any Senior
Indebtedness shall first be paid in full before the Holder shall be entitled to
receive or, if received, to retain any payment or distribution on account of
this Note, and upon any such Proceeding, any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities, to which the Holder would be entitled except for the

 

20

 

provisions of this Section 13 shall 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 who shall have received such payment or distribution, directly to the
holders of the Senior Indebtedness (pro rata to each such holder on the basis
of the respective amounts of such Senior Indebtedness held by such holder) or
their representatives to the extent necessary to pay all such Senior
Indebtedness in full after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness, before any
payment or distribution is made to the Holder or any holders of the Notes.

 

(d)                                 Payments on
Notes.  Subject to Sections 13(b) and
13(c), the Company may make regularly scheduled payments of the Principal of,
or Interest on, this Note or any other payment payable with respect to this
Note, if at the time of payment, and immediately after giving effect thereto,
there exists no Payment Default or a Payment Blockage Period.

 

(e)                                  Certain Rights.  Nothing contained in this Section 13 or
elsewhere in this Note is intended to or shall impair, as among the Company,
its creditors including the holders of Senior Indebtedness and the Holder, the
right, which is absolute and unconditional, of the Holder to convert this Note
in accordance herewith.

 

(f)                                    Subrogation.  Subject to payment in full in cash of all
Senior Indebtedness, the rights of the Holder shall be subrogated to the rights
of the holders of Senior Indebtedness to receive payments or distributions of
the assets of the Company made on such Senior Indebtedness until all principal
and interest on this Note shall be paid in full in cash; and for purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which the Holder would be
entitled except for the subordination provisions of this Section 13 shall,
as between the Holder and the Company and/or its creditors other than the
holders of the Senior Indebtedness, be deemed to be a payment on account of the
Senior Indebtedness.

 

(g)                                 Rights of
Holders Unimpaired.  The
provisions of this Section 13 are and are intended solely for the purposes
of defining the relative rights of the Holder and the holders of Senior
Indebtedness and nothing in this Section 13 shall impair, as between the
Company and the Holder, the obligation of the Company, which is unconditional
and absolute, to pay to the Holder the principal thereof (and premium, if any)
and interest thereon, in accordance with the terms of this Note.

 

(h)                                 Holders of Senior
Indebtedness.  These
provisions regarding subordination will constitute a continuing offer to all
Persons who, in reliance upon such provisions, become holders of, or continue
to hold, Senior Indebtedness; such provisions are made for the benefit of the
holders of Senior Indebtedness, and such holders are hereby made obligees under
such provisions to the same extent as if they were named therein, and they or
any of them may proceed to enforce such subordination and no amendment or
modification of the provisions contained herein shall diminish the rights of
such holders unless such holders have

 

21

 

agreed in writing thereto.  The holders of Senior Indebtedness may, at
any time and from time to time, without the consent of or notice to the Holder,
without incurring responsibility to the Holder and without impairing or
releasing the subordination provisions of this Section 13, (i) subject
to the limitations set forth herein, increase the amount of, change the manner,
terms or place of payment of, or renew or alter, any Senior Indebtedness, or
otherwise amend, modify, restate or supplement the same (provided that any such
modified indebtedness continues to be constitute Senior Indebedness within the
meaning of this Agreement), (ii) sell, exchange or release any collateral
mortgaged, pledged or otherwise securing the Senior Indebtedness, (iii) release
any Person liable in any manner for the Senior Indebtedness and (iv) exercise
or refrain from exercising any rights against the Company or any other Person.

 

(i)                                     Proceeds Held
in Trust.  In the
event that notwithstanding the foregoing, any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities (including, without limitation, by way of setoff or otherwise)
prohibited by the provisions hereof shall be received by the Holder before all
Senior Indebtedness if paid in full in cash, such payment or distribution shall
be held in trust for the benefit of and shall be paid over or delivered to the
holders of Senior Indebtedness, as their respective interests may appear, as
calculated by the Company, for application to, or to be held as collateral for,
the payment of any Senior Indebtedness remaining unpaid to the extent necessary
to pay all Senior Indebtedness in full in cash after giving effect to any
concurrent payment or distribution to or for the holders of such Senior
Indebtedness.

 

(j)                                     Blockage of
Remedies.  During any
Payment Default or any Payment Blockage Period, if an Event of Default has
occurred and is continuing under this Note, the Holder will not commence or
join with any creditor of the Company in asserting or commencing any
proceedings to collect or enforce its rights hereunder or take any action to
foreclose or realize upon the indebtedness hereunder for a period beginning on
the date of such Event of Default and ending on the first to occur of (i) the
date that is 180 days following the date that the holders of the Senior
Indebtedness are notified of such Event of Default or (ii) the date such
Payment Default is cured, waived or ceases to exist or the date such Payment
Blockage Period ends, as the case may be; provided, however, that
until all of the Senior Indebtedness shall have been paid in full in cash, any
payments, distributions or proceeds received by the Holder resulting from the
exercise of any action to collect or enforce any right or remedy available to
the Holder shall be subject to the terms of this Note.

 

(k)                                  Subsequent
Senior Indebtedness Requested Modifications.  In connection with the incurrence of any
future Senior Indebtedness, the Holder agrees that it shall act reasonably and
negotiate in good faith any modifications to the provisions of this Section 13
reasonably requested by the holder of such Senior Indebtedness; provided that
nothing in this section shall restrict the holders of Notes representing at
least a majority of the aggregate principal amount of the Notes then
outstanding from changing or amending this Section 13 pursuant to Section 17
hereof.

 

(l)                                     Failure to Make
Payment.  In the event that the Company
is

 

22

 

prohibited or restricted from making any
payment required under under this Note by reason of the provisions of this Section 13,
such prohibition or restriction shall not preclude the failure to make such
payment from being an Event of Default under Section 4(a) of this
Note.

 

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

 

(15)                            RANK;
ADDITIONAL INDEBTEDNESS; LIENS.

 

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

 

(b)                                 Incurrence of Senior
Indebtedness.  So long as
this Note is outstanding, the Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, incur or guarantee,
assume or suffer to exist any Indebtedness which shall rank senior to the Notes
other than Senior Indebtedness.

 

(c)                                  Existence of Liens.  So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, allow or suffer to exist any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or
assets (including accounts and contract rights) owned by the Company or any of
its Subsidiaries (collectively, “Liens”)
other than Permitted Liens.  As used
herein, “Permitted Liens” means (i) Liens
incurred to secure Senior Indebtedness, (ii) Liens on fixed or capital
assets acquired, constructed or improved by the Company or any Subsidiary, to
the extent of Indebtedness incurred within thirty days for such acquisition,
construction or improvement and incurred within thirty days of such
acquisition, construction or improvement, (iii) purchase money Liens, or (iv) carriers’,
warehousemen’s, mechanics’, materialmen’s, repairmen’s and other similar Liens
imposed by law.

 

(d)                                 Restricted Payments.  The Company shall not, and the Company shall
not permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness, other than Senior Indebtedness or Pari Passu Indebtedness, whether
by way of payment in respect of principal of (or premium, if any) or interest
on, such Indebtedness if at the time such payment is due or is otherwise made
or, after giving effect to such payment, an event constituting an Event of
Default has occurred and is continuing.

 

(16)                            PARTICIPATION.  The Holder, as the holder of this Note, shall
be

 

23

 

entitled to such dividends paid and
distributions made to the holders of Common Stock (each, a “Distribution”), in each such case to the
extent of the Distribution as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions.  Payments (if any) under
the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.

 

(17)                            VOTE TO ISSUE,
OR CHANGE THE TERMS OF, NOTES.  The affirmative vote at a meeting duly called
for such purpose or the written consent without a meeting, of the holders of
Notes representing not less than a majority of the aggregate principal amount
of the then outstanding Notes, shall be required for any change or amendment to
this Note or the Other Notes provided such change or amendment is consented to
by the Company, which such consent may be granted or withheld in the sole
discretion of the Company.

 

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

 

(19)                            REISSUANCE OF
THIS NOTE.

 

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

 

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

 

(c)                                  Note
Exchangeable for Different Denominations.  This Note is exchangeable, upon the surrender
hereof by the Holder at the principal office of the Company, for a new Note or
Notes (in accordance with Section 19(d) and in principal amounts of
at least $100,000) representing in the aggregate the outstanding Principal of
this Note, and each such new Note will represent such portion of such
outstanding Principal as is designated by the Holder at the time of such
surrender.

 

24

 

(d)                                 Issuance of New
Notes.  Whenever the Company is
required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall
be of like tenor with this Note, (ii) shall represent, as indicated on the
face of such new Note, the Principal remaining outstanding (or in the case of a
new Note being issued pursuant to Section 19(a) or Section 19(c),
the Principal designated by the Holder which, when added to the principal
represented by the other new Notes issued in connection with such issuance,
does not exceed the Principal remaining outstanding under this Note immediately
prior to such issuance of new Notes), (iii) shall have an issuance date,
as indicated on the face of such new Note, which is the same as the Issuance
Date of this Note, (iv) shall have the same rights and conditions as this
Note, and (v) shall represent accrued Interest on the Principal and
Interest of this Note, from the Issuance Date.

 

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

 

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

 

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

 

(23)                            FAILURE OR
INDULGENCE NOT WAIVER.  No
failure or delay on

 

25

 

the part of the Holder in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.

 

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

 

(25)                            NOTICES;
PAYMENTS.

 

(a)                                  Notices.  Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase
Agreement.  The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore.  Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) immediately upon any adjustment of the Conversion Price, setting forth
in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty  days prior to the date on
which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to
any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Change of Control, dissolution
or liquidation, provided in each case that such information shall be made known
to the public prior to or in conjunction with such notice being provided to the
Holder.  Notwithstanding the foregoing, Section 4(i) of
the Securities Purchase Agreement shall apply to all notices given pursuant to
this Note.

 

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

 

26

 

in writing (which address, in the case of
each of the Purchasers, shall initially be as set forth on the Schedule of
Buyers attached to the Securities Purchase Agreement); provided that the Holder
may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date.

 

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

 

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

 

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

 

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

 

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

 

(b)                                 “Bloomberg” means Bloomberg Financial
Markets.

 

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

 

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

 

27

 

October 1 and ending on and including December 31.

 

(e)                                  “Closing Bid Price” and “Closing
Sale Price” means, for any security as of any date, the last closing
bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins
to operate on an extended hours basis and does not designate the closing bid
price or the closing trade price, as the case may be, then the last bid price
or last trade price, respectively, of such security prior to 4:00 p.m.,
New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing bid price or last trade price, respectively, of such security on the
principal securities exchange or trading market where such security is listed
or traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). 
If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on
such date shall be the fair market value as mutually determined by the Company
and the Holder.  If the Company and the
Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

 

(f)                                    [Intentionally
left blank]

 

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

 

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

 

(i)                                     “Excluded Securities” means any shares of Common
Stock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon
conversion of the Notes and the Other Notes; (iii) upon conversion of any
Options or Convertible Securities which are outstanding on the Issuance Date, (iv) pursuant
to or in connection with commercial credit arrangements, equipment lease
financings, acquisitions of other assets or businesses, strategic

 

28

 

transactions not primarily for financing
purposes, or similar transactions into which the Company may enter with a
non-affiliate.

 

(j)                                     “Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
trade payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either
case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) off-balance sheet liabilities retained in connection
with asset securitization programs, synthetic leases, sale and leaseback
transactions or other similar obligations arising with respect to any other
transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheet of such Person and its subsidiaries, and (H) all indebtedness
referred to in clauses (A) through (G) above secured by (or for which
the holder of such Indebtedness has an existing right, contingent or otherwise,
to be secured by) any mortgage, lien, pledge, charge, security interest or
other encumbrance upon or in any property or assets (including accounts and
contract rights) owned by any Person, even though the Person which owns such
assets or property has not assumed or become liable for the payment of such
indebtedness, and (I) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (A) through
(H) above.

 

(k)                                  “Issuance Date” means October 1, 2007.

 

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

 

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

 

(n)                                 “Principal Market” means the OTC Bulletin
Board.

 

(o)                                 “Registration Rights Agreement” means that
certain Registration Rights Agreement, dated January 3, 2007, between the
Company and the initial holders of the Interest Notes.

 

(p)                                 “SEC” means the United States Securities and Exchange

 

29

 

Commission.

 

(q)                                 “Securities Purchase Agreement” means that certain
Securities Purchase Agreement, dated January 3, 2007, between the Company
and the initial holders of the Original Notes pursuant to which the Company
issued the Original Notes.

 

(r)                                    “Senior Indebtedness” means the principal of (and
premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable costs, enforcement expenses (including
reasonable legal fees and disbursements, collateral protection expenses and
other reimbursement or indemnity obligations relating thereto)), and all other
obligations of the Company under (i) any of the agreements or instruments
evidencing any Indebtedness of the Company and its Subsidiaries arising after
the Original Date to an unaffiliated, third-party commercial lender (together
with any renewals, refundings, refinancings or other extensions thereof) for
purposes of purchasing equipment (which debt shall be secured only by the
assets purchased with such financing), and (ii) Indebtedness secured by up
to a maximum of eighty five percent (85%) of the Company’s accounts receivable
and/or up to sixty percent (60%) of the value of the Company’s inventory.  For the avoidance of doubt, Senior
Indebtedness shall not include the debt which is required to be paid by the
Company pursuant to Section 4(i) of the Securities Purchase
Agreement.

 

(s)                                  [Intentionally
left blank]

 

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

 

(u)                                 [intentionally
left blank]

 

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

 

30

 

announces is the official close of trading)
as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 24. 
All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.

 

[Signature Page Follows]

 

31

 

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

 

	
   

  	
  LIQUIDMETAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Gerald E. Morrow

  
	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  

 

 

EXHIBIT I

 

LIQUIDMETAL TECHNOLOGIES, INC.

CONVERSION NOTICE

 

Reference is made to the Convertible
Subordinated Note (the “Note”)
issued to the undersigned by Liquidmetal Technologies, Inc. (the “Company”). 
In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into shares of Common Stock, par value $0.001 per share (the “Common Stock”), of the Company as of the
date specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount to be converted:

 

The undersigned  hereby certifies to the Company that the
undersigned’s conversion of the amount set forth above in accordance with Section 3(a) of
the Note will not directly result in the undersigned (together with the
undersigned’s affiliates) beneficially owning in excess of 4.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion, calculated in accordance with Section 3(d)(i) of the
Note; provided that if the undersigned has previously waived the 4.99%
beneficial ownership limitation upon no less than sixty one (61) days prior
written notice, the undersigned certifies to the Company that the undersigned’s
conversion of the amount set forth above will not directly result in the
undersigned (together with the undersigned’s affiliates) beneficially owning in
excess of 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to such conversion, calculated in accordance with Section 3(d)(i) of
the Note.

 

Please confirm the following information:

 

Conversion Price:

 

Number of shares of Common Stock to be issued:

 

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

 

Issue to:

 

 

 

Facsimile Number:

 

Authorization:

 

	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  
	
  Dated:

  	
   

  
					

 

 

Account Number:

 (if electronic book
entry transfer)

 

Transaction Code Number:

 (if electronic book
entry transfer)

 

 

ACKNOWLEDGMENT

 

The Company hereby
acknowledges this Conversion Notice and hereby directs American Stock Transfer &
Trust Co. to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated January 3, 2007 from
the Company.

 

	
   

  	
  LIQUIDMETAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00157-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00157-of-00352.parquet"}]]