Document:

Exhibit 10.1

 

VOTING AGREEMENT

 

This VOTING AGREEMENT (the “Agreement”),
dated as of September 24, 2008, is made by and among GSCP (NJ), Inc.,
GSC Recovery II, L.P., GSC Recovery IIA, L.P., GSC Partners CDO Fund, Limited,
GSC Partners CDO Fund II, Limited, OCM Principal Opportunities Fund, L.P. and
OCM/GFI Power Opportunities Fund, L.P. (each of the foregoing individually, a “Stockholder”
and, collectively, the “Stockholders”), Cherokee International
Corporation, a Delaware corporation (the “Company”), Lineage Power
Holdings, Inc., a Delaware corporation (“Parent”) and Birdie Merger
Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger
Sub”).  Capitalized terms used herein
but not otherwise defined herein shall have the meanings ascribed to such terms
in the Merger Agreement (as defined below).

 

WHEREAS, concurrently herewith, the Company,
Parent and Merger Sub are entering into an Agreement and Plan of Merger (the “Merger
Agreement”), providing for the merger of Merger Sub with and into the
Company with the Company as the surviving corporation (the “Merger”),
upon the terms and subject to the conditions set forth in the Merger Agreement;

 

WHEREAS, as of the date hereof, each of the
Stockholders beneficially owns and has (or upon exercise or exchange of a
convertible security will have) the power to vote and dispose of the number of
shares of common stock, par value $0.001 per share, of the Company (the “Common
Stock”) set forth opposite such Stockholder’s name on Schedule A
attached hereto (the “Owned Shares” and, together with any securities
issued or exchanged with respect to such shares of Common Stock upon any
recapitalization, reclassification, merger, consolidation, spin-off, partial or
complete liquidation, stock dividend, split-up or combination of the securities
of the Company or any other similar change in the Company’s capital structure
or securities of which such Stockholder acquires beneficial ownership after the
date hereof and prior to the termination hereof, whether by purchase,
acquisition or upon exercise of options, warrants, conversion of other
convertible securities or otherwise, collectively referred to herein as, the “Covered
Shares”); and

 

WHEREAS, as a condition to the willingness of
Parent and Merger Sub to enter into the Merger Agreement, each of Parent and
Merger Sub has required that the Stockholders agree, and in order to induce
Parent and Merger Sub to enter into the Merger Agreement, the Stockholders have
agreed, to enter into this Agreement with respect to (a) the Covered
Shares and (b) certain other matters as set forth herein.

 

NOW, THEREFORE, in consideration of the
foregoing and the mutual covenants and agreements contained herein, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:

 

 

ARTICLE I.

VOTING AGREEMENT

 

Section 1.1                                      Voting
Agreement.  The Stockholders hereby
agree, on a several but not joint basis, that during the Voting Period, at any
meeting of the stockholders of the Company, however called, or at any postponement
or adjournment thereof or in any other circumstances upon which a vote, consent
or other approval (including by written consent) is sought, the Stockholders
shall (a) when a meeting is held, appear at such meeting or otherwise cause the
Covered Shares to be counted as present thereat for the purpose of establishing
a quorum and (b) vote (or cause to be voted) in person or by proxy the Covered
Shares: (i) in favor of the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement if a vote, consent or other approval
(including by written consent) with respect to any of the foregoing is sought
and (ii) against any (x) extraordinary corporate transaction (other than the
Merger or the transactions with Parent and Merger Sub contemplated by the
Merger Agreement), such as a merger, consolidation, business combination,
tender or exchange offer, reorganization, recapitalization, liquidation, sale
or transfer of a material amount of the assets or securities of the Company or
any of its subsidiaries (other than pursuant to the Merger or the transactions
with Parent and Merger Sub contemplated by the Merger Agreement) or any other
Takeover Proposal or (y) amendment of the Company’s certificate of
incorporation or by-laws or other proposal or transaction involving the Company
or any of its subsidiaries, which amendment or other proposal or transaction
would in any manner reasonably be expected to impede, delay, frustrate, prevent
or nullify the Merger, the Merger Agreement or any of the other transactions
contemplated by the Merger Agreement or result in a breach in any material
respect of any representation, warranty, covenant or agreement of the Company
under the Merger Agreement or change in any manner the voting rights of the
Common Stock.  For the purposes of this
Agreement, “Voting Period” shall mean the period commencing on the date hereof
and ending immediately prior to any termination of this Agreement pursuant to
Section 6.1 hereof.

 

Section 1.2                                      Acknowledgement.  The Stockholders hereby acknowledge receipt
and review of a copy of the Merger Agreement.

 

Section 1.3                                      Proxy.

 

(a)                                  EACH STOCKHOLDER, ON A SEVERAL BUT
NOT JOINT BASIS, HEREBY GRANTS TO, AND APPOINTS, PARENT, THE PRESIDENT OF
PARENT AND THE SECRETARY OF PARENT, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS
OF PARENT, AND ANY OTHER DESIGNEE OF PARENT, EACH OF THEM INDIVIDUALLY, SUCH
STOCKHOLDER’S IRREVOCABLE (UNTIL THE VOTING AGREEMENT TERMINATION DATE (AS
DEFINED BELOW), AT WHICH TIME SUCH PROXY SHALL BE AUTOMATICALLY REVOKED) PROXY
AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE THE COVERED
SHARES IN ACCORDANCE WITH SECTION 1.1 HEREOF.  EACH STOCKHOLDER INTENDS THIS PROXY TO BE
IRREVOCABLE (UNTIL THE VOTING AGREEMENT TERMINATION DATE, AT WHICH TIME SUCH
PROXY SHALL BE AUTOMATICALLY REVOKED) AND COUPLED WITH AN INTEREST AND WILL
TAKE SUCH FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE
NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY
PREVIOUSLY GRANTED BY SUCH STOCKHOLDER WITH RESPECT TO THE COVERED SHARES.

 

2

 

(b)                                 The parties acknowledge and agree
that neither Parent, nor Parent’s successors, assigns, subsidiaries, divisions,
employees, officers, directors, shareholders, agents and affiliates, shall owe
any duty to, whether in law or otherwise, or incur any liability of any kind
whatsoever, including without limitation, with respect to any and all claims,
losses, demands, causes of action, costs, expenses (including reasonable
attorney’s fees) and compensation of any kind or nature whatsoever to the
Stockholder in connection with, as a result of or otherwise relating to any
vote (or refrain from voting) by Parent of the Covered Shares subject to the
irrevocable proxy hereby granted to Parent at any annual, special or other
meeting or action or the execution of any consent of the Stockholders of the
Company.  The parties acknowledge that,
pursuant to the authority hereby granted under the irrevocable proxy, Parent
may vote the Covered Shares pursuant to Section 1.1 hereof in furtherance
of its own interests, and Parent is not acting as a fiduciary for the
Stockholders.

 

(c)                                  Except pursuant to the terms of this
Agreement or applicable Law, this irrevocable proxy shall not be terminated by
any act of a Stockholder, whether by the death or incapacity of a Stockholder
or by the occurrence of any other event or events (including, without limiting
the foregoing, the termination of any trust or estate for which the Stockholder
is acting as a fiduciary or fiduciaries or the dissolution or liquidation of
any corporation or partnership).  If
after the execution hereof a Stockholder should die or become incapacitated, or
if any trust or estate should be terminated, or if any corporation or partnership
should be dissolved or liquidated, or if any other such event or events shall
occur before the Voting Agreement Termination Date, certificates representing
the Covered Shares shall be delivered by or on behalf of such Stockholder in
accordance with the terms and conditions of the Merger Agreement and this
Agreement, and actions taken by the Parent hereunder shall be as valid as if
such death, incapacity, termination, dissolution, liquidation or other event or
events had not occurred, regardless of whether or not the Parent has received
notice of such death, incapacity, termination, dissolution, liquidation or
other event.

 

Section 1.4                                      Other
Matters.  Except as set forth in
Section 1.1 of this Agreement, each Stockholder shall not be restricted from voting
in favor of, against or abstaining with respect to any matter presented to the
stockholders of the Company.  In
addition, nothing in this Agreement shall give Parent or any of its officers or
designees the right to vote any Covered Shares in connection with the election
of directors or any other matter not expressly contemplated by Section 1.1.

 

ARTICLE II.

REPRESENTATIONS
AND WARRANTIES OF THE COMPANY

 

The Company hereby represents and warrants to
each Stockholder and Parent that the Company has all necessary power and
authority to execute and deliver this Agreement and this Agreement has been
duly and validly authorized, executed and delivered by the Company and,
assuming the due authorization, execution and delivery by the other parties
hereto, constitutes a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium or other
similar laws relating to creditors rights generally and by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at Law).

 

3

 

Subject to Article IV of this Agreement,
the Company Board has taken all necessary action to ensure that the
restrictions on business combinations contained in Section 203 of the DGCL
will not apply to this Agreement or the transactions contemplated by this
Agreement.  The execution and delivery of
this Agreement by the Company do not, and the consummation by the Company of
the transactions contemplated hereby and compliance by the Company with the
terms hereof will not, conflict with, or result in any violation or default of
(with or without notice or lapse of time or both), any provision of, the
certificate of incorporation or by-laws of the Company, any trust agreement,
contract, loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise, license or Law applicable
to the Company or to the Company’s properties or assets.

 

ARTICLE III.

REPRESENTATIONS
AND WARRANTIES

OF THE STOCKHOLDERS

 

Each Stockholder hereby represents and
warrants, on a several but not joint basis, to Parent as follows:

 

Section 3.1                                      Valid
Existence.  Such Stockholder is duly
organized, formed or created, validly existing and in good standing under the
laws of the jurisdiction of its organization.

 

Section 3.2                                      Authority
Relative to This Agreement.  Such
Stockholder has all necessary power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby.  This
Agreement has been duly and validly authorized, executed and delivered by such
Stockholder and, assuming the due authorization, execution and delivery by the
other parties hereto, constitutes a legal, valid and binding obligation of such
Stockholder, enforceable against such Stockholder in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, moratorium or
other similar laws relating to creditors rights generally and by general
equitable principles (regardless of whether such enforceability is considered
in a proceeding in equity or at Law).

 

Section 3.3                                      No
Conflict.

 

(a)                                  The execution and delivery of this
Agreement by such Stockholder do not, and the performance of its obligations
under this Agreement by such Stockholder and the consummation by such
Stockholder of the transactions contemplated hereby will not, (i) conflict
with or violate any Law applicable to such Stockholder or by which the Owned
Shares are bound or affected or (ii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on, any of the Owned Shares pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which such Stockholder is a party or by which such
Stockholder or the Owned Shares are bound or affected.

 

4

 

(b)                                 The execution and delivery of this
Agreement by such Stockholder do not, and the performance of its obligations
under this Agreement will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any court or arbitrator or any
governmental entity, agency or official except (i) for applicable
requirements, if any, of the Securities and Exchange Act of 1934, as amended,
or (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
materially impair the ability of such Stockholder to perform its obligations
hereunder.

 

Section 3.4                                      Ownership
of Shares.  As of the date hereof,
such Stockholder has good and marketable title to and is the record and
beneficial owner or, in the case of GSCP (NJ), Inc., OCM Principal
Opportunities Fund, L.P., OCM/GFI Power Opportunities Fund, L.P., the
beneficial owner, of the Owned Shares set forth opposite such Stockholder’s
name on Schedule A hereto, free and clear of all pledges, liens, proxies,
claims, charges, security interests, preemptive rights, voting trusts, voting
agreements, options, rights of first offer or refusal and any other
encumbrances or arrangements whatsoever with respect to the ownership, transfer
or other voting of the Owned Shares. 
There are no outstanding options, warrants or rights to purchase or
acquire, or agreements or arrangements relating to the voting of, any Owned
Shares and such Stockholder (either directly or indirectly through one of its
affiliates) has the sole authority to direct the voting of the Owned Shares in
accordance with the provisions of this Agreement and the sole power of
disposition with respect to the Owned Shares, with no restrictions, subject to
applicable securities laws on its disposition pertaining thereto.  As of the date hereof, such Stockholder does
not own beneficially or of record any equity securities of the Company other
than the Owned Shares set forth opposite such Stockholder’s name on Schedule A
hereto.  Such Stockholder has not
appointed or granted a proxy which is still in effect with respect to any Owned
Shares.

 

Section 3.5                                      Stockholder
Has Adequate Information.  Such
Stockholder is an “accredited investor” (as defined under the Securities Act of
1933, as amended) and a sophisticated investor with respect to the Covered
Shares and has independently and without reliance upon Parent (other than
reliance on the agreements of Parent contained in the Merger Agreement) and
based on such information as such Stockholder has deemed appropriate, made its
own analysis and decision to enter into this Agreement.  Such Stockholder acknowledges that Parent has
not made nor makes any representation or warranty in this Agreement, whether
express or implied, of any kind or character. 
Such Stockholder acknowledges that the agreements contained herein with
respect to the Covered Shares by such Stockholder are irrevocable, and that the
Stockholder shall have no recourse to the Covered Shares or Parent with respect
to the Covered Shares, except with respect to breaches of representations,
warranties, covenants and agreements expressly set forth in this Agreement.

 

Section 3.6                                      Parent’s
Excluded Information.  Such
Stockholder acknowledges and confirms that (a) Parent may possess or hereafter
come into possession of certain non-public information concerning the Covered
Shares and the Company which is not known to Stockholder and which may be
material to Stockholder’s decision to vote in favor of the Merger (“Parent’s
Excluded Information”), (b) Stockholder has requested not to receive
Parent’s Excluded Information and has determined to vote in favor of the Merger
and sell the Covered Shares notwithstanding its lack of knowledge of Parent’s
Excluded Information, and (c) Parent shall have no liability or obligation to
Stockholder in connection with, and Stockholder hereby waives and releases
Parent from, any claims which Stockholder or its successors and assigns may
have against Parent (whether pursuant to applicable securities, laws or
otherwise) with respect to the non-disclosure of Parent’s Excluded Information.

 

5

 

Section 3.7                                      No
Setoff.  Such Stockholder has no
liability or obligation related to or in connection with the Covered Shares
other than the obligations to Parent as set forth in this Agreement.  To the knowledge of such Stockholder, there
are no legal or equitable defenses or counterclaims that have been or may be
asserted by or on behalf of the Company, as applicable, to reduce the amount of
the Covered Shares or affect the validity or enforceability of the Covered
Shares.

 

Section 3.8                                      Reliance
by Parent and Merger Sub.  Such
Stockholder understands and acknowledges that Parent and Merger Sub are
entering into the Merger Agreement in reliance upon such Stockholder’s execution
and delivery of this Agreement.

 

ARTICLE IV.

REPRESENTATIONS
AND WARRANTIES

OF PARENT AND MERGER SUB

 

As of the date
hereof, Parent and Merger Sub hereby, jointly and severally, represent and
warrant to each Stockholder and the Company that each of Parent and Merger Sub
has all necessary power and authority to execute and deliver this Agreement and
this Agreement has been duly and validly authorized, executed and delivered by
Parent and Merger Sub and, assuming the due authorization, execution and delivery
by the other parties hereto, constitutes a legal, valid and binding agreement
of Parent and Merger Sub, enforceable against Parent and Merger Sub in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other similar laws relating to creditors rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at Law).  As of the date hereof, neither Parent, Merger
Sub nor any of their respective subsidiaries beneficially owns, directly or
indirectly, any shares of Company Common Stock or other securities convertible
into, exchangeable into or exercisable for shares of Company Common Stock.  Neither Parent nor Merger Sub, nor any of their
“affiliates” or “associates” (as such terms are defined in Section 203 of
the DGCL) have been an “interested stockholder” of the Company (as defined in Section 203
of the DGCL) within the three years prior to the date of this Agreement.  The execution and delivery of this Agreement
by Parent and Merger Sub do not, and the consummation by Parent and Merger Sub
of the transactions contemplated hereby and compliance by Parent and Merger Sub
with the terms hereof will not, conflict with, or result in any violation or
default of (with or without notice or lapse of time or both), any provision of,
the certificate of incorporation or by-laws of Parent or Merger Sub, any trust
agreement, contract, loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise, license or
Law applicable to Parent or Merger Sub or to Parent or Merger Sub’s properties
or assets.

 

ARTICLE V.

COVENANTS OF THE
STOCKHOLDERS

 

Each Stockholder, on a several but not joint
basis, hereby covenants and agrees as follows:

 

6

 

Section 5.1                                      No
Solicitation.

 

(a)                                  Such Stockholder
hereby acknowledges that it is aware of the covenants of the Company contained
in Section 5.2 of the Merger Agreement and hereby agrees that it shall,
and shall cause its representatives to, except as allowed under Section 5.2(g) of
the Merger Agreement, immediately cease any discussions or negotiations with
any parties that may be ongoing with respect to a Takeover Proposal.  Such Stockholder further agrees that it shall
not, nor shall it permit any of its representatives to, directly or indirectly,
(i) solicit, initiate, cause, encourage or take any other action to
knowingly facilitate (including by way of furnishing non-public information or
providing access to the Company’s or such Stockholder’s properties, books,
records or personnel, as applicable) any inquiries regarding, or the making of
any proposal or offer that constitutes, or could reasonably be expected to lead
to, a Takeover Proposal or (ii) enter into, continue or otherwise
participate in any discussions or negotiations regarding a Takeover Proposal,
or otherwise knowingly facilitate any efforts or attempt to implement a
Takeover Proposal or execute or enter into any agreement, understanding or
arrangement with respect to a Takeover Proposal, except, in each case, to the
extent that the Company is permitted to engage in such solicitation,
initiation, facilitation, discussion or negotiation pursuant to Section 5.2
of the Merger Agreement.  Such
Stockholder shall promptly advise Parent orally and in writing of the receipt
by such Stockholder or any of its representatives of any Takeover Proposal or
any inquiry with respect to, or that could reasonably be expected to lead to,
any Takeover Proposal (in each case within 3 calendar days after receipt),
specifying the material terms and conditions of such Takeover Proposal or
inquiry and the identity of the party making such Takeover Proposal or inquiry.  Such Stockholder shall, subject to the
fiduciary duties of the Company Board, keep Parent reasonably informed of the
material details of any such Takeover Proposal or inquiry.

 

(b)                                 Notwithstanding the
foregoing, nothing in this Agreement shall be deemed to prohibit David Robbins
and John Michal Conaway from fulfilling each of their obligations as directors
of the Company with respect to the taking, as a representative of the Company,
any action which is expressly permitted to be taken by the Company pursuant to Section 5.2
of the Merger Agreement or from entering into negotiations and discussions
regarding the Covered Shares with respect to any Takeover Proposal at any time
that the Company is permitted to engage in negotiations or discussions with
respect thereto under such Section 5.2. 
The parties acknowledge that this Agreement is entered into by each
Stockholder solely in such Stockholder’s capacity as the beneficial owner of
such Stockholder’s Owned Shares and that the taking of, or the refraining from
taking, any action contemplated in the immediately preceding sentence by either
of the aforementioned representatives of either Stockholder solely in such
representative’s capacity as a director of the Company shall not be deemed to
constitute a breach of this Agreement.

 

Section 5.2                                      No
Transfer.  Other than pursuant to the
terms of this Agreement or the Merger Agreement, without the prior written
consent of Parent or as otherwise provided in this Agreement, during the term
of this Agreement, such Stockholder hereby agrees to not, directly or
indirectly, (a) grant any proxies or enter into any voting trust or other
agreement or arrangement with respect to the voting of any Covered Shares or
(b) sell, pledge, assign, transfer, encumber or otherwise dispose of (including
by merger, consolidation or otherwise by operation of Law), or enter into any
contract, option or other arrangement or understanding with respect to the
direct or indirect assignment, transfer, encumbrance or other disposition of
(including by merger, consolidation or otherwise by operation of Law), any
Covered Shares.

 

7

 

Parent and Merger Sub hereby acknowledge that
one or more Covered Shares may, as of the date hereof, be pledged or encumbered
pursuant to financing arrangements of each Stockholder existing as of the date
hereof.

 

Section 5.3                                      No
Inconsistent Agreement.  Such
Stockholder hereby covenants and agrees that such Stockholder (a) has not
entered into and shall not enter into any agreement that would restrict, limit
or interfere with the performance of such Stockholder’s obligations hereunder
and (b) shall not knowingly take any action that would reasonably be expected
to make any of its representations and warranties contained herein untrue or
incorrect or have the effect of preventing or disabling it from performing its
obligations under this Agreement.

 

Section 5.4                                      Public
Announcement.  Stockholder shall
consult with Parent before issuing any press releases or otherwise making any
public statements with respect to the transactions contemplated herein and
shall not issue any such press release or make any such public statement
without the approval of Parent, except as may be required by Law.

 

Section 5.5                                      Additional
Shares.  Stockholder shall as
promptly as practicable notify Parent of the number of any new Covered Shares
acquired by the Stockholder, if any, after the date hereof.  Any such shares shall be subject to the terms
of this Agreement as though owned by the Stockholder on the date hereof.

 

ARTICLE VI.

MISCELLANEOUS

 

Section 6.1                                      Termination.  This Agreement and all of its provisions
shall terminate upon the earlier of (i) the Effective Time, (ii) the
termination of the Merger Agreement in accordance with its terms (including,
following the payment of the Termination Fee, if due at that time thereunder),
or (iii) written notice of termination of this Agreement by Parent to
Stockholders (such date of termination, the “Voting Agreement Termination
Date”).  Nothing in this Section 6.1
shall be deemed to release any party from any liability for any breach by such
party of the terms and provisions of this Agreement when such Agreement was in
effect.

 

Section 6.2                                      Amendment
of Merger Agreement.  The obligations
of the Stockholders under this Agreement shall terminate if the Merger
Agreement is amended or otherwise modified after the date hereof without the
prior written consent of the Stockholders in a manner that reduces or changes
the form of Merger Consideration, adversely affects the rights of the
Stockholders or extends the term of the Merger Agreement.

 

Section 6.3                                      Survival
of Representations and Warranties. 
The respective representations and warranties of the Stockholders
contained herein shall not be deemed waived or otherwise affected by any
investigation made by the other party hereto. 
The representations and warranties contained herein shall expire with,
and be terminated and extinguished upon, the Voting Agreement Termination Date,
and thereafter no party hereto shall be under any liability whatsoever with
respect to any such representation or warranty.

 

8

 

Section 6.4                                      Fees
and Expenses.  Except as otherwise
provided herein or as set forth in the Merger Agreement, all costs and expenses
incurred in connection with the transactions contemplated by this Agreement
shall be paid by the party incurring such costs and expenses.

 

Section 6.5                                      Liabilities
Several.  The obligations of the
Stockholders under this Agreement shall be several and not joint.

 

Section 6.6                                      Limited
Recourse.  With respect to GSC
Partners CDO Fund, Limited and GSC Partners CDO Fund II, Limited (each, a
“CDO”), each other party to this Agreement (each, a “Non-CDO Party”) agrees
that, notwithstanding any other provision of this Agreement, the liability of
each CDO to the Non-CDO Parties hereunder is limited in recourse to the Covered
Shares with respect to such CDO, and if the proceeds of the Covered Shares,
when applied in accordance with the Priority of Payments (in each case, as
defined in the Indenture governing such CDO), are insufficient to meet the
obligations of such CDO hereunder in full, such CDO shall have no further
liability in respect of any such obligations, and such obligations and all
claims of the Non-CDO Parties against such CDO shall thereupon extinguish and
not thereafter revive.

 

Notwithstanding any other provision of this
Agreement, each Non-CDO Party agrees not to institute against, or join any
other person in instituting against, either of the CDOs any bankruptcy,
reorganization, arrangement, insolvency, moratorium or liquidation proceedings,
or other proceedings under Cayman Islands bankruptcy laws, United States
federal or state bankruptcy laws, or similar laws of any jurisdiction until at
least one year and one day or the then applicable, if longer, preference period
after the payment in full of all amounts payable in respect of the securities
issued by such CDO plus one day; provided, however, that nothing in this
provision shall preclude or limit, or be deemed to stop, any Non CDO Party (A) from
taking any action prior to the expiration of the aforementioned one year and
one day period (or, if longer, the applicable preference period then in effect
plus one day) in (x) any case or proceeding voluntarily filed or commenced
by such CDO or (y) any involuntary insolvency proceeding filed or
commenced against such CDO, as the case may be, by a person other than a
Non-CDO Party or its affiliates, or (B) from commencing or pursuing
against such CDO or any properties of such CDO any legal action which is not a
bankruptcy, reorganization, arrangement, insolvency, moratorium, liquidation or
similar proceeding.

 

Section 6.7                                      Notices.  All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (a) on
the date of delivery if delivered personally, (b) on the first business day
following the date of dispatch if delivered by a nationally recognized next-day
courier service, (c) on the fifth business day following the date of mailing if
delivered by registered or certified mail (postage prepaid, return receipt
requested) or (d) if sent by facsimile transmission, when transmitted and
receipt is confirmed.  All notices
hereunder shall be delivered to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 6.7):

 

9

 

if to Parent or Merger Sub:

c/o The Gores Group, LLC

10877 Wilshire Blvd., 18th Floor 

Los Angeles, CA 90024 

Attention:  Fund General Counsel

Facsimile No: (310) 443-2149

 

with a copy to:

 

Latham & Watkins LLP

555 Eleventh Street, N.W.

Suite 1000

Washington, DC 20004

Attention:                 Paul
F. Sheridan, Jr.

                                                                        Joseph
A. Simei

Facsimile No.:  (202) 637-2201

 

if to GSCP (NJ), INC., GSCP
(NJ), Inc., GSC Recovery II, L.P., GSC Recovery IIA, L.P., GSC Partners
CDO Fund, Limited, or GSC Partners CDO Fund II, Limited:

 

c/o GSC Group

300 Campus Drive

Florham Park, New Jersey  07932

Attention:  General Counsel

Facsimile No.:  (973) 437-1037

 

if to OCM Principal
Opportunities Fund, L.P. and OCM/GFI Power Opportunities Fund, L.P.

 

c/o Oaktree Capital Management, L.P.

333 South Grand Avenue, 28th Floor

Los Angeles, CA  90071

Attention:                 Adam
Pierce, Vice President

Facsimile No: (213) 830-6394

 

if to the Company:

 

Cherokee International Corporation

2841 Dow Avenue

Tustin, California 92780

Attention: Jeffrey Frank, President and Chief Executive Officer

Facsimile No: (714) 838-8569

 

10

 

	
  with a copy
  to:

  
	
   

  
	
  O’Melveny &
  Myers LLP

  
	
  610 Newport
  Center Drive, Suite 1700

  
	
  Newport
  Beach, CA 92660

  
	
  Attention: 

  	
  Gary J.
  Singer, Esq.

  
	
   

  	
  Loren J.
  Weber, Esq.

  
	
  Facsimile
  No: (949) 823-6994

  

 

Section 6.8                                      Severability.  If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
Law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. 
Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that
the transactions contemplated hereby be consummated as originally contemplated
to the fullest extent possible.

 

Section 6.9                                      Entire
Agreement; Assignment.  This
Agreement and the Merger Agreement constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof and
supersede all prior agreements and undertakings, both written and oral, among
the parties hereto, or any of them, with respect to the subject matter hereof
and thereof.  This Agreement shall not be
assigned (whether pursuant to a merger, by operation of law or otherwise), except
that Merger Sub may assign all or any of its rights and obligations hereunder
to Parent or any direct or indirect wholly-owned subsidiary of Parent,
provided, however, that no such assignment shall relieve the assigning party of
its obligations hereunder if such assignee does not perform such obligations.

 

Section 6.10                                Amendment.  This Agreement may be amended by the parties
at any time prior to the Effective Time. 
This Agreement may not be amended except by an instrument in writing
signed by each of the parties hereto.

 

Section 6.11                                Waiver.  At any time prior to the Effective Time, any
party hereto may (a) extend the time for the performance of any obligation or
other act of any other party hereto, (b) waive any inaccuracy in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any agreement
of any other party or any condition to its own obligations contained
herein.  Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby.  The failure
of any party to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of those rights.

 

Section 6.12                                Parties
in Interest.  This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
other Person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.

 

11

 

Section 6.13                                Governing
Law.  This Agreement shall be
governed by, and construed in accordance with, the laws of the State of
Delaware (without giving effect to the choice of law principles therein).

 

Section 6.14                                Specific
Performance; Submission to Jurisdiction. 
The parties agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached.  It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions of this
Agreement in the Court of Chancery or other courts of the State of Delaware,
this being in addition to any other remedy to which such party is entitled at
law or in equity.  In addition, each of
the parties hereto (a) consents to submit itself to the personal jurisdiction
of the Court of Chancery or other courts of the State of Delaware in the event
any dispute arises out of this Agreement or any of the transactions
contemplated by this Agreement or any of the transactions contemplated by this
Agreement, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from such court, (c) agrees
that it will not bring any action relating to this Agreement or any of the
transactions contemplated by this Agreement in any court other than the Court
of Chancery or other courts of the State of Delaware and (d) to the fullest
extent permitted by Law, consents to service being made through the notice
procedures set forth in Section 6.7. 
Each party hereto hereby agrees that, to the fullest extent permitted by
Law, service of any process, summons, notice or document by U.S. registered
mail to the respective addresses set forth in Section 6.7 shall be effective
service of process for any suit or proceeding in connection with this Agreement
or the transactions contemplated hereby.

 

Section 6.15                                Waiver
of Jury Trial.  Each of the parties
hereto hereby waives to the fullest extent permitted by applicable Law any
right it may have to a trial by jury with respect to any litigation directly or
indirectly arising out of, under or in connection with this Agreement.  Each of the parties hereto (a) certifies that
no representative, agent or attorney of any other party has represented,
expressly or otherwise, that such other party would not, in the event of
litigation, seek to enforce that foregoing waiver and (b) acknowledges that it
and the other parties hereto have been induced to enter into this Agreement by,
among other things, the mutual waivers and certifications in this Section 6.15.

 

Section 6.16                                Headings.  The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.

 

Section 6.17                                Counterparts.
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement.

 

Section 6.18                                Further
Assurances.

 

From time to
time, at the request of another party and without further consideration, each
party hereto shall take such reasonable further action as may reasonably be necessary
or desirable to consummate and make effective the transactions contemplated by
this Agreement.

 

[SIGNATURE PAGE FOLLOWS]

 

12

 

IN WITNESS WHEREOF, the Stockholders, the
Company, Parent and Merger Sub have caused this Agreement to be duly executed
on the date hereof.

 

 

	
   

  	
  PARENT:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  LINEAGE POWER HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ryan Wald

  
	
   

  	
   

  	
  Name:

  	
  Ryan Wald

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MERGER SUB:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  BIRDIE MERGER SUB, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven G. Eisner

  
	
   

  	
   

  	
  Name:

  	
  Steven G. Eisner

  
	
   

  	
   

  	
  Title:

  	
  Vice President & Secretary

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CHEROKEE INTERNATIONAL CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jeffrey Frank

  
	
   

  	
   

  	
  Name:

  	
  Jeffrey Frank

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

S-1

 

	
   

  	
  STOCKHOLDERS:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GSCP (NJ), INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David L. Goret

  
	
   

  	
   

  	
  Name:

  	
  David L. Goret

  
	
   

  	
   

  	
  Title:

  	
  Senior Managing Director and Secretary

  

 

 

	
   

  	
  GSC RECOVERY II, L.P.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSC Recovery II GP, L.P.,

  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSC RII, LLC,

  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSCP (NJ) Holdings, L.P.,

  its managing member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSCP (NJ), Inc.,

  its general partner

  

 

 

	
   

  	
  By:

  	
  /s/ David Robbins

  
	
   

  	
   

  	
  Name:

  	
  David Robbins

  
	
   

  	
   

  	
  Title:

  	
  Managing Director

  

 

S-2

 

	
   

  	
  GSC RECOVERY IIA, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  GSC Recovery IIA GP, L.P.,

  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSC RIIA, LLC, 

  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSCP (NJ) Holdings, L.P., 

  its managing member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  GSCP (NJ), Inc., 

  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Robbins

  
	
   

  	
   

  	
  Name:

  	
  David Robbins

  
	
   

  	
   

  	
  Title:

  	
  Managing Director

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GSC PARTNERS CDO FUND, LIMITED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Alan Corkish

  
	
   

  	
   

  	
  Name:

  	
  Alan Corkish

  
	
   

  	
   

  	
  Title:

  	
  Director

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GSC PARTNERS CDO FUND II, LIMITED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Dyer

  
	
   

  	
   

  	
  Name:

  	
  David Dyer

  
	
   

  	
   

  	
  Title:

  	
  Director

  
					

 

S-3

 

	
   

  	
  OCM PRINCIPAL OPPORTUNITIES FUND, L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Oaktree Fund GP I, L.P.

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael P. Harmon

  
	
   

  	
   

  	
  Name:

  	
  Michael P. Harmon

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Adam C. Pierce

  
	
   

  	
   

  	
  Name:

  	
  Adam C. Pierce

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
					

 

S-4

 

	
   

  	
  OCM/GFI POWER OPPORTUNITIES FUND, L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Oaktree Fund GP I, L.P.

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael P. Harmon

  
	
   

  	
   

  	
  Name:

  	
  Michael P. Harmon

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Adam C. Pierce

  
	
   

  	
   

  	
  Name:

  	
  Adam C. Pierce

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
					

 

S-5

 

SCHEDULE A

 

	
  Stockholder

  	
   

  	
  Shares of Common Stock

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  GSCP (NJ), Inc.

  	
   

  	
  5,020,148

  	
  (1)

  
	
   

  	
   

  	
   

  	
   

  
	
  GSC Recovery II, L.P.

  	
   

  	
  2,312,360

  	
   

  
	
  GSC Recovery IIA, L.P.

  	
   

  	
  2,280,175

  	
   

  
	
  GSC Partners CDO Fund, Limited

  	
   

  	
  349,416

  	
   

  
	
  GSC Partners CDO Fund II, Limited

  	
   

  	
  78,197

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  OCM Principal Opportunities Fund, L.P.

  	
   

  	
  4,465,079

  	
   

  
	
  OCM/GFI Power Opportunities Fund, L.P.

  	
   

  	
  312,897

  	
   

  

 

(1) Shares are held by GSC
Recovery II, L.P., GSC Recovery IIA, L.P., GSC Partners CDO Fund, Ltd., and GSC
Partners CDO Fund II, Ltd. GSCP (NJ), Inc. is a beneficial owner only.Exhibit 10.1

=

CONFIDENTIAL

 

SUBSCRIPTION AGREEMENT

 

September 29,
2008

 

Wave Systems Corp.

480 Pleasant Street

Lee, MA 01238

 

The undersigned (the “Investor”)
hereby confirms its agreement with you as follows:

 

1.                                      This
Subscription Agreement (this “Agreement”) is made as of the date set
forth below between Wave Systems Corp., a Delaware corporation (the “Company”),
and the Investor.

 

2.                                      The
Company has authorized the sale and issuance to certain investors of (a) up
to 48 shares of Series I Convertible Preferred Stock (the “Securities”),
par value $0.01 per share (the “Series I Preferred Stock”) for a
purchase price of $4,400 per share (the “Purchase Price”). The terms of
the Series I Preferred Stock are set forth in the Certificate of
Designations, attached hereto as Annex III, filed with the Secretary of State
of the State of Delaware on September 12, 2008 (the “Certificate of
Designations”).

 

3.                                      The
offering and sale of the Securities (the “Offering”) are being made
pursuant to the Company’s registration statement including a base prospectus
(the “U.S. Base Prospectus”) on Form S-3 (Registration No. 333-150340) filed with the United States Securities and
Exchange Commission (the “Commission”) (which, together with all
amendments or supplements thereto is referred to herein as the “Registration
Statement”) and a Prospectus Supplement containing certain supplemental
information regarding the Securities and terms of the Offering that will be
filed with the Commission (the “Prospectus Supplement”).

 

4.                                      The
Company and the Investor agree that the Investor will purchase from the Company
and the Company will issue and sell to the Investor, for the aggregate purchase
price set forth below, the number of shares of Series I Preferred Stock
set forth below (the “Investor Securities”). The Investor Securities
shall be purchased pursuant to the Terms and Conditions for Purchase of
Securities attached hereto as Annex I and incorporated herein by this reference
as if fully set forth herein.

 

5.                                      The
Investor represents that, except as set forth below, (a) it has had no
position, office or other material relationship within the past three years
with the Company or any of its affiliates and (b) it has no direct or
indirect affiliation or association with any NASD member. Exceptions:

 

(If no exceptions, write “none.” If left blank, response will be
deemed to be “none.”)

 

 

6.                                      The
Investor acknowledges that, prior to or in connection with the execution and
delivery of this Agreement, it has reviewed the final U.S. Base Prospectus,
dated June 23, 2008, which is a part of
the Company’s Registration Statement, and the Prospectus Supplement. THIS AGREEMENT SHALL NOT CONSTITUTE A BINDING
COMMITMENT ON THE PART OF THE COMPANY UNTIL (A) THE COMPANY HAS
TIMELY RECEIVED AN EXECUTED COPY OF THE COMPLETED SUBSCRIPTION AGREEMENT FROM
THE INVESTOR AND (B) THE COMPANY HAS DELIVERED TO THE INVESTOR AN EXECUTED
COUNTERPART SIGNATURE PAGE HERETO. THE INVESTOR ACKNOWLEDGES THAT, AT ANY
TIME PRIOR TO THE DELIVERY OF ITS EXECUTED COUNTERPART SIGNATURE PAGE, THE
COMPANY MAY ELECT TO NOT ENTER INTO THIS SUBSCRIPTION AGREEMENT FOR ANY
REASON.

 

 

CONFIDENTIAL

 

SIGNATURE PAGE

 

	
  Number of
  Investor Securities:

  	
                  

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Price Per
  Investor Share:

  	
  $4,400

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Aggregate
  Purchase Price:

  	
  $              

  	
   

  	
   

  	
   

  

 

Please confirm
that the foregoing correctly sets forth the agreement between us by signing in
the space provided below for that purpose.

 

	
   

  	
  Dated as of: September 29, 2008

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INVESTOR

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Print Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Phone#:

  	
   

  
	
   

  	
  Email:

  	
   

  
								

 

	
  Agreed and
  Accepted

  	
   

  
	
  September 29,
  2008:

  	
   

  
	
   

  	
   

  
	
  WAVE SYSTEMS
  CORP.

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
  Gerard T.
  Feeney

  	
   

  
	
  Title:

  	
  CFO

  	
   

  
				

 

 

CONFIDENTIAL

 

EXHIBIT A

 

WAVE SYSTEMS
CORP.

 

INVESTOR
QUESTIONNAIRE

 

Pursuant to Section 3
of Annex I to this Agreement, please provide us with the following
information:

 

	
  1.

  	
  The exact name that your Investor
  Securities are to be registered in. You may use a nominee name if
  appropriate:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  The relationship between the Investor and
  the registered holder listed in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  The mailing address of the registered
  holder listed in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  The Social
  Security Number or Tax Identification Number of the registered holder listed
  in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  The mailing address where you would like
  your certificated securities to be sent to if different from item 3 above:

  	
   

  	
   

  

 

 

CONFIDENTIAL

 

ANNEX I

 

TERMS AND CONDITIONS FOR PURCHASE OF
SECURITIES

 

All
capitalized terms not otherwise defined in this Annex I shall have the meanings
ascribed thereto in the Subscription Agreement to which this Annex I is
attached.

 

1.                                      Authorization and Sale of the Investor
Securities. Subject to the terms and conditions of this Agreement,
the Company has authorized the sale of the Investor Securities.

 

2.                                      Agreement
to Sell and Purchase the Investor Securities;.

 

2.1.                            At
the Closing (as defined in Section 3.1), the Company will sell to the
Investor, and the Investor will purchase from the Company, upon the terms and
conditions set forth herein, the number of Investor Securities set forth on the
last page of the Subscription Agreement to which these Terms and
Conditions for Purchase of Investor Securities are attached as Annex I
(the “Signature Page”) for the aggregate purchase price therefor set forth on
the Signature Page.

 

2.2.                            The
Company proposes to enter into substantially this same form of Subscription
Agreement with certain other investors (the “Other Investors”) and expects to
complete sales of some or all of the remaining Securities to them as part of
the Offering (subject to Section 3.2(b) below). The Investor and the
Other Investors are hereinafter sometimes collectively referred to as the “Investors”.
The Company may complete sales of the remaining Securities in this Offering to
certain of the Other Investors without requiring such Other Investors to enter
into a Subscription Agreement; such sales shall nevertheless be on the same
price terms as the price terms for all of the other sales in the Offering.

 

3.                                      Closings
and Delivery of the Securities and Funds.

 

3.1.                            Closing.
The completion of the purchase and sale of the Securities (the “Closing”) will
occur on or before September 30, 2008 (the “Closing Date”). At the
Closing: (a) the Company will deliver (by overnight courier) a certificate
representing the number of shares of Series I Preferred Stock set forth on
the Signature Page registered in the name of the Investor or, if so
indicated on the Investor Questionnaire attached to the Subscription Agreement
as Exhibit A, in the name of a nominee designated by the Investor and (b) the
aggregate purchase price for the Investor Securities being purchased by the
Investor will be paid by or on behalf of the Investor to the Company by wire
transfer of immediately available funds to the account set forth on Annex II
hereto the aggregate purchase price for the Securities being purchased by the
Investor hereunder.

 

3.2.                            (a)                                  Conditions to the Company’s Obligations.
The Company’s obligation to issue the Investor Securities to the Investor will
be subject to (i) the receipt by the Company of the aggregate purchase
price for the Investor Securities being purchased hereunder as set forth on the
Signature Page, (ii) the accuracy of the representations and warranties
made by the Investor in this Agreement, (iii) the fulfillment of those
undertakings of the Investor to be fulfilled prior to the Closing Date, (iv) the
Registration Statement remaining in effect and no stop

 

 

order proceedings with respect
thereto being pending or threatened, and (v) there being no objections
raised by the staff of the NASDAQ Stock Market to the consummation of the sale
without the approval of the Company’s stockholders.

 

(b)                                 Conditions to the Investor’s Obligations.
The Investor’s obligation to purchase the Investor Securities will be subject
to (i) the filing by the Company of the Certificate of Designations with
the Secretary of State of the State of Delaware, substantially in the form
attached hereto as Annex III and (ii) the fulfillment of those other undertakings
of the Company with respect to the Investor Securities and/or the Investor to
be fulfilled prior to the Closing Date. The Investor’s obligations are
expressly not conditioned on the purchase by any or all of the Other Investors
of the remaining Securities that they have agreed to purchase from the Company.

 

4.                                      Representations, Warranties and
Covenants.

 

4.1.                            Representations,
Warranties and Covenants of the Investor.

 

(a)                                  The
Investor represents and warrants to, and covenants with, the Company that: (a) the
Investor is knowledgeable, sophisticated and experienced in making, and is
qualified to make decisions with respect to, investments in shares presenting
an investment decision like that involved in the purchase of the Investor
Securities, including investments in securities issued by the Company and
investments in comparable companies, and has requested, received, reviewed and
considered all information it deemed relevant in making an informed decision to
purchase the Investor Securities; (b) the Investor has answered all
questions on the Signature Page for use in the Prospectus Supplement and
the answers thereto are true and correct as of the date hereof and will be true
and correct as of the Closing Date; and (c) the Investor, in connection
with its decision to purchase the number of Investor Securities set forth on
the Signature Page, is relying only upon the U.S. Base Prospectus, the
Prospectus Supplement and the documents incorporated by reference therein.

 

(b)                                 The
Investor acknowledges, represents and agrees that no action has been or will be
taken in any jurisdiction outside the United States by the Company that would
permit an offering of the Investor Securities, or possession or distribution of
offering materials in connection with the issue of the Investor Securities, in
any jurisdiction outside the United States where action for that purpose is
required. The Investor, if outside the United States, will comply with all
applicable laws and regulations in each foreign jurisdiction in which it
purchases, offers, sells or delivers Investor Securities or has in its
possession or distributes any offering material, in all cases at its own
expense.

 

(c)                                  The
Investor further represents and warrants to, and covenants with, the Company
that: (a) the Investor has full right, power, authority and capacity to
enter into this Agreement and to consummate the transactions contemplated
hereby and has taken all necessary action to authorize the execution, delivery
and performance of this Agreement; and (b) this Agreement constitutes a
valid and binding obligation of the Investor enforceable against the Investor
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors’ and contracting parties’ rights generally and except as
enforceability may be subject to general

 

 

principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

 

(d)                                 The
Investor understands that nothing in this Agreement or any other materials
presented to the Investor in connection with the purchase and sale of the
Investor Securities constitutes legal, tax or investment advice. The Investor
has consulted such legal, tax and investment advisors as it, in its sole
discretion, has deemed necessary or appropriate in connection with its purchase
of Investor Securities.

 

(e)                                  The
Investor represents, warrants and agrees that, since the earlier to occur of (i) the
date on which the Investor was first contacted about the Offering and (ii) the
date that is the tenth (10th) trading day prior to the date of this
Agreement, it has not directly or indirectly (a) engaged in any
short selling, (b) established or increased any “put equivalent position”
as defined in Rule 16(a)-1(h) under the Securities Exchange Act of
1934 or (c) granted any option for the purchase of or entered into any
hedging or similar transaction with the same economic effect as a short sale,
in each case with respect to the Company’s securities.

 

5.                                      Survival of Representations, Warranties and
Agreements. Notwithstanding any investigation made by any party to
this Agreement, all covenants, agreements, representations and warranties made
by the Company and the Investor herein will survive the execution of this
Agreement, the delivery to the Investor of the Investor Securities being
purchased and the payment therefor.

 

6.                                      Notices. All notices, requests,
consents and other communications hereunder will be in writing, will be mailed (a) if
within the domestic United States by first-class registered or certified
airmail, or nationally recognized overnight express courier, postage prepaid,
or by facsimile or (b) if delivered from outside the United States, by
International Federal Express or facsimile, and will be deemed given (i) if
delivered by first-class registered or certified mail domestic, three business
days after so mailed, (ii) if delivered by nationally recognized overnight
carrier, one business day after so mailed, (iii) if delivered by
International Federal Express, two business days after so mailed, and (iv) if
delivered by facsimile, upon electronic confirmation of receipt and will be
delivered and addressed as follows:

 

(a)                                  if
to the Company, to:

 

Wave Systems Corp.

480 Pleasant Street

Lee, MA 01238

Fax: (413) 243-0391

ATTN:  Gerard Feeney, CFO

 

with copies to:

 

Bingham McCutchen LLP

399 Park Avenue

New York, NY 10022

Fax: (212) 752-5378

ATTN:  Neil W. Townsend

 

 

(b)                                 if
to the Investor, at its address on the Signature Page hereto, or at such
other address or addresses as may have been furnished to the Company in
writing.

 

7.                                      Changes. This Agreement shall not
be modified or amended except pursuant to an instrument in writing signed by
the Company and the Investor.

 

8.                                      Headings. The headings of the
various sections of this Agreement have been inserted for convenience of
reference only and will not be deemed to be part of this Agreement.

 

9.                                      Severability. In case any
provision contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein will not in any way be affected or
impaired thereby.

 

10.                               Governing Law; Jurisdiction. This
Agreement will be governed by, and construed in accordance with, the internal
laws of the State of New York, without giving effect to the principles of
conflicts of law that would require the application of the laws of any other
jurisdiction. Any legal action, suit or proceeding arising out of or relating
to this Agreement or the transactions contemplated hereby shall only be
instituted, heard and adjudicated (excluding appeals) only in a state or
federal court located in New York, and each party hereto knowingly, voluntarily
and intentionally waives any objection which such party may now or hereafter
have to the laying of the venue of any such action, suit or proceeding, and
irrevocably submits to the exclusive personal jurisdiction of any such court in
any such action, suit or proceeding. Service of process in connection with any
such action, suit or proceeding may be served on each party hereto anywhere in
the world by the same methods as are specified for the giving of notices under
this Agreement.

 

11.                               Counterparts. This Agreement may
be executed in two or more counterparts, each of which will constitute an
original, but all of which, when taken together, will constitute but one
instrument, and will become effective when one or more counterparts have been
signed by each party hereto and delivered to the other parties.

 

12.                               Confirmation of Sale. The Investor
acknowledges and agrees that such Investor’s receipt of the Company’s
counterpart to this Agreement shall constitute written confirmation of the
Company’s sale of Investor Securities to such Investor.

 

13.                               Entire Agreement. This Agreement
and the Warrant constitutes the entire agreement between the parties hereto
with respect to the subject matter hereof and supersedes all prior agreements
and understandings between such parties with respect to such subject matter.

 

14.                               No Assignment. This Agreement
shall not be assigned by any party hereto, without the express prior written
consent of the Company or the Investor.

 

 

ANNEX II

 

Company
Wire Instructions

 

In accordance with section 3.1(b) of
the terms and conditions attached hereto as Annex I, remit by wire transfer the
amount of funds equal to the aggregate purchase price for the shares being
purchased by the investor to the following account:

 

Wire info for:  Wave Systems Corp

 

480 Pleasant Street

 

Lee, MA 01238

 

 

Account:  Wave Systems Corp

 

HSBC Bank

 

452 Fifth Avenue

 

New York, NY 10018

 

 

Bank ABA/Routing #  021001088

 

US Govt MM Fund:  610185055

 

Contact:  Will Aquino 
/  Phone:  212-525-8859  
/ Fax: 212-525-8924

 

International Transactions:  Use Swift #  
MRMDUS33

 

 

ANNEX III

 

Certificate
of Designation

 

(See
attached)

 

 

CERTIFICATE OF DESIGNATIONS

 

of

 

SERIES I CONVERTIBLE PREFERRED STOCK

 

of

 

WAVE SYSTEMS CORP.

 

Wave Systems Corp., a
corporation organized and existing under the laws of the State of Delaware (the
“Corporation”), does hereby certify that, pursuant to the authority
conferred on the Board of Directors of the Corporation by the Restated
Certificate of Incorporation (the “Certificate of Incorporation”) of the
Corporation, on September 11, 2008 the Board of Directors of the
Corporation duly adopted the following resolution establishing a series of
2,000 shares of Preferred Stock of the Corporation designated as “Series I
Convertible Preferred Stock” (referred to herein as the “Series I
Preferred Stock”):

 

RESOLVED, that the Board has
determined that it is in the best interests of the Corporation to provide for
the designation and issuance of Series I Preferred Stock, par value $0.01
per share, to consist of up to 2,000 shares, and hereby fixes the powers,
designations, preferences and relative other special rights of the shares of
such Series I Preferred Stock as follows:

 

SERIES I PREFERRED STOCK

 

1.             Designation.  This resolution shall provide for a series of
preferred stock, the designation of which shall be “Series I
Convertible Preferred Stock”, par value $0.01 per share.  The number of authorized shares constituting
the Series I Preferred Stock is 2,000. 
The Series I Preferred Stock will have the liquidation preferences
set forth in Section 4 below.

 

2.             Rank.  With respect to the payment of dividends and
other distributions on the capital stock of the Corporation, including
distribution of the assets of the Corporation upon a Liquidation Event (as
defined below), the Series I Preferred Stock shall be senior to the Class A
Common Stock of the Corporation, $0.01 par value per share (“Class A
Common Stock”), and the Class B Common Stock of the Corporation, $0.01
par value per share (collectively with the Class A Common Stock, the “Common
Stock”), and, except for any series of preferred stock that is designated
by the Board of Directors after the date hereof as senior to the Series I
Preferred Stock (“Senior Stock”) or as pari passu with the Series I
Preferred Stock (the “Pari Passu Stock”), senior to all other series of
preferred stock (collectively, the Common Stock and all such other series of
preferred stock that are not Senior Stock or Pari Passu Stock, the “Junior
Stock”).

 

3.             Dividends.

 

(a)           Holders of shares of
outstanding Series I Preferred Stock shall be entitled to receive, out of
funds of the Corporation legally available therefor, dividends at the annual
rate 

 

 

of
8.0% per share on the Original Purchase Price (the “Dividend Rate”).  Dividends shall be declared by the
Corporation and paid in arrears on each Dividend Payment Date (as defined
below) commencing on March 15, 2009 for the Dividend Period ending
immediately prior to such Dividend Payment Date.  Such dividends shall be payable to the record
holders of Series I Preferred Stock on the record date on which such
dividends are declared (notwithstanding any transfer or other disposition after
such record date and prior to the Dividend Payment Date).  If a Dividend Payment Date is not a business
day, payment will be made on the next succeeding business day, without any
interest or other payment in lieu of interest accruing with respect to this
delay.  Subject to Section 3(e) below,
all such dividends shall accrue from the most recent date as to which dividends
shall have been paid or, if no dividends have been paid, from the original date
of issuance of the Series I Preferred Stock (the “Issue Date”),
whether or not in any Dividend Period(s) there shall have been funds of
the Corporation legally available for the payment of such dividends.  Notwithstanding the foregoing, such dividends
shall be paid only to the extent assets are legally available therefor on the
Dividend Payment Date and any amounts for which assets are not legally
available shall be paid promptly as assets become legally available
therefore.  Any partial payment of
dividends otherwise required to be paid on a Dividend Payment Date will be made
pro rata among the applicable record holders of shares of Series I
Preferred Stock based on their respective holdings of such shares.

 

(i)            The term “Dividend
Payment Date” shall mean September 15th and March 15th
of each year, beginning with March 15, 2009.

 

(ii)           The term “Dividend
Period” shall mean the period from and including a Dividend Payment Date
through the day immediately preceding the next Dividend Payment Date, except
that the initial Dividend Period will commence on and include the Issue Date
and will end on the day immediately preceding the first Dividend Payment Date

 

(b)           Method of Payment
of Dividends.  Prior to the fifth
anniversary of the date hereof, the Company may elect to pay any declared
dividend on the Series I Preferred Stock (in accordance with the
applicable Stockholder Instructions) in any one of the following manners:

 

(i)            in cash;

 

(ii)           by delivery of
shares of Class A Common Stock; or

 

(iii)          through any
combination of cash and shares of Class A Common Stock.

 

Class A Common Stock issued in payment
or partial payment of a declared dividend shall be issued at a price per share
equal to the then current Series I Conversion Price (as defined below).
After the fifth (5th) anniversary of the date hereof the Company may dividends
only in cash.

 

The term “Stockholder Instructions”
means (A) with respect to the payment of cash dividends to a holder of Series I
Preferred Stock, the address of the stockholder on the books and records of the
Corporation to which a check representing such dividends may be mailed and (B) with
respect to the payments of dividends in Class A Common Stock or the
issuance of Class A Common Stock upon any conversion of shares of Series I
Preferred Stock pursuant to Section 6 

 

2

 

below, the account of the holder with the
Depository Trust Company on record with the Corporation (to which such shares
of Class A Common Stock may be transferred via the Deposit Withdrawal
Agent Commission System) as set forth in (x) in the Subscription Agreement
pursuant to which the shares were purchased from the Corporation or (y) the
Conversion Notice.  The Stockholder
Instructions may include any other manner of payment or delivery agreed to by
the Corporation and the stockholder.

 

(c)           So long as any
shares of Series I Preferred Stock are outstanding, the Corporation shall
not declare, pay or set apart for payment any dividend or make any distribution
on any Junior Stock (other than dividends or distributions payable in
additional shares of Junior Stock), unless at the time of such dividend or
distribution the Corporation shall have paid all accrued and unpaid dividends
on the outstanding shares of Series I Preferred Stock.  For purposes hereof, unless the context
otherwise requires, “distribution” shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise, payable other
than in shares of Class A Common Stock or other equity securities of the
Corporation, or the purchase or redemption of shares of the Corporation (other
than repurchases of Class A Common Stock held by employees or consultants
of the Corporation upon termination of their employment or services pursuant to
agreements providing for such repurchase or upon the cashless exercise of
options held by employees or consultants) for cash or property.

 

(d)           In the event that
the Board of Directors shall declare and set apart for payment, out of funds
legally available therefore, any cash dividend on the shares of Class A
Common Stock, in addition to the dividends and preferences provided for in
Sections 3(a) and (c) above, the holders of the Series I
Preferred Stock shall be entitled to receive, on a pro rata basis with the
holders of Class A Common Stock, the cash dividend such holders would have
otherwise been entitled to if they had elected to convert all of their shares
of Series I Preferred Stock pursuant to Section 6 immediately prior
to the declaration of such dividend.

 

(e)           Notwithstanding the
foregoing provisions, upon any conversion of a share of Series I Preferred
Stock pursuant to Section 6 below, all dividends that have accrued since
the last Dividend Payment Date shall be waived and cancelled.

 

(f)            All numbers
relating to calculation of dividends shall be subject to equitable adjustment
in the event of any stock dividend, stock split, combination, reorganization,
recapitalization, reclassification or other similar event involving the
Preferred Stock or the Common Stock.

 

4.             Liquidation, Dissolution or
Winding Up.

 

(a)           In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation (a “Liquidation Event”), the holders of shares of  Series I Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, but before any payment shall be
made to the holders of Junior Stock, by reason of their ownership thereof, an
amount per share equal to the sum (the “Series I Liquidation Preference”)
of (i) $ 4,400 (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar recapitalization
affecting such shares) (the “Original Issue Price”), plus (ii) all
accrued and unpaid dividends.  If upon
any such 

 

3

 

liquidation,
dissolution or winding up of the Corporation the assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
full Series I Liquidation Preference, the holders of shares of  Series I Preferred Stock and any Pari
Passu Stock shall share ratably in the assets and funds of the Corporation
available for distribution to its stockholders in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to such shares
were paid in full.

 

(b)           After payment in
full of the Series I Liquidation Preference to holders of all shares of Series I
Preferred Stock, the Series I Preferred Stock shall not be entitled to
receive any additional cash, property or other assets of the Corporation upon
the liquidation, dissolution or winding up of the Corporation.

 

(c)           Any merger or consolidation
of the Corporation into or with another corporation (except one in which the
holders of capital stock of the Corporation immediately prior to such merger or
consolidation continue to hold a majority of the voting power of the capital
stock of the surviving or acquiring corporation (on a fully diluted basis)
immediately after such merger or consolidation), or sale of all or
substantially all the assets of the Corporation (each of the foregoing, a “Sale
Event”), shall be deemed to be a Liquidation Event of the Corporation for
purposes of this Section 4, and the agreement or plan of merger or
consolidation with respect to such merger, consolidation or sale shall provide
that the consideration payable to the stockholders of the Corporation (in the
case of a merger or consolidation), or consideration payable to the
Corporation, together with all other available assets of the Corporation (in
the case of an asset sale), shall be distributed to the holders of capital
stock of the Corporation in accordance with Section 4(a).  The amount deemed distributed to the holders
of Series I Preferred Stock upon any such merger, consolidation or sale
shall be determined by the Board of Directors of the Corporation based on the
net cash or the net value of the property, rights or securities distributed to
such holders by the Corporation or the acquiring person, firm or other
entity.  The provisions of this Section 4(c) shall
not apply to any Sale Event (i) involving (a) only a change in the
state of  incorporation of the Corporation
or (b) a merger of the Corporation with or into a wholly-owned subsidiary
of the Corporation that is incorporated in the United States or (ii) that
the holders of at least a majority of the outstanding shares of Series I
Preferred Stock elect not to treat as a Sale Event for purposes of this Section 4.

 

5.             Voting.  The holders of the Series I Preferred
Stock shall not be entitled to any voting rights except as may be required by
law and except that the Corporation may not amend or repeal the preferences,
special rights or other powers of the Series I Preferred Stock set forth
herein so as to affect adversely the Series I Preferred Stock without the
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Series I Preferred Stock, given in writing or by
vote at a meeting, consenting or voting (as the case may be) separately as a
class.  Any such amendment or repeal that
is that is so approved by the holders of a majority of the then outstanding
shares of Series I Preferred Stock shall be effective and binding upon all
of the holders of shares of Series I Preferred Stock.  The Class A Common Stock into which the Series I
Preferred Stock is convertible shall, upon issuance, have all of the same
voting rights as other issued and outstanding Class A Common Stock of the
Corporation.

 

4

 

6.             Conversion Rights.

 

(a)           Right to Convert.

 

(i)            Each share of Series I
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Class A Common Stock as is determined by dividing (x) the
Original Issue Price by (y) the Series I Conversion Price (as
defined below) in effect at the time of conversion (a “Voluntary Conversion”).  The Series I Conversion Price shall
initially be $0.44.  The Series I
Conversion Price, and the rate at which shares of Series I Preferred Stock
may be converted into shares of Class A Common Stock, shall be subject to
adjustment as provided below.

 

(ii)           To complete a
Voluntary Conversion of shares of Series I Preferred Stock the holder
thereof shall deliver to the Corporation at its principal office (A) a
completed and executed notice of conversion substantially in the form attached
hereto as Exhibit A (the “Conversion Notice”) and (B) the
certificate representing the shares of Series I Preferred Stock to be so
converted.  The Corporation shall, within
three (3) trading days following the date of receipt by the Corporation of
the executed Conversion Notice and such share certificate, direct its transfer
agent to issue and deliver, in accordance with the Stockholder Instructions, the
number of shares of Class A Common Stock to which the holder shall be
entitled.  In the event that any such
conversion is for a portion of the shares of Series I Preferred Stock
represented by the share certificate surrendered for conversion, the Corporation
shall issue and deliver to the holder (to the address of such holder on the
books and records of the Corporation) promptly after such conversion a new
share certificate representing the remainder of the shares of Series I
Preferred Stock.

 

(iii)          All shares of Series I
Preferred Stock which shall have been converted as herein provided shall no
longer be deemed to be outstanding and all rights with respect to such shares,
including the rights, if any, to receive notices and to vote, shall immediately
cease and terminate on the date the Conversion Notice is received by the
Corporation, except only the right of the holders thereof to receive shares of Class A
Common Stock in exchange therefor.  Any
shares of Series I Preferred Stock so converted shall be retired and
cancelled and shall not be reissued, and the Corporation (without the need for
stockholder action) may from time to time take such appropriate action as may
be necessary to reduce the authorized number of shares of Series I
Preferred Stock accordingly.

 

(b)           Mandatory Conversion.

 

(i)            Each share of Series I
Preferred Stock outstanding on the Mandatory Conversion Date shall,
automatically and without any action on the part of the holder thereof, convert
into a number of fully paid and nonassessable shares of Class A Common
Stock as is determined by dividing (x) the Original Issue Price by (y) the
Series I Conversion Price in effect on the Mandatory Conversion Date.

 

(ii)           As used herein, “Mandatory
Conversion Date” shall be the first date on which the average of the
Closing Bid Prices (as defined below) of the Class A Common 

 

5

 

Stock
for the fifteen (15) trading day period then ended equals or exceeds $1.10 per
share (the “Bid Price Target”).

 

(iii)          The term “Closing Bid Price” shall mean, for any
date, the last closing bid price determined by the first of the following
clauses that applies: (a) if the Class A Common Stock is then listed
or quoted on a Trading Market, the last closing bid price of the Class A
Common Stock for such date on the Trading Market on which the Class A
Common Stock is then listed or quoted for trading as reported by Bloomberg
Financial L.P.; (b) if the Class A Common Stock is not then quoted
for trading on a Trading Market and if prices for the Common Stock are then
reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
last closing bid price per share of the Class A Common Stock so reported
for such date; or (d) in all other cases, the fair market value of a share
of Class A Common Stock as determined in a reasonable manner and in good
faith by the Company.

 

As used herein, the term “Trading
Market”, shall mean:  the NASDAQ
Global Market, the American Stock Exchange, the New York Stock Exchange, the
NASDAQ Capital Market or the OTC Bulletin Board.

 

(iv)          On the Mandatory Conversion Date, the
outstanding shares of Series I Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation
shall not be obligated to issue the shares of Class A Common Stock
issuable upon conversion of any shares of Series I Preferred Stock unless
the certificates representing such shares are either delivered to the
Corporation or the holder certifies to the Corporation that such certificates
have been lost, stolen, or destroyed, and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection therewith.  Upon the
occurrence of the automatic conversion of the Series I Preferred Stock
pursuant to this Section 6, each holder of the Series I Preferred
Stock shall surrender his, her or its certificates representing the shares of Series I
Preferred Stock to the Corporation and the Corporation shall deliver the shares
of Class A Common Stock issuable upon such conversion to such holder (in
accordance with the Stockholder Instructions) within three (3) business
days of the holder’s delivery of such certificates.

(v)           All certificates evidencing shares of
Series I Preferred Stock which are required to be surrendered for
conversion in accordance with the provisions hereof shall, from and after the
Mandatory Conversion Date, be deemed to have been retired and cancelled and the
shares of Series I Preferred Stock represented thereby converted into Class A
Common Stock for all purposes, notwithstanding the failure of the holder or
holders thereof to surrender such certificates on or prior to such date.  Such converted Series I Preferred Stock
may not be reissued, and the Corporation may thereafter take such appropriate
action (without the need for stockholder action) as may be necessary to reduce
the authorized number of shares of Series I Preferred Stock accordingly.

 

(c)           Dividends Upon
Conversion.  Upon any conversion of
the Series I Preferred Stock pursuant to this Section 6, the
Corporation shall pay to the holder of the Series I 

 

6

 

Preferred
Stock so converted (in accordance with Section 3(b) above) any
dividends in respect of such shares that have accrued through the immediately
preceding Dividend Payment Date and that have not yet been paid (if any), and
all dividends that have accrued since the last Dividend Payment Date shall be
waived and cancelled in accordance with Section 3(e) above.

 

(d)           Adjustment for
Stock Splits and Combinations.  If
the Corporation shall at any time or from time to time after the Original Issue
Date effect a subdivision of the outstanding Class A Common Stock, the Series I
Conversion Price and the Bid Price Target then in effect immediately before
that subdivision shall be proportionately decreased.  If the Corporation shall at any time or from
time to time after the Original Issue Date combine the outstanding shares of Class A
Common Stock, the Series I Conversion Price and the Bid Price Target then
in effect immediately before the combination shall be proportionately
increased.  Any adjustment under this Section shall
become effective at the close of business on the date the subdivision or
combination becomes effective.

 

(e)           Adjustment for
Reclassification, Exchange, or Substitution.  If the Class A Common Stock issuable
upon the conversion of the Series I Preferred Stock shall be changed into
the same or a different number of shares of any class or classes of stock,
whether by capital reorganization, reclassification, or otherwise (other than a
subdivision or combination of shares or stock dividend provided for above, or a
reorganization, merger, consolidation, or sale of assets provided for below),
then and in each such event the holder of each such share of Series I
Preferred Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property
receivable, upon such reorganization, reclassification, or other change, by
holders of the number of shares of Class A Common Stock into which such
shares of Series I Preferred Stock might have been converted immediately
prior to such reorganization, reclassification, or change, all subject to
further adjustment as provided herein.

 

(f)            Adjustment for
Merger or Reorganization, etc. 
Subject to the provisions of Section 4(c), in case of any
consolidation or merger of the Corporation with or into another corporation,
each share of Series I Preferred Stock that remains outstanding upon such consolidation
or merger shall thereafter be convertible (or shall be converted into a
security which shall be convertible) into the kind and amount of shares of
stock or other securities or property to which a holder of the number of shares
of Class Common Stock of the Corporation deliverable upon conversion of
one share of Series I Preferred Stock would have been entitled upon such
consolidation or merger; and, in such case, appropriate adjustment (as
determined in good faith by the Board of Directors) shall be made in the
application of the provisions in this Section 6 set forth with respect to
the rights and interest thereafter of the holders of the Series I
Preferred Stock, to the end that the provisions set forth in this Section 6
(including provisions with respect to changes in and other adjustments of the Series I
Conversion Price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter deliverable
upon the conversion of the Series I Preferred Stock.

 

(g)           No Impairment.  The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to 

 

7

 

avoid
the observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 6 and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series I Preferred Stock against
impairment.

 

(h)           Certificate as to
Adjustments.  Upon the occurrence of
each adjustment or readjustment of the Series I Conversion Price pursuant
to this Section 6, the Corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and furnish
to each holder of Series I Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.  The
Corporation shall, upon the written request at any time of any holder of Series I
Preferred Stock, furnish or cause to be furnished to such holder a similar
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series I Conversion Price then in effect, and (iii) the number of
shares of Class A Common Stock and the amount, if any, of other
securities, cash or property which then would be received upon the conversion
of Series I Preferred Stock.

 

(i)            Reservation of
Shares.  The Corporation shall at all
times when the Series I Preferred Stock shall be outstanding, reserve and
keep available out of its authorized but unissued stock, for the purpose of
effecting the conversion of the Series I Preferred Stock, such number of
its duly authorized shares of Class A Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Series I
Preferred Stock.  Before taking any
action which would cause an adjustment reducing the Series I Conversion
Price below the then par value of the shares of Class A Common Stock
issuable upon conversion of the Series I Preferred Stock, the Corporation
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue fully
paid and nonassessable shares of Class A Common Stock at such adjusted Series I
Conversion Price.

 

(j)            No Fractional
Shares.  No fractional shares of Class A
Common Stock shall be issued upon conversion of the Series I Preferred
Stock.  In lieu of any fractional shares
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Series I
Conversion Price.

 

7.             Transfers.  Shares of Series I Preferred Stock may
not be assigned, sold, pledged, hypothecated or otherwise transferred (a “Transfer”),
other than by operation of law without the prior written consent of the
Corporation and any such attempted Transfer without the prior written consent
of the Corporation shall be null and void and of no force or effect.  Each share certificate representing shares of
Series I Preferred Stock shall bear the following legend:

 

THE SHARES OF SERIES I
CONVERTIBLE PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE
ASSIGNED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, OTHER THAN BY OPERATION OF
LAW, WITHOUT THE PRIOR WRITTEN CONSENT OF THE CORPORATION 

 

8

 

AND ANY SUCH ATTEMPTED TRANSFER
WITHOUT THE PRIOR WRITTEN CONSENT OF THE CORPORATION SHALL BE NULL AND VOID AND
OF NO FORCE OR EFFECT, AS SET FORTH IN SECTION 7 OF THE SERIES I
CONVERTIBLE PREFERRED STOCK CERTIFIATE OF DEISGNATIONS FILED WITH THE SECRETARY
OF STATE OF THE STATE OF DELAWARE ON SEPTEMBER 12, 2008.  A COPY OF THIS CERTIFICATE OF DESIGNATIONS MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION.

 

8.             Miscellaneous.

 

(a)           Headings of
Subdivisions.  The headings of the
various Sections hereof are for convenience of reference only and shall not
affect the interpretation of any of the provisions hereof.

 

(b)           Waiver.  The holders of record of at least a majority
of the shares of Series I Preferred Stock may be written notice to the
Corporation waive or modify past, present or future compliance by the
Corporation with any of the conditions, covenants or obligations set forth
herein applicable to the Series I Preferred Stock.  Any waiver by the holders of Series I
Preferred Stock of a breach of any provision herein as contemplated by the
preceding sentence, shall not operate or be construed as a waiver of any
preceding or succeeding breach and no failure by the holders of the Series I
Preferred Stock, as applicable, to exercise any right or privilege hereunder
shall be deemed a waiver of such holders’ rights to exercise the same at any
subsequent time or times hereunder.

 

(c)           Severability of
Provisions. If any right, preference or limitation of the Series I
Preferred Stock set forth herein (as this resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any rule of
law or public policy, all other rights, preferences and limitations set forth
in this resolution (as so amended), which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such
right, preference or limitation unless so expressed.

 

[Remainder
of page intentionally left blank, signature page follows]

 

9

 

IN WITNESS WHEREOF, Wave Systems Corp. has
caused this certificate to be signed on its behalf by Gerard T. Feeney, its
Chief Financial Officer, this 12th day of September, 2008.

 

	
   

  	
  WAVE SYSTEMS CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gerard T. Feeney

  
	
   

  	
  Name:

  	
  Gerard T. Feeney

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  

 

 

EXHIBIT A

 

WAVE SYSTEMS CORP.

 

CONVERSION NOTICE

 

Reference is made to the Certificate of Designations
of the Series I Convertible Preferred Stock (the “Certificate of
Designations”) of Wave Systems Corp., a Delaware corporation (the “Company”).
In accordance with and pursuant to the Certificate of Designations, the
undersigned hereby elects to convert the number of shares of Series I
Convertible Preferred Stock, par value $.01 per share (the “Preferred Stock”),
of the Company, indicated below into shares of Class A Common Stock, par
value $.01 per share (the “Common Stock”), of the Company, by tendering the
stock certificate(s) representing the share(s) of Preferred Stock
specified below as of the date specified below.

 

	
  Date:

  	
   

  
	
   

  	
   

  
	
  Number of shares of Preferred Stock to be
  converted:

  	
   

  
	
   

  	
   

  
	
  Stock certificate no(s). of the Preferred Stock to
  be converted:

  	
   

  

 

Please issue the Common Stock into which the
Preferred Stock is being converted in the following name and to the following
account number at the Depository Trust Company (to which the Common Stock will
be transferred via the Deposit Withdrawal Agent Commission System):

 

	
  Issue to:

  	
   

  
	
   

  	
   

  
	
  Account No.:

  	
   

  
	
   

  	
   

  
	
  Authorization:

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated:

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