Document:

Exhibit 4.2

 

AXIS CAPITAL
HOLDINGS LIMITED

 

AND

 

THE BANK OF
NEW YORK

TRUSTEE

 

 

FIRST
SUPPLEMENTAL INDENTURE

 

 

Dated as of November
15, 2004

 

 

 

$500,000,000

 

 

5.75% Senior
Notes

 

 

Due December
1, 2014

 

 

 

TABLE OF
CONTENTS

 

	
  ARTICLE
  I 5.75% SENIOR NOTES DUE 2014

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 1.01

  	
  Establishment

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.02

  	
  Definitions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.03

  	
  Payment of Principal
  and Interest

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.04

  	
  Denominations

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.05

  	
  Global
  Securities

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.06

  	
  Transfer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.07

  	
  Defeasance

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.08

  	
  Redemption at
  the Option of the Company

  	
   

  
	
   

  	
   

  
	
  ARTICLE
  II MISCELLANEOUS PROVISIONS

  	
   

  
	
   

  	
   

  
	
   

  	
  Section
  2.01

  	
  Recitals
  by the Company

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.02

  	
  Ratification
  and Incorporation of Original Indenture

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section
  2.03

  	
  Executed
  in Counterparts

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section
  2.04

  	
  New
  York Law to Govern

  	
   

  
	
   

  	
   

  
	
   

  	
  Exhibit A

  	
  Form of Global Note

  	
   

  
	
   

  	
  Exhibit B

  	
  Form of Certificate of Authentication

  	
   

  
						

 

 

THIS FIRST SUPPLEMENTAL INDENTURE is made as
of the 15th day of November, 2004, by and between AXIS CAPITAL HOLDINGS
LIMITED, an exempted company incorporated in Bermuda as a holding company (the “Company”),
and THE BANK OF NEW YORK, a New York banking corporation, as trustee (the
“Trustee”):

 

WHEREAS, the Company has heretofore entered
into a Senior Indenture, dated as of November 15, 2004 (the “Original Indenture”),
with the Trustee;

 

WHEREAS, the Original Indenture is
incorporated herein by this reference and the Original Indenture, as
supplemented by this First Supplemental Indenture, is herein called the
“Indenture”;

 

WHEREAS, under the Original Indenture, a new
series of senior notes may at any time be established by the Board of Directors
of the Company in accordance with the provisions of the Original Indenture and
the terms of such series may be described by a supplemental indenture executed
by the Company and the Trustee;

 

WHEREAS, the Company proposes to create under
the Indenture a new series of senior notes;

 

WHEREAS, additional senior notes of other
series hereafter established, except as may be limited in the Original
Indenture as at the time supplemented and modified, may be issued from time to
time pursuant to the Indenture as at the time supplemented and modified, and
all senior notes issued by the Company of any one series need not be issued at
the same time and, unless otherwise so provided, may be reopened for issuances
of additional senior notes of such series; and

 

WHEREAS, all conditions necessary to
authorize the execution and delivery of this First Supplemental Indenture and
make it a valid and binding obligation of the Company, in accordance with its
terms, have been done or performed.

 

NOW THEREFORE, in consideration of the
agreements and obligations set forth herein and for other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:

 

ARTICLE I

 

5.75% SENIOR NOTES DUE 2014

 

Section
1.01           Establishment. 
There is hereby established a new series of senior notes to be issued
under the Indenture, to be designated as the Company’s 5.75% Senior Notes due
2014 (the “Senior Notes”).

 

There are to be authenticated and delivered
Senior Notes, initially limited in aggregate principal amount of $500,000,000
and no further Senior Notes shall be authenticated and delivered except as
provided by Section 2.8, 2.9, 2.11, 8.5 or 12.3 of the Original Indenture and
the terms of this First Supplemental Indenture; provided, however, that the
aggregate principal amount of the Senior Notes may be increased in the future,
without the consent of the holders of the Senior Notes, on the same terms and
with the same CUSIP and ISIN numbers as the Senior Notes.  The Senior Notes shall be issued in fully
registered form without coupons.

 

The Senior Notes shall be issued in the form
of one or more Global Securities (as defined below) in substantially the form
set out in Exhibit A hereto.  The
Depositary with respect to the Senior Notes shall be The Depository Trust
Company.

 

The form of the Trustee’s Certificate of
Authentication for the Senior Notes shall be substantially in the form set
forth in Exhibit B hereto.

 

 

Each Senior Note shall be dated the date of
authentication thereof and shall bear interest from the date of original
issuance thereof or from the most recent Interest Payment Date to which
interest has been paid or duly provided for.

 

Section
1.02           Definitions. 
The following defined terms used herein with respect to the Senior Notes
shall, unless the context otherwise requires, have the meanings specified below.  Capitalized terms used herein for which no
definition is provided herein shall have the meanings set forth in the Original
Indenture.

 

“Global Security” means, with respect to any
series of securities, a security authenticated and delivered under the Original
Indenture executed by the Company and delivered by the Trustee to the
Depositary or pursuant to the Depositary’s instruction, all in accordance with
the Original Indenture, which shall be registered in the name of the Depositary
or its nominee.

 

“Interest Payment Date” means June 1 and
December 1 of each year, commencing June 1, 2005.

 

“Original Issue Date” means November 15,
2004.

 

“Regular Record Date” means, with respect to
each Interest Payment Date, the close of business on the preceding May 15 or
November 15, as the case may be.

 

“Stated Maturity” means Decembr 1, 2014.

 

“Underwriters” means Citigroup Global Markets
Inc., J.P. Morgan Securities Inc., Barclays Capital Inc., Deutsche Bank
Securities Inc., Calyon Securities (USA) Inc., HSBC Securities (USA) Inc. and
Wachovia Capital Markets, LLC.

 

Section
1.03           Payment of Principal and Interest.  The principal of the Senior Notes shall be
due at Stated Maturity (unless earlier redeemed).  The unpaid principal amount of the Senior Notes shall bear interest
at the rate of 5.75% per year until paid or duly provided for, such interest to
accrue from November 15, 2004 or from the most recent Interest Payment Date to
which interest has been paid or duly provided for.  Interest shall be paid semi-annually in arrears on each Interest
Payment Date, commencing June 1, 2005, to the Person or Persons in whose name
the Senior Notes are registered on the Regular Record Date for such Interest
Payment Date, provided that interest payable at the Stated Maturity of principal
or on a Redemption Date as provided herein will be paid to the Person to whom
principal is payable.  Any such interest
that is not so punctually paid or duly provided for will forthwith cease to be
payable to the holders on such Regular Record Date and may be paid as provided
in Section 2.7 of the Original Indenture.

 

Payments of interest on the Senior Notes will
include interest accrued to but excluding the respective Interest Payment
Dates.  Interest payments for the Senior
Notes shall be computed and paid on the basis of a 360-day year consisting of
twelve 30-day months.  In the event that
any date on which interest is payable on the Senior Notes is not a Business
Day, then payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on the date the payment was originally payable.

 

Payment of the principal, premium, if any,
interest and Additional Amounts due at the Stated Maturity of, or on a
Redemption Date for, the Senior Notes shall be made upon surrender of the
Senior Notes at the Corporate Trust Office of the Trustee.  The principal of and interest on the Senior
Notes shall be paid in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private
debts.  Payments of interest (including
interest on any Interest Payment Date) will be made, subject to such surrender
where applicable, at the option of the Company, (i) by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register or (ii) by wire transfer at such place and to such account at
a banking institution in the United States as may be designated in writing to
the Trustee at least 15 days prior to the date for payment by the Person
entitled thereto.

 

A-2

 

Section
1.04           Denominations. 
The Senior Notes may be issued in denominations of $1,000, or whole
multiples of $1,000 in excess of $2,000.

 

Section
1.05           Global Securities.  The Senior Notes will initially be issued in the form of one or
more Global Securities registered in the name of the Depositary (which
initially shall be The Depository Trust Company) or its nominee.  Except under the limited circumstances described
below, Senior Notes represented by such Global Securities will not be
exchangeable for, and will not otherwise be issuable as, Senior Notes in
definitive form.  The Global Securities
described above may not be transferred except by the Depositary to a nominee of
the Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or to a successor Depositary or its nominee.

 

Owners of beneficial interests in such Global
Securities will not be considered the holders thereof for any purpose under the
Indenture, and no Global Security representing a Senior Note shall be
exchangeable, except for another Global Security of like denomination and tenor
to be registered in the name of the Depositary or its nominee or to a successor
Depositary or its nominee.  The rights
of holders of such Global Securities shall be exercised only through the
Depositary.

 

A Global Security shall be exchangeable for
Senior Notes registered in the names of Persons other than the Depositary or
its nominee only as provided by Section 2.8(5) of the Original Indenture.  Any Global Security that is exchangeable
pursuant to the preceding sentence shall be exchangeable for Senior Notes
registered in such names as the Depositary shall direct.

 

Section
1.06           Transfer.  No
service charge will be made for any registration of transfer or exchange of
Senior Notes, but payment will be required of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.

 

Section
1.07           Defeasance. 
The provisions of Sections 10.4 and 10.5 of the Original Indenture will
apply to the Senior Notes.

 

Section
1.08           Redemption at the Option of the
Company.  The Senior Notes will
be redeemable, at the option of the Company, in whole or in part at any time (a
“Redemption Date”), at a redemption price (the “Redemption Price”) equal to the
greater of (i) 100% of the aggregate principal amount of the Senior Notes to be
redeemed and (ii) an amount equal to the sum of the present values of the remaining
scheduled payments for principal and interest on the Senior Notes to be
redeemed, not including any portion of the payments of interest accrued as of
such Redemption Date, discounted to such Redemption Date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate, plus 25 basis points; plus in each case, accrued and unpaid interest on
the principal amount being redeemed to, but excluding, such Redemption Date.

 

“Treasury Rate” means (1) the yield, under the
heading which represents the average for the immediately preceding week,
appearing in the most recently published statistical release designated
“H.15(519)” or any successor publication which is published weekly by the Board
of Governors of the Federal Reserve System and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption “Treasury Constant Maturities,” for the maturity
corresponding to the Comparable Treasury Issue (if no maturity is within three
months before or after the remaining life, yields for the two published
maturities most closely corresponding to the Comparable Treasury Issue will be
determined and the Treasury Rate will be interpolated or extrapolated from such
yields on a straight line basis, rounding to the nearest month) or (2) if such
release (or any successor release) is not published during the week preceding
the calculation date or does not contain such yields, the rate per year equal
to the semi-annual equivalent yield to maturity of the Comparable Treasury
Issue, calculated using a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price
for such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.

 

A-3

 

“Comparable Treasury Issue” means the United
States Treasury security selected by the Independent Investment Banker as
having a maturity comparable to the remaining term of the Senior Notes to be
redeemed.

 

“Independent Investment Banker” means either
Citigroup Global Markets Inc. and its successors or J.P. Morgan Securities Inc.
and its successors or, if either of such firms is unwilling or unable to select
the Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee after consultation with the Company.

 

“Comparable Treasury Price” means (1) the
average of five Reference Treasury Dealer Quotations for such Redemption Date,
after excluding the highest and lowest of such Reference Treasury Dealer
Quotations, or (2) if the trustee obtains fewer than five such Reference
Treasury Dealer Quotations, the average of all such quotations.

 

“Reference Treasury Dealer” means each of
Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. and their
respective successors and three other primary U.S. government securities
dealers (each a “Primary Treasury Dealer”), as specified by the Company;
provided, that (1) if any of Citigroup Global Markets Inc. and J.P. Morgan
Securities Inc. and their respective successors or any Primary Treasury Dealer
as specified by the Company shall cease to be a Primary Treasury Dealer, the
Company will substitute therefor another Primary Treasury Dealer and (2) if the
Company fails to select a substitute within a reasonable period of time, then
the substitute will be a Primary Treasury Dealer selected by the Independent
Investment Banker after consultation with the Company.

 

“Reference Treasury Dealer Quotations” mean,
with respect to the Reference Treasury Dealer and any Redemption Date, the
average, as determined by the Independent Investment Banker, of the bid and
asked prices for the Comparable Treasury Issue (expressed, in each case, as a
percentage of its principal amount) quoted in writing to the Independent
Investment Banker by such Reference Treasury Dealer at 5:00 p.m., New York City
time, on the third Business Day preceding such Redemption Date.

 

Notwithstanding Section 12.2 of the Original
Indenture, the notice of redemption with respect to the foregoing redemption
need not set forth the Redemption Price but only the manner of calculation
thereof.

 

The Company shall notify the Trustee of the
Redemption Price with respect to the foregoing redemption promptly after the
calculation thereof.  The Trustee shall
not be responsible for calculating the Redemption Price.

 

If less than all of the Senior Notes are to
be redeemed, the Trustee shall select, in such manner as it shall deem
appropriate and fair, the principal amount of such Senior Notes held by each
beneficial owner of such Senior Notes to be redeemed. The Trustee may select
notes and portions of notes in amounts of $1,000 and whole multiples of $1,000
in excess of $2,000.  The Trustee shall
promptly notify the Company in writing of the Senior Notes selected for
redemption and, in the case of any Senior Notes selected for partial
redemption, the principal amount thereof to be redeemed.

 

The Senior Notes shall not have a sinking
fund.

 

Section 1.09           Paying Agent.  The Trustee shall initially serve as Paying
Agent with respect to the Senior Notes, with the place of payment initially
being the Corporate Trust Office.

 

 

ARTICLE II

 

MISCELLANEOUS PROVISIONS

 

Section
2.01           Recitals by the Company.  The recitals in this First Supplemental
Indenture are made by the Company only and not by the Trustee, and the Trustee
assumes no responsibility for their correctness.

 

A-4

 

The Trustee makes no
representations as to the validity or sufficiency of this First Supplemental
Indenture or of the Senior Notes.  The
Trustee shall not be accountable for the use or application by the Company of the
Senior Notes or the proceeds thereof. 
All of the provisions contained in the Original Indenture in respect of
the rights, privileges, immunities, powers and duties of the Trustee shall be
applicable in respect of the Senior Notes and of this First Supplemental
Indenture as fully and with like effect as if set forth herein in full.

 

Section
2.02           Ratification and Incorporation of
Original Indenture.  As
supplemented hereby, the Original Indenture is in all respects ratified and
confirmed, and the Original Indenture and this First Supplemental Indenture
shall be read, taken and construed as one and the same instrument.

 

Section
2.03           Executed in Counterparts.  This First Supplemental Indenture may be
simultaneously executed in several counterparts, each of which shall be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.

 

Section
2.04           New York Law to Govern.  This First Supplemental Indenture and each
Senior Note shall be deemed to be a contract under the laws of the State of New
York, and for all purposes shall be construed in accordance with the laws of
such state, except as may be required by mandatory provisions of law.

 

A-5

 

IN WITNESS
WHEREOF, each party hereto has caused this instrument to be signed in its name
and behalf by a duly authorized officer, all as of the day and year first above
written.

 

 

	
   

  	
  AXIS CAPITAL HOLDINGS LIMITED,

  
	
   

  	
  as Issuer

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Andrew Cook

  	
   

  
	
   

  	
  Name: Andrew Cook

  
	
   

  	
  Title: Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE BANK OF NEW YORK.

  
	
   

  	
  as Trustee

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/Remo J. Reale

  	
   

  
	
   

  	
  Name: Remo J. Reale

  
	
   

  	
  Title: Vice President

  
					

 

 

EXHIBIT A

 

Form of •% Senior Note due •, 20•

 

THIS NOTE IS A GLOBAL SECURITY WITHIN THE
MEANING OF THE FIRST SUPPLEMENTAL INDENTURE TO THE ORIGINAL INDENTURE
HEREINAFTER REFERRED TO.  UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (“DTC”), A NEW YORK CORPORATION, TO AXIS CAPITAL HOLDINGS LIMITED
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR
IN PART FOR SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITARY TO THE NOMINEE OF THE DEPOSITARY OR BY A
NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY
OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.

 

 

No.       

 

	
   

  	
   

  	
  CUSIP No. •

  
	
   

  	
   

  	
  ISIN No. •

  
	
   

  	
   

  
	
  AXIS CAPITAL
  HOLDINGS LIMITED
•% Senior Notes

  Due •, 20•

  
	
   

  	
   

  
	
  Principal Amount:

  	
  $•,000,000

  
	
   

  	
   

  
	
  Regular Record Date:

  	
  with respect to each Interest Payment Date,
  the close of business on the preceding • or •, as the case may be (whether or not
  a Business Day)

  
	
   

  	
   

  
	
  Original Issue Date:

  	
  •,
  2004

  
	
   

  	
   

  
	
  Stated Maturity:

  	
  •,
  20•

  
	
   

  	
   

  
	
  Interest Payment Dates:

  	
  •
  and • commencing •

  
	
   

  	
   

  
	
  Interest Rate:

  	
  •%
  per year

  
	
   

  	
   

  
	
  Authorized Denomination:

  	
  $1,000 or any integral multiples thereof

  

 

AXIS Capital Holdings Limited, an exempted
company incorporated in Bermuda as a holding company (the “Company,” which term
includes any successor corporation under the Indenture referred to on the
reverse hereof), for value received, hereby promises to pay to
              ,
or registered assigns, the principal sum of
($           ) on the
Stated Maturity shown above, and to pay interest thereon from the Original
Issue Date shown above, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semi-annually in arrears on each
Interest Payment Date as specified above, commencing on -, and on the Stated
Maturity at the rate per year shown above until the principal hereof is paid or
made available for payment and on any overdue principal and on any overdue
installment of interest to the extent permitted by law.  As provided in the Indenture, the Company
under certain circumstances would be required to pay Additional Amounts to the
Holders of the Senior Notes.  The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date (other than an Interest Payment Date that is the Stated Maturity
or a Redemption Date) will, as provided in the Indenture, be paid to the Person
in whose name this Note is registered at the close of business on the Regular
Record Date as specified above next preceding such Interest Payment Date,
provided that any interest payable at Stated Maturity or on a Redemption Date
will be paid to the Person to whom principal is payable.  Except as otherwise provided in the
Indenture, any such interest that is not so punctually paid or duly provided
for will forthwith cease to be payable to the Holders on such Regular Record
Date and may be paid as provided in Section 2.7 of the Original Indenture.

 

Payments of interest on this Note will
include interest accrued to but excluding the respective Interest Payment
Dates.  Interest payments for this Note
shall be computed and paid on the basis of a 360-day year consisting of twelve
30-day months.  In the event that any
date on which interest is payable on this Note is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the
date the payment was originally payable.

 

Payment of the principal of and interest due
at the Stated Maturity or a Redemption Date of this Note shall be made upon
surrender of this Note at the Corporate Trust Office of the Trustee.  The principal of and interest on this Note
shall be paid in such coin or currency of the United States of America as at
the

 

 

time of payment is legal tender for payment
of public and private debts.  Payment of
interest (including interest on an Interest Payment Date) will be made, subject
to such surrender where applicable, at the option of the Company, (i) by check
mailed to the address of the Person entitled thereto as such address shall
appear in the Security Register or (ii) by wire transfer at such place and to
such account at a banking institution in the United States as may be designated
in writing to the Trustee at least 15 days prior to the date for payment by the
Person entitled thereto.

 

The Senior Notes (as defined on the reverse
hereof) will be unsecured obligations of the Company and will rank equally in
right of payment with all the other unsecured, unsubordinated indebtedness of
the Company from time to time outstanding. The Senior Notes will rank senior to
any subordinated indebtedness of the Company.

 

REFERENCE IS HEREBY MADE TO THE FURTHER
PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF, WHICH FURTHER
PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS
PLACE.

 

Unless the certificate of authentication
hereon has been executed by the Trustee by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory
for any purpose.

 

A-3

 

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

 

	
   

  	
  AXIS CAPITAL HOLDINGS LIMITED,

  
	
   

  	
  as Issuer

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

 

(Reverse Side of Note)

 

This Note is one of a duly authorized issue
of Senior Notes of the Company issued and issuable in one or more series under
a Senior Indenture dated as of •, 2004 (the “Original Indenture”), as
supplemented by the First Supplemental Indenture, dated as of •, 2004 (the “First Supplemental
Indenture,” and together with the Original Indenture, the “Indenture”), between
the Company and The Bank of New York, as Trustee (the “Trustee,” which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures incidental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee and the Holders of the Senior Notes issued thereunder
and of the terms upon which said Senior Notes are, and are to be, authenticated
and delivered.  This Note is one of the
series designated on the face hereof as •% Senior Notes due •, 20•
(the “Senior Notes”), initially limited in aggregate principal amount of $•,000,000; provided,
however, that the aggregate principal amount of the Senior Notes may be
increased in the future, without the consent of the holders of the Senior
Notes, on the same terms and with the same CUSIP and ISIN numbers as the Senior
Notes.  Capitalized terms used herein
for which no definition is provided herein shall have the meanings set forth in
the Indenture.

 

This Note is exchangeable in whole or from
time to time in part for Senior Notes of this series in definitive registered
form only as provided herein and in the Indenture.  If (i) at any time the Depositary notifies the Company that it is
unwilling or unable to continue as Depositary for this Note, and the Company
does not appoint a successor Depositary within 90 days after the Company
receives such notice or becomes aware of such condition, as the case may be,
(ii) at any time, the Depositary ceases to be a clearing agency registered
under the Securities Exchange Act of 1934 and the Company has not appointed a
successor depositary within 90 days after the Company learns that the
Depositary has ceased to be so registered or (iii) the Company in its sole
discretion determines that this Note shall be exchangeable for Senior Notes of
this series in definitive registered form and executes and delivers to the
Security Registrar a written order of the Company providing that this Note
shall be so exchangeable, this Note shall be exchangeable for Senior Notes of
this series in definitive registered form, provided that the definitive Senior
Notes so issued in exchange for this Note shall be in denominations of $1,000 and
whole multiples of $1,000 in excess of $2,000, without coupons, and be of like
aggregate principal amount and tenor as the portion of this Note to be
exchanged.  Except as provided above,
owners of beneficial interests in this Note will not be entitled to have Senior
Notes registered in their names, will not receive or be entitled to physical
delivery of Senior Notes in definitive registered form and will not be
considered the holders thereof for any purpose under the Indenture.  Neither the Company, the Trustee, any Paying
Agent nor the Security Registrar shall have any responsibility or liability for
any aspect of records relating to or payments made on account of beneficial
ownership interests in this Note, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.

 

If an Event of Default with respect to the
Senior Notes shall occur and be continuing, the principal of the Senior Notes
may become or may be declared due and payable in the manner, with the effect
and subject to the conditions provided in the Indenture.

 

The Indenture permits, with certain
exceptions as therein provided, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders of the Senior
Notes under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal
amount of the Senior Notes at the time Outstanding.  The Indenture also contains provisions permitting the holders of
specified percentages in principal amount of the Senior Notes at the time
Outstanding, on behalf of the holders of all Senior Notes, to waive compliance
by the Company with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences.  Any such consent or waiver by the Holder of this Note shall be
conclusive and binding upon such holder and upon all future Holders of this
Note and of any Senior Note issued upon the registration of transfer hereof or
in exchange hereof or in lieu hereof, whether or not notation of such consent
or waiver is made upon this Note.

 

The Indenture contains provisions for
defeasance at any time of (a) the entire indebtedness of the Company pursuant
to this Note and (b) restrictive covenants and the related Events of Default,
upon compliance by the Company with certain conditions set forth therein, which
provisions apply to this Note.

 

 

The Senior Notes will be redeemable, at the
option of the Company, in whole or in part, at any time after • (a “Redemption Date”), at
a redemption price (the “Redemption Price”) equal to the greater of (i) 100% of
the aggregate principal amount of the Senior Notes to be redeemed and (ii) an
amount equal to the sum of the present values of the remaining scheduled
payments for principal and interest on the Senior Notes to be redeemed, not
including any portion of the payments of interest accrued to such Redemption
Date, discounted to such Redemption Date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Rate, plus • basis points; plus in
each case, accrued and unpaid interest on the principal amount being redeemed
to, but excluding, such Redemption Date.

 

“Treasury Rate” means (1) the yield, under
the heading which represents the average for the immediately preceding week,
appearing in the most recently published statistical release designated
“H.15(519)” or any successor publication which is published weekly by the Board
of Governors of the Federal Reserve System and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption “Treasury Constant Maturities,” for the maturity
corresponding to the Comparable Treasury Issue (if no maturity is within three
months before or after the remaining life, yields for the two published
maturities most closely corresponding to the Comparable Treasury Issue will be
determined and the Treasury Rate will be interpolated or extrapolated from such
yields on a straight line basis, rounding to the nearest month), or (2) if such
release (or any successor release) is not published during the week preceding
the calculation date or does not contain such yields, the rate per year equal
to the semi-annual equivalent yield to maturity of the Comparable Treasury
Issue, calculated using a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price
for such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.

 

“Comparable Treasury Issue” means the United
States Treasury security selected by the Independent Investment Banker as
having a maturity comparable to the remaining term of the Senior Notes to be
redeemed.

 

“Independent Investment Banker” means either
Citigroup Global Markets Inc. and its successors or J.P. Morgan Securities Inc.
and its successors or, if either of such firms is unwilling or unable to select
the Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee after consultation with the Company.

 

“Comparable Treasury Price” means (1) the
average of five Reference Treasury Dealer Quotations for such Redemption Date,
after excluding the highest and lowest of such Reference Treasury Dealer
Quotations, or (2) if the trustee obtains fewer than five such Reference
Treasury Dealer Quotations, the average of all such quotations.

 

“Reference Treasury Dealer” means each of Citigroup
Global Markets Inc. and J.P. Morgan Securities Inc. and their respective
successors and three other primary U.S. government securities dealers (each a
“Primary Treasury Dealer”), as specified by the Company; provided, that (1) if
any of Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. and their
respective successors or any Primary Treasury Dealer as specified by the
Company shall cease to be a Primary Treasury Dealer, the Company will
substitute therefor another Primary Treasury Dealer and (2) if the Company
fails to select a substitute within a reasonable period of time, then the
substitute will be a Primary Treasury Dealer selected by the Independent
Investment Banker after consultation with the Company.

 

“Reference Treasury Dealer Quotations” mean,
with respect to the Reference Treasury Dealer and any Redemption Date, the
average, as determined by the Independent Investment Banker, of the bid and
asked prices for the Comparable Treasury Issue (expressed, in each case, as a
percentage of its principal amount) quoted in writing to the Independent
Investment Banker by such Reference Treasury Dealer at 5:00 p.m., New York City
time, on the third Business Day preceding such Redemption Date.

 

Notice of any redemption will be mailed at
least 30 days but no more than 60 days before the Redemption Date to each
Holder of the Senior Notes to be redeemed. 
Notwithstanding Section 12.2 of the Original Indenture, the notice of
redemption with respect to the foregoing redemption need not set forth the
Redemption Price but only the manner of calculation thereof.

 

A-6

 

The Company shall notify the Trustee of the
Redemption Price with respect to the foregoing redemption promptly after the
calculation thereof.  The Trustee shall
not be responsible for calculating said Redemption Price.  Unless the Company defaults in payment of
the redemption price, on and after the redemption date, interest will cease to
accrue on the Senior Notes or portions thereof called for redemption.

 

If less than all of the Senior Notes are to
be redeemed, the Trustee shall determine, in such manner as it deems
appropriate and fair, the principal amount of such notes held by each
beneficial owner of such Senior Notes to be redeemed. The Trustee may select
notes and portions of notes in amounts of $1,000 and whole multiples of $1,000
in excess of $2,000.

 

The Indenture contains provisions for
redemption of the Senior Notes for tax purposes in whole but not in part at the
option of the Company.

 

No reference herein to the Indenture and no
provision of this Note or of the Indenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of
and interest on this Note at the time, place and rate, and in the coin or
currency, herein prescribed.

 

As provided in the Indenture and subject to
certain limitations therein set forth, the transfer of this Note is registrable
in the Security Register, upon surrender of this Note for registration of
transfer at the office or agency of the Company for such purpose, duly endorsed
by, or accompanied by a written instrument of transfer in form satisfactory to
the Company or the Security Registrar and duly executed by, the Holder hereof
or his attorney duly authorized in writing, and thereupon one or more new
Senior Notes, of authorized denominations and of like tenor and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.  No service charge shall be
made for any such exchange or registration of transfer, but the Company will
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.

 

Prior to due presentment of this Note for
registration of transfer, the Company, the Trustee, any Person authorized by
the Company to pay the principal of or any premium, interest or Additional
Amounts on any Securities on behalf of the Company (“Paying Agent”) and the
Security Registrar of the Company or the Trustee may deem and treat the Person
in whose name this Note is registered as the absolute owner hereof for all
purposes, whether or not this Note be overdue and notwithstanding any notice of
ownership or writing thereon made by anyone other than the Security Registrar,
and neither the Company nor the Trustee nor any Paying Agent nor the Security
registrar shall be affected by notice to the contrary.

 

The Senior Notes are issuable only in
registered form without coupons in denominations of $1,000 and whole multiples
of $1,000 in excess of $2,000.  As
provided in the Indenture and subject to certain limitations therein set forth,
Senior Notes are exchangeable for a like aggregate principal amount of Senior
Notes of a different authorized denomination, as requested by the Holder
surrendering the same upon surrender of the Senior Note or Senior Notes to be
exchanged at the office or agency of the Company.

 

No recourse shall be had for payment of the
principal of or interest on this Note, or for any claim based hereon, or otherwise
in respect hereof, or based on or in respect of the Indenture, against any
incorporator, as such or against any past, present or future shareholder,
officer or director, as such, of the Company or of any successor, either
directly or through the Company or any successor, under any rule, law statute
or constitutional provision, or by the enforcement of any assessment or by any
legal or equitable proceeding or otherwise, all such liability being expressly
waived and released, by the acceptance hereof and as part of the consideration
for the issuance hereof.

 

Unless the certificate of authentication
hereon has been executed by the Trustee by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory
for any purpose.

 

This Note shall be deemed to be
a contract under the laws of the State of New York, and for all purposes shall
be construed in accordance with the laws of such state, except as may be
required by mandatory provisions of law.

 

A-7

 

ABBREVIATIONS

 

The following abbreviations, when used in the
inscription on the face of this instrument, shall be construed as though they
were written out in full according to applicable laws or regulations:

 

	
  TEN COM – as tenants in common

  	
  UNIF GIFT MIN ACT – Custodian under Uniform
  Gift to Minors Act

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (State)

  
	
   

  	
   

  
	
  TEN ENT - as tenants by the entireties

  	
   

  
	
   

  	
   

  
	
  JT TEN – as joint tenants with rights of

  	
  CUST – Custodian

  
	
   

  	
  survivorship and not as

  
	
   

  	
  tenants in common

  

 

Additional abbreviations may also be used

though not on the above list.

 

FOR VALUE RECEIVED, the undersigned hereby
sell(s) and transfer(s) unto

 

PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING POSTAL ZIP CODE OF ASSIGNEE

 

	
   

  
	
   

  
	
   

  

(please insert Social Security or other
identifying number of assignee)

 

the within Note and all rights thereunder,
hereby irrevocably constituting and appointing

 

 

agent to transfer said Note on the books of
the Company, with full power of substitution in the premises.

 

	
  Dated:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NOTICE: The signature to this assignment must correspond with the
  name as written upon the face of the within instrument in every particular
  without alteration or enlargement, or any change whatever.

  
	
   

  

A-8

 

EXHIBIT B

 

 

CERTIFICATE OF
AUTHENTICATION

 

This is one of the •% Senior Notes due • referred to in the
within-mentioned Indenture.

 

 

	
   

  	
  THE BANK OF NEW YORK

  
	
   

  	
  as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
            Authorized
  SignatoryQuickLinks
 -- Click here to rapidly navigate through this document

 
 

EXHIBIT 4.1    
    

CERTIFICATE OF DESIGNATIONS, RIGHTS AND PREFERENCES

of

SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK

of

TRANSMERIDIAN EXPLORATION INCORPORATED  

        TRANSMERIDIAN EXPLORATION INCORPORATED, a Delaware corporation (the "Corporation"), pursuant to Section 151
of the General Corporation Law of the State of Delaware, does hereby make this Certificate of Designations, Rights and Preferences and does hereby state and certify that pursuant to the authority
expressly vested in the Board of Directors of the Corporation (the "Board") by the Certificate of Incorporation of the Corporation, as amended and restated to date (the "Certificate of
Incorporation"), which authorizes the issuance of 5,000,000 shares of preferred stock, $0.0006 per share, in one or more series, the Board duly adopted the following resolutions, which resolutions
remain in full force and effect as of the date hereof: 

        RESOLVED, that, pursuant to Article 15 of the Certificate of Incorporation the Board hereby authorizes the issuance of, and fixes
the designation and preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions, of a series of preferred stock of the Corporation
consisting of 1,785.714 shares, par value $0.0006 per share, to be designated "Series A Cumulative Convertible Preferred Stock" (hereinafter, the "Preferred Stock"); and be it 

        RESOLVED, that each share of Preferred Stock shall rank equally in all respects, shall be convertible into shares of the common stock of
the Corporation, par value $0.0006 per share (the "Common Stock") as provided herein and shall be subject to the following terms and provisions: 

        1.     Dividends. The holders of the Preferred Stock shall be entitled to receive, when, if and as declared by the Corporation's
Board of Directors, out of funds legally available therefor, cumulative dividends payable as set forth in this Section 1. 

        (a)   Dividends
on the Preferred Stock shall accrue from the date of original issuance of the shares of Preferred Stock (the "Date of Original Issue"), shall be cumulative
from the Date of Original Issue, and such dividends shall be payable, whether or not earned or declared by the Board of Directors of the Corporation. Until paid, the right to receive dividends on the
Preferred Stock shall accumulate, and shall be payable in cash as set forth below, in arrears, on March 31, June 30, September 30 and December 31 of each year (each, a
"Dividend Payment Date"), commencing on December 31, 2004 (the "Initial Dividend Payment Date") except that if such Dividend Payment Date is not a business day, then the Dividend Payment Date
will be the immediately preceding business day. Each such dividend declared by the Board of Directors on the Preferred Stock shall be paid to the holders of record of shares of the Preferred Stock as
they appear on the stock register of the Corporation on the record date which shall be the business day next preceding a Dividend Payment Date. Dividends in arrears for any past dividend period may be
declared by the Board of Directors of the Corporation and paid on shares of the Preferred Stock on any date fixed by the Board of Directors of the Corporation, whether or not a regular Dividend
Payment Date, to holders of record of shares of the Preferred Stock as they appear on the Corporation's stock register on the record date. Any dividend payment made on shares of the Preferred Stock
shall first be credited against the dividends accumulated with respect to the earliest dividend period for which dividends have not been paid. 

        (b)   The
dividend rate (the "Dividend Rate") on each share of Preferred Stock shall be 4.5% per share per annum on $14,000 (the Liquidation Preference (as defined below) of
each such share) for the period from the Date of Original Issue until the Initial Dividend Payment Date and, for each dividend period thereafter, which shall commence on the last day of the preceding
dividend period and shall end on the next Dividend Payment Date, shall be at the Dividend Rate (as adjusted from time to time as hereinafter provided) on such Liquidation Preference. For the period
ending on the Initial Dividend Payment Date, the amount of dividends per share of the Preferred Stock shall be computed by 

 

multiplying
the Dividend Rate for such dividend period by a fraction the numerator of which shall be the number of days in the dividend period or part thereof on which such share was outstanding and
the denominator of which shall be 365 and multiplying the result by the Liquidation Preference. For each dividend period thereafter, the Corporation will pay quarterly dividends in equal amounts, and
each such quarterly dividend payment shall be determined by using the annual Dividend Rate to be paid divided by four; provided, that with respect to any dividend payments required hereunder for
partial dividend periods, such payment shall be calculated in accordance with the prior sentence. 

        (c)   No
dividends shall be declared or paid or set apart for payment on the shares of Common Stock or any other class or series of capital stock of the Corporation for any
dividend period unless full cumulative dividends have been or contemporaneously are declared and paid on the Preferred Stock through the most recent Dividend Payment Date. If full cumulative dividends
have not been paid on shares of the Preferred Stock, all dividends declared on shares of the Preferred Stock shall be paid pro rata to the holders of outstanding shares of the Preferred Stock. 

        (d)   Dividends
on the Preferred Stock may be paid even if, after giving effect thereto, the Corporation's total assets would be less than the sum of its total liabilities,
plus the amount that would be needed, if the Corporation were to be dissolved at the time of such distribution, to satisfy the preferential rights upon dissolution of stockholders, if any, whose
preferential rights are superior to those receiving the distribution. 

        (e)   The
holders of the Preferred Stock shall each be entitled to receive dividends, on a pari passu basis with the holders of
shares of Common Stock, out of any assets legally available therefor, with the amount of such dividends to be distributed to the holders of Preferred Stock computed on the basis of the number of
shares of Common Stock which would be held by such holder if, immediately prior to the declaration of the dividend, all of the shares of Preferred Stock had been converted into shares of Common Stock
at the then current Conversion Value (as defined below). 

        2.     Voting Rights. Except as otherwise provided herein or by law, the holders of the Preferred Stock shall have full voting
rights and powers, subject to the Beneficial Ownership Cap as defined in Section 5(h), equal to the voting rights and powers of holders of Common Stock and shall be entitled to notice of any
stockholders meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, with respect to any question upon which holders of Common Stock have the right to vote, including,
without limitation, the right to vote for the election of directors, voting together with the holders of Common Stock as one class. Each holder of shares of Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the taking of a vote, subject to the Beneficial
Ownership Cap limitations set forth in Section 5(h), or, if no record date is established, at the day prior to the date such vote is taken or any written consent of stockholders is first
executed. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by
each holder could be converted) shall be rounded down to the nearest whole number. 

        3.     Rights on Liquidation. 

        (a)   In
the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (any such event being hereinafter referred to as a "Liquidation"),
before any distribution of assets of the Corporation shall be made to or set apart for the holders of Common Stock, the holders of Preferred Stock shall be entitled to receive payment out of such
assets of the Corporation in an amount equal to $14,000 per share of Preferred Stock (such applicable amount being referred to as the "Liquidation Preference" for the Preferred Stock), plus any
accumulated and unpaid dividends thereon (whether or not earned or declared) on the Preferred Stock. If the assets of the Corporation available for distribution to the holders of Preferred Stock shall
not be sufficient to make in full the payment herein required, such assets shall be distributed pro-rata among the holders of Preferred Stock 

2

 

based
on the aggregate Liquidation Preferences of the shares of Preferred Stock held by each such holder. 

        (b)   If
the assets of the Corporation available for distribution to stockholders exceed the aggregate amount of the Liquidation Preferences plus accumulated and unpaid
dividends payable with respect to all shares of Preferred Stock then outstanding, then, after the payment required by paragraph 3(a) above shall have been made or irrevocably set aside, the
holders of Common Stock shall be entitled to receive with respect to each share of Common Stock payment of a pro rata portion of such assets based on the aggregate number of shares of Common Stock
held by each such holder. The holders of the Preferred Stock shall participate in such a distribution on a pro-rata basis with the holders of the Common Stock, with the amount
distributable to the holders of Preferred Stock to be computed on the basis of the number of shares of Common Stock which would be held by them if immediately prior to the Liquidation all of the
outstanding shares of Preferred Stock had been converted into shares of Common Stock at the then current Conversion Value. 

        (c)   A
Change of Control (as defined below) of the Corporation shall not be deemed a Liquidation, but shall instead be governed by the terms of Section 7 below. 

        4.     Actions Requiring the Consent of Holders of Preferred Stock. As long as at least 20% of the number of shares of Preferred
Stock issued on the Date of Original Issue are outstanding, the consent of the holders of at least 75% of the shares of Preferred Stock, at the time outstanding, given in accordance with the
Certificate of Incorporation and Bylaws of the Corporation, as amended, shall be necessary for effecting or validating any of the following transactions or acts (whether by merger, consolidation or
otherwise): 

        (a)   Any
amendment, alteration or repeal of any of the provisions of this Certificate of Designation (including any increase in the number of shares of Preferred Stock
authorized hereunder); 

        (b)   Any
amendment, alteration or repeal of the Certificate of Incorporation or Bylaws of the Corporation that will adversely affect the rights of the holders of the
Preferred Stock; 

        (c)   The
authorization, creation, offer or sale by the Corporation of, or the increase in the number of authorized shares of, any stock of any class (including the Preferred
Stock), or any security convertible into stock of any class, or the authorization or creation of any new class of preferred stock (or any action which would result in another series of preferred
stock) ranking in terms of liquidation preference, redemption rights or dividend rights, pari passu with or senior to, the Preferred Stock in any
manner; 

        (d)   The
redemption, purchase or other acquisition, directly or indirectly, of any shares of capital stock of the Corporation or any of its subsidiaries or any option,
warrant or other right to purchase or acquire any such shares, or any other security, other than the: (A) redemption of Preferred Stock pursuant to the terms hereof, (B) repurchase of
shares at cost from employees of the Corporation upon termination of employment with the Corporation in accordance with written agreements pursuant to which the shares were issued, or
(C) repurchase or redemption of shares pursuant to written agreements outstanding on the Date of Original Issue; and 

        (e)   The
declaration or payment of any dividend or other distribution (whether in cash, stock or other property) with respect to the capital stock of the Corporation or any
subsidiary, other than a dividend or other distribution pursuant to the terms of the Preferred Stock. 

        5.     Conversion. 

        (a)   Right to Convert. Subject to the limitation set forth in Section 5(h) hereof, the holder of any share or shares of
Preferred Stock shall have the right at any time, at such holder's option, to convert all or any lesser portion of such holder's shares of Preferred Stock into such number of fully paid and
non-assessable shares of Common Stock as is determined by dividing (i) the aggregate Liquidation 

3

 

Preference
of the shares of Preferred Stock to be converted plus accrued and unpaid dividends thereon (provided, that if the Corporation is current in the payment of all prior quarterly dividends, it
shall have the option to pay any accrued and unpaid dividends for a partial dividend period in cash upon conversion) by (ii) the applicable Conversion Value (as defined below) then in effect
for such Preferred Stock. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of any Preferred Stock. With respect to any fraction of a share of Common
Stock called for upon any conversion, the Corporation shall pay to the holder an amount in cash equal to such fraction multiplied by the Current Market Price per share of the Common Stock. 

        "Current
Market Price" means, in respect of any share of Common Stock on any date herein specified: 

        (1)   if
there shall not then be a public market for the Common Stock, the higher of (a) the book value per share of Common Stock at such date, and (b) the
Appraised Value (as defined below) per share of Common Stock at such date, or 

        (2)   if
there shall then be a public market for the Common Stock, the higher of (x) the book value per share of Common Stock at such date, and (y) the average
of the daily market prices for the 20 consecutive trading days immediately before such date. The daily market price for each such trading day shall be (i) the closing price on such day on the
principal stock exchange (including Nasdaq) on which such Common Stock is then listed or admitted to trading, or quoted, as applicable, (ii) if no sale takes place on such day on any such
exchange, the last reported closing price on such day as officially quoted on any such exchange (including Nasdaq), (iii) if the Common Stock is not then listed or admitted to trading on any
stock exchange, the last reported closing bid price on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic
Quotation System or the National Quotation Bureau, Inc., (iv) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by any similar
firm then engaged in such business, or (v) if there is no such firm, as furnished by any member of the National Association of Securities Dealers, Inc. (the "NASD") selected mutually by
holders of a majority of the Preferred Stock and the Corporation or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by holders of
a majority of the Preferred Stock and one of which shall be selected by the Corporation (as applicable, the "Daily Market Price"). 

        "Appraised
Value" means, in respect of any share of Common Stock on any date herein specified, the fair saleable value of such share of Common Stock (determined without giving effect to
the discount for (i) a minority interest or (ii) any lack of liquidity of the Common Stock or to the fact that the Corporation may have no class of equity registered under the Exchange
Act of 1934, as amended (the "Exchange Act")) as of the last day of the most recent fiscal month end prior to such date specified, based on the value of the Corporation (assuming the conversion and
exercise of all of the Corporation's authorized and issued capital stock), as determined by a nationally recognized investment banking firm selected by the Corporation's Board of Directors and having
no prior relationship with the Corporation, and reasonably acceptable to not less than a majority in interest of the holders of the Preferred Stock then outstanding. 

        (b)   Mandatory Conversion. Subject to the limitation set forth in Section 5(h) hereof, at any time after the date that
is twelve months following the date on which the Registration Statement (as defined below) is declared effective, all the outstanding Preferred Stock shall be converted following the occurrence of a
Conversion Triggering Event (as defined below), as of the date of occurrence of the Conversion Triggering Event, into such number of fully paid and non-assessable shares of Common Stock as
is determined by dividing (x) the aggregate Liquidation Preference of the shares of Preferred Stock to be converted plus accrued and unpaid dividends thereon (provided, that if the Corporation
is current in the payment of all prior quarterly dividends, it shall have the option to pay any accrued and 

4

 

unpaid
dividends for a partial dividend period in cash upon conversion) by (y) the applicable Conversion Value (as defined below) then in effect for such Preferred Stock. The Corporation shall
immediately provide written notice (the "Notice") to the holders of the Preferred Stock upon the occurrence of a Conversion Triggering Event which shall describe in reasonable detail the applicable
events constituting the Conversion Triggering Event and provide the date on which such Conversion Triggering Event occurred. A "Conversion Triggering Event" means such date on which all of the
following events simultaneously occur: 

          (i)  The
Registration Statement (as defined below) covering all of the Registrable Securities (as defined in the Investor Rights Agreement) is effective and sales may be
made pursuant thereto (or all of the shares of Common Stock into which the Preferred Stock is convertible or for which the Warrants are exercisable may be sold without restriction pursuant to
Rule 144(k) promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act")); 

         (ii)  on
such date, the Daily Market Price (solely as provided in clause (2)(i), 2(ii) or (2)(iii) of the definition of Current Market Price) of the
Common Stock has been greater than $4.15 per share (subject to adjustment for stock dividends, subdivisions and combinations) for the immediately prior twenty consecutive trading days; and 

        (iii)  the
average daily trading volume (subject to adjustment for stock dividends, subdivisions and combinations) of the Common Stock for the applicable twenty consecutive
trading day period exceeds 200,000 shares. 

        "Registration
Statement" shall have the meaning established in the Investor Rights Agreement dated the Date of Original Issue by and among the Corporation and the other parties signatory
thereto (the "Investor Rights Agreement"). 

        (c)   Mechanics of Conversion. 

          (i)  Such
right of conversion (other than mandatory conversion) shall be exercised by the holder of shares of Preferred Stock by delivering to the Corporation a conversion
notice in the form attached hereto as Exhibit A (the "Conversion Notice"), appropriately completed and duly signed and specifying the number of
shares of Preferred Stock that the holder elects to convert (the "Converting Shares") into shares of Common Stock, and by surrender not later than two (2) business days thereafter of the
certificate or certificates representing such Converting Shares. The Conversion Notice shall also contain a statement of the name or names (with addresses and tax identification or social security
numbers) in which the certificate or certificates for Common Stock shall be issued, if other than the name in which the Converting Shares are registered. Promptly after the receipt of the Conversion
Notice, the Corporation shall issue and deliver, or cause to be delivered, to the holder of the Converting Shares or such holder's nominee, a certificate or certificates for the number of shares of
Common Stock issuable upon the conversion of such Converting Shares. Such conversion shall be deemed to have been effected as of the close of business on the date of receipt by the Corporation of the
Conversion Notice (the "Conversion Date"), and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the holder or holders
of record of such shares of Common Stock as of the close of business on the Conversion Date. 

         (ii)  The
Corporation shall effect such issuance of Common Stock (and certificates for unconverted Preferred Stock) within three (3) trading days of the Conversion
Date and shall transmit the certificates by messenger or reputable overnight delivery service to reach the address designated by such holder within three (3) trading days after the receipt by
the Corporation of such Conversion Notice. If certificates evidencing the Common Stock are not received by the holder within five (5) Trading Days of the Conversion Notice, then the holder will
be entitled to revoke and withdraw its Conversion Notice, in whole or in part, at any time prior to its receipt of 

5

 

those
certificates. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion of Converting Shares or in payment of dividends hereunder, provided the
Corporation's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the holder, the Corporation shall use its
commercially reasonable efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion or dividend payment to the holder, by crediting the account of the
holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery described above, and for delivery of Common Stock in payment of dividends
hereunder, shall apply to the electronic transmittals through the DWAC system. The parties agree to coordinate with DTC to accomplish this objective. The person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock at the close of business on the Conversion Date. If the conversion has
not been rescinded in accordance with this paragraph and the Corporation fails to deliver to the holder such certificate or certificates (or shares through DTC) pursuant to this Section 5 (free
of any restrictions on transfer or legends, if such shares have been registered) in accordance herewith, prior to the seventh trading day after the Conversion Date (assuming timely surrender of the
Preferred Stock certificates), the Corporation shall pay to such holder, in cash, on a per diem basis, an amount equal to 2% of the Liquidation Preference of all Preferred Stock held by such holder
per month until such delivery takes place. 

        The
Corporation's obligation to issue Common Stock upon conversion of Preferred Stock shall be absolute, is independent of any covenant of any holder of Preferred Stock, and shall not be
subject to: (i) any offset or defense; or (ii) any claims against the holders of Preferred Stock whether pursuant to this Certificate of Designation, that certain Preferred Stock and
Warrant Purchase Agreement entered into among the Corporation and the purchasers of the Preferred Stock on the Date of Original Issue (the "Preferred Stock Purchase Agreement"), the Investor Rights
Agreement, the Warrants issued pursuant to the Preferred Stock Purchase Agreement (the "Warrants") or otherwise. 

        (iii)  Subject
to the provisions of Section 5(h), in the event that a Conversion Triggering Event has occurred, all the shares of Preferred Stock shall be converted on
the date of the Conversion Triggering Event which shall be set forth in the Notice as if the holders thereof had delivered a Conversion Notice with respect to such shares on such day. Promptly
thereafter, the holders of the Preferred Stock shall deliver their certificates evidencing the Preferred Stock to the Corporation or its duly authorized transfer agent, and upon receipt thereof, the
Corporation shall issue or cause its transfer agent to issue certificates evidencing the Common Stock into which the shares of Preferred Stock have been converted. 

        (d)   Beneficial Ownership Cap. To the extent that any shares of Preferred Stock are not automatically converted upon the
occurrence of a Conversion Triggering Event on account of the application of Section 5(h), such shares of Preferred Stock shall be deemed converted automatically under this Section 5 at
the first moment thereafter when Section 5(h) would not prevent such conversion. Notwithstanding the preceding sentence, following the Conversion Triggering Event, on the effective date of
conversion set forth in the Notice, the right to: (i) accrue dividends on Preferred Stock (other than dividends pursuant to Section 1(e) hereof); (ii) the liquidation preference
of the Preferred Stock, including, without limitation, the right to be treated as holders of Preferred Stock in the event of a merger or consolidation; (iii) the veto rights described in
Section 4 hereof; (iv) the participation rights provided in Section 10 hereof; (v) the redemption rights in Section 13 hereof, and (vi) all other preferential
contractual rights granted to holders of the Preferred Stock (but not the Common Stock), shall cease immediately. 

        (e)   Conversion Value. The initial conversion value for the Preferred Stock shall be $1.40 per share of Common Stock, such
value to be subject to adjustment in accordance with the provisions of this 

6

 

Section 5.
Such conversion value in effect from time to time, as adjusted pursuant to this Section 5, is referred to herein as a "Conversion Value." All of the remaining provisions of
this Section 5 shall apply separately to each Conversion Value in effect from time to time with respect to Preferred Stock. 

        (f)    Stock Dividends, Subdivisions and Combinations. If at any time while the Preferred Stock is outstanding, the Corporation
shall: 

          (i)  cause
the holders of its Common Stock to be entitled to receive a dividend payable in, or other distribution of, additional shares of Common Stock, 

         (ii)  subdivide
its outstanding shares of Common Stock into a larger number of shares of Common Stock, or 

        (iii)  combine
its outstanding shares of Common Stock into a smaller number of shares of Common Stock, 

then
in each such case the Conversion Value shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding
immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of
this Section 5(f) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant
to clauses (ii) or (iii) of this Section 5(f) shall become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment
under this paragraph occurs during the period that a Conversion Value is calculated hereunder, then the calculation of such Conversion Value shall be adjusted appropriately to reflect such event. 

        (g)   Certain Other Distributions. If at any time while the Preferred Stock is outstanding the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: 

          (i)  cash,

         (ii)  any
evidences of its indebtedness, any shares of stock of any class or any other securities or property or assets of any nature whatsoever (other than cash or
additional shares of Common Stock as provided in Section 5(f) hereof), or 

        (iii)  any
warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property or
assets of any nature whatsoever (in each case set forth in subparagraphs 5(g)(i), 5(g)(ii) and 5(g)(iii) hereof, the "Distributed Property"), 

then
upon any conversion of Preferred Stock that occurs after such record date, the holder of Preferred Stock shall be entitled to receive, in addition to the shares of Common Stock otherwise issuable
upon such conversion of the Preferred Stock ("Conversion Shares"), the Distributed Property that such holder would have been entitled to receive in respect of such number of Conversion Shares had the
holder been the record holder of such Conversion Shares as of such record date. Such distribution shall be made whenever any such conversion is made. In the event that the Distributed Property
consists of property other than cash, then the fair value of such Distributed Property shall be as determined in good faith by the Board of Directors of the Corporation and set forth in reasonable
detail in a written valuation report (the "Valuation Report") prepared by the Board of Directors. The Corporation shall give written notice of such determination and a copy of the Valuation Report to
all holders of Preferred Stock, and if the holders of a majority of the outstanding Preferred Stock object to such determination within twenty (20) business days following the date such notice
is given to all of the holders of Preferred Stock, the Corporation shall submit such valuation to an investment banking firm of recognized national standing selected by not less than a majority of the
holders of the Preferred 

7

 

Stock
and acceptable to the Company in its reasonable discretion, whose opinion shall be binding upon the Corporation and the Preferred Stockholders. A reclassification of the Common Stock (other than
a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the
Corporation to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 5(g) and, if the outstanding shares of Common Stock shall be
changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding
shares of Common Stock within the meaning of Section 5(f). 

        (h)   Blocking Provisions. 

          (i)  Except
as provided otherwise in this Section 5(h)(i) and except prior to a Change of Control the terms of which require the conversion of the Preferred
Stock into Common Stock, the number of Conversion Shares that may be acquired by any holder, and the number of shares of Preferred Stock that shall be entitled to voting rights under Section 2
hereof, shall be limited to the extent necessary to insure that, following such conversion (or deemed conversion for voting purposes), the number of shares of Common Stock then beneficially owned by
such holder and its Affiliates and any other persons or entities whose beneficial ownership of Common Stock would be aggregated with the holder's for purposes of Section 13(d) of the Exchange
Act (including shares held by any "group" of which the holder is a member, but excluding shares beneficially owned by virtue of the ownership of securities or rights to acquire securities that have
limitations on the right to convert, exercise or purchase similar to the limitation set forth herein) does not exceed 4.999% of the total number of shares of Common Stock of the Corporation then
issued and outstanding (the "Beneficial Ownership Cap"). For purposes hereof, "group" has the meaning set forth in Section 13(d) of the Exchange Act and applicable regulations of the Securities
and Exchange Commission, and the percentage held by the holder shall be determined in a manner consistent with the provisions of Section 13(d) of the Exchange Act. As used herein, the term
"Affiliate" means any person or entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a person or entity, as such terms
are used in and construed under Rule 144 under the Securities Act. With respect to a holder of Preferred Stock, any investment fund or managed account that is managed on a discretionary basis
by the same investment manager as such holder will be deemed to be an Affiliate of such holder. Each
delivery of a Conversion Notice by a holder of Preferred Stock will constitute a representation by such Holder that it has evaluated the limitation set forth in this paragraph and determined, subject
to the accuracy of information filed under the Securities Act and the Exchange Act by the Corporation with respect to the outstanding Common Stock of the Corporation, that the issuance of the full
number of shares of Common Stock requested in such Conversion Notice is permitted under this paragraph. This paragraph shall be construed and administered in such manner as shall be consistent with
the intent of the first sentence of this paragraph. Any provision hereof which would require a result that is not consistent with such intent shall be deemed severed herefrom and of no force or effect
with respect to the conversion contemplated by a particular Conversion Notice. 

         (ii)  In
the event the Corporation is prohibited from issuing shares of Common Stock as a result of any restrictions or prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other self-regulatory organization, the Corporation shall as soon as possible seek the approval of its stockholders and
take such other action to authorize the issuance of the full number of shares of Common Stock issuable upon the full conversion of the then outstanding shares of Preferred Stock. 

        (iii)  Notwithstanding
the foregoing provisions of Section 5(h), any holder of Preferred Stock shall have the right prior to the Date of Original Issue upon written
notice to the Corporation, or 

8

 

after
the Date of Original Issue upon 61 days prior written notice to the Corporation, to choose not to be governed by the Beneficial Ownership Cap provided herein. 

        (i)    Common Stock Reserved. The Corporation shall at all times reserve and keep available out of its authorized but unissued
Common Stock, solely for issuance upon the conversion of shares of Preferred Stock as herein provided, such number of shares of Common Stock as shall from time to time be issuable upon the conversion
of all the shares of Preferred Stock at the time outstanding (without regard to any ownership limitations provided in Section 5(h)). 

        (j)    Adjustment Upon Issuance of Additional Shares of Common Stock. 

          (i)  Adjustment to Conversion Value. If at any time while any Preferred Stock is outstanding the Corporation shall issue or
sell any additional shares of Common Stock ("Additional Common Stock") in exchange for consideration in an amount per share of Additional Common Stock less than the Conversion Value at the time the
shares of Additional Common Stock are issued or sold, then the Conversion Value immediately prior to such issue or sale shall be reduced to a price determined by dividing: 

        (1)   an
amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing
Conversion Value, plus (b) the consideration, if any, received by the Company upon such issue or sale; by 

        (2)   the
total number of shares of Common Stock outstanding immediately after such issue or sale. 

         (ii)  Issuance of Common Stock Equivalents. If at any time while the Preferred Stock is outstanding the Corporation shall
issue or sell any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any securities convertible, directly or indirectly, into shares of Common Stock
(collectively, "Common Stock Equivalents"), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the effective price per share for which Common Stock is
issuable upon the exercise, exchange or conversion of such Common Stock Equivalents shall be less than the current Conversion Value in effect immediately prior to the time of such issue or sale, then
the current Conversion Value shall be adjusted as provided in Section 5(j)(i) on the basis that the maximum number of additional shares of Common Stock issuable pursuant to all such
Common Stock Equivalents shall be deemed to have been issued and outstanding and the Corporation shall have received all of the consideration payable therefor, if any, as of the date of the actual
issuance of such Common Stock Equivalents. No further adjustments to the current Conversion Value shall be made under this Section 5(j) upon the actual issue of such Common Stock upon the
exercise, conversion or exchange of such Common Stock Equivalents. 

        (iii)  Certain Issues of Common Stock Excepted. The provisions of Section 5(j) shall not apply to any issuance of
Additional Common Stock for which an adjustment is provided under Section 5(f). The Corporation shall not be required to make any adjustment of the Conversion Value pursuant to
Section 5(j) in the case of the issuance from and after the Date of Original Issue of (A) shares issued or issuable upon conversion of the Preferred Stock, (B) shares issued or
issuable upon exercise of the Warrants, (C) shares of Common Stock issued or issuable upon the exercise of any warrants or options outstanding as of the Date of Original Issue,
(D) shares of Common Stock in connection with a bona-fide strategic transaction, partnership, joint venture, or acquisition, (E) shares of Common Stock issued in connection
with any stock-based compensation plans of the Corporation in existence as of the Date of Original Issue, or any issuance (at issuance or exercise prices at or above fair market value) of Common
Stock, stock awards or options under, or the exercise of options granted pursuant to, any Board approved employee stock option or similar plan for the issuance of options or capital stock of the
Corporation, or (F) the issuance of shares of Common Stock in connection with a bona-fide underwritten public offering. 

9

 

        (iv)  Superseding Adjustment. If, at any time after any adjustment to the current Conversion Value shall have been made
pursuant to Section 5(j) as the result of any issuance of Common Stock Equivalents, (x) the right to exercise, exchange or convert all or a portion of the Common Stock Equivalents shall
expire unexercised, or (y) the conversion rate or consideration per share for which shares of Common Stock are issuable pursuant to such Common Stock Equivalents shall be increased solely by
virtue of
provisions therein contained for an automatic increase in such conversion rate or consideration per share, as the case may be, upon the occurrence of a specified date or event, then any such previous
adjustments to the Conversion Value shall be rescinded and annulled and the additional shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with
the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Upon the occurrence of an event set forth in this
Section 5(j)(iv) above, there shall be a recomputation made of the effect of such Common Stock Equivalents on the basis of: (i) treating the number of additional shares of Common
Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise, exchange or conversion of any such Common Stock Equivalents, as having been issued on the
date or dates of any such exercise, exchange or conversion and for the consideration actually received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then
remain outstanding as having been granted or issued immediately after the time of such increase of the conversion rate or consideration per share for which shares of Common Stock or other property are
issuable under such Common Stock Equivalents; whereupon a new adjustment to the current Conversion Value shall be made, which new adjustment shall supersede the previous adjustment so rescinded and
annulled. 

        6.     Other Provisions Applicable to Adjustments. The following provisions shall be applicable to the making of adjustments of
the number of shares of Common Stock into which the Preferred Stock is convertible and the current Conversion Value provided for in Section 5: 

        (a)   When Adjustments to Be Made. The adjustments required by Section 5 shall be made whenever and as often as any
specified event requiring an adjustment shall occur, except that any adjustment to the Conversion Value that would otherwise be required may be postponed (except in the case of a subdivision or
combination of shares of the Common Stock, as provided for in Section 5(f)) up to, but not beyond the Conversion Date if such adjustment either by itself or with other adjustments not
previously made adds or subtracts less than 1% of the shares of Common Stock into which the Preferred Stock is convertible immediately prior to the making of such adjustment. Any adjustment
representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required
by Section 5 and not previously made, would result in a minimum adjustment or on the Conversion Date. For the purpose of any adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence. 

        (b)   Fractional Interests. In computing adjustments under Section 5, fractional interests in Common Stock shall be
taken into account to the nearest 1/100th of a share. 

        (c)   When Adjustment Not Required. If the Corporation undertakes a transaction contemplated under Section 5(g) and as a
result takes a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights or other benefits contemplated under
Section 5(g) and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights
or other benefits contemplated under Section 5(g), then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect
thereof shall be rescinded and annulled. 

10

 

        (d)   Escrow of Stock. If after any property becomes distributable pursuant to Section 5 by reason of the taking of any
record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, a holder of the Preferred Stock either converts the Preferred Stock or there is a
mandatory conversion during such period or such holder is unable to convert shares pursuant to Section 5(h), such holder of Preferred Stock shall continue to be entitled to receive any shares
of Common Stock issuable upon conversion under Section 5 by reason of such adjustment (as if such Preferred Stock were not yet converted) and such shares or other property shall be held in
escrow for the holder of the Preferred Stock by the Corporation to be issued to holder of the Preferred Stock upon and to the extent that the event actually takes place. Notwithstanding any other
provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be canceled by the Corporation and escrowed property
returned to the Corporation. 

        7.     Merger, Consolidation or Disposition of Assets. 

        (a)   If,
after the Date of Original Issue and while the Preferred Stock is outstanding, there occurs, whether in one transaction or in a series of related transactions:
(i) an acquisition by an individual or legal entity or group (as set forth in Section 13(d) of the Exchange Act) of more than 50% of the voting rights or equity interests in the
Corporation; or (ii) a merger or consolidation of the Corporation where the holders of the Corporation's voting securities prior to such transaction fail to continue to hold at least 50% of the
voting power of the Corporation; or (iii) a sale, transfer or other disposition of all or substantially all the Corporation's property, assets or business to another corporation (each, a
"Change of Control"), and, pursuant to the terms of such Change of Control, shares of common stock of the successor or acquiring corporation, or of the Corporation, if it is the surviving corporation,
and any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the
successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Corporation then the successor or acquiring corporation (if other than
the Corporation) shall assume the Preferred Stock pursuant to Section 7(b) below. Prior to the occurrence of any Change of Control approved by the Corporation's Board of Directors, and
immediately after the occurrence of any Change of Control not approved by the Corporation's Board of Directors, the Corporation shall notify the holders that they have a right to make a change of
control redemption election. If, within 10 days after receiving such notice from the Corporation, any holder delivers notice to the Corporation of its election to exercise such right (which may
be in whole or in part), then the Corporation shall pay to such holder an amount equal to (A) all accrued but unpaid dividends as of the date of the redemption with respect to each share to be
redeemed, plus (B) 100% of the Liquidation Preference of each share of Preferred Stock to be redeemed, such amount to be paid, at the Corporation's election, in cash by wire transfer of
immediately available funds or in the form of Common Stock. If, at the sole option of the Corporation, the amount is to be paid in Common Stock, (i) the Common Stock shall be valued at the
Current Market Price as of such date and (ii) if applicable, such payment shall take place prior to the consummation of any Change of Control transaction approved by the Corporation's Board of
Directors. 

        (b)   In
case of any such Change of Control, the successor or acquiring corporation (if other than the Corporation) shall have the right to expressly assume the due and
punctual observance and performance of each and every covenant and condition contained in this Certificate of Designation to be performed and observed by the Corporation and all the obligations and
liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Corporation) in order to provide for adjustments of
shares of the Common Stock into which the Preferred Stock is convertible which shall be as nearly equivalent as practicable to the adjustments provided for in Section 5. For purposes of
Section 5, common stock of the successor or acquiring corporation shall include stock of such corporation of any class which is not preferred as to dividends or assets on liquidation over any
other class of stock of such corporation and which is not 

11

 

subject
to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or
upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. 

        (c)   The
foregoing provisions of this Section 7 shall similarly apply to successive Change of Control transactions. 

        8.     Other Action Affecting Common Stock. In case at any time or from time to time the Corporation shall take any action in
respect of its Common Stock, other than the payment of dividends permitted by Section 5 or any other action described in Section 5, then, unless such action will not have a materially
adverse effect upon the rights of the holder of Preferred Stock, the number of shares of Common Stock or other stock into which the Preferred Stock is convertible exercisable and/or the purchase price
thereof shall be adjusted in such manner as may be equitable in the circumstances; provided, that the mere authorization or issuance of additional shares of capital stock of the Company shall not be
considered any action in respect of its Common Stock for purposes of this Section 8. 

        9.     Certain Limitations. Notwithstanding anything herein to the contrary, the Corporation agrees not to enter into any
transaction which, by reason of any adjustment hereunder, would cause the current Conversion Value to be less than the par value per share of Common Stock. 

        10.   Participation Rights. 

        (a)   Subject
to the terms and conditions specified in this Section 10, at any time while the Preferred Stock is outstanding, the holders of shares of Preferred Stock
shall have a right to participate with respect to the issuance or possible issuance by the Corporation of any future equity or equity-linked securities or debt which is convertible into equity or in
which there is an equity component (as the case may be, "Additional Securities") on the same terms and conditions as offered by the Corporation to the other purchasers of such Additional Securities.
Each time the Corporation proposes to offer any Additional Securities, the Corporation shall make an offering of such Additional Securities to each holder of shares of Preferred Stock in accordance
with the following provisions: 

          (i)  The
Corporation shall deliver a notice (the "Issuance Notice") to the holders of shares of Preferred Stock stating (a) its bona fide intention to offer such
Additional Securities, (b) the number of such Additional Securities to be offered, (c) the price and terms, if any, upon which it proposes to offer such Additional Securities, and
(d) the anticipated closing date of the sale of such Additional Securities. 

         (ii)  By
written notification received by the Corporation, within five (5) trading days after giving of the Issuance Notice, any holder of shares of Preferred Stock
may elect to purchase or obtain, at the price and on the terms specified in the Issuance Notice, up to that number of such Additional Securities which equals such holder's Pro Rata Amount (as defined
below). The "Pro Rata Amount" for any given holder of shares of Preferred Stock shall be determined as follows: (A) if such holder exercises its right to pay the consideration for the
Additional Securities purchasable hereunder with shares of Preferred Stock (as provided in Section 10(b) below), then such holder's Pro Rata Amount shall be that number of Additional Securities
as is equal to (x) the Liquidation Preference attributable to such holder's shares of Preferred Stock plus any accrued and unpaid dividends on such Preferred Stock divided by (y) the
price per Additional Security, and in such event the Corporation shall be obligated to sell such number of Additional Securities to each such holder, even if the aggregate Pro Rata Amount for all such
holders exceeds the aggregate amount of Additional Securities that the Corporation had initially proposed to offer or (B) if the issuance of the Additional Securities is to be consummated
within twenty-four months following the Date of Original Issue and such holder elects to pay the consideration for the Additional Securities purchasable hereunder in cash, then the
holder's Pro Rata Amount shall equal that portion of Additional Securities, the price of which is equal to 50% of the aggregate 

12

 

purchase
price that such holder paid to the Corporation upon issuance of the Preferred Stock. The Corporation shall promptly, in writing, inform each holder of shares of Preferred Stock which elects
to purchase all of the Additional Shares available to it ("Fully-Exercising Holder") of any other holder's failure to do likewise. During the five-day period commencing after such
information is given, each Fully-Exercising Holder shall be entitled to obtain that portion of the Additional Securities for which the holders of shares of Preferred Stock were entitled to subscribe
but which were not subscribed for by such holders which is equal to the proportion that the number of shares of Preferred Stock held by such Fully-Exercising Holder bears to the total number of shares
of Preferred Stock held by all Fully-Exercising Holders who wish to purchase some of the unsubscribed shares. 

        (iii)  If
all Additional Securities which the holders of shares of Preferred Stock are entitled to obtain pursuant to Section 10(a)(ii) are not elected to be
obtained as provided in Section 10(a)(ii) hereof, the Corporation may, during the 75-day period following the expiration of the period provided in
Section 10(a)(ii) hereof, offer the remaining unsubscribed portion of such Additional Securities to any person or persons at a price not less than, and upon terms no more favorable to
the offeree than, those specified in the Issuance Notice. If the Corporation does not consummate the sale of such Additional Securities within such period, the right provided hereunder shall be deemed
to be revived and such Additional Securities shall not be offered or sold unless first reoffered to the holders of shares of Preferred Stock in accordance herewith. 

        (b)   In
the event that any holder of shares of Preferred Stock exercises its participation right under this Section 10, such holder shall be entitled to use the shares
of Preferred Stock as the consideration for the purchase of its allocated portion of Additional Securities pursuant to this Section 10, with the shares of Preferred Stock being valued at the
Liquidation Preference plus any accrued and unpaid dividends for such purpose.

        (c)   The
rights of the holders of Preferred Stock under this Section 10 shall not apply to: (A) the conversion of the Preferred Stock or the exercise of the
Warrants (B) the exercise of any warrants or options (collectively, the "Existing Warrants") outstanding on the date this Certificate of Designation is filed with the Delaware Secretary of
State (the "Filing Date"), (C) the issuance (at issuance or exercise prices at or above fair market value) of Common Stock, stock awards or options under, or the exercise of any options granted
pursuant to, any Board-approved employee stock option or similar plan for the issuance of options or capital stock of the Corporation, (D) the issuance of shares of Common Stock in connection
with a bona-fide strategic transaction, partnership or acquisition, (E) the issuance of shares of Common Stock in connection with a bona-fide public offering or
(F) the issuance of shares of Common Stock pursuant to a stock split, combination or subdivision of the outstanding shares of Common Stock. 

        (d)   The
participation right set forth in this Section 10 may not be assigned or transferred, except that such right is assignable by each holder of shares of
Preferred Stock to any wholly-owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Securities Act, controlling, controlled by or under common control with,
any such holder. 

        11.   Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Value, the
Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of 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
Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Value at the time in effect
for the Preferred Stock and (iii) the number of shares of Common Stock and the amount, if any, of other 

13

 

property
which at the time would be received upon the conversion of Preferred Stock owned by such holder (without regard to the ownership limitations set forth in Section 5(h)). 

        12.   Notices of Record Date. In the event of any fixing by the Corporation of a record date for the holders of any class of
securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any shares of Common Stock or other
securities, or any right to subscribe for, purchase or otherwise acquire, or any option for the purchase of, any shares of stock of any class or any other securities or property, or to receive any
other right, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or rights, and the amount and character of such dividend, distribution or right. 

        13.   Redemption. 

        (a)   Redemption at the Holders' Elections. If a Redemption Triggering Event (as defined below) has occurred, and a holder has
so elected, the Corporation shall redeem the Preferred Stock of any holder who gives a Demand for Redemption (as defined below). The Corporation shall thereafter redeem the shares of Preferred Stock
as set forth in the Demand for Redemption. The Corporation shall effect such redemption by paying in cash for each such share to be redeemed an amount equal to the greater of (i) the Redemption
Price (as defined below) or (ii) the total number of shares of Common Stock into which such Preferred Stock is convertible multiplied by the Current Market Price at the time of the Redemption
Triggering Event. 

        "Redemption
Triggering Event" means the Corporation's failure or refusal to convert any shares of Preferred Stock in accordance with the terms hereof, or the providing of written notice
to such effect; 

        "Redemption
Price" means (i) all accrued but unpaid dividends as of the date of Demand for Redemption with respect to each share to be redeemed, plus (ii) 100% of the
Liquidation Preference of each share to be redeemed. 

        (b)   Demand for Redemption. A holder desiring to elect a redemption as herein provided shall deliver a notice (the "Demand for
Redemption") to the Corporation while such Redemption Triggering Event continues specifying the following: 

          (i)  The
approximate date and nature of the Redemption Triggering Event; 

         (ii)  The
number of shares of Preferred Stock to be redeemed; and 

        (iii)  The
address to which the payment of the Redemption Price shall be delivered, or, at the election of the holder, wire instructions with respect to the account to which
payment of the Redemption Price shall be required. 

        A
holder may deliver the certificates evidencing the Preferred Stock to be redeemed with the Demand for Redemption or under separate cover. Payment of the Redemption Price shall be made
not later than two (2) business days after the date on which each of the following conditions has been satisfied: (i) a holder has delivered a Demand for Redemption and the certificates
evidencing the shares of Preferred Stock to be redeemed; and (ii) any Breach Cure Period has expired. 

        (c)   Status of Redeemed or Purchased Shares. Any shares of the Preferred Stock at any time purchased, redeemed or otherwise
acquired by the Corporation shall not be reissued and shall be retired. 

        14.   Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall
be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 5:00 p.m. (New York City time) on a business day, (b) the 

14

 

next
business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a business day or
later than 5:00 p.m. (New York City time) on any business day, or (c) the business day following the date of mailing, if sent by U.S. nationally recognized overnight courier service such
as Federal Express. The address for such notices and communications shall be as follows: (i) if to the Corporation, to 397 N Sam Houston Pkwy E, Suite 300, Houston, Texas 77060, facsimile:
281-999-9094, Attention: Chief Financial Officer, or (ii) if to a holder of Preferred Stock, to the address or facsimile number appearing on the Corporation's
stockholder records or, in either case, to such other address or facsimile number as the Corporation or a holder of Preferred Stock may provide to the other in accordance with this Section. 

        15.   Stock Transfer Taxes. The issue of stock certificates upon conversion of the Preferred Stock shall be made without charge
to the converting holder for any tax in respect of such issue; provided, however, that the Corporation shall be entitled to withhold any applicable withholding taxes with respect to such issue, if
any. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares in any name other than that of the
holder of any of the Preferred Stock converted, and the Corporation shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue
thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. 

[signature
page follows] 

15

 

        IN
WITNESS WHEREOF, the undersigned being a duly authorized officer of the Corporation, does file this Certificate of Designations, Rights and Preferences, hereby declaring and
certifying that the facts stated herein are true and accordingly has hereunto set his hand this 12th day of November, 2004. 

TRANSMERIDIAN
EXPLORATION, INC. 

By:
/s/ EARL W. MCNIEL

Name: Earl W. McNiel

Title:    Vice President, Chief Financial Officer 

16

 
EXHIBIT
A

   

FORM OF CONVERSION NOTICE 

(To
be executed by the registered Holder in order to convert shares of Preferred Stock) 

        The
undersigned hereby irrevocably elects to convert the number of shares of Series A Cumulative Preferred Stock (the "Preferred Stock") indicated below into shares of common
stock, par value $0.0006 per share (the "Common Stock"), of Transmeridian Exploration Incorporated, a Delaware corporation (the "Corporation"), according to the Certificate of Designation of the
Preferred Stock and the conditions hereof, as of the date written below. The undersigned hereby requests that certificates for the shares of Common Stock to be issued to the undersigned pursuant to
this Conversion Notice be issued in the name of, and delivered to, the undersigned or its designee as indicated below. If the shares of Common Stock are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. A copy of the certificate representing the Preferred Stock being converted is attached hereto. 

	

 Date of Conversion (Date of Notice)
	

 Number of shares of Preferred Stock owned prior to Conversion
	

 Number of shares of Preferred Stock to be Converted
	

 Stated Value of Preferred Stock to be Converted
	

 Amount of accumulated and unpaid dividends on shares of Preferred Stock to be Converted
	

 Number of shares of Common Stock to be Issued (including conversion of accrued but unpaid dividends on shares of Preferred Stock to be Converted)
	

 Applicable Conversion Value
	

 Number of shares of Preferred Stock owned subsequent to Conversion
	

Conversion Information:[NAME OF HOLDER]
	

 

    

	

Address of Holder:

 Issue Common Stock to (if different than above):	
 	

 
	Name:	 	    
	 	 
	Address:	 	    
	 	 
	

	
 	

 
	

Tax ID #:	
 	

	
 	

 

        The undersigned represents, subject to the accuracy of information filed under the Securities Act and the Exchange Act by the Corporation with respect to the
outstanding Common Stock of the Corporation, as of the date hereof that, after giving effect to the conversion of Preferred Shares pursuant to this Conversion Notice, the undersigned will not exceed
the "Beneficial Ownership Cap" contained in Section 5(h) of the Certificate of Designation of the Preferred Stock. 

	
 Name of Holder	 	 
	

    	
 	

 	
 	

 
	By:	 	
	 	 
	Name:

Title:	 	 	 	 

17

QuickLinks

EXHIBIT 4.1

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