Document:

Exhibit 4.2

 

Execution Version

 

GUARANTOR SECURITY AGREEMENT

 

GUARANTOR
SECURITY AGREEMENT, dated as of October 5, 2010 (as amended, supplemented
or otherwise modified from time to time, this “Security Agreement”),
made by (i) STEINWAY MUSICAL INSTRUMENTS, INC., a Delaware
corporation (“SMI”), (ii) THE O.S. KELLY COMPANY, an Ohio
corporation (“O.S. Kelly”), (iii) MUSIC MATTERS AFTER SCHOOL, INC.,
a Delaware corporation (“MMAS”), and (iv) ARKIVMUSIC, LLC, a New
York limited liability company (“ArkivMusic” and, together with SMI,
O.S. Kelly and MMAS, the “Grantors” and each a “Grantor”), in
favor of BANK OF AMERICA, N.A., a national banking association, as
administrative agent (in such capacity, the “Administrative Agent”) for
the lenders (the “Lenders”) party to the Loan Agreement referred to
below.

 

BACKGROUND

 

(A)          Simultaneous with the execution of this Security Agreement,
Conn-Selmer, Inc., a Delaware corporation (“Conn-Selmer”), and
Steinway, Inc., a Delaware corporation (“Steinway” and, together
with Conn-Selmer, the “Borrowers”), the Administrative Agent and the
Lenders party thereto are entering into a Loan and Security Agreement (the “Loan
Agreement”), pursuant to which the Lenders will make Loans and other
financial accommodations to the Borrowers on the terms set forth therein.

 

(B)           SMI owns, directly, all of the equity of Conn-Selmer, and
Conn-Selmer, either directly or indirectly, as applicable, owns all of the
equity of Steinway and the Grantors (other than SMI).

 

(C)           Pursuant to a Guarantee dated as of the date hereof, each
Grantor, among other things, will jointly and severally, unconditionally and
irrevocably, guarantee to the Administrative Agent, for the ratable benefit of
the Lenders and the other Secured Parties and their respective successors,
indorsees, transferees and assigns, the prompt and complete payment and
performance by the Borrowers when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations under the Loan Agreement and the
other Loan Documents.

 

(D)          The Borrowers and the Grantors, though separate legal
entities, comprise an integrated financial enterprise, and the extension of
credit to the Borrowers under the Loan Agreement will inure, directly or
indirectly, to the benefit of the Grantors as the successful operation of
Grantors is dependent on the continued successful performance of the Borrowers.

 

(E)           It is a condition precedent to the effectiveness of the
Loan Agreement that the Grantors execute and deliver this Security Agreement to
the Administrative Agent.

 

FOR
VALUE RECEIVED and in consideration of the promises and to induce the Lenders
and the Administrative Agent to enter into the Loan Agreement and to induce the
Lenders to make their respective loans to the Borrowers under the Loan
Agreement, each Grantor hereby agrees with the Administrative Agent, for the
ratable benefit of the Lenders and the other Secured Parties, as follows:

 

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1.             Defined Terms. 
(a) Unless otherwise defined herein, capitalized terms which are
defined in the Loan Agreement and used herein shall have the meanings given to
them in the Loan Agreement; the following terms which are defined in the
Uniform Commercial Code in effect in The Commonwealth of Massachusetts on the
date hereof are used herein as so defined: Chattel Paper, Commercial Tort
Claims, Documents, Equipment, Farm Products, General Intangibles, Goods, Instruments, Investment
Property, Proceeds, and Supporting Obligations; and the following terms shall
have the following meanings:

 

“Bank
Account”: (i) a deposit, custody or other account (whether, in any
case, time or demand or interest or non-interest bearing) maintained by any
Grantor with any Lender or other institution acceptable to the Administrative
Agent, (ii) all cash and securities from time to time standing to the
credit of such account, and (iii) all interest, principal and other
distributions payable on or with respect to, such account or such cash or
securities.  Within 180 days of the
Closing Date, each such account (other than (a) any Excluded Account and (b) any
individual account exclusively used for payroll, payroll taxes or employee
benefits, or an account containing not more than $100,000 at any time; provided
that at no time shall the Obligors maintain accounts containing in excess of
$2,500,000 in the aggregate at any time that are not subject to the control of
the Administrative Agent) shall be subject to a Deposit Account Control
Agreement, in form and substance satisfactory, which shall provide that such
account shall be subject to the control of the Administrative Agent and that
the bank or other institution with which such account is maintained shall
comply with the instructions of the Administrative Agent upon the occurrence
and during the continuation of an Event of Default regarding such cash,
securities, interest, principal and distributions held in such account without
further consent by any Grantor.

 

“Collateral”:
as defined in Section 2 of this Security Agreement.

 

“Contracts”:
all contracts and agreements, including the material contracts and agreements
listed on Schedule V hereto, as the same may from time to time be
amended, supplemented or otherwise modified, including, without limitation, (a) all
rights of any Grantor to receive moneys due and to become due to it thereunder
or in connection therewith, (b) all rights of any Grantor to damages
arising out of, or for, breach or default in respect thereof and (c) all
rights of any Grantor to perform and to exercise all remedies thereunder.

 

“Copyright”:
(a) any copyright in any original work of authorship fixed in any tangible
medium of expression (including, without limitation, any thereof referred to on
Schedule I hereto), including, without limitation, all databases, source
codes, object codes and manuals, whether published or unpublished, whether now
or hereafter existing, and whether in the United States or any other country,
and all applications, registrations, renewals, extensions and recordings
relating thereto filed in the United States Copyright Office or in any other
governmental office or agency in the United States or any other country or
political subdivision thereof, in each case in which any Grantor has any right,
title or interest, whether as author, assignee, transferee or otherwise, and
all other rights which any Grantor presently has or hereafter acquires pursuant
to any Copyright License relating to any such copyright, including, without
limitation, copyright assignments, and exclusive and nonexclusive licenses, and
(b) all right, title and interest of any Grantor in all physical materials
embodying any work with respect to which any Grantor owns or holds rights in
any Copyright or Copyright License.

 

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“Copyright
License”: (a) any agreement, written or oral, naming any Grantor as
licensor or licensee, granting any right in or to any Copyright or copyright
registration in the United States or any foreign country (including, without
limitation, any thereof referred to on Schedule I hereto) or (b) any
and all present and future agreements, including, without limitation,
assignments and consents, as any such agreements may from time to time be
amended or supplemented, pursuant to which any Grantor now has or hereafter
acquires any direct or beneficial interest in any Copyright, or is a grantor of
rights to any third party with respect to any copyright, whether as a party to
any such agreement or as an assignee of any rights under any such agreement
(including, without limitation, any thereof referred to on Schedule I
hereto) excluding, however, non-exclusive computer software licenses.

 

“Patents”:
(a) all letters patent of the United States or any other country,
including patents, design patents and utility models, and all registrations and
recordings thereof, including, without limitation, any thereof referred to in Schedule
I hereto, (b) all applications for letters patent of the United States
or any other country and (c) all reissues, extensions, divisions,
continuations and continuations-in-part thereof, and the inventions disclosed
or claimed therein, including the right to make, sell and/or use the inventions
disclosed or claimed therein; including, without limitation, any thereof
referred to in Schedule I hereto.

 

“Patent
License”: any agreement, whether written or oral, providing for the grant
by or to any Grantor of any right to manufacture, use or sell any invention
covered by a Patent, and all rights of any Grantor under such agreement;
including, without limitation, any thereof referred to in Schedule I
hereto.

 

“Security
Agreement”: as defined in the preamble hereto.

 

“Trademarks”:
(a) all trademarks, trade names, corporate names, company names, business
names, fictitious business names, trade styles, service marks, logos and other
source or business identifiers, all prints or labels on which any of the
foregoing appear, and all designs and general intangibles of a like nature, and
the goodwill associated therewith or symbolized thereby, and all other assets,
rights and interests that uniquely embody such goodwill, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and
all applications in connection therewith, whether in the United States Patent
and Trademark Office or in any similar office or agency of the United States,
any state thereof or any other country or any political subdivision thereof, or
otherwise, including, without limitation, any thereof referred to in Schedule
I hereto, and (b) all extensions or renewals thereof.

 

“Trademark
License”: any agreement, written or oral, providing for the grant by or to
any Grantor of any right to use any Trademark, including, without limitation,
any thereof referred to in Schedule I hereto.

 

(b)           The words “hereof”, “herein” and “hereunder” and words of
similar import when used in this Security Agreement shall refer to this
Security Agreement as a whole and not to any particular provision of this
Security Agreement, and Section, Schedule. 
Annex, and Exhibit references are to this Security Agreement unless
otherwise specified.  The meanings given
to terms defined herein shall be equally applicable to both the singular and
plural forms of such terms.

 

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2.             Grant of Security Interest.  As collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations, each Grantor hereby grants to
the Administrative Agent for the ratable benefit of the Lenders and the other
Secured Parties a security interest in all of its personal property, including
without limitation, the following property now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Collateral”):

 

a.                                       all Accounts;

 

b.                                      all Bank
Accounts;

 

c.                                       all Chattel
Paper, including electronic chattel paper;

 

d.                                      all Commercial
Tort Claims;

 

e.                                       all Contracts;

 

f.                                         all Documents;

 

g.                                      all General Intangibles,
including all Copyrights, Copyright Licenses, Patents, Patent Licenses,
Trademarks, and Trademark Licensese;

 

h.                                      all Goods,
including Equipment, Inventory and fixtures;

 

i.                                          all
Instruments;

 

j.                                          all Investment
Property;

 

k.                                       all letters of
credit rights and other supporting obligations;

 

l.                                          all monies,
whether or not in the possession or under the control of the Administrative
Agent, a Lender, or a bailee or Affiliate of the Administrative Agent or a
Lender,
including any Cash Collateral;

 

m.                                    all accessions
to, substitutions for, and all replacements, products, and cash and non-cash
proceeds of the foregoing, including proceeds of and unearned premiums with
respect to insurance policies, and claims against any Person for loss, damage
or destruction of any Collateral; and

 

n.                                      all books and
records (including customer lists, files, correspondence, tapes, computer
programs, print-outs and computer records) pertaining to the foregoing;

 

provided
that the term “Collateral” shall not include: 
(x) any contract, license, agreement, instrument, document, permit
or franchise that validly prohibits, restricts or requires the consent not
obtained of a third party for the creation by such Grantor of a security
interest in such contract, license, agreement, instrument, document, permit or
franchise (or in any rights or property obtained by such Grantor under such
contract, license, agreement, instrument, document, permit or franchise) except
to the extent such prohibition, restriction or consent

 

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requirement
would be rendered ineffective with respect to the creation of the security
interest hereunder pursuant to Sections 9-406, 9-407, 9-408 and 9-409 of the
UCC; provided that, at such time as the condition causing such limitation shall
be remedied, whether by contract, change of law or otherwise, the contract,
license, lease, agreement, instrument, document, permit or franchise shall
immediately be included in the Collateral, and any security interest that would
otherwise be granted herein shall attach immediately to such contract, license,
lease, agreement, instrument, document, permit or franchise, or to the extent
severable, to any portion thereof that does not result in such limitation; (y) any
“intent-to-use” application for registration of a Trademark filed pursuant to Section 1(b)
of the Lanham Act, 15 U.S.C. § 1051, prior to the filing of a “Statement of Use”
pursuant to Section 1(d) of the Lanham Act or of an “Amendment to
Allege Use” pursuant to Section 1(c) of the Lanham Act with respect
thereto, solely to the extent, if any, that and solely during the period, if
any, in which, the grant of a security interest therein would impair the
validity or enforceability of any registration that issues from such intent-to-use
application under applicable federal law; and (z) the Voting Equity
Interests of any Foreign Subsidiary constituting more than 65% of the total
combined voting power of all voting Equity Interests of such Foreign
Subsidiary; provided that, notwithstanding anything to the contrary set forth
herein, the Collateral shall include any proceeds (and the right to receive
proceeds, including from the sale, assignment or transfer of such assets),
substitutions or replacements of any such assets excluded from the Collateral
pursuant to the foregoing clauses (x), (y) and (z) (unless such
proceeds, substitutions or replacements would constitute assets specifically
covered by the foregoing clauses (x), (y) and (z)).

 

3.             Administration of Accounts; Bank Accounts.

 

(a)           Records and Schedules of Accounts.  Each Grantor shall keep accurate and complete
records of its Accounts, including all payments and collections thereon, and
shall submit to the Administrative Agent sales, collection, reconciliation and
other reports in form satisfactory to the Administrative Agent, on such
periodic basis as the Administrative Agent may request.

 

(b)           Account Verification.  Whether or not a Default or Event of Default
exists, the Administrative Agent shall have the right at any time during
regular business hours, in the name of the Administrative Agent, any designee
of the Administrative Agent or any Grantor, to verify the validity, amount or
any other matter relating to any Accounts of Grantors by mail, telephone or
otherwise; provided that so long as no Event of Default has occurred and is
continuing, nor more than one such verification process shall be paid for by
the Grantors during any twelve (12) month period.  Grantors shall cooperate fully with Agent in
an effort to facilitate and promptly conclude any such verification process.

 

(c)           Maintenance of Dominion Account.  Grantors shall maintain Dominion Accounts
pursuant to lockbox or other arrangements acceptable to the Administrative
Agent.  Grantors shall obtain an
agreement (in form and substance satisfactory to the Administrative Agent) from
each lockbox servicer and Dominion Account bank, establishing the
Administrative Agent’s control over and Lien in the lockbox or Dominion
Account, which may be exercised by the Administrative Agent during any Cash
Trigger Period, requiring immediate deposit of all remittances received in the
lockbox to a Dominion Account, and waiving offset rights of such servicer or
bank, except for customary administrative charges.  If a Dominion Account is not maintained with
Bank of America, the Administrative Agent may, during any Cash Trigger Period,
require immediate transfer of all funds in such account to a Dominion Account

 

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maintained with Bank of America.  The Administrative Agent and Lenders assume
no responsibility to Grantors for any lockbox arrangement or Dominion Account,
including any claim of accord and satisfaction or release with respect to any
Payment Items accepted by any bank.

 

(d)           Proceeds of Collateral.  Grantors shall request in writing and
otherwise take all necessary steps to ensure that all payments on Accounts or
otherwise relating to Collateral are made directly to a Dominion Account (or a
lockbox relating to a Dominion Account). 
If any Grantor receives cash or Payment Items with respect to any
Collateral, it shall hold same in trust for the Administrative Agent and
promptly (not later than the next Business Day) deposit same into a Dominion
Account.

 

(e)           Bank Accounts. 
Schedule II sets
forth all Bank Accounts maintained by Grantors, including all Dominion
Accounts.  Within 180 days of the Closing
Date, each Grantor shall take all actions necessary to establish the
Administrative Agent’s control of each such Bank Account (other than (a) any
Excluded Account and (b) any individual account containing not more that
$100,000 at any time; provided that at no time shall the Obligors maintain
accounts containing in excess of $2,500,000 in the aggregate at any time that
are not subject to the control of the Administrative Agent) and, in connection
therewith, shall cause each depository bank for each such Bank Account to
execute a Deposit Account Control Agreement in form and substance satisfactory
to the Administrative Agent.  Each
Grantor shall be the sole account holder of each Bank Account and shall not
allow any other Person (other than the Administrative Agent) to have control
over a Bank Account or any Property deposited therein.  Each Grantor shall promptly notify the
Administrative Agent of any opening or closing of a Bank Account and, with the
consent of the Administrative Agent, will amend Schedule II to reflect
same.

 

(f)            Grantors Remain Liable under Accounts and Contracts.  Notwithstanding anything to the contrary
herein, each Grantor shall remain liable under each of the Accounts and
Contracts to observe and perform all the conditions and obligations to be
observed and performed by it thereunder, all in accordance with the terms of
any agreement giving rise to each such Account and in accordance with and
pursuant to the terms and provisions of each such Contract.  Neither the Administrative Agent, nor any
Lender shall have any obligation or liability under any Account (or any
agreement giving rise thereto) or under any Contract by reason of or arising
out of this Security Agreement or the receipt by the Administrative Agent or
any such Lender of any payment relating to such Account or Contract pursuant
hereto, nor shall the Administrative Agent, nor any Lender be obligated in any
manner to perform any of the obligations of any Grantor under or pursuant to
any Account (or any agreement giving rise thereto) or under or pursuant to any
Contract, to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any Account (or any agreement giving rise
thereto) or under any Contract, to present or file any claim, to take any
action to enforce any performance or to collect the payment of any amounts
which may have been assigned to it or to which it may be entitled at any time
or times.

 

(g)           Notice to Account Debtors and Contracting Parties.  Upon the request of the Administrative Agent
at any time after the occurrence and during the continuance of an Event of
Default, each Grantor shall notify account debtors on the Accounts and parties
to the Contracts that the Accounts and the Contracts have been assigned to the
Administrative Agent

 

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for the ratable benefit of the Lenders and the other
Secured Parties and that payments in respect thereof shall be made directly to
the Administrative Agent.

 

4.             Representations and Warranties.  Each Grantor hereby represents and warrants
that:

 

(a)           Title; No Other Liens.  Except for the Liens granted to the
Administrative Agent for the ratable benefit of the Lenders and the other
Secured Parties pursuant to this Security Agreement, and the other Liens
permitted to exist on the Collateral pursuant to the Loan Agreement, each
Grantor owns each item of the Collateral free and clear of any and all Liens or
claims of others.  No security agreement,
financing statement or other public notice with respect to all or any part of
the Collateral is on file or of record in any public office, except such as may
have been filed in favor of the Administrative Agent, for the ratable benefit
of the Lenders and the other Secured Parties, pursuant to this Security
Agreement or as may be permitted pursuant to the Loan Agreement.

 

(b)           Perfected First Priority Liens.  When financing statements have been filed in
the offices in the jurisdictions listed in Schedule III hereto, the
Liens granted pursuant to this Security Agreement will constitute perfected
Liens in favor of the Administrative Agent, for the ratable benefit of the
Lenders and the other Secured Parties, in the Collateral as collateral security
for the Obligations to the extent the filing of such financing statements
perfect such Liens, which Liens are prior to all other Liens on the Collateral
created by the Grantors and in existence on the date hereof and which are
enforceable as such against all creditors of and purchasers from any Grantor
and against any owner or purchaser of the real property where any of the
Equipment or Inventory is located and any present or future creditor obtaining
a Lien on such real property (subject to Permitted Encumbrances).

 

(c)           Accounts. 
The amount represented by each Grantor to the Administrative Agent from
time to time as owing by each Account Debtor or by all Account Debtors in
respect of the Accounts will at such time be the correct amount actually owing
by such Account Debtor or Account Debtors thereunder.  Except as permitted by the Loan Agreement, no
amount payable to any Grantor under or in connection with any Account is
evidenced by any Instrument or Chattel Paper which has not been delivered to
the Administrative Agent.

 

(d)           Material Contracts. 
Each Material Contract is in full force and effect and constitutes a
valid and legally enforceable obligation of the parties thereto, except as
enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws affecting the enforcement of
creditor’s rights generally and general equitable principles (whether
considered in a proceeding in equity or at law).  No consent or authorization of, filing with
or other act by or in respect of any Governmental Authority is required in
connection with the execution, delivery, performance, validity or
enforceability of any of the Material Contracts by any party thereto other than
those which have been duly obtained, made or performed, are in full force and
effect and do not subject the scope of any such Material Contract to any
material adverse limitation, either specific or general in nature.  Neither any Grantor nor (to the best of each
Grantor’s knowledge) any other party to any Material Contract is in default or
is likely to become in default in the performance or observance or any of the
terms thereof in any manner that, in the aggregate, could reasonably be
expected to have a Material Adverse Effect. 
Each Grantor has fully performed all its obligations under each Material
Contract.  The right, title and interest
of each Grantor in, to and under each Material

 

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Contract are not subject to any defense, offset,
counterclaim or claim which would materially adversely affect the value of such
Material Contract as Collateral, nor have any of the foregoing been asserted or
alleged against any Grantor as to any Material Contract.  Each Grantor has delivered to the
Administrative Agent a complete and correct copy of each Material Contract,
listed on Schedule V, including all amendments, supplements and other
modifications thereto.  No amount payable
to any Grantor under or in connection with any Material Contract is evidenced
by any Instrument or Chattel Paper which has not been delivered to the
Administrative Agent.

 

(e)           Inventory and Equipment.  The Inventory and the Equipment are kept at
the locations listed on Schedule IV hereto.

 

(f)            Chief Executive Office.  Steinway Musical Instruments, Inc.’s
chief executive office and its principal place of business is located at 800
South Street, Waltham, Massachusetts 02453. 
The O.S. Kelly Company’s chief executive office and its principal place
of business is located at 318 North Street, Springfield, Ohio 45503.  Music Matters After School, Inc.’s chief
executive office and its principal place of business is located at 500 Sun
Valley Drive, Suite D2, Roswell, Georgia 30076.  ArkivMusic, LLC’s chief executive office and
its principal place of business is located at One Steinway Place, Long Island
City, New York 11105.  Until written
notice is given to the Administrative Agent by a Grantor of any other office at
which it keeps its records pertaining to Accounts, all such records shall be
kept at the such Grantor’s above-mentioned principal place of business.

 

(g)           Farm Products. 
None of the Collateral constitutes, or is the Proceeds of, Farm
Products.

 

(h)           Insurance Policies. 
As of the date hereof, none of the Collateral constitutes an interest or
claim in or under any policy of insurance or contract for annuity, except to
the extent the same constitutes Proceeds.

 

(i)            Copyrights, Patents and Trademarks.  Schedule I hereto includes all
Copyrights and Copyright Licenses, all Patents and Patent Licenses and all
Trademarks and Trademark Licenses owned by each Grantor in its own name as of
the date hereof.  To the best of each
Grantor’s knowledge, each material Copyright, Patent and Trademark is valid,
subsisting, unexpired, enforceable and has not been abandoned.  Except as set forth in Schedule I,
none of such Copyrights, Patents and Trademarks is the subject of any licensing
or franchise agreement.  No holding,
decision or judgment has been rendered by any Governmental Authority which
would limit, cancel or question the validity of any material Copyright, Patent
or Trademark.  No action or proceeding is
pending (i) seeking to limit, cancel or question the validity of any
material Copyright, Patent or Trademark, or (ii) which, if adversely
determined, would have a material adverse effect on the value of any material
Copyright, Patent or Trademark.

 

(j)            Reserved.

 

(k)           Governmental Obligors.  None of the obligors on any Accounts, and
none of the parties to any Contracts, is a Governmental Authority.

 

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(l)            Bank Accounts. 
All deposit, custody, money-market or other accounts (whether, in any
case, time or demand or interest or non-interest bearing) maintained by any
Grantor with any bank or any other financial institution are Bank Accounts.

 

(m)          Legal Name; Organization.  Set forth on Schedule VII is the exact
legal name and jurisdiction of organization of each Grantor.

 

5.             Covenants. 
Each Grantor covenants and agrees with the Administrative Agent and the
Lenders that, from and after the date of this Security Agreement until the
Obligations are paid in full and the Commitments have expired or been
terminated:

 

(a)           Maintenance of Perfected Security Interests; Further
Documentation; Pledge of Instruments and Chattel Paper.  Each Grantor shall maintain the security
interest created by this Security Agreement as a perfected security interest
having at least the priority described in Section 4(b) hereof and
shall defend such security interest against the claims and demands of all
Persons whomsoever.  At any time and from
time to time, upon the written request of the Administrative Agent, and at the
sole expense of the Grantors, each Grantor will promptly and duly execute and
deliver such further instruments and documents and take such further action as
the Administrative Agent may reasonably request for the purpose of obtaining or
preserving the full benefits of this Security Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the Liens created hereby.  Each Grantor also hereby authorizes the
Administrative Agent to file any such financing or continuation statement with
respect to the security interests granted hereby.  If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any Instrument or
Chattel Paper, such Instrument or Chattel Paper (other than, as long as no
Default or Event of Default exists, such Collateral with a value of less than
$1,000,000) shall be immediately delivered to the Administrative Agent, duly
endorsed in a manner satisfactory to the Administrative Agent, to be Collateral
pursuant to this Security Agreement.

 

(b)           Maintenance of Records.  Each Grantor will keep and maintain at its
own cost and expense satisfactory and complete records of the Collateral,
including, without limitation, a record of all payments received and all
credits granted with respect to the Accounts. 
Each Grantor will mark its books and records pertaining to the
Collateral to evidence this Security Agreement and the security interests
granted hereby.  Upon the occurrence and
during the continuance of an Event of Default, each Grantor shall turn over any
books and records pertaining to the Collateral to the Administrative Agent or
to its representatives during normal business hours at the request of the
Administrative Agent.

 

(c)           Compliance with Laws, etc.  Each Grantor will comply in all material
respects with all Applicable Laws applicable to the Collateral or any part
thereof or to the operation of such Grantor’s business; provided, however,
that each Grantor may contest any Applicable Law in any reasonable manner which
shall not, in the sole opinion of the Administrative Agent, adversely affect
the Administrative Agent’s, or the Lender’s rights or the priority of its Liens
on the Collateral.

 

(d)           Compliance with Terms of Contracts, etc.  Each Grantor will perform and comply in all
material respects with all its obligations under the Contracts and all its
other contractual obligations relating to the Collateral.

 

9

 

(e)           Limitation on Liens on Collateral.  No Grantor will create, incur or permit to
exist, will defend the Collateral against, and will take such other action as
is necessary to remove, any Lien or claim on or to the Collateral, other than
the liens created hereby and other than as permitted pursuant to the Loan
Agreement, and will defend the right, title and interest of the Administrative
Agent and the Lenders in and to any of the Collateral against the claims and
demands of all Persons whomsoever.

 

(f)            Limitations on Dispositions of Collateral.  No Grantor will sell, transfer, lease or
otherwise dispose of any of the Collateral, or attempt, offer or contract to do
so except for sales of Inventory in the ordinary course of its business or as
otherwise permitted pursuant to Section 10.2.6 of the Loan Agreement.

 

(g)           Limitations on Modifications of Contracts and
Agreements Giving Rise to Accounts; Exercise of Rights; Notices.  No Grantor will (i) amend, modify,
terminate or waive any provision of any Contract or any agreement giving rise
to an Account in any manner which could reasonably be expected to materially
adversely affect the value of such Contract or such Account as Collateral, (ii) other
than in the ordinary course of business consistent with its past practice, fail
to exercise promptly and diligently each and every material right which it may
have under each Contract and each agreement giving rise to an Account (other
than any right of termination) or (iii) fail to deliver to the
Administrative Agent a copy of each material demand, notice or document
received by it relating in any way to any Contract or any agreement giving rise
to an Account that questions the validity or enforceability of such Contract or
Accounts constituting more than 5% of the aggregate amount of the Accounts of
such Grantor.

 

(h)           Limitations on Discounts, Compromises, Extensions of
Accounts.  Other than in the ordinary
course of business consistent with its past practice, no Grantor will (i) grant
any extension of the time of payment of any Account, (ii) compromise, compound
or settle any Account for less than the full amount thereof, (iii) release,
wholly or partially, any Person liable for the payment of any Account, or (iv) allow
any credit or discount whatsoever on any Account.

 

(i)            Maintenance of Equipment.  Each Grantor shall maintain all Equipment in
good operating condition and repair (reasonable wear and tear excepted) and
make all necessary replacements of and repairs thereto so that the value and
operating efficiency of the Equipment shall be maintained and preserved in all
material respects.

 

(j)            Maintenance of Insurance.  The Grantors will bear the full risk of loss
of any nature whatsoever with respect to the Collateral.  At the applicable Grantor’s own cost and
expense, in amounts and with carriers reasonably acceptable to the
Administrative Agent in accordance with the normal standards employed by the
Administrative Agent in this regard, such Grantor shall (i) keep all its
insurable properties and properties in which such Grantor has an interest
insured against the hazards of fire, flood, sprinkler leakage, those hazards
covered by extended coverage insurance and such other hazards, and for such amounts,
as is customary in the case of companies engaged in businesses similar to such
Grantor, including, without limitation, business interruption insurance (and
which presently effective insurance as of the Closing Date is listed on Schedule
VI hereto); (ii) maintain a bond in such amounts as is customary in
the case of companies engaged in business similar to such Grantor insuring
against larceny, embezzlement or other criminal misappropriation of insured’s
officers and employees who may either singly or jointly with others at any time
have access to the assets or funds of such Grantor either directly or through
authority to draw upon such funds or to direct generally

 

10

 

the disposition of such assets; (iii) maintain
public and product liability insurance against claims for personal injury,
death or property damage suffered by others; (iv) maintain all such
workmen’s compensation or similar insurance as may be required under the laws
of any state or jurisdiction in which such Grantor is engaged in business; and (v) furnish
the Administrative Agent with (A) copies of all policies and evidence of
the maintenance of such policies by the renewal thereof thirty (30) days before
any expiration date, and (B) appropriate loss payable endorsements in form and
substance satisfactory to the Administrative Agent, naming the Administrative
Agent for the ratable benefit of the Lenders and the other Secured Parties as
loss payee as its interests may appear with respect to all insurance coverage
referred to in clauses (i) and (ii) above, and providing (1) that
all proceeds thereunder, in the case of all coverages with respect to the
Collateral in which the Administrative Agent has a first priority Lien for the
ratable benefit of the Lenders and the other Secured Parties, shall be payable
directly and only to the Administrative Agent for the ratable benefit of the
Lenders and the other Secured Parties and that, in addition, following an Event
of Default, all proceeds in connection with fixed asset coverages shall be
payable to the Administrative Agent for the ratable benefit of the Lenders and
the other Secured Parties as its interests may appear, (2) that all proceeds,
in the case of business interruption insurance obtained by such Grantor shall
be payable to the Administrative Agent for the ratable benefit of the Lenders
and the other Secured Parties, (3) no such insurance shall be affected by
any act or neglect of the insured or owner of the property described in such
policy, and (4) that such policy and loss payable clauses may not be
canceled, amended or terminated unless at least thirty (30) days prior written
notice is given to the Administrative Agent. 
All such insurance shall be in amounts customary in the Grantors’
industry.  In the event of any loss
thereunder, the carriers named therein are hereby directed by the
Administrative Agent and each Grantor to make payment for such loss to the
Administrative Agent for the ratable benefit of the Lenders and the other
Secured Parties as its interests may appear. 
If any insurance losses are paid by check, draft or other instrument
payable to one or more Grantors and the Administrative Agent jointly, the Administrative
Agent may endorse the Grantors’ names thereon and do such other things as the
Administrative Agent may deem advisable to reduce the same to cash.  Subsequent to the occurrence and continuance
of an Event of Default, the Administrative Agent is hereby authorized to adjust
and compromise claims under insurance coverage(s) referred to above to the
extent that its interests may appear. 
All loss recoveries received by the Administrative Agent upon any such
insurance shall be applied to the Obligations. 
Any surplus shall be paid by the Administrative Agent to the Grantor or
applied as may be otherwise required by law. 
Any deficiency thereon shall be paid by the Grantors to the
Administrative Agent on demand. 
Notwithstanding anything to the contrary herein, the Grantors agree to
utilize any insurance proceeds payable hereunder as a result of casualty to
real estate and/or Equipment to repair, restore and/or replace any such damaged
Equipment and/or real estate, and to the extent the Administrative Agent
receives any of said casualty insurance policy proceeds, the Administrative
Agent shall remit the same to the Grantors for such purposes only.

 

(k)           Further Identification of Collateral.  Each Grantor will furnish to the
Administrative Agent from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Administrative Agent may reasonably request, all in
reasonable detail.

 

(l)            Notices. 
Each Grantor will advise the Administrative Agent and the Lenders
promptly, in reasonable detail, at their respective addresses set forth in the
Loan Agreement, (i) of any Lien (other than Liens created hereby or
permitted under the Loan 

 

11

 

Agreement) on, or claim asserted against, any of the
Collateral and (ii) of the occurrence of any other event which could
reasonably be expected to have a material adverse effect on the aggregate value
of the Collateral or on the Liens created hereunder.

 

(m)          Changes in Locations, Name, etc.  No Grantor will (i) change the location
of its chief executive office/chief place of business from that specified in Section 4(f) or
remove its books and records concerning the Accounts from the location
specified in Section 4(c), (ii) permit any of the Inventory or
Equipment to be kept at a location other than those listed on Schedule IV
hereto or (iii) change its name, identity or structure to such an extent
that any financing statement filed by the Administrative Agent in connection
with this Security Agreement would become seriously misleading, unless it shall
have given the Administrative Agent at least 30 days prior written notice
thereof.

 

(n)           Patents, Trademarks and Copyrights.

 

(i)            Each Grantor (either itself or through licensees) will (i) continue
to use each material Trademark on each and every material trademark class of
goods applicable to its current line as reflected in its current catalogs,
brochures and price lists in order to maintain such Trademark in full force
free from any claim of abandonment for non-use, (ii) maintain as in the
past the quality of products and services offered under such Trademark, (iii) employ
such Trademark with the appropriate notice of registration, (iv) not adopt
or use any mark which is confusingly similar or a colorable imitation of such
Trademark unless the Administrative Agent, for the ratable benefit of the
Lenders and the other Secured Parties, shall obtain a perfected security
interest in such mark pursuant to this Security Agreement, and (v) not
(and not permit any licensee or sublicensee thereof to) do any act or knowingly
omit to do any act whereby any material Trademark may become invalidated.

 

(ii)           No Grantor will do any act, or omit to do any act, whereby
any material Patent may become forfeited, abandoned or dedicated to the public.

 

(iii)          Each Grantor (either itself or through licensees) will, for
each work covered by a material Copyright, continue to publish, reproduce,
display, adopt and distribute the work with appropriate copyright notice as
necessary and sufficient to establish and preserve such Grantor’s material
rights under all applicable copyright laws.

 

(iv)          Each Grantor will notify the Administrative Agent and the
Lenders immediately if it knows, or has reason to know, that any material
Patent, Trademark or Copyright or any application or registration relating to
any thereof may become abandoned, lost or dedicated to the public, or of any
adverse determination or development (including, without limitation, the
institution of, or any such determination or development in, any proceeding in
the United States Patent and Trademark Office, the United States Copyright
Office or any court or tribunal or similar office in any country) regarding
such Grantor’s ownership of, right to use, interest in, or the validity of any
material Patent, Trademark or Copyright or its right to register the same or to
keep and maintain the same.

 

(v)           Whenever any Grantor, either by itself or through any
agent, employee, licensee or designee, shall file an application for the
registration of any Patent or 

 

12

 

Trademark with the United
States Patent and Trademark Office or any similar office or agency in any other
country or any political subdivision thereof, or shall file an application for
registration of any Copyright with the United States Copyright Office or any
similar office or agency in any other country or any political subdivision
thereof, such Grantor shall report such filing to the Administrative Agent
within seven Business Days after such filing occurs.

 

(vi)          Each Grantor shall from time to time execute and deliver
any and all agreements, instruments, documents, and papers as the
Administrative Agent may request (including, without limitation, one or more
Notice of Security Interest in Patents attached hereto as Annex A, one
or more Memorandum of Security Agreement - Trademarks attached hereto as Annex
B and one or more Memorandum of Security Agreement - Copyrights attached
hereto as Annex C, in each case with appropriate completions and
schedules) to evidence the Administrative Agent’s security interest for the
ratable benefit of the Lenders and the other Secured Parties in any Patent,
Trademark or Copyright and the goodwill and general intangibles of the Grantors
relating thereto or represented thereby, and each Grantor hereby constitutes
the Administrative Agent its attorney-in-fact to execute and file all such
writings for the foregoing purposes, all acts of such attorney being hereby
ratified and confirmed, such power being coupled with an interest is
irrevocable until the Obligations are paid in full and the Commitments are
terminated.

 

(vii)         Each Grantor will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States
Patent and Trademark Office or the United States Copyright Office, or any
similar office or agency in any other country or any political subdivision
thereof, to maintain and pursue each application (and to obtain the relevant registration)
and to maintain each registration of the material Patents, Trademarks and
Copyrights, including, without limitation, timely filing of applications for
renewal, affidavits of use and affidavits of incontestability and payment of
maintenance fees.

 

(viii)        In the event that any material Patent,
Trademark or Copyright included in the Collateral is infringed, misappropriated
or diluted by a third party, each Grantor shall promptly notify the
Administrative Agent and the Lenders after it learns thereof and, at the
Grantors’ sole expense, shall, unless the Grantors shall reasonably determine
that such Patent, Trademark or Copyright is of negligible economic value to the
Grantors, promptly sue for infringement, misappropriation or dilution, to seek
injunctive relief where appropriate and to recover any and all damages for such
infringement, misappropriation or dilution, or take such other actions as the
Grantors shall reasonably deem appropriate under the circumstances to protect
such Patent, Trademark or Copyright.

 

(ix)           Upon and during the continuance of an Event of Default and
at the reasonable request of the Administrative Agent, each Grantor shall use
its reasonable efforts to obtain all requisite consents or approvals by the
licensor of each Copyright License, Patent License or Trademark License to
effect the assignment of all of such Grantor’s rights, title and interest
thereunder to the Administrative Agent or its designee.

 

13

 

(o)           Reserved.

 

(p)           Inventory. 
None of the Inventory of any Grantor shall be evidenced by a warehouse
receipt.

 

(q)           Commercial Tort Claims.  In the event that any Grantor at any time
after the date of this Security Agreement shall have any Commercial Tort Claim
which is reasonably expected to have a recoverable value in excess of
$1,000,000, such Grantor shall promptly notify the Administrative Agent thereof
in writing, which notice shall (i) set forth in reasonable detail the
basis for and nature of the Commercial Tort Claim, and (ii) include the
express grant by Grantor to the Administrative Agent of a security interest in
the Commercial Tort Claim (and the proceeds thereof).  In the event that such notice does not
include such grant of a security interest, the sending thereof by Grantor to
the Administrative Agent shall be deemed to constitute such grant to the
Administrative Agent.  Upon the sending
of such notice, any Commercial Tort Claim described in the notice shall
constitute part of the Collateral and shall be deemed included therein.  Without limiting the authorization of the
Administrative Agent provided in this Security Agreement or otherwise arising
by the execution by any Grantor of this Security Agreement or any of the other
Loan Documents, the Administrative Agent is hereby irrevocably authorized at
any time to file financing statements naming the Administrative Agent or its
designee as secured party and Grantor as debtor, or any amendments to any
financing statements, covering any Commercial Tort Claim as Collateral.  In addition, Grantors shall promptly upon the
Administrative Agent’s request, execute and deliver, or cause to be executed
and delivered to the Administrative Agent, such other agreements, documents and
instruments as the Administrative Agent may reasonably require in connection
with any Commercial Tort Claim in order to perfect and preserve its security
interest in such Commercial Tort Claim and the proceeds and profits thereof.

 

(r)            Real Estate.

 

Each Grantor covenants that,
until Full Payment of the Obligations, such Grantor shall not without the
consent of the Administrative Agent:

 

(i)            except as permitted by the Loan Agreement, directly or
indirectly, sell, assign, exchange, convey, lease, sublease, pledge,
subordinate, alienate, hypothecate, gift, devise or otherwise transfer or grant
any option with respect to any real Property owned by such Grantor, whether
voluntarily or by operation of law; or

 

(ii)           directly or indirectly, create or suffer to exist any
mortgage, deed of trust, lien, security interest or other charge or encumbrance
against, in or with respect to any real Property owned by such Grantor, whether
voluntarily or by operation of law, except for Permitted Encumbrances.

 

6.             Administrative Agent’s Appointment as
Attorney-in-Fact.

 

(a)           Powers.  Each
Grantor hereby irrevocably constitutes and appoints the Administrative Agent
and any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of each Grantor and in the name of each Grantor or in its own
name, from time to time in the Administrative Agent’s discretion, for the
purpose of carrying out the terms of this Security Agreement, to take any and
all appropriate action and to execute any and all documents and 

 

14

 

instruments which may be necessary or desirable to
accomplish the purposes of this Security Agreement, and, without limiting the
generality of the foregoing, each Grantor hereby gives the Administrative Agent
the power and right, on behalf of each Grantor, without notice to or assent by
any Grantor, to do the following:

 

(i)            in the name of each Grantor or its own name, or
otherwise, to take possession of and endorse and collect any checks, drafts,
notes, acceptances or other instruments for the payment of moneys due under any
Account, Instrument, General Intangible or Contract or with respect to any
other Collateral and to file any claim or to take any other action or
proceeding in any court of law or equity or otherwise deemed appropriate by the
Administrative Agent for the purpose of collecting any and all such moneys due
under any Account, Instrument, General Intangible or Contract or with
respect to any other Collateral whenever payable;

 

(ii)           to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance
called for by the terms of this Security Agreement and to pay all or any part
of the premiums therefor and the costs thereof;

 

(iii)          in the case of any Patent, Trademark or Copyright, to
execute and deliver any and all agreements, instruments, documents and papers
as the Administrative Agent may request to evidence the Administrative Agent’s
and the Lenders’ security interest in such Patent, Trademark or Copyright and
the goodwill and general intangibles of the Grantors relating thereto or
represented thereby;

 

(iv)          to execute, in connection with any sale provided for in Section 9
hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral; and

 

(v)           (A) to direct any party liable for any payment under
any of the Collateral to make payment of any and all moneys due or to become
due thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct; (B) to ask or demand for, collect, receive payment of and
receipt for, any and all moneys, claims and other amounts due or to become due
at any time in respect of or arising out of any Collateral; (C) notify the
post office authorities to change the address for delivery of Grantors’ mail to
an address designated by Administrative Agent, to receive and open all mail
relating to the collateral and forward all other mail to Grantors; (D) use
the information recorded on or contained in any data processing equipment and
computer hardware and software relating to Accounts, Inventory, Equipment
and any other Collateral and to which Grantors have access; (E)to sign and
endorse any invoices, freight or express bills, bills of lading, storage or
warehouse receipts, drafts against debtors, assignments, verifications, notices
and other documents in connection with any of the Collateral; (F) to
commence and prosecute any suits, actions or proceedings at law or in equity in
any court of competent jurisdiction to collect the Collateral or any thereof
and to enforce any other right in respect of any Collateral; (G) to defend any
suit, action or proceeding brought against any Grantor with respect to any
Collateral; (H) to settle, compromise or adjust any such suit, action or
proceeding and, in connection therewith, to give such discharges or releases as
the Administrative Agent may deem appropriate; (I) to assign any Patent or
Trademark (along with the goodwill of the business to which any such Trademark 

 

15

 

pertains), throughout the
world for such term or terms, on such conditions, and in such manner, as the
Administrative Agent shall in its sole discretion determine; and (J) generally,
to sell, transfer, pledge and make any agreement with respect to or otherwise
deal with any of the Collateral as fully and completely as though the
Administrative Agent were the absolute owner thereof for all purposes, and to
do, at the Administrative Agent’s option and the Grantors’ expense, at any
time, or from time to time, all acts and things which the Administrative Agent
deems necessary to protect, preserve or realize upon the Collateral and the
Administrative Agent’s, Liens thereon for the ratable benefit of the Lenders
and the other Secured Parties and to effect the intent of this Security
Agreement, all as fully and effectively as the Grantors might do.

 

Anything in this Section 6(a) to the contrary
notwithstanding, the Administrative Agent agrees that it will not exercise any
rights under the power of attorney provided for in this Section unless an
Event of Default has occurred and is continuing.

 

Each Grantor hereby ratifies all that said attorneys shall lawfully do
or cause to be done by virtue hereof. 
This power of attorney is a power coupled with an interest and are
irrevocable.

 

(b)           No Duty on Administrative Agent’s and Lenders’ Part.  The powers conferred on the Administrative
Agent and the Lenders hereunder are solely to protect the Administrative Agent’s
and the Lenders’ interests in the Collateral and shall not impose any duty upon
the Administrative Agent or any Lender to exercise any such powers.  Each of the Administrative Agent and the
Lenders shall be accountable only for amounts that it actually receives as a
result of the exercise of such powers, and neither they nor any of their
officers, directors, employees or agents shall be responsible to any Grantor
for any act or failure to act hereunder, except for its own gross negligence or
willful misconduct.

 

7.             Performance by Agent of Grantors’ Obligations.  If any Grantor fails to perform or comply
with any of its agreements contained herein, the Administrative Agent, at its
option, but without any obligation to do so, may itself perform or comply, or
otherwise cause performance or compliance, with such agreement.  The expenses of the Administrative Agent
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to the then current Applicable
Margin plus the Base Rate, shall be payable, jointly and severally, by the
Grantors to the Administrative Agent on demand and shall constitute Obligations
secured hereby.

 

8.             Application of Proceeds.  The Administrative Agent may apply all or any
part of such cash or Payment Items against the Obligations (whether matured or
unmatured) all in accordance with Sections 5.6 and 5.7 of the Loan Agreement.

 

9.             Remedies. 
If an Event of Default shall occur and be continuing, the Administrative
Agent, on behalf of the Lenders, may exercise, in addition to all other rights
and remedies granted to it in this Security Agreement and in any other
instrument or agreement securing, evidencing or relating to the Obligations,
all rights and remedies of a secured party under the UCC.  Without limiting the generality of the
foregoing, the Administrative Agent, without demand of performance or other
demand, presentment, protest, advertisement or notice of any kind (except any
notice required by law referred to below) to or upon any Grantor or any other
Person (all and each of which demands, defenses, advertisements and notices are
hereby 

 

16

 

waived), may in such circumstances forthwith
collect, receive, appropriate and realize upon the Collateral, or any part
thereof, and/or may forthwith sell, lease, assign, give option or options to
purchase, or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, at any exchange, broker’s board or office of
the Administrative Agent or any Lender or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of any credit
risk.  The Administrative Agent or any
Lender shall have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in any Grantor, which right or equity is hereby waived or
released.  Each Grantor further agrees,
at the Administrative Agent’s request, to assemble the Collateral and make it
available to the Administrative Agent at places which the Administrative Agent
shall reasonably select, whether at any Grantor’s premises or elsewhere.  The Administrative Agent shall apply the net
proceeds of any such collection, recovery, receipt, appropriation, realization
or sale, after deducting all reasonable costs and expenses of every kind
incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the
Administrative Agent and the Lenders arising out of the exercise by the
Administrative Agent hereunder, including, without limitation, reasonable
attorneys’ fees and disbursements, to the payment in whole or in part of the
Obligations pursuant to Section 5.6 of the Loan Agreement, and only after
such application and after the payment by the Administrative Agent of any other
amount required by any provision of law, including, without limitation, Section 9-615
of the UCC, need the Administrative Agent account for the surplus, if any, to
the Grantors.  To the extent permitted by
Applicable Law, each Grantor waives all claims, damages and demands it may
acquire against the Administrative Agent or any Lender arising out of the
exercise by the Administrative Agent or any Lender of any of its rights
hereunder.  If any notice of a proposed
sale or other disposition of Collateral shall be required by law, such notice
shall be deemed reasonable and proper if given at least 10 days before such
sale or other disposition.  Each Grantor
shall remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay the Obligations and the
fees and disbursements of any attorneys employed by the Administrative Agent or
any Lender to collect such deficiency.

 

If an Event of Default shall occur and be
continuing, the Administrative Agent on behalf of the Lenders, may (a) without
notice, demand or other process, and without charge, enter any of Grantors’
premises and, without breach of the peace, until the Administrative Agent
completes the enforcement of its rights in the Collateral, take possession of
such premises or place custodians in exclusive control thereof, remain on such
premises and use the same and any of Grantors’ equipment for the purpose of
completing any work-in-process, preparing any Collateral for disposition and
disposing of or collecting any Collateral, and (b) in the exercise of its
rights under this Security Agreement, without payment of compensation of any
kind, use any and all trademark, trade styles, trade names, patents, patent
applications, licenses, franchises and the like to the extent of each Grantor’s
rights therein and each Grantor hereby grants a license for that purpose.

 

10.           Grant of License to Use Patent, Trademark and Copyright
Collateral.  For the purpose of
enabling the Administrative Agent to exercise rights and remedies under Section 9
hereof at such time as the Administrative Agent shall be lawfully entitled to
exercise such rights and remedies, each Grantor hereby grants to the
Administrative Agent an irrevocable, non-

 

17

 

exclusive license (exercisable without payment of
royalty or other compensation to any Grantor) to use, license or sublicense any
of the Copyrights, Patents and Trademarks, now owned or hereafter acquired by
any Grantor, and wherever the same may be located, and including in such
license reasonable access to all media in which any of the licensed items may
be recorded or stored.  The use of such
license by the Administrative Agent shall be exercised, at the option of the
Administrative Agent for any purpose appropriate in connection with the
exercise of remedies hereunder, only upon the occurrence and during the continuance
of an Event of Default.  The
Administrative Agent agrees to apply the net proceeds received from any license
as provided herein.

 

11.           Limitation on Duties Regarding Presentation of
Collateral.  The Administrative Agent’s
sole duty with respect to the custody, safekeeping and physical preservation of
the Collateral in its possession, under Section 9-207 of the UCC or
otherwise, shall be to deal with it in the same manner as the Administrative
Agent deals with similar property for its own account.  Neither the Administrative Agent nor any
Lender, nor any of their respective directors, officers, employees or agents
shall be liable for failure to demand, collect or realize upon all or any part
of the Collateral or for any delay in doing so or shall be under any obligation
to sell or otherwise dispose of any Collateral upon the request of any Grantor
or any other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.  The
powers conferred on the Administrative Agent and the Lenders hereunder are
solely to protect the Administrative Agent’s and the Lenders’ interests in the
Collateral and shall not impose any duty upon the Administrative Agent or any
Lender to exercise any such powers.  The
Administrative Agent and the Lenders shall be accountable only for amounts that
they actually receive as a result of the exercise of such powers, and neither
they nor any of their officers, directors, employees or agents shall be
responsible to any Grantor for any act or failure to act hereunder, except for
their own gross negligence or willful misconduct.

 

12.           Powers Coupled with an Interest.  All authorizations and agencies herein
contained with respect to the Collateral are irrevocable and powers coupled
with an interest.

 

13.           Notices.  All
notices and other communications by or to a party hereto shall be in writing
and shall be given to any Grantor at such Grantor’s address shown on the
signature pages hereof, and to any other Person at its address shown on
the signature pages hereof, or at such other address as a party may
hereafter specify by notice in accordance with this Section 13.  Each such notice or other communication shall
be effective only (a) if given by facsimile transmission, when transmitted
to the applicable facsimile number, if confirmation of receipt is received; (b) if
given by mail, three Business Days after deposit in the U.S. mail, with
first-class postage pre-paid, addressed to the applicable address; or (c) if
given by personal delivery, when duly delivered to the notice address with
receipt acknowledged.  Any written notice
or other communication that is not sent in conformity with the foregoing
provisions shall nevertheless be effective on the date actually received by the
noticed party.

 

14.           Authority of Administrative Agent.  Each Grantor acknowledges that the rights and
responsibilities of the Administrative Agent under this Security Agreement with
respect to any action taken by the Administrative Agent or the exercise or
non-exercise by the Administrative Agent of any option, voting right, request,
judgment or other right or remedy provided for herein or resulting or arising
out of this Security Agreement shall, as between the Administrative Agent and
the Lenders , be governed by the Loan Agreement and by such other agreements
with respect thereto as may exist from time to time among them, but, as between
the 

 

18

 

Administrative Agent and the Grantors, the
Administrative Agent shall be conclusively presumed to be acting as agent for
the Lenders with full and valid authority so to act or refrain from acting, and
no Grantor shall be under any obligation, or entitlement, to make any inquiry
respecting such authority.

 

15.           Severability. 
Any provision of this Security Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or unenforceability
in any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.

 

16.           Counterparts; Delivery by Telecopier.  This Security Agreement may be executed by
one or more of the parties to this Security Agreement on any number of separate
counterparts (including by facsimile transmission of signature pages hereto),
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument.  A set of the
copies of this Security Agreement signed by all the parties shall be lodged
with the Grantors and the Administrative Agent. 
Delivery of an executed counterpart of a signature page of this
Security Agreement by telecopier shall be effective as delivery of an
originally executed counterpart of this Security Agreement.

 

17.           Paragraph Headings. 
The paragraph headings used in this Security Agreement are for
convenience of reference only and are not to affect the construction hereof or
be taken into consideration in the interpretation hereof.

 

18.           No Waiver; Cumulative Remedies.  Neither the Administrative Agent, nor any
Lender shall by any act (except by a written instrument pursuant to Section 18
hereof), delay, indulgence, omission or otherwise be deemed to have waived any
right or remedy hereunder or to have acquiesced in any Default or Event of
Default or in any breach of any of the terms and conditions hereof.  No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof.  No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.  A waiver by the Administrative Agent or any
Lender of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Administrative Agent or
such Lender would otherwise have on any future occasion.  The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.

 

19.           Waivers and Amendments; Successors and Assigns;
Governing Law.  None of the terms or
provisions of this Security Agreement may be waived, amended, supplemented or
otherwise modified except by a written instrument executed by each Grantor and
the Administrative Agent, provided that any provision of this Security
Agreement may be waived by the Administrative Agent in a written instrument
executed by the Administrative Agent. 
This Security Agreement shall be binding upon the successors and assigns
of each Grantor and shall inure to the benefit of the Administrative Agent and
the Lenders and their respective successors and assigns.  This Security Agreement shall be governed by,
and construed and interpreted in accordance with, the laws of The Commonwealth
of Massachusetts.

 

19

 

20.           Submission To Jurisdiction; Waivers.  Each Grantor hereby irrevocably and
unconditionally:

 

(a)           submits for itself and its property in any legal action or
proceeding relating to this Security Agreement and the other Loan Documents to
which it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the courts of The
Commonwealth of Massachusetts, the courts of the United States of America for
the District of Massachusetts, and appellate courts from any thereof;

 

(b)           consents that any such action or proceeding may be brought
in such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;

 

(c)           agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to each
Grantor at its address set forth in Section 13 hereof or at such other
address of which the Administrative Agent shall have been notified pursuant
hereto;

 

(d)           agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and

 

(e)           waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or
consequential damages.

 

21.           WAIVER OF JURY TRIAL.  EACH GRANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM
THEREIN.

 

22.           Additional Grantors.  Each Subsidiary of SMI which is required
pursuant to Section 10.1.9 of the Loan Agreement to become party to this
Security Agreement shall become a Grantor for all purposes of this Security
Agreement upon execution and delivery by such Subsidiary of a Supplement in the
form of Annex D hereto.

 

[SIGNATURE PAGE FOLLOWS]

 

20

 

IN
WITNESS WHEREOF, each Grantor has caused this Guarantor Security Agreement to
be duly executed and delivered as of the date first above written.

 

	
   

  	
  STEINWAY
  MUSICAL INSTRUMENTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Dennis M. Hanson

  
	
   

  	
   

  	
  Name:

  	
  Dennis
  M. Hanson

  
	
   

  	
   

  	
  Title:

  	
  Senior
  Executive Vice President and

  
	
   

  	
   

  	
   

  	
  Chief
  Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  Address
  for Notices:

  
	
   

  	
   

  
	
   

  	
  800
  South Street, Suite 305

  
	
   

  	
  Waltham,
  MA 02453

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (781) 894-9803

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  THE
  O.S. KELLY COMPANY

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Dennis M. Hanson

  
	
   

  	
   

  	
  Name:

  	
  Dennis
  M. Hanson

  
	
   

  	
   

  	
  Title:

  	
  Executive
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  Address
  for Notices:

  
	
   

  	
   

  
	
   

  	
  315
  East North Street

  
	
   

  	
  Springfield,
  OH 45503

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (937) 322-1322

  
	
   

  	
   

  
	
   

  	
  with
  a copy to:

  
	
   

  	
   

  
	
   

  	
  800
  South Street, Suite 305

  
	
   

  	
  Waltham,
  MA 02453

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (781) 894-9803

  

 

[ SIGNATURE PAGE TO
GUARANTOR SECURITY AGREEMENT ]

 

 

	
   

  	
  MUSIC
  MATTERS AFTER SCHOOL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Dennis M. Hanson

  
	
   

  	
   

  	
  Name:

  	
  Dennis
  M. Hanson

  
	
   

  	
   

  	
  Title:

  	
  Executive
  Vice President

  
	
   

  	
   

  
	
   

  	
  Address
  for Notices:

  
	
   

  	
   

  
	
   

  	
  500
  Sun Valley Drive, Suite D2

  
	
   

  	
  Roswell,
  GA 30076-5636

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (574) 295-5405

  
	
   

  	
   

  
	
   

  	
  with
  a copy to:

  
	
   

  	
   

  
	
   

  	
  800
  South Street, Suite 305

  
	
   

  	
  Waltham,
  MA 02453

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (781) 894-9803

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ARKIVMUSIC,
  LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Dennis M. Hanson

  
	
   

  	
   

  	
  Name:

  	
  Dennis
  M. Hanson

  
	
   

  	
   

  	
  Title:

  	
  Executive
  Vice President

  
	
   

  	
   

  
	
   

  	
  Address
  for Notices:

  
	
   

  	
   

  
	
   

  	
  One
  Steinway Place

  
	
   

  	
  Long
  Island City, NY 11105

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (781) 894-9803

  
	
   

  	
   

  
	
   

  	
  with
  a copy to:

  
	
   

  	
   

  
	
   

  	
  800
  South Street, Suite 305

  
	
   

  	
  Waltham,
  MA 02453

  
	
   

  	
  Attn:
  Dennis M. Hanson

  
	
   

  	
  Facsimile:
  (781) 894-9803

  

 

[ SIGNATURE PAGE TO
GUARANTOR SECURITY AGREEMENT ]

 

 

	
   

  	
  BANK
  OF AMERICA, N.A.,

  
	
   

  	
  as
  Administrative Agent

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Christopher O’Halloran

  
	
   

  	
   

  	
  Name:

  	
  Christopher
  O’Halloran

  
	
   

  	
   

  	
  Title:

  	
  Senior
  Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
  225
  Franklin Street

  
	
   

  	
  MA1-225-02-05

  
	
   

  	
  Boston,
  MA 02110

  
	
   

  	
  Fax:
  (312) 453-6319

  
					

 

[ SIGNATURE PAGE TO
GUARANTOR SECURITY AGREEMENT ]

 

 

ANNEX A

 

FORM OF

NOTICE OF SECURITY INTEREST IN PATENTS

 

United
States Department of Commerce

Commissioner
of Patents and Trademarks

Box
Assignments

Washington,
D.C. 20231

 

Ladies
and Gentlemen:

 

Pursuant
to a Guarantor Security Agreement, dated as of October 5, 2010 (as
amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), [NAME OF GRANTOR], a
                    
                               (the
“Assignor”), has granted to BANK OF AMERICA, N.A., as agent for certain
lenders, as Assignee (the “Assignee”) a continuing security interest in,
and a continuing lien upon, the Patents (as such term is defined in the
Security Agreement) including the patents and patent applications listed on the
annexed Exhibit A, and all applications, registrations, renewals
and proceeds (including accounts receivable and royalties) thereof (the “Patents”).  The Assignee’s security interest in the
Patents can only be terminated in accordance with the terms of the Security
Agreement.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Very
  truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  [NAME
  OF GRANTOR]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  

 

 

	
  ACKNOWLEDGED
  BY:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  BANK
  OF AMERICA, N.A.,

  	
   

  	
   

  	
   

  
	
  as
  Assignee

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  

 

 

Exhibit A

 

PATENTS

 

 

PATENT LICENSES

 

 

PATENT APPLICATIONS

 

 

ANNEX B

 

FORM OF

MEMORANDUM OF SECURITY INTEREST IN TRADEMARKS

 

United
States Department of Commerce

Commissioner
of Patents and Trademarks

Box
Assignments

Washington,
D.C. 20231

 

Ladies
and Gentlemen:

 

Pursuant
to a Guarantor Security Agreement, dated as of October 5, 2010 (as
amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), [NAME OF GRANTOR], a                       
                               
(the “Assignor”), has granted to BANK OF AMERICA, N.A., as agent for
certain lenders, as Assignee (the “Assignee”) a continuing security
interest in, and a continuing lien upon, the Trademarks and Trademark Licenses
(as such terms are defined in the Security Agreement) including the trademarks
listed on the annexed Exhibit A, and all applications,
registrations, renewals and proceeds (including accounts receivable and
royalties) thereof (the “Trademarks”), together with the goodwill of the
business connected with the use of and symbolized by the Trademarks.  The Assignee’s security interest in the
Trademarks can only be terminated in accordance with the terms of the Security
Agreement.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Very
  truly yours,

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  [NAME
  OF GRANTOR]

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ACKNOWLEDGED BY:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  BANK OF AMERICA, N.A.,

  	
   

  	
   

  	
   

  
	
  as Assignee

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
						

 

 

Exhibit B

 

TRADEMARKS

 

 

TRADEMARK LICENSES

 

 

TRADEMARK APPLICATIONS

 

 

ANNEX C

 

[COPYRIGHT FILING DOCUMENT]

 

FORM OF

MEMORANDUM OF SECURITY INTEREST IN COPYRIGHTS

 

United
States Department of Commerce

Commissioner
of Patents and Trademarks

Box
Assignments

Washington,
D.C. 20231

 

Ladies
and Gentlemen:

 

Pursuant
to a Guarantor Security Agreement, dated as of October 5, 2010 (as
amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), [NAME OF GRANTOR], a                      
                             
(the “Assignor”), has granted to BANK OF AMERICA, N.A., as agent for
certain lenders, as Assignee (the “Assignee”) a continuing security
interest in, and a continuing lien upon, the Copyrights and Copyright Licenses
(as such terms are defined in the Security Agreement) including the copyrights
listed on the annexed Exhibit A, and all applications,
registrations, renewals and proceeds (including accounts receivable and
royalties) thereof (the “Copyrights”), together with the goodwill of the
business connected with the use of and symbolized by the Copyrights.  The Assignee’s security interest in the
Copyrights can only be terminated in accordance with the terms of the Security
Agreement.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Very
  truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  [NAME
  OF GRANTOR]

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ACKNOWLEDGED
  BY:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  BANK
  OF AMERICA, N.A.,

  	
   

  	
   

  	
   

  
	
  as
  Assignee

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
						

 

 

Schedule I

 

COPYRIGHTS

 

 

COPYRIGHT LICENSES

 

 

COPYRIGHT APPLICATIONS

 

 

ANNEX D

 

ADDENDUM TO SECURITY AGREEMENT

 

Each
of the undersigned, [NAME OF NEW SUBSIDIARY] (each a “New Grantor”,
together the “New Grantors”):

 

(i)            agrees to all of
the provisions of the Guarantor Security Agreement, dated as of October 5,
2010 (as amended, supplemented or otherwise modified prior to the date hereof,
the “Security Agreement”), made by (a) STEINWAY MUSICAL INSTRUMENTS, INC.,
a Delaware corporation (“SMI”), (b) THE O.S. KELLY COMPANY, an Ohio
corporation (“O.S. Kelly”), (c) ARKIVMUSIC, LLC, a New York limited
liability company (“ArkivMusic”) and (d) MUSIC MATTERS AFTER SCHOOL, INC.,
a Delaware corporation (“MMAS” and, together with SMI, O.S. Kelly and
ArkivMusic, the “Grantors” and each a “Grantor”), in favor of
BANK OF AMERICA, N.A., a national banking association, as administrative agent
(in such capacity, the “Administrative Agent”) for the lenders (the “Lenders”)
party to the Loan and Security Agreement, dated as of October 5, 2010 (the
“Loan Agreement”), among Conn-Selmer, Inc., a Delaware corporation
(“Conn-Selmer”), and Steinway, Inc., a Delaware corporation (“Steinway”
and, together with Conn-Selmer, the “Borrowers”), the Administrative
Agent and the Lenders;

 

(ii)           effective on the
date hereof, becomes a party to the Security Agreement, as a Grantor, with the
same effect as if the undersigned were an original signatory to the Security
Agreement and with the representations and warranties contained therein being
deemed to be made by it on and as of the date hereof;

 

(iii)          as additional
collateral security for the prompt and complete payment when due (whether at
stated maturity, by acceleration or otherwise) of the Obligations and in order
to induce the Lenders to make and maintain outstanding their Loans under the
Loan Agreement and the other Loan Documents, hereby grants to the
Administrative Agent, for the benefit of the Lenders, a security interest in
all of the property listed in Section 2 of the Security Agreement now
owned or at any time hereafter acquired by such New Grantor or in which such
New Grantor now has or at any time in the future may acquire any right, title
or interest (collectively, the “New Grantor Collateral”);

 

(iv)          represents and
warrants that the information provided on the attached schedules disclose, with
respect to it, all information that is required under the Security Agreement to
be disclosed by a Grantor; and

 

(v)           the Schedules to the
Security Agreement are hereby supplemented by, if a supplement to any such
Schedule is attached to this Supplement, by including the items listed on such
supplement to such Schedule in such Schedule.

 

 

Terms
defined in the Security Agreement and the Loan Agreement shall have such defined
meanings when used herein.

 

By
its acceptance hereof, the undersigned New Grantor hereby ratifies and confirms
its respective obligations under the Security Agreement, as supplemented
hereby.

 

	
   

  	
   

  	
  [NAME
  OF NEW GRANTOR]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  
	
  Date:                    
     , 20   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ACCEPTED
  AND AGREED:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  BANK
  OF AMERICA, N.A.,

  	
   

  	
   

  	
   

  
	
  as
  Administrative Agent

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:Exhibit 4.1

SPHERIX INCORPORATED

 

CERTIFICATE OF DESIGNATION OF
PREFERENCES,

RIGHTS AND LIMITATIONS

OF

SERIES B CONVERTIBLE PREFERRED
STOCK

 

PURSUANT TO SECTION 151 OF THE

DELAWARE GENERAL CORPORATION LAW

 

The undersigned, Claire L. Kruger and Robert L. Clayton,
do hereby certify that:

 

1.             They
are the Chief Executive Officer/Chief Operating Officer and Treasurer/Chief
Financial Officer, respectively, of Spherix Incorporated, a Delaware
corporation (the “Corporation”).

 

2.             The
Corporation is authorized to issue 2,000,000 shares of preferred stock, of
which 500,000 shares have been previously designated as “Series A Junior
Preferred Stock,” pursuant to Certificate of Designations filed with the
Secretary of State of the State of Delaware.

 

3.             The
following resolutions were duly adopted by the Board of Directors of the
Corporation (the “Board of Directors”):

 

WHEREAS, the Certificate of Incorporation of the
Corporation provides for a class of its authorized stock known as preferred
stock, consisting of 2,000,000 shares, $0.01 par value per share, issuable from
time to time in one or more series;

 

WHEREAS, the Board of Directors is authorized to fix the
dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series
of preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and

 

WHEREAS, it is the desire of the Board of Directors,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to a series of the preferred stock,
which shall consist of, except as otherwise set forth in the Purchase
Agreement, 5,250 shares of the preferred stock which the Corporation has the
authority to issue, as follows:

 

NOW, THEREFORE, BE IT RESOLVED, that the Board of
Directors does hereby provide for the issuance of a series of preferred stock
for cash or exchange of other securities, rights or property and does hereby
fix and determine the rights, preferences, restrictions and other matters
relating to such series of preferred stock as follows:

 

TERMS OF PREFERRED STOCK

 

Section 1.  Definitions.  For the purposes hereof, the following terms
shall have the following meanings:

 

“Affiliate” means any Person that, directly or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with a Person, as such terms are used in and construed
under Rule 405 of the Securities Act.

 

“Alternate Consideration” shall have the meaning set
forth in Section 7(e).

 

“Beneficial Ownership Limitation” shall have the meaning
set forth in Section 6(d).

 

 

“Business Day” means any day except any Saturday, any
Sunday, any day which is a federal legal holiday in the United States or any
day on which banking institutions in the State of New York are authorized or
required by law or other governmental action to close.

 

“Buy-In” shall have the meaning set forth in Section 6(c)(iv).

 

“Change of Control Transaction” means the occurrence
after the date hereof of any of (a) an acquisition after the date hereof
by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Corporation, by contract or otherwise) of in
excess of 33% of the voting securities of the Corporation (other than by means
of conversion or exercise of Preferred Stock and the Securities issued together
with the Preferred Stock), (b) the Corporation merges into or consolidates
with any other Person, or any Person merges into or consolidates with the
Corporation and, after giving effect to such transaction, the stockholders of
the Corporation immediately prior to such transaction own less than 66% of the
aggregate voting power of the Corporation or the successor entity of such
transaction, (c) the Corporation sells or transfers all or substantially
all of its assets to another Person and the stockholders of the Corporation
immediately prior to such transaction own less than 66% of the aggregate voting
power of the acquiring entity immediately after the transaction, (d) a
replacement at one time or within a one year period of more than one-half of
the members of the Board of Directors which is not approved by a majority of
those individuals who are members of the Board of Directors on the Original
Issue Date (or by those individuals who are serving as members of the Board of
Directors on any date whose nomination to the Board of Directors was approved
by a majority of the members of the Board of Directors who are members on the
Original Issue Date), or (e) the execution by the Corporation of an
agreement to which the Corporation is a party or by which it is bound providing
for any of the events set forth in clauses (a) through (d) above.

 

“Closing” means the closing of the purchase and sale of
the Securities pursuant to Section 2.1 of the Purchase Agreement.

 

“Closing Date” means the Trading Day on which all of the
Transaction Documents have been executed and delivered by the applicable
parties thereto and all conditions precedent to (i) each Holder’s
obligations to pay the Subscription Amount and (ii) the Corporation’s
obligations to deliver the Securities have been satisfied or waived.

 

“Commission” means the United States Securities and
Exchange Commission.

 

“Common Stock” means the Corporation’s common stock, par
value $0.005 per share, and stock of any other class of securities into which
such securities may hereafter be reclassified or changed.

 

“Common Stock Equivalents” means any securities of the
Corporation or the Subsidiaries which would entitle the holder thereof to
acquire at any time Common Stock, including, without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is at any
time convertible into or exercisable or exchangeable for, or otherwise entitles
the holder thereof to receive, Common Stock.

 

“Conversion Amount” means the sum of the Stated Value at
issue.

 

“Conversion Date” shall have the meaning set forth in Section 6(a).

 

“Conversion Price” shall have the meaning set forth in Section 6(b).

 

“Conversion Shares” means, collectively, the shares of
Common Stock issuable upon conversion of the shares of Preferred Stock in
accordance with the terms hereof.

 

“Dividend Payment Date” shall have the meaning set forth
in Section 3(a).

 

2

 

“Exchange Act” means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.

 

“Fundamental Transaction” shall have the meaning set
forth in Section 7(e).

 

“GAAP” means United States generally accepted accounting
principles.

 

“Holder” means a holder of shares of Preferred Stock.

 

“Indebtedness” means (a) any liabilities for
borrowed money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations in respect of indebtedness of others,
whether or not the same are or should be reflected in the Corporation’s balance
sheet (or the notes thereto), except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business, and (c) the present value of any lease payments in
excess of $50,000 due under leases required to be capitalized in accordance
with GAAP.

 

“Junior Securities” means the Common Stock and all other
Common Stock Equivalents of the Corporation other than those securities which
are explicitly senior or pari  passu to the Preferred Stock in
dividend rights or liquidation preference.

 

“Liens” means a lien, charge, security interest,
encumbrance, right of first refusal, preemptive right or other restriction.

 

“Liquidation” shall have the meaning set forth in Section 5.

 

“New York Courts” shall have the meaning set forth in Section 11(d).

 

“Notice of Conversion” shall have the meaning set forth
in Section 6(a).

 

“Original Issue Date” means the date of the first
issuance of any shares of the Preferred Stock regardless of the number of
transfers of any particular shares of Preferred Stock and regardless of the
number of certificates which may be issued to evidence such Preferred Stock.

 

“Permitted Indebtedness” means (a) the Indebtedness
existing on the Original Issue Date and set forth on Schedule 3.1(aa)
attached to the Purchase Agreement and (b) lease obligations and purchase
money indebtedness of up to $100,000, in the aggregate, incurred in connection
with the acquisition of capital assets and lease obligations with respect to
newly acquired or leased assets.

 

“Permitted Lien” means the individual and collective
reference to the following:  (a) Liens
for taxes, assessments and other governmental charges or levies not yet due or
Liens for taxes, assessments and other governmental charges or levies being
contested in good faith and by appropriate proceedings for which adequate
reserves (in the good faith judgment of the management of the Corporation) have
been established in accordance with GAAP, (b) Liens imposed by law which
were incurred in the ordinary course of the Corporation’s business, such as
carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and
other similar Liens arising in the ordinary course of the Corporation’s
business, and which (x) do not individually or in the aggregate materially
detract from the value of such property or assets or materially impair the use
thereof in the operation of the business of the Corporation and its
consolidated Subsidiaries or (y) are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing for
the foreseeable future the forfeiture or sale of the property or asset subject
to such Lien, (c) Liens incurred in connection with Permitted Indebtedness
under clause (a) thereunder, and (d) Liens incurred in connection
with Permitted Indebtedness under clause (b) thereunder, provided that
such Liens are not secured by assets of the Corporation or its Subsidiaries
other than the assets so acquired or leased.

 

3

 

“Person” means an individual or corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.

 

“Preferred Stock” shall have the meaning set forth in Section 2.

 

“Purchase Agreement” means the Securities Purchase
Agreement dated as of the Original Issue Date among the Corporation and the
original Holders, as amended, modified or supplemented from time to time in
accordance with its terms.

 

“Securities” means the Preferred Stock, the Warrants,
the Warrant Shares and the Underlying Shares.

 

“Securities Act” means the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.

 

“Shareholder Approval” means such approval as may be
required by the applicable rules and regulations of the Nasdaq Stock
Market (or any successor entity) from the shareholders of the Corporation with
respect to the transactions contemplated by the Transaction Documents,
including the issuance of all of the Underlying Shares in excess of 19.99% of
the issued and outstanding Common Stock on the Closing Date (including all
shares issuable in lieu of cash dividends hereunder).

 

“Share Delivery Date” shall have the meaning set forth
in Section 6(c).

 

“Stated Value” shall have the meaning set forth in Section 2,
as the same may be increased pursuant to Section 3.

 

“Subscription Amount” shall mean, as to each Holder, the
aggregate amount to be paid for the Preferred Stock purchased pursuant to the
Purchase Agreement as specified below such Holder’s name on the signature page of
the Purchase Agreement and next to the heading “Subscription Amount,” in United
States dollars and in immediately available funds.

 

“Subsidiary” means any subsidiary of the Corporation as
set forth on Schedule 3.1(a) of the Purchase Agreement and shall, where
applicable, also include any direct or indirect subsidiary of the Corporation
formed or acquired after the date of the Purchase Agreement.

 

“Successor Entity” shall have the meaning set forth in Section 7(e).

 

“Trading Day” means a day on which the principal Trading
Market is open for business.

 

“Trading Market” means any of the following markets or
exchanges on which the Common Stock is listed or quoted for trading on the date
in question:  the NYSE AMEX, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board (or any successors to any of
the foregoing).

 

“Transaction Documents” means this Certificate of
Designation, the Purchase Agreement, the Warrants, all exhibits and schedules
thereto and hereto and any other documents or agreements executed in connection
with the transactions contemplated pursuant to the Purchase Agreement.

 

“Transfer Agent” means American Stock Transfer &
Trust Company LLC, the current transfer agent of the Company, and any successor
transfer agent of the Corporation.

 

4

 

“Underlying Shares” means the shares of Common Stock
issued and issuable upon conversion or redemption of the Preferred Stock, and
upon exercise of the Warrants and issued and issuable in lieu of the cash
payment of dividends on the Preferred Stock in accordance with this Certificate
of Designation.

 

“VWAP” means, for any date, the price determined by the
first of the following clauses that applies: 
(a) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time)), (b) if the OTC Bulletin Board is not a Trading Market,
the volume weighted  average price
of the Common Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board, (c) if the Common Stock is not then listed or quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then
reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a
similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported,
or (d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Holders of a majority in interest of the Securities then outstanding and
reasonably acceptable to the Corporation, the fees and expenses of which shall
be paid by the Corporation.

 

“Warrants” means, collectively, the Common Stock
purchase warrants delivered to the Holder at the Closing in accordance with Section 2.2(a) of
the Purchase Agreement, which Warrants shall be exercisable immediately and
have a term of exercise equal to 5 years, in the form of Exhibit C
attached to the Purchase Agreement.

 

“Warrant Shares” means the shares of Common Stock
issuable upon exercise of the Warrants.

 

Section 2.  Designation, Amount and Par Value.  The series of preferred stock shall be
designated as the Series B Convertible Preferred Stock (the “Preferred Stock”)
and the number of shares so designated shall be 5,250.  Each share of Preferred Stock shall have a
par value of $0.01 per share and a stated value equal to $1,000, subject to
increase set forth in Section 3 below (the “Stated Value”).

 

Section 3.  Dividends.

 

a)             Dividends.  Holders shall be entitled to
receive, and the Corporation shall pay, dividends on shares of Preferred Stock
equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as
dividends (other than dividends in the form of Common Stock) actually paid on
shares of the Common Stock when, as and if such dividends (other than dividends
in the form of Common Stock) are paid on shares of the Common Stock.  Other than as set forth in the previous
sentence, no other dividends shall be paid on shares of Preferred Stock; and
the Corporation shall pay no dividends (other than dividends in the form of
Common Stock) on shares of the Common Stock unless it simultaneously complies
with the previous sentence.  All accrued
but unpaid dividends on shares of Preferred Stock shall increase the Stated
Value of such shares, but when such dividends are actually paid any such
increase in the Stated Value shall be rescinded.

 

b)            So long as any Preferred Stock
shall remain outstanding, neither the Corporation nor any Subsidiary thereof
shall redeem, purchase or otherwise acquire directly or indirectly more than a de
minimis amount of any Junior Securities other than as to repurchases of
Common Stock or Common Stock Equivalents from departing officers or directors,
and provided that, while any of the Preferred Stock remains outstanding, such
repurchases shall not exceed an aggregate of $100,000 in any fiscal year from
all officers and directors.

 

Section 4.  Voting Rights.  Except as otherwise provided herein or as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, as long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the Holders of at least
67% of the then outstanding shares of the Preferred Stock, (a) alter or
change adversely the powers, preferences or rights given to the Preferred Stock
or alter or amend this Certificate of Designation, (b) authorize or create
any class of stock ranking as to dividends,

 

5

 

redemption or distribution of assets upon a Liquidation
(as defined in Section 5) senior to, or otherwise pari  passu
with, the Preferred Stock, (c) amend its certificate of incorporation or
other charter documents in any manner that adversely affects any rights of the
Holders, (d) increase the number of authorized shares of Preferred Stock,
or (e) enter into any agreement with respect to any of the foregoing.
Notwithstanding anything to the contrary set forth in this Section 4, the
holders of Preferred Stock shall not have a separate class vote with respect to
any action taken in connection with a Change of Control Transaction.

 

Section 5.  Liquidation.  Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”),
the Holders shall be entitled to receive out of the assets, whether capital or
surplus, of the Corporation an amount equal to the Stated Value, plus any
accrued and unpaid dividends thereon and any other fees or liquidated damages
then due and owing thereon under this Certificate of Designation, for each  share of Preferred Stock before any distribution
or payment shall be made to the holders of any Junior Securities, and if the
assets of the Corporation shall be insufficient to pay in full such amounts,
then the entire assets to be distributed to the Holders shall be ratably
distributed among the Holders in accordance with the respective amounts that
would be payable on such shares if all amounts payable thereon were paid in
full. A Fundamental Transaction or Change of Control Transaction shall not be
deemed a Liquidation. The Corporation shall mail written notice of any such
Liquidation, not less than 45 days prior to the payment date stated therein, to
each Holder.

 

Section 6.  Conversion.

 

a)             Conversions at Option
of Holder.  Each share of Preferred Stock shall be
convertible, at any time and from time to time from and after the Original
Issue Date at the option of the Holder thereof, into that number of shares of
Common Stock (subject to the limitations set forth in Section 6(d))
determined by dividing the Stated Value of such share of Preferred Stock by the
Conversion Price. Holders shall effect conversions by providing the Corporation
with the form of conversion notice attached hereto as Annex A (a “Notice of
Conversion”).  Each Notice of Conversion
shall specify the number of shares of Preferred Stock to be converted, the
number of shares of Preferred Stock owned prior to the conversion at issue, the
number of shares of Preferred Stock owned subsequent to the conversion at issue
and the date on which such conversion is to be effected, which date may not be
prior to the date the applicable Holder delivers by facsimile such Notice of Conversion
to the Corporation (such date, the “Conversion Date”).  If no Conversion Date is specified in a
Notice of Conversion, the Conversion Date shall be the date that such Notice of
Conversion to the Corporation is deemed delivered hereunder. The calculations
and entries set forth in the Notice of Conversion shall control in the absence
of manifest or mathematical error. To effect conversions of shares of Preferred
Stock, a Holder shall not be required to surrender the certificate(s) representing
the shares of Preferred Stock to the Corporation unless all of the shares of
Preferred Stock represented thereby are so converted, in which case such Holder
shall deliver the certificate representing such shares of Preferred Stock
promptly following the Conversion Date at issue. Shares of Preferred Stock
converted into Common Stock or redeemed in accordance with the terms hereof
shall be canceled and shall not be reissued, The Company shall maintain records
showing the number of shares of Preferred Stock converted for each Holder and
the applicable Conversion Date. Each Holder and any
assignee, by acceptance of a certificate for the Preferred Stock, acknowledges
and agrees that, by reason of the provisions of this paragraph, the number of
shares of Preferred Stock represented by such certificate may at any given time
be less than the amount stated on the face thereof.

 

b)            Conversion Price.  The conversion price for the
Preferred Stock shall equal $1.25, subject to adjustment herein (the “Conversion
Price”).

 

c)             Mechanics of Conversion.

 

i)              Delivery of Certificate
Upon Conversion.  Not later than three (3) Trading Days
after each Conversion Date (the “Share Delivery Date”), the Corporation shall
deliver, or cause to be delivered, to the converting Holder (A) a certificate
or certificates representing the Conversion Shares which shall be free of
restrictive legends and trading restrictions representing the number of
Conversion Shares being acquired upon the conversion of the Preferred Stock.
The Corporation shall use its best efforts to deliver any certificate or
certificates

 

6

 

required to be delivered by the Corporation under this Section 6
electronically through the Depository Trust Company or another established
clearing corporation performing similar functions.

 

ii)             Failure to Deliver
Certificates.  If, in the case of any Notice of Conversion,
such certificate or certificates are not delivered to or as directed by the
applicable Holder by the Share Delivery Date, the Holder shall be entitled to
elect by written notice to the Corporation at any time on or before its receipt
of such certificate or certificates, to rescind such Conversion, in which event
the Corporation shall promptly return to the Holder any original Preferred
Stock certificate delivered to the Corporation and the Holder shall promptly
return to the Corporation the Common Stock certificates issued to such Holder
pursuant to the rescinded Conversion Notice.

 

iii)            Obligation
Absolute;  Partial Liquidated Damages.  The Corporation’s obligation to
issue and deliver the Conversion Shares upon conversion of Preferred Stock in
accordance with the terms hereof are absolute and unconditional, irrespective
of any action or inaction by a Holder to enforce the same, any waiver or  consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by such Holder or any other Person of any obligation
to the Corporation or any violation or alleged violation of law by such Holder
or any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to such Holder in connection
with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Corporation of any such action
that the Corporation may have against such Holder. In the event a Holder shall
elect to convert any or all of the Stated Value of its Preferred Stock, the
Corporation may not refuse conversion based on any claim that such Holder or
any one associated or affiliated with such Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from
a court, on notice to Holder, restraining and/or enjoining conversion of all or
part of the Preferred Stock of such Holder shall have been sought and obtained,
and the Corporation posts a surety bond for the benefit of such Holder in the
amount of 150% of the Stated Value of Preferred Stock which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which
shall be payable to such Holder to the extent it obtains judgment. In the
absence of such injunction, the Corporation shall issue Conversion Shares and,
if applicable, cash, upon a properly noticed conversion. If the Corporation
fails to deliver to a Holder such certificate or certificates pursuant to Section 6(c)(i) on
the second Trading Day after the Share Delivery Date applicable to such
conversion, the Corporation shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $10,000 of Stated Value of Preferred
Stock being converted, $10 per Trading Day (increasing to $20 per Trading Day
on the fifth Trading Day after such damages begin to accrue) for each Trading
Day after such second Trading Day after the Share Delivery Date until such
certificates are delivered or Holder rescinds such conversion. Nothing herein
shall limit a Holder’s right to pursue actual damages for the Corporation’s
failure to deliver Conversion Shares within the period specified herein and
such Holder shall have the right to pursue all remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any such rights
shall not prohibit a Holder from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.

 

iv)           Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion.  In addition to any other rights
available to the Holder, if the Corporation fails for any reason to deliver to
a Holder the applicable certificate or certificates by the Share Delivery Date
pursuant to Section 6(c)(i), and if after such Share Delivery Date such
Holder is required by its brokerage firm to purchase (in an open market
transaction or otherwise), or the Holder’s brokerage firm otherwise purchases,
shares of Common Stock to deliver in satisfaction of a sale by such Holder of
the Conversion Shares which such Holder was entitled to receive upon the
conversion relating to such Share Delivery Date (a “Buy-In”), then the
Corporation shall (A) pay in cash to such Holder (in addition to any other
remedies available to or elected by such Holder) the amount, if any, by which (x) such
Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such Holder was entitled to
receive from the conversion at issue multiplied by (2) the actual sale
price at which the sell order giving rise to such purchase obligation was
executed (including any brokerage commissions) and (B) at the option of
such Holder, either reissue (if surrendered) the shares of Preferred Stock
equal to the number of shares of Preferred Stock submitted for conversion (in which
case, such conversion shall be deemed rescinded) or deliver to such Holder the
number of

 

7

 

shares of Common Stock that would have been issued if
the Corporation had timely complied with its delivery requirements under Section 6(c)(i).
For example, if a Holder purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of shares of Preferred Stock with respect to which the actual sale
price of the Conversion Shares (including any brokerage commissions) giving
rise to such purchase obligation was a total of $10,000 under clause (A) of
the immediately preceding sentence, the Corporation shall be required to pay
such Holder $1,000. The Holder shall provide the Corporation written notice
indicating the amounts payable to such Holder in respect of the Buy-In and,
upon request of the Corporation, evidence of the amount of such loss. Nothing
herein shall limit a Holder’s right to pursue any other remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Corporation’s
failure to timely deliver certificates representing shares of Common Stock upon
conversion of the shares of Preferred Stock as required pursuant to the terms
hereof.

 

v)            Reservation of Shares
Issuable Upon Conversion.  The Corporation covenants that it will at all
times reserve and keep available out of its authorized and unissued shares of
Common Stock for the sole purpose of issuance upon conversion of the Preferred
Stock, as herein provided, free from preemptive rights or any  other actual contingent purchase rights of
Persons other than the Holder (and the other holders of the Preferred Stock),
not less than such aggregate number of shares of the Common Stock as shall
(subject to the terms and conditions set forth in the Purchase Agreement) be
issuable (taking into account the adjustments and restrictions of Section 7)
upon the conversion of the then outstanding shares of Preferred Stock
hereunder. The Corporation covenants that all shares of Common Stock that shall
be so issuable shall, upon issue, be duly authorized, validly issued, fully
paid and nonassessable.

 

vi)           Fractional Shares.  No fractional shares or scrip
representing fractional shares shall be issued upon the conversion of the
Preferred Stock. As to any fraction of a share which the Holder would otherwise
be entitled to purchase upon such conversion, the Corporation shall at its
election, either pay a cash adjustment in respect of such final fraction in an
amount equal to such fraction multiplied by the Conversion Price or round up to
the next whole share.

 

vii)          Transfer Taxes.  The issuance of certificates for
shares of the Common Stock on conversion of this Preferred Stock shall be made
without charge to any Holder for any documentary stamp or similar taxes that
may be payable in respect of the issue or delivery of such certificates,
provided that the Corporation shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificate upon conversion in a name other than that of the Holders of
such shares of Preferred Stock and the Corporation shall not be required to
issue or deliver such certificates unless or until the Person or Persons
requesting the issuance thereof shall have paid to the Corporation the amount
of such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.

 

d)            Beneficial Ownership
Limitation.  The Corporation shall not effect any
conversion of the Preferred Stock, and a Holder shall not have the right to
convert any portion of the Preferred Stock, to the extent that, after giving effect
to the conversion set forth on the applicable Notice of Conversion, such Holder
(together with such Holder’s Affiliates, and any Persons acting as a group
together with such Holder or any of such Holder’s Affiliates) would
beneficially own in excess of the Beneficial Ownership Limitation (as defined
below). For purposes of the foregoing sentence, the number of shares of Common
Stock beneficially owned by such Holder and its Affiliates shall include the
number of shares of Common Stock issuable upon conversion of the Preferred
Stock with respect to which such determination is being made, but shall exclude
the number of shares of Common Stock which are issuable upon (i) conversion
of the remaining, unconverted Stated Value of Preferred Stock beneficially
owned by such Holder or any of its Affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Corporation subject to a limitation on conversion or exercise analogous to
the limitation contained herein (including, without limitation, the Preferred
Stock or the Warrants) beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 6(d), beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder. The
submission of a Notice of Conversion shall be deemed to be such Holder’s
determination of whether the shares of Preferred Stock may be converted (in
relation to other securities

 

8

 

owned by such Holder together with any Affiliates) and
how many shares of the Preferred Stock are convertible, in each case subject to
the Beneficial Ownership Limitation. To ensure compliance with this
restriction, each Holder will be deemed to represent to the Corporation each
time it delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Corporation shall
have no obligation to verify or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder.  For purposes of this Section 6(d), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as stated in the most
recent of the following: (i) the Corporation’s most recent periodic or
annual report filed with the Commission, as the case may be, (ii) a more
recent public announcement by the Corporation or (iii) a more recent
written notice by the Corporation or the Transfer Agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request
of a Holder, the Corporation shall within two Trading Days confirm orally and
in writing to such 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 Corporation, including the Preferred Stock, by such Holder or
its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99%
of the number of shares of the Common Stock outstanding immediately after
giving effect to the issuance of shares of Common Stock issuable upon
conversion of Preferred Stock held by the applicable Holder. A Holder, upon not
less than 61 days’ prior notice to the Corporation, may increase or decrease
the Beneficial Ownership Limitation provisions of this Section 6(d) applicable
to its Preferred Stock provided that the Beneficial Ownership Limitation in no
event exceeds 9.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock upon
conversion of this Preferred Stock held by the Holder and the provisions of
this Section 6(d) shall continue to apply. Any such increase or
decrease will not be effective until the 61st day after such notice is delivered to the
Corporation and shall only apply to such Holder and no other Holder. The
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 6(d) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation contained herein
or to make changes or supplements necessary or desirable to properly give
effect to such limitation. The limitations contained in this paragraph shall
apply to a successor holder of Preferred Stock.

 

Section 7.  Certain Adjustments.

 

a)             Stock
Dividends and Stock Splits.  If the
Corporation, at any time while this Preferred Stock is outstanding:  (i) pays a stock dividend or otherwise
makes a distribution or distributions payable in shares of Common Stock on
shares of Common Stock or any other Common Stock Equivalents (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Corporation upon conversion of, or payment of a dividend on, this Preferred
Stock), (ii) subdivides outstanding shares of Common Stock into a larger
number of shares, (iii) combines (including by way of a reverse stock
split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues,
in the event of a reclassification of shares of the Common Stock, any shares of
capital stock of the Corporation, then the Conversion Price shall be multiplied
by a fraction of which the numerator shall be the number of shares of Common
Stock (excluding any treasury shares of the Corporation) outstanding
immediately before such event, and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any
adjustment made pursuant to this Section 7(a) shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or re-classification.

 

b)            RESERVED.

 

c)             Subsequent
Rights Offerings.  If the
Corporation, at any time while this Preferred Stock is outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to the
Holders) entitling them to subscribe for or purchase shares of Common Stock at
a price per share that is lower than the VWAP on the record date referenced
below, then the Conversion Price shall be multiplied by a fraction of which the
denominator 

 

9

 

shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights, options or warrants plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of the
Common Stock outstanding on the date of issuance of such rights, options or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered (assuming delivery to the Corporation in full
of all consideration payable upon exercise of such rights, options or warrants)
would purchase at such VWAP. Such adjustment shall be made whenever such
rights, options or warrants are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such rights, options or warrants.

 

d)            Pro
Rata Distributions.  If the
Corporation, at any time while this Preferred Stock is outstanding, distributes
to all holders of Common Stock (and not to the Holders) evidences of its
indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security, then in each such case the
Conversion Price shall be adjusted by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness or rights or warrants so distributed applicable to one
outstanding share of the Common Stock as determined by the Board of Directors
of the Corporation in good faith. In either case the adjustments shall be
described in a statement delivered to the Holders describing the portion of
assets or evidences  of indebtedness
so distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.

 

e)             Fundamental
Transaction.  If, at any time while
this Preferred Stock is outstanding, (i) the Corporation, directly or
indirectly, in one or more related transactions effects any merger or
consolidation of the Corporation with or into another Person, (ii) the
Corporation, directly or indirectly, effects any sale, lease, license,
assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions, (iii) any,
direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Corporation or another Person) is completed pursuant to which holders of
Common Stock are permitted to sell, tender or exchange their shares for other
securities, cash or property and has been accepted by the holders of 50% or
more of the outstanding Common Stock, (iv) the Corporation, directly or
indirectly, in one or more related transactions effects any reclassification,
reorganization or recapitalization of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property, (v) the Corporation,
directly or indirectly, in one or more related transactions consummates a stock
or share purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
or share purchase agreement or other business combination) (each a “Fundamental
Transaction”), then, upon any subsequent conversion of this Preferred Stock,
the Holder shall have the right to receive, for each Conversion Share that
would have been issuable upon such conversion immediately prior to the
occurrence of such Fundamental Transaction (without regard to any limitation in
Section 6(d) on the conversion of this Preferred Stock), the number
of shares of Common Stock of the successor or acquiring corporation or of the
Corporation, if it is the surviving corporation, and any additional
consideration (the “Alternate Consideration”) receivable as a result of such
Fundamental Transaction by a holder of the number of shares of Common Stock for
which this Preferred Stock is convertible immediately prior to such Fundamental
Transaction (without regard to any limitation in Section 6(d) on the
conversion of this Preferred Stock). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Corporation shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any conversion of
this

 

10

 

Preferred Stock following such Fundamental Transaction.
To the extent necessary to effectuate the foregoing provisions, any successor
to the Corporation or surviving entity in such Fundamental Transaction shall
file a new Certificate of Designation with the same terms and conditions and
issue to the Holders new preferred stock consistent with the foregoing
provisions and evidencing the Holders’ right to convert such preferred stock
into Alternate Consideration. The Corporation shall cause any successor entity
in a Fundamental Transaction in which the Corporation is not the survivor (the “Successor
Entity”) to assume in writing all of the obligations of the Corporation under
this Certificate of Designation and the other Transaction Documents (as defined
in the Purchase Agreement) in accordance with the provisions of this Section 7(e) pursuant
to written agreements in form and substance reasonably satisfactory to the
Holder and approved by the Holder (without unreasonable delay) prior to such
Fundamental Transaction and shall, at the option of the holder of this
Preferred Stock, deliver to the Holder in exchange for this Preferred Stock a
security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Preferred Stock which is
convertible for a corresponding number of shares of capital stock of such Successor
Entity (or its parent entity) equivalent to the shares of Common Stock
acquirable and receivable upon conversion of this Preferred Stock (without
regard to any limitations on the conversion of this Preferred Stock) prior to
such Fundamental Transaction, and with a conversion price which applies the
conversion price hereunder to such shares of capital stock (but taking into
account the relative value of the shares of Common Stock pursuant to such
Fundamental Transaction and the value of such shares of capital stock, such
number of shares of capital stock and such conversion price being for the
purpose of protecting the economic value of this Preferred Stock immediately
prior to the consummation of such Fundamental Transaction), and which is
reasonably satisfactory in form and substance to the Holder. Upon the
occurrence of any such Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental  Transaction, the provisions of
this Certificate of Designation and the other Transaction Documents referring
to the “Corporation” shall refer instead to the Successor Entity), and may
exercise every right and power of the Corporation and shall assume all of the
obligations of the Corporation under this Certificate of Designation and the
other Transaction Documents with the same effect as if such Successor Entity
had been named as the Corporation herein.

 

f)             Calculations.  All calculations under this Section 7
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 7, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be
the sum of the number of shares of Common Stock (excluding any treasury shares
of the Corporation) issued and outstanding.

 

g)            Notice
to the Holders.

 

i)              Adjustment
to Conversion Price.  Whenever the
Conversion Price is adjusted pursuant to any provision of this Section 7,
the Corporation shall promptly deliver to each Holder a notice setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.

 

ii)             Notice
to Allow Conversion by Holder.  If (A) the
Corporation shall declare a dividend (or any other distribution in whatever
form) on the Common Stock, (B) the Corporation shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (C) the
Corporation shall authorize the granting to all holders of the Common Stock of
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights, (D) the approval of any stockholders of the
Corporation shall be required in connection with any reclassification of the
Common Stock, any consolidation or merger to which the Corporation is a party,
any sale or transfer of all or substantially all of the assets of the
Corporation, or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property or (E) the Corporation
shall authorize the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Corporation, then, in each case, the
Corporation shall cause to be filed at each office or agency maintained for the
purpose of conversion of this Preferred Stock, and shall cause to be delivered
to each Holder at its last address as it shall appear upon the stock books of
the Corporation, at least twenty (20) calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants

 

11

 

are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is expected
that holders of the Common Stock of record shall be entitled to exchange their
shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share
exchange, provided that the failure to deliver such notice or any defect
therein or in the delivery thereof shall not affect the validity of the
corporate action required to be specified in such notice. To the extent that
any notice provided hereunder constitutes, or contains, material, non-public
information regarding the Corporation or any of the Subsidiaries, the
Corporation shall simultaneously file such notice with the Commission pursuant
to a Current Report on Form 8-K. 
The Holder shall remain entitled to convert the Conversion Amount of
this Preferred Stock (or any part hereof) during the 20-day period commencing
on the date of such notice through the effective date of the event triggering
such notice except as may otherwise be expressly set forth herein.

 

Section 8.  RESERVED

 

Section 9.  Negative Covenants.  As long as any shares of Preferred Stock are
outstanding, unless the holders of at least 67% in Stated Value of the then
outstanding shares of Preferred Stock shall have otherwise given prior written
consent, the Corporation shall not, and shall not permit any of the
Subsidiaries to, directly or indirectly:

 

a)             other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including but
not limited to, a guarantee, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits therefrom;

 

b)            other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now
owned or hereafter acquired or any interest therein or any income or profits
therefrom;

 

c)             amend
its charter documents, including, without limitation, its certificate of
incorporation and bylaws, in any manner that materially and adversely affects
any rights of the Holder; provided, however, that this covenant shall in no
event apply to amendments to increase the Corporation’s authorized number of
shares of Common Stock;

 

d)            repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de
minimis number of shares of its Common Stock, Common Stock Equivalents
or Junior Securities, other than as to (i) the Conversion Shares or
Warrant Shares as permitted or required under the Transaction Documents and (ii) repurchases
of Common Stock or Common Stock Equivalents of departing officers and directors
of the Corporation, provided that such repurchases shall not exceed an
aggregate of $100,000 in any fiscal year for all officers and directors for so
long as the Preferred Stock is outstanding;

 

e)             pay
cash dividends or distributions on Junior Securities of the Corporation; or

 

f)             enter
into any agreement with respect to any of the foregoing.

 

Section 10.  Miscellaneous.

 

a)             Notices.  Any and all notices or other communications
or deliveries to be provided by the Holders hereunder including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service, addressed to the Corporation, at 6430 Rockledge Drive, #503, Bethesda,
Maryland  20817, Attention:  Corporate Secretary, facsimile number (301)
897-2567, or such other facsimile number or address as the Corporation may
specify for such purposes by notice to the Holders delivered in accordance with
this Section 10, with a copy sent by facsimile or overnight courier
service to:  James E. Baker, Jr.,
Baxter, Baker, Sidle, Conn & Jones, P.A., 120 E. Baltimore Street, Suite 2100,
Baltimore, Maryland  21202, facsimile
number (410) 230-3801.  Any and all
notices or other communications or deliveries to 

 

12

 

be provided by the Corporation hereunder shall be in
writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile
number or address of such Holder appearing on the books of the Corporation, or
if no such facsimile number or address appears on the books of the Corporation,
at the principal place of business of such Holder, as set forth in the Purchase
Agreement. Any notice or other communication or deliveries hereunder shall be deemed
given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth in this Section prior to 5:30 p.m. (New York City time) on
any date, (ii) the next Trading Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth in this Section on a day that is not a Trading Day or later than
5:30 p.m. (New York City time) on any Trading Day, (iii) the second
Trading Day following the date of mailing, if sent by U.S. nationally
recognized overnight courier service, or (iv) upon actual receipt by the
party to whom such notice is required to be given.

 

b)            Absolute
Obligation.  Except as expressly
provided herein, no provision of this Certificate of Designation shall alter or
impair the obligation of the Corporation, which is absolute and unconditional,
to pay liquidated damages, accrued dividends and accrued interest, as
applicable, on the shares of Preferred Stock at the time, place, and rate, and
in the coin or currency, herein prescribed.

 

c)             Lost
or Mutilated Preferred Stock Certificate. 
If a Holder’s Preferred Stock certificate shall be mutilated, lost,
stolen or destroyed, the Corporation shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated certificate, or in lieu
of or in substitution for a lost, stolen or destroyed certificate, a new
certificate for the shares of Preferred Stock so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or destruction
of such certificate, and of the ownership hereof reasonably satisfactory to the
Corporation.

 

d)            Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Certificate of
Designation shall be governed by and construed and enforced in accordance with
the internal laws of the State of Delaware, without regard to the principles of
conflict of laws thereof.

 

e)             Waiver.  Any waiver by the Corporation or a Holder of
a breach of any provision of this Certificate of Designation shall not operate
as or be construed to be a waiver of any other breach of such provision or of
any breach of any other provision of this Certificate of Designation or a
waiver by any other Holders. The failure of the Corporation or a Holder to
insist upon strict adherence to any term of this Certificate of Designation on
one or more occasions shall not be considered a waiver or deprive that party
(or any other Holder) of the right thereafter to insist upon strict adherence
to that term or any other term of this Certificate of Designation on any other
occasion. Any waiver by the Corporation or a Holder must be in writing.

 

f)             Severability.  If any provision of this Certificate of
Designation is invalid, illegal or unenforceable, the balance of this
Certificate of Designation shall remain in effect, and if any provision is
inapplicable to any Person or circumstance, it shall nevertheless remain
applicable to all other Persons and circumstances.  If it shall be found that any interest or
other amount deemed interest due hereunder violates the applicable law
governing usury, the applicable rate of interest due hereunder shall automatically
be lowered to equal the maximum rate of interest permitted under applicable
law.

 

g)            Next
Business Day.  Whenever any payment
or other obligation hereunder shall be due on a day other than a Business Day,
such payment shall be made on the next succeeding Business Day.

 

h)            Headings.  The headings contained herein are for
convenience only, do not constitute a part of this Certificate of Designation
and shall not be deemed to limit or affect any of the provisions hereof.

 

i)              Status
of Converted or Redeemed Preferred Stock. 
Shares of Preferred Stock may only be issued pursuant to the Purchase
Agreement. If any shares of Preferred Stock shall be converted, redeemed or
reacquired by the Corporation, such shares shall resume the status of
authorized but unissued shares of preferred stock and shall no longer be
designated as Series B Convertible Preferred Stock.

 

13

 

RESOLVED, FURTHER, that the Chief Executive
Officer/Chief Operating Officer, the Treasurer and the Secretary or any
assistant secretary, of the Corporation be and they hereby are authorized and
directed to prepare and file this Certificate of Designation of Preferences,
Rights and Limitations in accordance with the foregoing resolution and the
provisions of Delaware law.

 

IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 7th  day of October, 2010.

 

 

	
   

  	
   

  	
   

  
	
  Name: Robert L. Clayton

  	
   

  	
  Name: Claire L. Kruger

  
	
  Title: Treasurer and Chief Financial Officer

  	
   

  	
  Title: Chief Executive Officer and Chief Operating
  Officer

  

 

14

 

ANNEX A

 

NOTICE OF CONVERSION

 

(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO
CONVERT SHARES OF PREFERRED STOCK)

 

The undersigned hereby elects to convert the number of
shares of Series B Convertible Preferred Stock indicated below into shares
of common stock, par value $0.005 per share (the “Common Stock”), of Spherix
Incorporated, a Delaware corporation (the “Corporation”), according to the
conditions hereof, as of the date written below.  If shares of Common Stock are to be issued in
the name of a Person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as may be required by the Corporation in accordance
with the Purchase Agreement.  No fee will
be charged to the Holders for any conversion, except for any such transfer
taxes.

 

Conversion calculations:

 

Date to Effect Conversion:

 

Number of shares of Preferred Stock owned prior to
Conversion:

 

Number of shares of Preferred Stock to be Converted:

 

Stated Value of shares of Preferred Stock to be
Converted:

 

Number of shares of Common Stock to be Issued:

 

Applicable Conversion Price:

 

Number of shares of Preferred Stock subsequent to
Conversion:

 

Address for Delivery:

 

or

 

DWAC Instructions*:

 

Name of DTC Participant (Holder’s prime broker-dealer):

 

DTC Participant Number:

 

Name of Account at DTC Participant to be credited with
the shares:

 

Account Number at DTS Participant to be credited with
the shares:

 

*You must contact your
broker-dealer and ask them to initiate the DWAC or you will not receive the
shares.

 

	
   

  	
   

  
	
   

  	
  (Print Name of Holder)

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

15

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