Document:

Exhibit 4.1

 

Exhibit 4.1

NATIONAL HEALTHCARE CORPORATION

and

COMPUTERSHARE TRUST COMPANY, N.A.

as Rights Agent

 

RIGHTS AGREEMENT

Dated as of August 2, 2007

 

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	PAGE
	SECTION 1.

	 	CERTAIN DEFINITIONS
	 	 	1	 
	SECTION 2.

	 	APPOINTMENT OF RIGHTS AGENT
	 	 	4	 
	SECTION 3.

	 	ISSUANCE OF RIGHTS CERTIFICATES
	 	 	4	 
	SECTION 4.

	 	FORM OF RIGHTS CERTIFICATES
	 	 	7	 
	SECTION 5.

	 	COUNTERSIGNATURE AND REGISTRATION
	 	 	7	 
	SECTION 6.

	 	TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS
CERTIFICATES
	 	 	8	 
	SECTION 7.
SECTION 8.

	 	EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS

CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES
	 	 	9

11	 
	SECTION 9.

	 	RESERVATION AND AVAILABILITY OF CAPITAL STOCK
	 	 	11	 
	SECTION 10.

	 	PREFERRED STOCK RECORD DATE
	 	 	13	 
	SECTION 11.

	 	ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR

NUMBER OF RIGHTS
	 	 	13	 
	SECTION 12.

	 	CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES
	 	 	21	 
	SECTION 13.

	 	CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR

EARNING POWER
	 	 	21	 
	SECTION 14.

	 	FRACTIONAL RIGHTS AND FRACTIONAL SHARES
	 	 	24	 
	SECTION 15.

	 	RIGHTS OF ACTION
	 	 	25	 
	SECTION 16.

	 	AGREEMENT OF RIGHTS HOLDERS
	 	 	26	 
	SECTION 17.

	 	RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER
	 	 	26	 
	SECTION 18.

	 	CONCERNING THE RIGHTS AGENT
	 	 	26	 
	SECTION 19.

	 	MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT
	 	 	27	 

 

 

	 	 	 	 	 	 	 
	 	 	 	 	PAGE
	SECTION 20.

	 	RIGHTS AND DUTIES OF RIGHTS AGENT
	 	 	28	 
	SECTION 21.

	 	CHANGE OF RIGHTS AGENT
	 	 	30	 
	SECTION 22.

	 	ISSUANCE OF NEW RIGHTS CERTIFICATES
	 	 	31	 
	SECTION 23.

	 	REDEMPTION
	 	 	31	 
	SECTION 24.

	 	EXCHANGE
	 	 	32	 
	SECTION 25.

	 	NOTICE OF CERTAIN EVENTS
	 	 	34	 
	SECTION 26.

	 	NOTICES
	 	 	35	 
	SECTION 27.

	 	SUPPLEMENTS AND AMENDMENTS
	 	 	36	 
	SECTION 28.

	 	SUCCESSORS
	 	 	36	 
	SECTION 29.

	 	DETERMINATIONS AND ACTIONS BY THE
BOARD OF DIRECTORS, ETC
	 	 	36	 
	SECTION 30.

	 	BENEFITS OF THIS AGREEMENT
	 	 	37	 
	SECTION 31.

	 	SEVERABILITY
	 	 	37	 
	SECTION 32.

	 	GOVERNING LAW
	 	 	37	 
	SECTION 33.

	 	COUNTERPARTS
	 	 	37	 
	SECTION 34.

	 	DESCRIPTIVE HEADINGS
	 	 	37	 
	SECTION 35.

	 	FORCE MAJEURE.
	 	 	37	 

EXHIBITS

Exhibit A Form of Certificate of Designation

Exhibit B Form of Rights Certificate

Exhibit C Summary of Rights to Purchase Preferred Stock

 

 

RIGHTS AGREEMENT

     This Rights Agreement, dated as of August 2, 2007 (the “Agreement”), is made by and between
National Healthcare Corporation, a Delaware corporation (the “Company”), and Computershare Trust
Company, N.A., a federally chartered trust company, as Rights Agent (the “Rights Agent”).

WITNESSETH:

     WHEREAS, on August 2, 2007 (the “Rights Dividend Declaration Date”), the Board of Directors of
the Company authorized and declared a dividend distribution of one Right (as hereinafter defined)
for each share of Common Stock, par value $0.01 per share, of the Company outstanding at the Close
of Business on August 2, 2007 (the “Record Date”), and has authorized the issuance of one Right (as
such number may hereinafter be adjusted pursuant to the provisions of Section 11(p) hereof) for
each share of Common Stock of the Company issued between the Record Date (whether originally issued
or delivered from the Company’s treasury) and the Distribution Date (as defined in Section 3
hereof), each Right initially representing the right to purchase one ten-thousandth of a share of
Series B Junior Participating Preferred Stock of the Company, $0.01 par value, having the rights,
powers and preferences set forth in the Form of Certificate of Designation, Preferences and Rights
attached hereto as Exhibit A, upon the terms and subject to the conditions hereinafter set forth
(the “Rights”);

     NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth,
the parties hereby agree as follows:

AGREEMENT:

     SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings
indicated:

          (a) “Acquiring Person” shall mean any Person who or which, together with all Affiliates and
Associates of such Person, shall be the Beneficial Owner of twenty percent (20%) or more of the
shares of Common Stock then outstanding, but shall not include the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any
Person or entity organized, appointed or established by the Company for or pursuant to the terms of
any such employee benefit plan. In addition, notwithstanding the foregoing, no Person shall be
deemed to be an Acquiring Person if (i) the Board of Directors of the Company determines in good
faith that a person who would otherwise be an “Acquiring Person,” but for the operation of this
clause (i), has become such inadvertently, and such person divests as promptly as practicable (or
in such a period of time the Board of Directors and Company determine is practicable) a sufficient
number of shares of Common Stock so that such person would no longer be an “Acquiring Person,” (ii)
as the result of an acquisition of Common Stock by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially owned by such Person
to twenty percent (20%) or more of the Common Stock of the Company then outstanding; provided,
however, that if a Person shall become the Beneficial Owner of twenty percent (20%) or more of the
Common Stock of the Company then outstanding by reason of share purchases by the Company and shall,

1

 

after such share purchases by the Company, become the Beneficial Owner (other than by way of a
stock dividend or stock split) of additional shares of Common Stock representing one-half of one
percent (.50%) of the then outstanding shares of Common Stock of the Company, then such Person
shall be deemed to be an Acquiring Person, or (iii) a Person enters into an agreement or
transaction or understanding with the Company whereby, solely as a consequence of that agreement or
transaction or understanding, such Person would become an “Acquiring Person” (but for the operation
of this clause (iii)), and such agreement, transaction or understanding is approved by a majority
of the Board of Directors of the Company; provided, however, that if such Person subsequently
becomes the Beneficial Owner of any additional shares of Common Stock in a manner not specifically
approved by a majority of the Board of Directors, such Person shall be deemed to be an Acquiring
Person.

          (b) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in
Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date of
this Agreement; provided, however, that no Person who is a director or officer of
the Company shall be deemed an Affiliate or Associate of any other officer or director of the
Company solely as a result of his or her position as officer or director of the Company.

          (c) A Person shall be deemed the “Beneficial Owner” of, and shall be deemed to “beneficially
own,” any securities:

               (i) that such Person or any of such Person’s Affiliates or Associates beneficially owns (as
determined pursuant to Rule 13d-3 of the Rules under the Exchange Act), directly or indirectly;

               (ii) that such Person or any of such Person’s Affiliates or Associates, directly or
indirectly, has the right to acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of Company Series A Convertible Preferred Stock conversion rights,
exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall
not be deemed the “Beneficial Owner” of, or to “beneficially own,” (A) securities tendered pursuant
to a tender or exchange offer made by such person or any of such Person’s Affiliates or Associates
until such tendered securities are accepted for purchase or exchange, or (B) securities which a
Person or any of such Person’s Affiliates or Associates may be deemed to have the right to acquire
pursuant to any merger or other acquisition agreement between the Company and such Person (or one
or more of its Affiliates or Associates) if such agreement has been approved by the Board of
Directors of the Company prior to there being an Acquiring Person, or (C) securities issuable upon
exercise of Rights at any time prior to the occurrence of a Triggering Event, or (D) securities
issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights
were acquired by such Person or any of such Person’s Affiliates or Associates prior to the
Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the “Original Rights”) or
pursuant to Section 11(i) hereof in connection with an adjustment made with respect to any Original
Rights; or

               (iii) that such Person or any of such Person’s Affiliates or Associates, directly or
indirectly, has the right to vote or dispose of or “beneficial ownership” of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange

2

 

Act), including pursuant to any agreement, arrangement or understanding, whether or not in
writing; provided, however, that a Person shall not be deemed the “Beneficial Owner” of, or to
“beneficially own,” any security under this subparagraph (iii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement, arrangement or understanding:
(A) arises solely from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable provisions of the General
Rules and Regulations under the Exchange Act, and (B) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or successor report); or

               (iv) that are beneficially owned, directly or indirectly, by any other Person (or any
Affiliate or Associate thereof) with which such Person (or any of such Person’s Affiliates or
Associates) has any agreement, arrangement or understanding (whether or not in writing), for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the
proviso to subparagraph (iii) of this paragraph (c)) or disposing of any voting securities of the
Company; provided, however, that nothing in this paragraph (c) shall cause a person engaged in
business as an underwriter of securities to be the “Beneficial Owner” of, or to “beneficially own,”
any securities acquired through such person’s participation in good faith in a firm commitment
underwriting until the expiration of forty (40) days after the date of such acquisition; and
provided further, however, that in no case shall an officer or director of the Company be deemed
(x) the Beneficial Owner of any securities beneficially owned by another officer or director of the
Company solely by reason of actions undertaken by such persons in their capacity as officers or
directors of the Company or (y) the Beneficial Owner of securities held of record by the trustee of
any employee benefit plan of the Company or any Subsidiary of the Company for the benefit of any
employee of the Company or any Subsidiary of the Company, other than the officer or director, by
reason of any influence that such officer or director may have over the voting of the securities
held in the plan.

          (d) “Business Day” shall mean any day other than a Saturday, Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or executive order to
close.

          (e) “Close of Business” on any given date shall mean 5:00 P.M., New York City, New York time
on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M.,
New York City time, on the next succeeding Business Day.

          (f) “Common Stock” shall mean the Common Stock, par value $0.01 per share, of the Company,
except that “Common Stock” when used with reference to any Person other than the Company shall mean
the capital stock of such Person with the greatest voting power, or the equity securities or other
equity interest having power to control or direct the management, of such Person.

          (g) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended to date.

          (h) “Expiration Date” shall mean the earliest of (i) the Close of Business on the Final
Expiration Date, (ii) the time at which the Rights are redeemed as provided in Section

3

 

23 hereof, or (iii) the time at which the Board of Directors orders the exchange of the Rights
as provided in Section 24 hereof.

          (i) “Final Expiration Date” shall mean the Close of Business on the tenth anniversary of the
Record Date.

          (j) “Person” shall mean any individual, firm, corporation, limited liability company,
partnership, trust or other entity, and shall include any successor (by merger or otherwise) of
such entity.

          (k) “Preferred Stock” shall mean shares of Series B Junior Participating Preferred Stock, par
value $0.01 per share, of the Company, having the rights and preferences set forth in the form of
Certificate of Designation, Preferences and Rights attached hereto as Exhibit A.

          (l) “Section 11(a)(ii) Event” shall mean any event described in Section 11(a)(ii) (A), (B) or
(C) hereof.

          (m) “Section 13 Event” shall mean any event described in clauses (x), (y) or (z) of Section
13(a) hereof.

          (n) “Stock Acquisition Date” shall mean the first date of public announcement (which, for
purposes of this definition, shall include, without limitation, a report filed pursuant to Section
13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.

          (o) “Subsidiary” shall mean, with reference to any Person, any corporation of which an amount
of voting securities sufficient to elect at least a majority of the directors of such corporation
is beneficially owned, directly or indirectly, by such Person, or otherwise controlled by such
Person.

          (p) “Triggering Event” shall mean any Section 11(a)(ii) Event or any Section 13 Event.

     SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for
the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts
such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable upon ten (10) days prior written notice to the Rights Agent. The Rights
Agent shall have no duty to supervise, and in no event shall be liable for, the acts or omissions
of any such co-Rights Agent.

     SECTION 3. ISSUANCE OF RIGHTS CERTIFICATES.

          (a) Until the earlier of (i) the Close of Business on the tenth day (or such later date as may
be determined by action of a majority of the Board of Directors) after the Stock Acquisition Date
(or, if the tenth day after the Stock Acquisition Date occurs before the Record

4

 

Date, the Close of Business on the Record Date), or (ii) the Close of Business on the tenth
Business Day (or such later date as may be determined by action of a majority of the Board of
Directors then in office) after the date that a tender or exchange offer by any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such employee benefit plan) is commenced within the
meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon
consummation thereof, such Person would be the Beneficial Owner of twenty percent (20%) or more of
the shares of Common Stock then outstanding (the earlier of (i) and (ii) being herein referred to
as the “Distribution Date”), (x) the Rights will be evidenced (subject to the provisions of
paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names
of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates, and (y) the Rights will be transferable
only in connection with the transfer of the underlying shares of Common Stock (including a transfer
to the Company). The Company shall promptly notify the Rights Agent in writing upon the occurrence
of the Distribution Date and, if such notification is given orally, the Company shall confirm in
writing on or prior to the Business Day next following. Until such notice is received by the
Rights Agent, the Rights Agent may presume conclusively for all purposes that the Distribution Date
has not occurred. As soon as practicable after the Distribution Date, and receipt by the Rights
Agent of notice of such occurrence, the Rights Agent, if requested and provided with all necessary
information and documentation, will send by first-class, insured, postage prepaid mail, to each
record holder of the Common Stock as of the Close of Business on the Distribution Date, at the
address of such holder shown on the records of the Company, one or more rights certificates, in
substantially the form of Exhibit B hereto (the “Rights Certificates”), duly executed and
countersigned in the manner provided for in Section 5(a) hereof, evidencing one Right for each
share of Common Stock so held, subject to adjustment as provided herein. In the event that an
adjustment in the number of Rights per share of Common Stock has been made pursuant to Section
11(p) hereof, at the time of distribution of the Rights Certificates, the Company shall make the
necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that
Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in
lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates and may be transferred by the transfer of the Rights
Certificates as permitted hereby, separately and apart from any transfer of one or more shares of
Common Stock, and the holders of such Rights Certificates as listed in the records of the Company
or any transfer agent or registrar for the Rights shall be the record holders thereof.

          (b) As promptly as practicable following the Record Date, the Company will send a copy of a
Summary of Rights, in substantially the form attached hereto as Exhibit C (the “Summary of
Rights”), by first-class, postage prepaid mail, to each record holder of the Common Stock as of the
Close of Business on the Record Date, at the address of such holder shown on the records of the
Company. With respect to certificates for the Common Stock outstanding as of the Record Date,
until the Distribution Date, the Rights will be evidenced by such certificates for the Common Stock
and the registered holders of the Common Stock shall also be the registered holders of the
associated Rights. Until the earlier of the Distribution Date or the Expiration Date, the transfer
of any certificates representing shares of Common Stock in

5

 

respect of which Rights have been issued shall also constitute the transfer of the Rights
associated with such shares of Common Stock.

          (c) Unless the Board of Directors by resolution adopted at or before the time of the issuance
(including pursuant to the exercise of rights under the Company’s employee benefit plans) of any
Common Stock specifies to the contrary, Rights shall be issued in respect of all shares of Common
Stock that are issued after the Record Date but prior to the earlier of the Distribution Date or
the Expiration Date. Certificates representing such shares of Common Stock shall also be deemed to
be certificates for Rights, and shall bear the following legend:

     This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in the Rights Agreement between
National Healthcare Corporation, a Delaware corporation (the
“Company”) and Computershare Trust Company, N.A., as Rights Agent
(the “Rights Agent”), dated as of August 2, 2007 (the “Rights
Agreement”), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of
the Company. The Rights are not exercisable prior to the occurrence
of certain events specified in the Rights Agreement. Under certain
circumstances, as set forth in the Rights Agreement, such Rights
will be evidenced by separate certificates and will no longer be
evidenced by this certificate. The Company will mail to the holder
of this certificate a copy of the Rights Agreement, as in effect on
the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in
the Rights Agreement, Rights issued to, or held by, any Person who
is, was or becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any subsequent
holder, may become null and void.

With respect to such certificates containing the foregoing legend, until the earlier of (i) the
Distribution Date or (ii) the Expiration Date, the Rights associated with the Common Stock
represented by such certificates shall be evidenced by such certificates alone and registered
holders of Common Stock also shall be the registered holders of the associated Rights, and the
transfer of any of such certificates shall also constitute the transfer of the Rights associated
with the Common Stock represented by such certificates. In the event that the Company purchases or
acquires any Common Stock after the Record Date but prior to the Distribution Date, any Rights
associated with such Common Stock shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Stock which are no longer
outstanding.

6

 

     SECTION 4. FORM OF RIGHTS CERTIFICATES.

          (a) The Rights Certificates (and the forms of election to purchase and of assignment to be
printed on the reverse thereof) shall each be substantially in the form set forth in Exhibit B
hereto and may have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate which are not inconsistent with
the provisions of this Agreement and which do not affect the rights, duties and responsibilities of
the Rights Agent, or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the
Rights may from time to time be listed, or to conform to usage. Subject to the provisions of
Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as
of the Record Date and on their face shall entitle the holders thereof to purchase such number of
one ten-thousandths of a share of Preferred Stock as shall be set forth therein at the price set
forth therein (such exercise price per one ten-thousandth of a share, the “Purchase Price”), but
the amount and type of securities purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided herein.

          (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 hereof that
represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of
an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee
of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity
interests in such Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a
transfer which the Board of Directors of the Company has determined is part of a plan, arrangement
or understanding which has as a primary purpose or effect avoidance of Section 7(e) hereof, and any
Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange,
replacement or adjustment of any other Rights Certificate referred to in this sentence, shall
contain (to the extent feasible) the following legend:

     The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms
are defined in the Rights Agreement). Accordingly, this Rights
Certificate and the Rights represented hereby may become null and
void in the circumstances specified in Section 7(e) of such
Agreement.

     SECTION 5. COUNTERSIGNATURE AND REGISTRATION.

          (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President or any Vice President, either manually or by facsimile signature, and shall
have affixed thereto the Company’s seal or a facsimile thereof which shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The
Rights Certificates shall be manually countersigned by the Rights

7

 

Agent and shall not be valid for any purpose unless so countersigned. In case any officer of
the Company who shall have signed any of the Rights Certificates shall cease to be such officer of
the Company before countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and
delivered by the Company with the same force and effect as though the Person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights Certificates may be
signed on behalf of the Company by any Person who, at the actual date of the execution of such
Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate,
although at the date of the execution of this Rights Agreement any such Person was not such an
officer.

          (b) Following the Distribution Date, and receipt by the Rights Agent of notice of such
occurrence, and of all other necessary information and documentation, as provided in Section 3(a)
hereof, the Rights Agent will keep or cause to be kept, at its office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rights Certificates, the Rights Certificate number and the
date of each of the Rights Certificates.

     SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED,
DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.

          (a) Subject to the provisions of Section 4(b), Section 7(e), Section 14 and Section 24 hereof,
at any time after the Close of Business on the Distribution Date, and at or prior to the Close of
Business on the Expiration Date, any Rights Certificate or Certificates may be transferred, split
up, combined or exchanged for another Rights Certificate or Certificates, entitling the registered
holder to purchase a like number of one ten-thousandths of a share of Preferred Stock (or following
a Triggering Event, Common Stock, other securities, cash or other assets, as the case may be) as
the Rights Certificate or Certificates surrendered then entitled such holder (or former holder in
the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine
or exchange any Rights Certificate or Certificates shall make such request in writing delivered to
the Rights Agent, and shall surrender the Rights Certificate or Certificates to be transferred,
split up, combined or exchanged at the principal office or offices of the Rights Agent designated
for such purpose. The Rights Certificates shall be transferable only on the registry books of the
Rights Agent. Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights Certificate until the
registered holder shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) thereof and of the
Rights evidenced thereby or of the Affiliates or Associates of such Beneficial Owner (or former
Beneficial Owner) as the Company or the Rights Agent shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e), Section 14 and Section 24 hereof, countersign
and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be

8

 

imposed in connection with any transfer, split up, combination or exchange of Rights
Certificates, registered in such name or names as may be designated by the surrendering registered
holder. If and to the extent the Company does require payment of any such taxes or governmental
charges, the Rights Agent shall not deliver the Rights Certificate(s) unless and until it is
satisfied that all such payments have been made, and the Rights Agent shall promptly forward any
such sum collected by it to the Company or to such persons as the Company may specify by written
notice.

          (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to
them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement
to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company
will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for
countersignature and delivery to the registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.

     SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS.

          (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may
exercise the Rights evidenced thereby (except as otherwise provided herein including, without
limitation, the restrictions on exercisability set forth in Section 9(c), Section 11(a)(iii) and
Section 23(a) hereof) in whole or in part at any time after the Distribution Date upon surrender of
the Rights Certificate, with the form of election to purchase and the certificate on the reverse
side thereof duly and properly executed, to the Rights Agent at the office or offices of the Rights
Agent designated for such purpose, together with payment of the aggregate Purchase Price with
respect to the total number of one ten-thousandths of a share of Preferred Stock (or other
securities or property, as the case may be) as to which such surrendered Rights are then
exercisable, and an amount equal to any applicable transfer tax or charge required to be paid under
Section 9(e) hereof, at or prior to the Expiration Date. Except for those provisions herein which
expressly survive the termination of this Agreement, this Agreement shall terminate at such time as
the Rights are no longer exercisable hereunder.

          (b) The Purchase Price for each one ten-thousandths of a share of Preferred Stock pursuant to
the exercise of a Right shall initially be Two Hundred Fifty Dollars ($250), and shall be subject
to adjustment from time to time as provided in Section 11 hereof and shall be payable in accordance
with paragraph (c) below.

          (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of
election to purchase and the certificate duly and properly executed, accompanied by payment, with
respect to each Right so exercised, of the Purchase Price per one ten-thousandths of a share of
Preferred Stock (or other shares, securities or property, as the case may be) to be purchased as
set forth below and an amount equal to any applicable transfer tax or charge required to be paid
under Section 9(e) hereof, the Rights Agent shall, subject to Section 20(k) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the shares of Preferred Stock (or make
available, if the Rights Agent is the transfer agent for such shares) certificates for

9

 

the total number of one ten-thousandths of a share of Preferred Stock to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B)
if the Company shall have elected to deposit the total number of shares of Preferred Stock issuable
upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary
agent depositary receipts representing such number of one ten-thousandths of a share of Preferred
Stock as are to be purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the depositary agent),
and the Company will direct the depositary agent to comply with such request, (ii) when
appropriate, requisition from the Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 11 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the registered holder
of such Rights Certificate, registered in such name or names as may be designated by such holder,
and (iv) when appropriate, after receipt thereof, deliver such cash, if any, to or upon the order
of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof) and an amount equal to any applicable
transfer tax or charge required to be paid under Section 9(e) hereof, may be made (x) in cash or by
certified bank check, cashier’s check, bank draft or money order payable to the order of the
Company, or (y) by delivery of a certificate or certificates (with appropriate stock powers
executed in blank attached thereto) evidencing a number of shares of Common Stock equal to the sum
of the then Purchase Price and an amount equal to any applicable transfer tax or charge required to
be paid under Section 9(e) hereof, divided by the closing market price (as determined pursuant to
Section 11(d) hereof) per share of Common Stock on the Trading Date immediately preceding the date
of such exercise. In the event that the Company is obligated to issue other securities (including
Common Stock) of the Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other securities, cash and/or
other property are available for distribution by the Rights Agent, if and when appropriate.

          (d) In case the registered holder of any Rights Certificate shall exercise less than all the
Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights
remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of,
the registered holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14 hereof.

          (e) Notwithstanding anything in this Agreement to the contrary, from and after the first
occurrence of a Triggering Event, any Rights beneficially owned by (i) an Acquiring Person or an
Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such (a
“Post Transferee”), or (iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration)
from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person had any continuing agreement, arrangement or understanding regarding
the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined
is part of a plan, arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(e) (a “Prior Transferee”), or (iv) any subsequent transferee receiving
transferred Rights

10

 

from a Post Transferee or a Prior Transferee, either directly or through one or more
intermediate transferees, shall become null and void without any further action and no holder of
such Rights shall have any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure
that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have
no liability to any holder of Rights Certificates or other person as a result of its failure to
make any determinations with respect to an Acquiring Person or its Affiliates, Associates or
transferees hereunder.

          (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor
the Company shall be obligated to undertake any action with respect to a registered holder of
Rights or other securities upon the occurrence of any purported exercise as set forth in this
Section 7 unless such registered holder shall have (i) properly completed and signed the
certificate contained in the form of election to purchase set forth on the reverse side of the
Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) thereof and of the Rights evidenced
thereby or of the Affiliates or Associates of such Beneficial Owner (or former Beneficial Owner) as
the Company or the Rights Agent shall reasonably request.

     SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for
the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the
Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates
shall be issued in lieu thereof except as expressly permitted by any of the provisions of this
Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled
Rights Certificates to the Company, or shall, at the written request of the Company, destroy such
cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof
to the Company.

     SECTION 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.

          (a) The Company covenants and agrees that it will cause to be reserved and kept available out
of its authorized and unissued shares of Preferred Stock (and, following the occurrence of a
Triggering Event, out of its authorized and unissued shares of Common Stock and/or other securities
or out of its authorized and issued shares held in its treasury), the number of shares of Preferred
Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities)
that, as provided in this Agreement including Section 11(a)(iii) hereof, will be sufficient to
permit the exercise in full of all outstanding Rights.

          (b) So long as the shares of Preferred Stock (and following the occurrence of a Triggering
Event, Common Stock and/or other securities) issuable and deliverable upon the exercise of the
Rights may be listed on any national securities exchange or the NMS, the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all shares reserved
for such issuance to be listed on such exchange or the NMS upon official notice of issuance upon
such exercise.

11

 

          (c) The Company shall use its best efforts to (i) file, as soon as practicable following the
earliest date after the first occurrence of a Section 11(a)(ii) Event on which the consideration to
be delivered by the Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act of 1933, as amended (the “Act”),
with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii)
cause such registration statement to become effective as soon as practicable after such filing, and
(iii) cause such registration statement to remain effective (with a prospectus at all times meeting
the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the date of the expiration of the Rights. The Company will
also take such action as may be appropriate under, or to ensure compliance with, the securities or
“blue sky” laws of the various states in connection with the exercisability of the Rights. The
Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date
set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the
Rights in order to prepare and file such registration statement and permit it to become effective.
Upon any such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public announcement at
such time as the suspension is no longer in effect. The Company shall notify the Rights Agent in
writing whenever it makes a public announcement pursuant to this Section 9(c) and give the Rights
Agent a copy of such announcement(s). Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction unless the requisite
qualification in such jurisdiction shall have been obtained and until a registration statement (if
required) has been declared effective.

          (d) The Company covenants and agrees that it will take all such action as may be necessary to
ensure that all one ten-thousandths of a share of Preferred Stock (and, following the occurrence of
a Triggering Event, Common Stock and/or other securities) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and nonassessable.

          (e) The Company further covenants and agrees that it will pay when due and payable any and all
federal and state transfer taxes and charges which may be payable in respect of the issuance or
delivery of the Rights Certificates and of any certificates for shares of Preferred Stock (or
Common Stock and/or other securities, as the case may be) upon the exercise of Rights. The Company
shall not, however, be required to pay any transfer tax or charge which may be payable in respect
of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or
delivery of a number of one ten-thousandths of a share of Preferred Stock (or Common Stock and/or
other securities, as the case may be) in respect of a name other than that of, the registered
holder of the Rights Certificates evidencing Rights surrendered for exercise or to issue or deliver
any certificates for a number of one ten-thousandths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in a name other than that of the registered holder
upon the exercise of any Rights until such tax shall have been paid (any such tax being payable by
the holder of such Rights Certificate at the time of surrender) or until it has been established to
the Company’s satisfaction that no such tax is due.

12

 

     SECTION 10. PREFERRED STOCK RECORD DATE. Each Person in whose name any certificate for a number of one
ten-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case
may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preferred Stock (or Common Stock and/or other
securities, as the case may be) represented thereby on, and such certificate shall be dated, the
date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of
the Purchase Price (and all applicable transfer taxes or charges) was duly made; provided, however,
that if the date of such surrender and payment is a date upon which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares (fractional or otherwise)
on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred
Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a stockholder of the Company with respect to shares for
which the Rights shall be exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.

     SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR NUMBER OF RIGHTS. The Purchase
Price, the number and kind of shares covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.

          (a) (i) In the event the Company shall at any time after the date of this Agreement (A)
declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the
outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of
shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise provided in this Section
11(a) or in Section 7 hereof, the Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or capital stock, as the case may be, issuable on such
date, shall be proportionately adjusted so that the holder of any Right exercised after such time
shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate
number and kind of shares of Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date and at a time when the Preferred Stock
transfer books of the Company were open, such holder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If
an event occurs which would require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof.

               (ii) In the event:

13

 

                    (A) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time
after the date of this Agreement, directly or indirectly, (1) shall merge into the Company or
otherwise combine with the Company or any subsidiary of the Company and the Company shall be the
continuing or surviving corporation of such merger or combination and the Common Stock of the
Company shall remain outstanding and unchanged, (2) shall, in one transaction or a series of
transactions, transfer any assets to the Company or to any of its Subsidiaries in exchange (in
whole or in part) for shares of Common Stock, for shares of other equity securities of the Company,
or for securities exercisable for or convertible into shares of equity securities of the Company
(Common Stock or otherwise) or otherwise obtain from the Company, with or without consideration,
any additional shares of such equity securities or securities exercisable for or convertible into
shares of such equity securities (other than pursuant to a pro rata distribution to all holders of
Common Stock), (3) shall sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise
acquire or dispose of, in the transaction or a series of transactions, to, from or with (as the
case may be) the Company or any of its Subsidiaries, assets on terms and conditions less favorable
to Company than the Company would be able to obtain in arm’s length negotiation with an
unaffiliated third party, other than pursuant to a transaction set forth in Section 13(a) hereof,
(4) shall receive any compensation from the Company or any of the Company’s Subsidiaries other than
compensation for full time employment as a regular employee at rates in accordance with the
Company’s (or its Subsidiaries’) past practices, or (5) shall receive the benefit, directly or
indirectly (except proportionately as a stockholder and except if resulting from a requirement of
law or governmental regulation), of any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantage provided by the Company or any of its
Subsidiaries, or

                    (B) any Person shall become an Acquiring Person, other than pursuant to any transaction set
forth in Section 13(a) hereof, or

                    (C) during such time as there is an Acquiring Person, there shall be any reclassification of
securities (including any reverse stock split), or recapitalization of the Company, or any merger
or consolidation of the Company with any of its Subsidiaries or any other transaction or series of
transactions involving the Company or any of its Subsidiaries, other than a transaction or
transactions to which the provisions of Section 13(a) apply (whether or not with or into or
otherwise involving an Acquiring Person) which has the effect, directly or indirectly, of
increasing by more than one percent (1%) the proportionate share of the outstanding shares of any
class of equity securities of the Company or any of its Subsidiaries which is directly or
indirectly beneficially owned by any Acquiring Person or any Associate or Affiliate of any
Acquiring Person, then, promptly following ten (10) days after the date of the occurrence of an
event described in Section 11(a)(ii)(B) hereof and promptly following the occurrence of any event
described in Section 11(a)(ii)(A) or (C) hereof, proper provision shall be made so that each holder
of a Right (except as provided below and in Section 7(e) hereof) shall thereafter have the right to
receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of
this Agreement, in lieu of shares of Preferred Stock, such number of shares of Common Stock of the
Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by
the then number of one ten-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, and dividing
that product (which, following such first occurrence, shall thereafter

14

 

be referred to as the “Purchase Price” for each Right and for all purposes of this Agreement)
by (y) fifty percent (50%) of the current market price (determined pursuant to Section 11(d)
hereof) per share of Common Stock on the date of such first occurrence (such number of shares, the
“Adjustment Shares”).

               (iii) In the event that the number of shares of Common Stock which are authorized by the
Company’s charter but not outstanding or reserved for issuance for purposes other than upon
exercise of the Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall: (A)
determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a
Right (the “Current Value”) over (2) the Purchase Price (such excess, the “Spread”), and (B) with
respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon
payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3)
Common Stock or other equity securities of the Company (including, without limitation, shares, or
units of shares, of preferred stock which the Board of Directors of the Company has deemed to have
the same value as shares of Common Stock (such shares of preferred stock, “common stock
equivalents”)), (4) debt securities of the Company, (5) other assets, or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value, where such aggregate value has
been determined by the Board of Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of the Company; provided,
however, if the Company shall not have made adequate provision to deliver value pursuant to clause
(B) above within thirty (30) days following the later of (x) the first occurrence of a Section
11(a)(ii) Event and (y) the date on which the Company’s right of redemption pursuant to Section
23(a) expires (the later of (x) and (y) being referred to herein as the “Section 11(a)(ii) Trigger
Date”), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right
and without requiring payment of the Purchase Price, shares of Common Stock (to the extent
available) and then, if necessary, cash, which in the aggregate are equal to the Spread. If the
Board of Directors of the Company shall determine in good faith that it is likely that sufficient
additional shares of Common Stock could be authorized for issuance upon exercise in full of the
Rights, the thirty (30) day period set forth above may be extended to the extent necessary, but not
more than ninety (90) days following the first occurrence of a Section 11(a)(ii) Trigger Date, in
order that the Company may seek stockholder approval for the authorization of such additional
shares (such period, as it may be extended, the “Substitution Period”). To the extent that the
Company determines that some action need be taken pursuant to the first and/or second sentences of
this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such
action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of
the Rights until the expiration of the Substitution Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of distribution to be made pursuant to such
first sentence and to determine the value thereof. In the event of any such suspension, the Company
shall issue a public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the suspension is no longer
in effect. For purposes of this Section 11(a)(iii), the value of the Common Stock shall be the
current market price (as determined pursuant to Section 11(d) hereof) per share of the Common Stock
on the date of the first occurrence of a Section 11(a)(ii) Trigger Date and the value of any
“common stock equivalent” shall be deemed to have the same value as the Common Stock on such date.

15

 

          (b) In case the Company shall fix a record date for the issuance of rights, options or
warrants to all holders of Preferred Stock entitling them to subscribe for or purchase (for a
period expiring within forty-five (45) calendar days after such record date) Preferred Stock (or
shares having the same rights, privileges and preferences as the shares of Preferred Stock
(“equivalent preferred stock”)) or securities convertible into Preferred Stock or equivalent
preferred stock at a price per share of Preferred Stock or per share of equivalent preferred stock
(or having a conversion price per share, if a security convertible into Preferred Stock or
equivalent preferred stock) less than the current market price (as determined pursuant to Section
11(d) hereof) per share of Preferred Stock on such record date, the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the number of shares of
Preferred Stock outstanding on such record date, plus the number of shares of Preferred Stock which
the aggregate offering price of the total number of shares of Preferred Stock and/or equivalent
preferred stock so to be offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and the denominator of
which shall be the number of shares of Preferred Stock outstanding on such record date, plus the
number of additional shares of Preferred Stock and/or equivalent preferred stock to be offered for
subscription or purchase (or into which the convertible securities so to be offered are initially
convertible); provided, however, that in no event shall the consideration to be paid upon the
exercise of one Right be less than the aggregate par value of the shares of capital stock of the
Company issuable upon the exercise of one Right. In case such subscription price may be paid by
delivery of consideration part or all of which may be in a form other than cash, the value of such
consideration shall be as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and shall be binding on
the Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed, and in the event
that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been fixed.

          (c) In case the Company shall fix a record date for a distribution to all holders of Preferred
Stock (including any such distribution made in connection with a consolidation or merger in which
the Company is the continuing corporation) of evidences of indebtedness, cash (other than a regular
cash dividend out of the earnings or retained earnings of the Company), assets (other than a
dividend payable in Preferred Stock, but including any dividend payable in stock other than
Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(b)
hereof), the Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the current market price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the cash, assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants applicable to a share
of Preferred Stock and the denominator of which shall be such current market price (as determined
pursuant to Section 11(d) hereof) per share of Preferred Stock; provided, however, that in no event
shall the consideration to be paid upon the exercise of one

16

 

Right be less than the aggregate par value of the shares of capital stock of the Company
issuable upon the exercise of one Right. Such adjustments shall be made successively whenever such
a record date is fixed, and in the event that such distribution is not so made, the Purchase Price
shall be adjusted to be the Purchase Price which would have been in effect if such record date had
not been fixed.

          (d) (i) For the purpose of any computation hereunder, other than computations made pursuant to
Section 11(a)(iii) hereof, the “current market price” per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices per share of such Common Stock for the
thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to
such date, and for purposes of computations made pursuant to Section 11(a)(iii) hereof, the
“current market price” per share of Common Stock on any date shall be deemed to be the average of
the daily closing prices per share of such Common Stock for the ten (10) consecutive Trading Days
immediately following such date; provided, however, that in the event that the current market price
per share of the Common Stock is determined during a period following the announcement by the
issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in
shares of such Common Stock or securities convertible into shares of such Common Stock (other than
the Rights), or (B) any subdivision, combination or reclassification of such Common Stock, and
prior to the expiration of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as
set forth above, after the dividend date for such dividend or distribution, or the record date for
such subdivision, combination or reclassification, then, and in each such case, the “current market
price” shall be properly adjusted to take into account the effect of such dividend, distribution,
subdivision, combination or reclassification. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to trading on the
American Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on
the American Stock Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange on which the shares
of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed
or admitted to trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated Quotation System
(“NASDAQ”) or such other system then in use, or, if on any such date the shares of Common Stock are
not quoted by any such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Common Stock selected by the Board of
Directors of the Company. If on any such date no market maker is making a market in the Common
Stock, the fair value of such shares on such date as determined in good faith by the Board of
Directors of the Company shall be used. The term “Trading Day” shall mean a day on which the
principal national securities exchange on which the shares of Common Stock are listed or admitted
to trading is open for the transaction of business or, if the shares of Common Stock are not listed
or admitted to trading on any national securities exchange, a Business Day. If the Common Stock is
not publicly held or not so listed or traded, “current market price” per share shall mean the fair
value per share as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and shall be conclusive
for all purposes.

17

 

               (ii) For the purpose of any computation hereunder, the “current market price” per share of
Preferred Stock shall be determined in the same manner as set forth above for the Common Stock in
clause (i) of this Section 11(d) (other than the last sentence thereof). If the current market
price per share of Preferred Stock cannot be determined in the manner provided above or if the
Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of
this Section 11(d), the “current market price” per share of Preferred Stock shall be conclusively
deemed to be an amount equal to 10,000 (as such number may be appropriately adjusted for such
events as stock splits, stock dividends and recapitalizations with respect to the Common Stock
occurring after the date of this Agreement) multiplied by the current market price per share of the
Common Stock. If neither the Common Stock nor the Preferred Stock is publicly held or so listed or
traded, “current market price” per share of the Preferred Stock shall mean the fair value per share
as determined in good faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for all purposes. For
all purposes of this Agreement, the “current market price” of one ten-thousandth of a share of
Preferred Stock shall be equal to the “current market price” of one share of Preferred Stock
divided by ten thousand (10,000).

          (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall
be required unless such adjustment would require an increase or decrease of at least one percent
(1%) in the Purchase Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the
nearest ten-thousandths of a share of Common Stock or other share or one-millionth of a share of
Preferred Stock, as the case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3)
years from the date of the transaction which mandates such adjustment, or (ii) the Expiration Date.

          (f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a)
hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of
capital stock other than Preferred Stock, thereafter the number of such other shares so receivable
upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect
to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m),
and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall
apply on like terms to any such other shares.

          (g) All Rights originally issued by the Company subsequent to any adjustment made to the
Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the
number of one ten-thousandths of a share of Preferred Stock purchasable from time to time hereunder
upon exercise of the Rights, all subject to further adjustment as provided herein.

          (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon
each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and
(c), each Right outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that

18

 

number of one ten-thousandths of a share of Preferred Stock (calculated to the nearest one
millionth) obtained by (i) multiplying (x) the number of one ten-thousandths of a share covered by
a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior
to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase
Price in effect immediately after such adjustment of the Purchase Price.

          (i) The Company may elect on or after the date of any adjustment of the Purchase Price to
adjust the number of Rights, in lieu of any adjustment in the number of one ten-thousandths of a
share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding
after the adjustment in the number of Rights shall be exercisable for the number of one
ten-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior
to such adjustment. Each Right held of record prior to such adjustment of the number of Rights
shall become that number of Rights (calculated to the nearest one millionth) obtained by dividing
the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase
Price in effect immediately after adjustment of the Purchase Price. The Company shall make a
public announcement (with prompt written notice thereof to the Rights Agent) of its election to
adjust the number of Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date on which the
Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued,
shall be at least ten (10) days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of
such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of
record in substitution and replacement for the Rights Certificates held by such holders prior to
the date of adjustment, and upon surrender thereof, if required by the Company, new Rights
Certificates evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed and delivered by the
Company and countersigned and delivered by the Rights Agent in the manner provided for herein (and
may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date specified in the public
announcement.

          (j) Irrespective of any adjustment or change in the Purchase Price or the number of one
ten-thousandths of a share of Preferred Stock issuable upon the exercise of the Rights, the Rights
Certificates theretofore and thereafter issued may continue to express the Purchase Price per one
ten-thousandth of a share and the number of one ten-thousandths of a share which were expressed in
the initial Rights Certificates issued hereunder.

          (k) Before taking any action that would cause an adjustment reducing the Purchase Price below
the then par or stated value, if any, of the number of one ten-thousandths of a share of Preferred
Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable such number of one ten-thousandths of a share of Preferred Stock at
such adjusted Purchase Price.

19

 

          (l) In any case in which this Section 11 shall require that an adjustment in the Purchase
Price be made effective as of a record date for a specified event, the Company may elect to defer
(with prompt written notice thereof to the Rights Agent) until the occurrence of such event the
issuance to the holder of any Right exercised after such record date the number of one
ten-thousandths of a share of Preferred Stock and other capital stock or securities of the Company,
if any, issuable upon such exercise over and above the number of one ten-thousandths of a share of
Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however,
that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing
such holder’s right to receive such additional shares (fractional or otherwise) or securities upon
the occurrence of the event requiring such adjustment.

          (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled
to make such reductions in the Purchase Price, in addition to those adjustments expressly required
by this Section 11, as and to the extent that in their good faith judgment the Board of Directors
of the Company shall determine to be advisable in order that any (i) consolidation or subdivision
of the Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less than
the current market price, (iii) issuance wholly for cash of shares of Preferred Stock or securities
which by their terms are convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividend or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter
made by the Company to holders of its Preferred Stock shall not be taxable to such stockholders.

          (n) The Company covenants and agrees that it shall not, at any time after the Distribution
Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), (ii) merge with or into any other Person
(other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof),
or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a
series of related transactions, assets or earning power aggregating more than fifty percent (50%)
of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the time of or
immediately after such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger or sale, the stockholders of
the Person who constitutes, or would constitute, the “Principal Party” for the purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of
its Affiliates and Associates.

          (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as
permitted by Section 23, Section 24 or Section 27 hereof, take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably foreseeable that such action will
diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights.

20

 

          (p) Anything in this Agreement to the contrary notwithstanding, in the event that the Company
shall at any time after the Rights Dividend Declaration Date and prior to the Distribution Date (i)
declare a dividend on the outstanding shares of Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, the number of Rights associated with each share of Common Stock then
outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with each share of
Common Stock following any such event shall equal the result obtained by multiplying the number of
Rights associated with each share of Common Stock immediately prior to such event by a fraction,
the numerator of which shall be the total number of shares of Common Stock outstanding immediately
prior to the occurrence of the event and the denominator of which shall be the total number of
shares of Common Stock outstanding immediately following the occurrence of such event.

     SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as
provided in Section 11 and Section 13 hereof, the Company shall (a) promptly prepare a certificate
setting forth such adjustment and a brief, reasonably detailed statement of the facts, computations
and methodology accounting for such adjustment, (b) promptly file with the Rights Agent, and with
each transfer agent for the Preferred Stock and the Common Stock, a copy of such certificate, and
(c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to the
Distribution Date, to each holder of a certificate representing shares of Common Stock) in
accordance with Section 26 hereof. Notwithstanding the foregoing sentence, the failure of the
Company to make such certification or give such notice shall not affect the validity of such
adjustment or the force or effect of the requirement for such adjustment. The Rights Agent shall
be fully protected in relying on any such certificate and on any adjustment therein contained and
shall have no duty or liability with respect to, and shall not be deemed to have knowledge of, any
adjustment unless and until it shall have received any such certificate.

     SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER.

          (a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the
Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), and the Company shall
not be the continuing or surviving corporation of such consolidation or merger, (y) any Person
(other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof)
shall consolidate with, or merge with or into, the Company, and the Company shall be the continuing
or surviving corporation of such consolidation or merger and, in connection with such consolidation
or merger, all or part of the outstanding shares of Common Stock shall be changed into or exchanged
for stock or other securities of any other Person or cash or any other property, or (z) the Company
shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one transaction or a series of related transactions, assets or earning power
aggregating more than fifty percent (50%) of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any Subsidiary
of the Company in one or more transactions each of which complies with Section 11(o) hereof),

21

 

then, and in each such case, proper provision shall be made so that: (i) each holder of a Right,
except as provided in Section 7(e) hereof, shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement,
such number of validly authorized and issued, fully paid, nonassessable and freely tradable shares
of Common Stock of the Principal Party (as such term is hereinafter defined), not subject to any
liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the
result obtained by (1) multiplying the then current Purchase Price by the number of one
ten-thousandths of a share of Preferred Stock for which a Right is exercisable immediately prior to
the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to
the first occurrence of a Section 13 Event, multiplying the number of such one ten-thousandths of a
share for which a Right was exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event by the Purchase Price in effect immediately prior to such first occurrence), and
(2) dividing that product (which, following the first occurrence of a Section 13 Event, shall be
referred to as the “Purchase Price” for each Right and for all purposes of this Agreement) by fifty
percent (50%) of the current market price (determined pursuant to Section 11(d)(i) hereof) per
share of the Common Stock of such Principal Party on the date of consummation of such Section 13
Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of
such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement;
(iii) the term “Company” shall thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 hereof shall apply only to such Principal
Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take
such steps (including, but not limited to, the reservation of a sufficient number of shares of its
Common Stock) in connection with the consummation of any such transaction as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be,
in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights;
provided, however, that upon the subsequent occurrence of any merger, consolidation, sale of all or
substantially all assets, recapitalization, reclassification of shares, reorganization or other
extraordinary transaction in respect of such Principal Party, each holder of a Right shall
thereupon be entitled to receive, upon exercise of a Right and payment of the Purchase Price, such
cash, shares, rights, warrants and other property which such holder would have been entitled to
receive had he, at the time of such transaction, owned the shares of Common Stock of the Principal
Party purchasable upon the exercise of a Right, and such Principal Party shall take such steps
(including, but not limited to, reservation of shares of stock) as may be necessary to permit the
subsequent exercise of the Rights in accordance with the terms hereof for such cash, shares,
rights, warrants and other property; and (v) the provisions of Section 11(a)(ii) hereof shall be of
no effect following the first occurrence of any Section 13 Event.

          (b) “Principal Party” shall mean:

               (i) in the case of any transaction described in clause (x) or (y) of the first sentence of
Section 13(a), the Person that is the issuer of any securities into which shares of Common Stock of
the Company are converted in such merger or consolidation, and if no securities are so issued, the
Person that is the other party to such merger or consolidation; and

22

 

               (ii) in the case of any transaction described in clause (z) of the first sentence of Section
13(a), the Person that is the party receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;

provided, however, that in any such case, (1) if the Common Stock of such Person is
not at such time and has not been continuously over the preceding twelve (12) month period
registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary
of another Person the Common Stock of which is and has been so registered, “Principal Party” shall
refer to such other Person whose Common Stock is so registered; and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Stocks of two or more of
which are and have been so registered, “Principal Party” shall refer to whichever of such Persons
is the issuer of the Common Stock having the greatest aggregate market value.

          (c) If, for any reason, the Rights cannot be exercised for Common Stock of such Principal
Party as provided in Section 13(a), then each holder of Rights shall have the right to exchange its
Rights for cash from such Principal Party in an amount equal to the number of shares of Common
Stock that it would otherwise be entitled to purchase times fifty percent (50%) of the current per
share market price, as determined pursuant to Section 11(d) hereof, of such Common Stock of such
Principal Party. If, for any reason, the foregoing formulation cannot be applied to determine the
cash amount into which the Rights are exchangeable, then the Board of Directors, based upon the
advice of one or more nationally recognized investment banking firms, and based upon the total
value of the Company, shall determine such amount reasonably and with good faith to the holders of
Rights. Any such determination shall be final and binding on the Rights Agent.

          (d) The Company shall not consummate any such consolidation, merger, sale or transfer unless
the Principal Party shall have a sufficient number of authorized shares of its Common Stock which
have not been issued or reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement providing for the terms
set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as
practicable after the date of any consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will:

               (i) prepare and file a registration statement under the Act, with respect to the Rights and
the securities purchasable upon exercise of the Rights on an appropriate form, and will use its
best efforts to cause such registration statement to (A) become effective as soon as practicable
after such filing and (B) remain effective (with a prospectus at all times meeting the requirements
of the Act) until the Expiration Date;

               (ii) deliver to holders of the Rights historical financial statements for the Principal Party
and each of its Affiliates which comply in all respects with the requirements for registration on
Form 10 under the Exchange Act;

               (iii) use its best efforts, if the Common Stock of the Principal Party shall become listed on
a national securities exchange, to list (or continue the listing of) the Rights and the securities
purchasable upon exercise of the Rights on such securities exchange and, if the

23

 

Common Stock of the Principal Party shall not be listed on a national securities exchange, to
cause the Rights and the securities purchasable upon exercise of the Rights to be reported by
NASDAQ or such other system then in use; and

               (iv) obtain waivers of any rights of first refusal, warrants, or rights in respect of the
shares of Common Stock of the Principal Party subject to purchase upon exercise of outstanding
Rights and which would have the effect of eliminating or significantly diminishing the benefits
intended to be afforded by the Rights.

          (e) The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at
any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore
been exercised shall thereafter become exercisable in the manner described in Section 13(a).

     SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.

          (a) The Company shall not be required to issue fractions of Rights, except prior to the
Distribution Date as provided in Section 11(p) hereof, or to distribute Rights Certificates which
evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the
registered holders of the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the current market value of
a whole Right. For purposes of this Section 14(a), the current market value of a whole Right shall
be the closing price of the Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price of the Rights for any day
shall be the last sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities listed or admitted
to trading on the American Stock Exchange or, if the Rights are not listed or admitted to trading
on the American Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading, or if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted, the average of the
high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional market maker making a
market in the Rights selected by the Board of Directors of the Company. If on any such date no such
market maker is making a market in the Rights the fair value of the Rights on such date as
determined in good faith by the Board of Directors of the Company shall be used.

          (b) The Company shall not be required to issue fractions of shares of Preferred Stock (other
than fractions which are integral multiples of one ten-thousandths of a share of Preferred Stock)
upon exercise of the Rights or to distribute certificates which evidence fractional shares of
Preferred Stock (other than fractions which are integral multiples of one ten-thousand of a share
of Preferred Stock). In lieu of fractional shares of Preferred Stock that are not integral
multiples of one ten-thousandths of a share of Preferred Stock, the Company may

24

 

pay to the registered holders of Rights Certificates at the time such Rights are exercised as
herein provided an amount in cash equal to the same fraction of the current market value of one
ten-thousandth of a share of Preferred Stock. For purposes of this Section 14(b), the current
market value of one ten-thousandth of a share of Preferred Stock shall be one ten-thousandth of the
closing price of a share of Preferred Stock (as determined pursuant to Section 11(d)(ii) hereof)
for the Trading Day immediately prior to the date of such exercise.

          (c) Following the occurrence of a Triggering Event, the Company shall not be required to issue
fractions of shares of Common Stock upon exercise of the Rights or to distribute certificates which
evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the current market
value of one (1) share of Common Stock. For purposes of this Section 14(c), the current market
value of one share of Common Stock shall be the closing price of one share of Common Stock (as
determined pursuant to Section 11(d)(i) hereof) for the Trading Day immediately prior to the date
of such exercise.

          (d) Whenever a payment for fractional Rights or any fractional shares is to be made by the
Rights Agent, the Company shall (i) promptly prepare and deliver to the Rights Agent a certificate
setting forth in reasonable detail the facts related to such payments and the prices and/or
formulas utilized in calculating such payments, and (ii) provide sufficient monies to the Rights
Agent in the form of fully collected funds to make such payments. The Rights Agent shall be fully
protected in relying upon such a certificate and shall have no duty with respect to, and shall not
be deemed to have knowledge of any payment for fractional Rights or fractional shares unless and
until the Rights Agent shall have received such a certificate and sufficient monies.

          (e) The holder of a Right by the acceptance of the Rights expressly waives his right to
receive any fractional Rights or any fractional shares upon exercise of a Right, except as
permitted by this Section 14.

     SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, excepting the rights of
action given to the Rights Agent under Section 18 and Section 20 hereof, are vested in the
respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the
registered holders of the Common Stock); and any registered holder of any Rights Certificate (or,
prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of
the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such
Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available
to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have
an adequate remedy at law for any breach by the Company of this Agreement and shall be entitled to
specific performance of the obligations hereunder and injunctive relief against actual or
threatened violations by the Company of the obligations hereunder of any Person subject to this
Agreement. Notwithstanding anything in this Agreement to the contrary, neither the Company nor the
Rights Agent shall have any liability to any holder

25

 

of a Right or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or other order, judgment
decree or ruling (whether interlocutory or final) issued by a court of competent jurisdiction or by
a governmental, regulatory, self-regulatory or administrative agency or commission, or any statute,
rule, regulation or executive order promulgated or enacted by any governmental authority,
prohibiting or otherwise restraining performance of such obligation; provided, however, the Company
must use all reasonable efforts to have any such injunction, order, judgment, decree or ruling
lifted or otherwise overturned as soon as possible.

     SECTION 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by accepting the same consents and
agrees with the Company and the Rights Agent and with every other holder of a Right that:

          (a) prior to the Distribution Date, the Rights will be transferable only in connection with
the transfer of Common Stock;

          (b) after the Distribution Date, the Rights Certificates are transferable only on the registry
books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent
designated for such purposes, duly endorsed or accompanied by proper instruments of transfer and
with the appropriate forms and certificates fully executed; and

          (c) subject to Section 6(a) and Section 7(f) hereof, the Company and the Rights Agent may deem
and treat the person in whose name a Rights Certificate (or, prior to the Distribution Date, the
associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates
or the associated Common Stock certificate made by anyone other than the Company or the Rights
Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be required
to be affected by any notice to the contrary.

     SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights
Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of
the number of one ten-thousandths of a share of Preferred Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Rights represented thereby, nor
shall anything contained herein or in any Rights Certificate be construed to confer upon the holder
of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right
to vote for the election of directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights
Certificate shall have been exercised in accordance with the provisions hereof.

     SECTION 18. CONCERNING THE RIGHTS AGENT.

          (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services
rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and disbursements and other disbursements incurred in

26

 

the preparation, delivery, amendment, administration and execution of this Agreement and the
exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability, damage, judgment, fine, penalty,
claim, demand, settlement, cost or expense (including, without limitation, the reasonable fees and
expenses of legal counsel) for any action taken, suffered or omitted by the Rights Agent in
connection with the acceptance, administration, exercise and performance of its duties under this
Agreement, including the costs and expenses of defending against any claim of liability in the
premises and of enforcing this rights of indemnification; provided, however, that the Company shall
not be liable under this Section 18(a) to the extent a court of competent jurisdiction shall have
determined by a final, non-appealable order, judgment, decree or ruling that such loss, liability,
damage, judgment, fine, penalty, claim, demand, settlement, cost or expense resulted from any
action taken, suffered or omitted by the Rights Agent through its gross negligence, bad faith or
willful misconduct. The provisions of this Section 18 and Section 20 hereof shall survive the
termination of this Agreement, the exercise or expiration of the Rights and the resignation,
replacement or removal of the Rights Agent.

          (b) The Rights Agent shall be authorized and protected and shall incur no liability for or in
respect of any action taken, suffered or omitted by it in connection with its acceptance and
administration of this Agreement and the exercise and performance of its duties hereunder in
reliance upon any Rights Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper
Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof.

     SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.

          (a) Any Person into which the Rights Agent or any successor Rights Agent may be merged or with
which it may be consolidated, or any Person resulting from any merger or consolidation to which the
Rights Agent or any successor Rights Agent shall be a party, or any Person succeeding to the stock
transfer or corporate trust business of the Rights Agent or any successor Rights Agent, shall be
the successor to the Rights Agent under this Agreement without the execution or filing of any paper
or any further act on the part of any of the parties hereto; provided, however, that such Person
would be eligible for appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver
such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates
shall not have been countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor Rights Agent or in the name of the successor
Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.

27

 

          (b) In case at any time the name of the Rights Agent shall be changed and at such time any of
the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt
the countersignature under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates either in its prior name or in its changed name; and
in all such cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.

     SECTION 20. RIGHTS AND DUTIES OF RIGHTS AGENT. The Rights Agent undertakes to perform only the duties and
obligations expressly imposed by this Agreement (and no implied duties) upon the following terms
and conditions, by all of which the Company and the holders of Rights Certificates, by their
acceptance thereof, shall be bound:

          (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company
or an employee of the Rights Agent), and the advice or opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to, and the Rights Agent shall incur
no liability for or in respect of, any action taken, suffered or omitted by it in good faith and in
accordance with such advice or opinion.

          (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem
it necessary or desirable that any fact or matter (including, without limitation, the identity of
any Acquiring Person and the determination of “current market price”) be proved or established by
the Company prior to taking, suffering or omitting to take any action hereunder such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the Chairman of the Board, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be
full and complete authorization and protection to the Rights Agent for, and the Rights Agent shall
incur no liability for or in respect of, any action taken, suffered or omitted by it in good faith
under the provisions of this Agreement in reliance upon such certificate.

          (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for
its own gross negligence, bad faith or willful misconduct.

          (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or
recitals contained in this Agreement or in the Rights Certificates or be required to verify the
same (except as to its countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.

          (e) The Rights Agent shall not have any liability for or be under any responsibility with
respect to the validity of this Agreement or the execution and delivery hereof (except the due
execution hereof by the Rights Agent) or with respect to the validity or execution of any Rights
Certificate (except its countersignature thereof); nor shall it be responsible for any breach by
the Company of any covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights (including the
Rights becoming null and void pursuant to Section 11 hereof) or any change or

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adjustment required under the provisions of Section 11 or Section 13 hereof or responsible for
the manner, method or amount of any such change or adjustment or the ascertaining of the existence
of facts that would require any such change or adjustment (except with respect to the exercise of
Rights evidenced by Rights Certificates after receipt of the certificate described in Section 12
hereof, upon which the Rights Agent may rely); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any shares of Common Stock
or Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to
whether any shares of Common Stock or Preferred Stock will, when so issued, be validly authorized
and issued, fully paid and nonassessable.

          (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be
performed, executed, acknowledged and delivered all such further and other acts, instruments and
assurances as may reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.

          (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to
the performance of its duties hereunder from the Chairman of the Board, the President, any Vice
President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the
Company, and to apply to such officers for advice or instructions in connection with its duties,
and such instructions shall be full authorization and protection to the Rights Agent and the Rights
Agent shall not be liable for any action taken, suffered or omitted by it in good faith in
accordance with instructions of any such officer or for any delay in action while waiting for those
instructions. The Rights Agent shall be fully authorized and protected in relying upon the most
recent instructions received by any such officer. Any application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent, set forth in writing any
action proposed to be taken, suffered or omitted by the Rights Agent under this Agreement and the
date on and/or after which such action shall be taken or suffered or such omission shall be
effective. The Rights Agent shall not be liable for any action taken, suffered or omitted by the
it in good faith in accordance with a proposal included in any such application on or after the
date specified in such application (which date shall not be less than five Business Days after the
date any officer of the Company actually receives such application, unless any such officer shall
have consented in writing to an earlier date) unless, prior to taking any such action (or the
effective date in the case of an omission), the Rights Agent shall have received written
instructions in response to such application specifying the action to be taken, suffered or
omitted.

          (h) The Rights Agent and any stockholder, affiliate, director, officer or employee of the
Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or
become pecuniarily interested in any transaction in which the Company may be interested, or
contract with or lend money to the Company or otherwise act as fully and freely as though the
Rights Agent were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent or any such stockholder, affiliate, director, officer or employee from acting in any other
capacity for the Company or for any other Person.

          (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it
or perform any duty hereunder either itself (through its directors, officer and employees) or by or
through its attorneys or agents, and the Rights Agent shall not be answerable

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or accountable for any act, default, neglect or misconduct of any such attorneys or agents or
for any loss to the Company or any other Person resulting from any such act, default, neglect or
misconduct; provided, however, reasonable care was exercised in the selection and continued
employment thereof.

          (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of its duties hereunder
or in the exercise of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not reasonably assured
to it.

          (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or
transfer, the certificate contained in the form of assignment or the form of election to purchase
set forth on the reverse thereof, as the case may be, has either not been completed or indicates an
affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further
action with respect to such requested exercise or transfer without first consulting with the
Company.

     SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days’ notice in writing, mailed to
the Company, and to each transfer agent of the Common Stock and Preferred Stock by registered or
certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon thirty (30) days’ notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Stock and Preferred Stock, by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. In the event the transfer agency relationship in
effect between the Company and the Rights Agent terminates, the Rights Agent will be deemed to
resign automatically on the effective date of such termination; and any required notice will be
sent by the Company. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company
shall fail to make such appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or incapacity by the resigning
or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such
notice, submit his Rights Certificate for inspection by the Company), then any registered holder of
any Rights Certificate may apply to any court of competent jurisdiction for an appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a Person organized and doing business under the law of the United States or of the
State of California (or of any other state of the United States so long as such corporation is
authorized to do business as a banking institution in the State of California), in good standing,
having a principal office in the State of California, which is authorized under such laws to
exercise stock transfer or corporate trust powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as Rights Agent a combined
capital and surplus of at least $50,000,000, or (b) an Affiliate of such a Person. After
appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without further act or deed;
but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any
property at the time held by it

30

 

hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary
for the purpose. Not later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common
Stock and the Preferred Stock, and mail a notice thereof in writing to the registered holders of
the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or
any defect therein, shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may be.

     SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement
or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or sale of shares of
Common Stock following the Distribution Date and prior to the redemption or expiration of the
Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to
the exercise of stock options or under any employee plan or arrangement, or upon the exercise,
conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other
case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with such issuance or
sale; provided, however, that (i) no such Rights Certificate shall be issued if, and to the extent
that, the Company shall be advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom such Rights Certificate
would be issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that
appropriate adjustment shall otherwise have been made in lieu of the issuance thereof.

     SECTION 23. REDEMPTION.

          (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier
of (i) the Close of Business on the tenth (10th) day following the Stock Acquisition Date, or such
later date as may be determined by action of a majority of the Board of Directors then in office
and publicly announced by the Company (or, if the Stock Acquisition Date shall have occurred prior
to the Record Date, the Close of Business on the tenth (10th) day following the Record Date, or
such later date as may be determined by action of a majority of the Board of Directors then in
office and publicly announced by the Company), or (ii) the Final Expiration Date, redeem all but
not less than all of the then outstanding Rights at a redemption price of $0.01 per Right, as such
amount may be appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being hereinafter referred to as
the “Redemption Price”). Notwithstanding anything contained in this Agreement to the contrary, a
Distribution Date shall not occur and the Rights shall not be exercisable until such time as the
Company’s right of redemption hereunder has expired.

          (b) Immediately upon the action of the Board of Directors of the Company ordering the
redemption of the Rights pursuant to subparagraph (a) of this Section 23, and without any further
action and without any notice, the right to exercise the Rights will terminate

31

 

and the only right thereafter of the holders of Rights shall be to receive the Redemption
Price for each Right so held. Promptly after the action of the Board of Directors or stockholders,
as applicable, ordering the redemption of the Rights, the Company shall give public notice of such
redemption (with prompt written notice thereof to the Rights Agent); provided, however, that the
failure to give, or any defect in, any such notice shall not affect the legality or validity of
such redemption. The Company shall promptly mail a notice of any such redemption to all the
holders of the then outstanding Rights at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer
Agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of redemption will
state the method by which the payment of the Redemption Price will be made. Neither the Company
nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any
time in any manner other than that specifically set forth in this Section 23 or in Section 24
hereof, and other than in connection with the purchase, acquisition or redemption of shares of
Common Stock prior to the Distribution Date.

          (c) The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock
(based on the “current market value” as defined in Section 11(d)(i) hereof) of the Common Stock as
of the time of redemption) or any other form of consideration deemed appropriate by the Board of
Directors.

          (d) The Board of the Directors of the Company shall establish a Shareholder Rights Plan
Committee that shall periodically consider whether the maintenance of this Agreement continues to
be in the best interests of the Company and its shareholders. The Shareholder Rights Plan
Committee shall conduct such review when, as and in such manner as such committee deems
appropriate, after giving due regard to all relevant circumstances; provided, however, that the
committee shall take such action at least once every five years. Following each such review, the
Shareholder Rights Plan Committee will report its conclusions to the full Board of Directors of the
Company, including any recommendation in light thereof as to whether this Agreement should be
modified, terminated or the Rights redeemed. The Shareholder Rights Plan Committee is authorized
to retain such legal counsel, financial advisors and other advisors as such committee deems
appropriate in order to assist the Shareholder Rights Plan Committee in carrying out its foregoing
responsibilities under this Agreement. The Shareholder Rights Plan Committee shall consist of
non-management directors who are otherwise eligible to serve on the committee in accordance with
the Company’s bylaws.

     SECTION 24. EXCHANGE.

          (a) Subject to applicable laws, rules and regulations, and subject to subsection (c) below,
the Company may, at its option, by majority vote of the Board of Directors, at any time after any
Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become null and void pursuant to the provisions of
Section 7(e) hereof) for Common Stock at an exchange ratio of one (1) share of Common Stock per
Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred to as the “Ratio of
Exchange”). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect
such exchange at any time after any Person (other than the Company,

32

 

any Subsidiary of the Company, any employee benefit plan of the Company or any such
Subsidiary, or any entity holding Common Stock for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of fifty
percent (50%) or more of the Common Stock then outstanding.

          (b) Immediately upon the action of the Board of Directors ordering the exchange of any Rights
pursuant to subsection (a) of this Section 24 and without any further action and without any
notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder
of such rights shall be to receive that number of shares of Common Stock equal to the number of
such Rights held by such holder multiplied by the Ratio of Exchange. The Company shall promptly
give public notice of any such exchange (with prompt written notice thereof to the Rights Agent);
provided, however, that the failure to give, or any defect in, such notice shall not affect the
legality or validity of such exchange. The Company shall promptly mail a notice of any such
exchange to all of the holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the Common Stock for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange
shall be effected pro rata based on the number of Rights (other than Rights which have become void
pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights.

          (c) In the event that there shall not be sufficient shares of Common Stock issued but not
outstanding or authorized but unissued to permit any exchange of Rights as contemplated in
accordance with Section 24(a), the Company shall either take such action as may be necessary to
authorize additional Common Stock for issuance upon exchange of the Rights or alternatively, at the
option of a majority of the Board of Directors, with respect to each Right (i) pay cash in an
amount equal to the Current Value (as hereinafter defined), in lieu of issuing Common Stock in
exchange therefor, or (ii) issue debt or equity securities or a combination thereof, having a value
equal to the Current Value (as defined below), in lieu of issuing Common Stock in exchange for each
such Right, where the value of such securities shall be determined by a nationally recognized
investment banking firm selected by the Board of Directors by majority vote of the Board of
Directors, or (iii) deliver any combination of cash, property, Common Stock and/or other securities
having a value equal to the Current Value in exchange for each Right. For purposes of this Section
24(c) only, the Current Value shall mean the product of the current per share market price of
Common Stock (determined pursuant to Section 11(d) on the date of the occurrence of the event
described above in subparagraph (a)) multiplied by the number of shares of Common Stock for which
the Right otherwise would be exchangeable if there were sufficient shares available. To the extent
that the Company determines that some action need be taken pursuant to clauses (i), (ii) or (iii)
of this Section 24(c), the Board of Directors may temporarily suspend the exercisability of the
Rights for a period of up to sixty (60) days following the date on which the event described in
Section 24(a) shall have occurred, in order to seek any authorization of additional shares of
Common Stock and/or to decide the appropriate form of distribution to be made pursuant to the above
provision and to determine the value thereof. In the event of any such suspension, the Company
shall issue a public announcement stating that the exercisability of the Rights has been
temporarily suspended.

33

 

          (d) The Company shall not be required to issue fractions of shares of Common Stock or to
distribute certificates which evidence fractional shares of Common Stock. In lieu of such
fractional shares of Common Stock, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional shares of Common Stock would otherwise be
issuable, an amount in cash equal to the same fraction of the current per share market value of a
whole share of Common Stock (as determined pursuant to the second sentence of Section 11(d)
hereof).

          (e) The Company may, at its option, by majority vote of the Board of Directors, at any time
before any Person has become an Acquiring Person, exchange all or part of the then outstanding
Rights for rights of substantially equivalent value, as determined reasonably and with good faith
by the Board of Directors, based upon the advice of one or more nationally recognized investment
banking firms.

          (f) Immediately upon the action of the Board of Directors ordering the exchange of any Rights
pursuant to subsection (e) of this Section 24 and without any further action and without any
notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of rights in exchange therefor as has been
determined by the Board of Directors in accordance with subsection (e) above. The Company shall
give public notice of any such exchange; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of
any such exchange to all of the holders of such Rights at their last addresses as they appear upon
the registry books of the transfer agent for the Common Stock of the Company. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange of the Rights
will be effected.

     SECTION 25. NOTICE OF CERTAIN EVENTS.

          (a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any
dividend payable in stock of any class to the holders of Preferred Stock or to make any other
distribution to the holders of Preferred Stock (other than a regular cash dividend out of earnings
or retained earnings of the Company), or (ii) to offer to the holders of Preferred Stock rights or
warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of
stock of any class or any other securities, rights or options, or (iii) to effect any
reclassification of its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), or to effect any sale or other transfer (or to permit one or
more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of
related transactions, of more than fifty percent (50%) of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which complies with
Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of the Company,
or (vi) to declare or pay any dividend on the Common Stock payable in Common Stock or to effect a
subdivision, consolidation or combination of the Common Stock (by reclassification or otherwise
than by payment in dividends in Common Stock), then, in each such case, the Company shall

34

 

give to the Rights Agent and to the extent feasible to each holder of a Rights Certificate, in
accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record
date for the purposes of such stock dividend, distribution of rights or warrants, or the date on
which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or
winding up is to take place and the date of participation therein by the holders of the shares of
Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of
any action covered by clause (i) or (ii) above at least ten (10) days prior to the record date for
determining holders of the shares of Preferred Stock for purposes of such action, and in the case
of any such other action, at least ten (10) days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of the shares of Preferred Stock
whichever shall be the earlier.

          (b) In case any of the events set forth in Section 11(a)(ii) hereof shall occur, then, in any
such case, (i) the Company shall as soon as practicable thereafter give to the Rights Agent and to
each holder of a Rights Certificate, to the extent feasible and in accordance with Section 26
hereof, a notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all
references in the preceding paragraph to Preferred Stock shall be deemed thereafter to refer to
Common Stock and/or, if appropriate, other securities.

     SECTION 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights
Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:

National HealthCare Corporation

100 Vine Street, Suite 1400

Murfreesboro, Tennessee 37130

Attn: General Counsel

Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be
given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent
shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Company) as follows:

Computershare Trust Company, N.A.

250 Royall Street

Canton, MA 02021

Attn: Client Services

Notices or demands authorized by this Agreement to be given or made by the Company or the Rights
Agent to the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder
of certificates representing shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown
on the registry books of the Company.

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     SECTION 27. SUPPLEMENTS AND AMENDMENTS. This Agreement may be supplemented or amended at the times and
for the purposes set forth below. Prior to the Distribution Date, the Company and the Rights Agent
shall, if the Company so directs, supplement or amend any provision of this Agreement without the
approval of any holders of certificates representing shares of Common Stock. From and after the
Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or
amend this Agreement without the approval of any holders of Rights Certificates in order (i) to
cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time
period hereunder, or (iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the interests of the
holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an
Acquiring Person); provided, however, this Agreement may not be supplemented or amended to
lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights
may be redeemed at such time as the Rights are not then redeemable, or (B) any other time period
unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of,
and/or the benefits to, the holders of Rights. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or
amendment; provided, that, the Rights Agent may, but shall not be obligated to enter into any
supplement or amendment that effects the Rights Agents’ own rights, duties, obligation or
immunities under this Agreement. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common Stock.

     SECTION 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the
Company or the Rights Agent shall bind and inure to the benefit of their respective successors and
assigns hereunder.

     SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all purposes of this
Agreement, any calculation of the number of shares of Common Stock outstanding at any particular
time, including for purposes of determining the particular percentage of such outstanding shares of
Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last
sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The
Board of Directors of the Company shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the Board or to the
Company, or as may be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii)
make all determinations deemed necessary or advisable for the administration of this Agreement
(including a determination to redeem or not redeem the Rights or to amend the Agreement). All such
actions, calculations, interpretations and determinations (including, for purposes of clause (y)
below, all omissions with respect to the foregoing) which are done or made by the Board in good
faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of
the Rights and all other parties, and (y) not subject the Board to any liability to the holders of
the Rights. The Rights Agent shall be entitled to assume the Board of Directors of the Company
acted in good faith and shall be fully protected and incur no liability in the Rights Agent’s
reliance thereon.

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     SECTION 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any
person other than the Company, the Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any
legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the
Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock).

     SECTION 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction or other authority to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated; provided, however,
that notwithstanding anything in this Agreement to the contrary, if any such term, provision,
covenant or restriction is held by such court or authority to be invalid, void or unenforceable and
the Board of Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or effect of this
Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the Close of Business on the tenth day following the date of such determination by the
Board of Directors.

     SECTION 32. GOVERNING LAW. This Agreement, each Right and each Rights Certificate issued hereunder shall
be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall
be governed by and construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.

     SECTION 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each such
counterpart shall for all purposes be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument.

     SECTION 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning or construction of any of
the provisions hereof.

     SECTION 35. FORCE MAJEURE. Notwithstanding anything to the contrary contained herein, neither
the Company nor the Rights Agent shall be liable for any delays or failures in performance
resulting directly from acts beyond its reasonable control that causes a sudden, substantial or
widespread disruption in business activities, including, without limitation, acts of God, terrorist
acts, shortage of supply, breakdowns or malfunctions, interruptions or malfunction of computer
facilities, or loss of data due to power failures or mechanical difficulties with information
storage or retrieval systems, labor difficulties, war, or civil unrest (each, a “Force Majeure
Condition”); provided, that such delayed or non-performing party shall use reasonable commercial
efforts to resume performance as soon as practicable. If any Force Majeure Condition occurs that
effects a party to this Agreement, the party delayed or unable to perform shall give notice to the
other party as soon as practicable, stating the nature of the Force Majeure Condition and any
action being taken to avoid or minimize its effect.

37

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.

	 	 	 	 	 
	 	National HealthCare Corporation,

a Delaware corporation

 	 
	 	By:  	/s/ Robert G. Adams
 	 
	 	 	Its:      CEO 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	Computershare Trust Company, N.A., as Rights

Agent, a federally chartered trust company

 	 
	 	By:  	/s/
Dennis V. Moccia
 	 
	 	 	Its:      Managing Director 	 
	 	 	 	 

38

 

	 	 	 	 	 

FORM OF DESIGNATION OF PREFERENCES

CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES

AND PRIVILEGES OF

SERIES B JUNIOR PARTICIPATING PREFERRED STOCK

OF

NATIONAL HEALTHCARE CORPORATION.

Pursuant to Section 151 of the General Corporation Law

of the State of Delaware

     Robert G. Adams, the President and Chief Executive Officer, and John K. Lines, Senior Vice
President and General Counsel, of National HealthCare Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DO HEREBY CERTIFY:

     That pursuant to the authority conferred upon the Board of Directors by the Certificate of
Incorporation of said Corporation, as amended, the Board of Directors on August 2, 2007, adopted
the following resolution creating a series of 3,000 shares of Preferred Stock designated as Series
B Junior Participating Preferred Stock:

     “RESOLVED, that pursuant to the authority vested in the Board of Directors of the corporation
by the Certificate of Incorporation, the Board of Directors does hereby provide for the issue of a
series of Preferred Stock, $0.01 par value, of the Corporation, to be designated “Series B Junior
Participating Preferred Stock,” initially consisting of 3,000 shares and to the extent that the
designations, powers, preferences and relative and other special rights and the qualifications,
limitations and restrictions of the Series B Junior Participating Preferred Stock are not stated
and expressed in the Certificate of Incorporation, does hereby fix and herein state and express
such designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions thereof, as follows (all terms used herein which are
defined in the Certificate of Incorporation shall be deemed to have the meanings provided therein):

     Section 1. Designation and Amount. The shares of such series shall be designated as “Series B
Junior Participating Preferred Stock,” par value $0.01 per share, and the number of shares
constituting such series shall be 3,000.

     Section 2. Dividends and Distributions.

     (A) Subject to the prior and superior right of the holders of any shares of any series of
Preferred Stock ranking prior and superior to the shares of Series B Junior Participating Preferred
Stock with respect to dividends, the holders of shares of Series B Junior Participating Preferred
Stock shall be entitled to receive when, as and if declared by the Board of Directors out of funds

 

 

legally available for the purpose, quarterly dividends payable in cash on the last day of
March, June, September and December in each year (each such date being referred to herein as a
“Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series B Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for
adjustment hereinafter set forth, 10,000 times the aggregate per share amount of all cash
dividends, and 10,000 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock of the Corporation (the “Common Stock”) since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series B Junior Participating
Preferred Stock. In the event the Corporation shall at any time after August 2, 2007 (the “Rights
Declaration Date”) (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case, the amount to which holders of shares of Series B
Junior Participating Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were outstanding immediately
prior to such event.

     (B) The Corporation shall declare a dividend or distribution on the Series B Junior
Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a
dividend payable in shares of Common Stock.

     (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B Junior
Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of
issue of such shares of Series B Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series B Junior Participating Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of
Series B Junior Participating Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix
a record date for the determination of holders of shares of Series B Junior Participating Preferred
Stock entitled to receive payment of a dividend or distribution declared thereon, which record date
shall be no more than thirty (30) days prior to the date fixed for the payment thereof.

     Section 3. Voting Rights. The holders of shares of Series B Junior Participating Preferred
Stock shall have the following voting rights:

2

 

     (A) Subject to the provision for adjustment hereinafter set forth, each share of Series B
Junior Participating Preferred Stock shall entitle the holder thereof to 10,000 votes on all
matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series B Junior Participating Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

     (B) Except as otherwise provided herein or by law, the holders of shares of Series B Junior
Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one
class on all matters submitted to a vote of stockholders of the Corporation.

     (C) Except as required by law, holders of Series B Junior Participating Preferred Stock shall
have no special voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate
action.

     Section 4. Certain Restrictions.

     (A) The Corporation shall not declare any dividend on, make any distribution on, or redeem or
purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance
of a share or fraction of a share of Series B Junior Participating Preferred Stock unless
concurrently therewith it shall declare a dividend on the Series B Junior Participating Preferred
Stock as required by Section 2 hereof.

     (B) Whenever quarterly dividends or other dividends or distributions payable on the Series B
Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B
Junior Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:

	 	(i)	 	declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series B Junior Participating Preferred Stock;
	 
	 	(ii)	 	declare or pay dividends on, make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with Series B Junior Participating
Preferred Stock, except dividends paid ratably on the Series B Junior
Participating Preferred stock and all such parity stock on which

3

 

dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;

	 	(iii)	 	redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series B Junior Participating
Preferred Stock, provided that the Corporation may at any time redeem purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series B Junior Participating
Preferred Stock; or
	 
	 	(iv)	 	purchase or otherwise acquire for consideration any shares of
Series B Junior Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series B Junior Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.

     (C) The Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.

     Section 5. Reacquired Shares. Any shares of Series B Junior Participating Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as part of a new
series of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth herein.

     Section 6. Liquidation, Dissolution or Winding Up.

     (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series B Junior
Participating Preferred Stock unless, prior thereto, the holders of shares of Series B Junior
Participating Preferred Stock shall have received an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment, plus an amount
equal to the greater of (1) $10,000.00 per share, provided that in the event the Corporation does
not have sufficient assets, after payment of its liabilities and distribution to holders of
Preferred Stock ranking prior to the Series B Junior Participating Preferred Stock,

4

 

available to permit payment in full of the $10,000.00 per share amount, the amount required to
be paid under this Section 6(A)(1) shall, subject to Section 6(B) hereof, equal the value of the
amount of available assets divided by the number of outstanding shares of Series B Junior
Participating Preferred Stock or (2) subject to the provisions for adjustment hereinafter set
forth, 10,000 times the aggregate per share amount to be distributed to the holders of Common Stock
(the greater of (1) or (2), the “Series B Liquidation Preference”). In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each such case the amount to
which holders of shares of Series B Junior Participating Preferred Stock were entitled immediately
prior to such event under clause (2) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of Common Stock that were
outstanding immediately after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.

     (B) In the event, however, that there are not sufficient assets available to permit
payment in full of the Series B Liquidation Preference and the liquidation preferences of
all other series of Preferred Stock, if any, which rank on a parity with the Series B Junior
Participating Preferred Stock, then such remaining assets shall be distributed ratably to
the holders of such parity shares in proportion to their respective liquidation preferences.

     Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other property, then in
any such case the shares of Series B Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 10,000 times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series B Junior Participating Preferred Stock
shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such event.

     Section 8. Redemption. The shares of Series B Junior Participating Preferred Stock shall not
be redeemable.

     Section 9. Ranking. The Series B Junior Participating Preferred Stock shall rank junior to all
other series of the Corporation’s Preferred Stock as to the payment of dividends and the

5

 

distribution of assets, unless the terms of any such series shall provide otherwise. The
Series B Junior Participating Preferred Stock shall rank senior to the Corporation’s Common Stock.

     Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be
further amended in any manner which would materially alter or change the powers, preference or
special rights of the Series B Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of a majority or more of the outstanding shares of
Series B Junior Participating Preferred Stock, voting separately as a class.

     Section 11. Fractional Shares. Series B Junior Participating Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such holder’s fractional
shares, to exercise voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series B Junior Participating Preferred Stock.

     IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the
foregoing as true under the penalties of perjury this 3rd day of August 2007.

	 	 	 	 	 
	 	 	 
	 	     /s/ Robert G. Adams
 	 
	 	Robert G. Adams 	 
	 	President and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	 	 
	 	     /s/ John K. Lines
 	 
	 	John K. Lines 	 
	 	Sr. Vice President and General Counsel 	 

6

 

	 	 	 	 	 

EXHIBIT B

Form of Rights Certificate

	 	 	 
	Certificate No. R-_________

	 	_________ Rights

     NOT EXERCISABLE AFTER AUGUST 2, 2017, OR EARLIER IF TERMINATED BY THE COMPANY OR AS OTHERWISE
PROVIDED IN THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. [UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF
SUCH RIGHTS MAY BECOME NULL AND VOID.] [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY,
THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE
CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH RIGHTS AGREEMENT.]*

	 	*	 	The portion of the legend in bracket shall be inserted only if applicable and shall
replace the preceding sentence.

RIGHTS CERTIFICATE

NATIONAL HEALTHCARE CORPORATION

     This certifies that ____________, or registered assigns, is the registered owner of
the number of Rights set forth above, each of which entitles the owner thereof, subject to the
terms, provisions and conditions of the Rights Agreement, dated as of August 2, 2007, as such
agreement may be amended from time to time in accordance with its terms (the “Rights Agreement”),
between National HealthCare Corporation, a Delaware corporation (the “Company”), and Computershare
Trust Company, N.A., a federally chartered trust company (the “Rights Agent”), to purchase from the
Company at any time after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M., New York City Time, on August 3, 2017, at the office of the
Rights Agent designated for such purpose, or at the office of its successor as Rights Agent, one
ten-thousandth of a fully paid non-assessable share of Series B Junior Participating Preferred
Stock, $0.01 par value (the “Preferred Shares”), of the Company, at a purchase price of $250 per
one ten-thousandth of a Preferred Share (the “Purchase Price”), upon presentation and surrender of
this Rights Certificate with the form of Election to Purchase and related Certificate duly
executed. The number of Rights evidenced by this Rights Certificate (and the number of one
ten-thousandths of a Preferred Share which may be purchased upon exercise hereof) set forth above,
are the number and Purchase Price as of August 2, 2007, based on the Preferred Shares as
constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number
and kind of Preferred Shares or other securities that may be purchased upon the exercise of the
Rights

 

 

evidenced by this Rights Certificate are subject to modification and adjustment upon the
happening of certain events.

     This Rights Certificate is subject to all of the terms, provisions and conditions of the
Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by
reference and made a part hereof and to which Rights Agreement reference is hereby made for a full
description of the rights, limitations of rights, obligations, duties and immunities hereunder of
the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of
rights include the temporary suspension of the exercisability of such Rights under the specific
circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the
principal executive offices of the Company and the above-mentioned office of the Rights Agent.

     Subject to the provisions of the Rights Agreement, the Rights evidenced by this Rights
Certificate (i) may be redeemed by the Company, at its option, at a redemption price of $0.01 per
Right or (ii) may be exchanged by the Company in whole or in part for Common Shares, substantially
equivalent rights or other consideration as determined by the Company.

     This Rights Certificate, with or without other Rights Certificates, upon surrender at the
office of the Rights Agent designated for such purpose may be exchanged for another Rights
Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate amount of securities as the Rights evidenced by the Rights Certificate or
Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender
hereof another Rights Certificate or Rights Certificates for the number of whole Rights not
exercised.

     No
fractional portion less than integral multiples of one ten-thousandth of a Preferred Share
will be issued upon the exercise of any Right or Rights evidenced hereby but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.

     No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other securities of the
Company which may at any time be issuable on the exercise hereof, nor shall anything contained in
the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of directors or upon
any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting stockholders (except
as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by this Rights Certificate shall have been exercised as
provided in the Rights Agreement.

     The Rights Certificate shall not be valid or obligatory for any purpose until it has been
countersigned by the Rights Agent.

2

 

     WITNESS the facsimile signature of the proper officers of the Company. Dated as of
___, 20_.

	 	 	 	 	 
	ATTEST:

	 	NATIONAL HEALTHCARE CORPORATION
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 
	[Secretary]
	 	 	 	 

Countersigned:

______________________

as Rights Agent

By:

______________________

Authorized Officer

3

 

Form of Reverse Side of Rights Certificate

FORM OF ASSIGNMENT

(To be executed by the registered holder if such holder desires to transfer the Rights Certificate)

     FOR VALUE RECEIVED ___________________________________________________________________________

hereby sells, assigns and transfers unto
_____________________________________________________________________

(Please print name and address of transferee)

this Rights Certificate, together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint _______________, to transfer the within Rights
Certificate on the books of the within-named Company, with full power of substitution.

Dated: _____________________________

	 	 	 	 	 
	 	 	 
	 	
 	 
	 	Signature 	 
	 	 	 
	 

Signature Guaranteed:

     The signature should be guaranteed by an eligible guarantor institution (banks, stock brokers,
savings and loan associations and credit unions with members in an approved signature guarantee
medallion program) pursuant to Rule17Ad-15 under the Securities Exchange Act of 1934, as amended.

4

 

CERTIFICATE

     The undersigned hereby certifies by checking the appropriate boxes that:

     (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on
behalf of a Person who is or was an Acquiring Person, or an Affiliate or Associate of any such
Person (as such terms are defined in the Rights Agreement);

     (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not
acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate of any such Person.

Dated: ______________________

	 	 	 	 	 
	 	 	 
	 	
 	 
	 	Signature 	 
	 	 	 
	 

     Signature Guaranteed:

The signature should be guaranteed by an eligible guarantor institution (banks, stock
brokers, savings and loan associations and credit unions with members in an approved
signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended.

5

 

FORM OF ELECTION TO PURCHASE

(To be executed if holder desires to exercise the Rights Certificate)

To: _______________________________________

     The
undersigned hereby irrevocable elects to exercise ____________ Rights represented by
this Rights Certificate to purchase the number of one ten-thousandths of a Preferred Share issuable
upon the exercise of such Rights and requests that certificates for such number of one
ten-thousandths of a Preferred Share be issued in the name of: _______________.

Please insert social security or other identifying number _______________

________________________

________________________

________________________

(Please print name and address)

If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new
Rights Certificate for the balance remaining of such Rights shall be registered in the name of and
delivered to: ____________.

Please insert social security or other identifying number _______________

________________________

________________________

________________________

(Please print name and address)

Dated: ___________________

	 	 	 	 	 
	 	 	 
	 	
 	 
	 	Signature 	 
	 	 	 
	 

Signature Guaranteed:

     The signature should be guaranteed by an eligible guarantor institution (banks, stock brokers,
savings and loan associations and credit unions with members in an approved signature guarantee
medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended.

6

 

CERTIFICATE

     The undersigned hereby certifies by checking the appropriate boxes that:

     (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on
behalf of a Person who is or was an Acquiring Person, or an Affiliate or Associate of any such
Person (as such terms are defined in the Rights Agreement);

     (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not
acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate of any such Person.

Dated: ____________________

	 	 	 	 	 
	 	 	 
	 	
 	 
	 	Signature 	 
	 	 	 
	 

     Signature Guaranteed:

The signature should be guaranteed by an eligible guarantor institution (banks, stock
brokers, savings and loan associations and credit unions with members in an approved
signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities
Exchange Act of 1934.

NOTICE

     The signature in the foregoing Forms of Assignment and Election must conform to the name as
written upon the face of this Rights Certificate in every particular, without alteration or
enlargement or any change whatsoever.

In the event the certification set forth on the foregoing Form of Assignment or the Form of
Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will
deem the beneficial owner of the Rights evidenced by the Rights Certificate to be an Acquiring
Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.

7

 

Exhibit C

SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK

     On August 2, 2007, the Board of Directors of National HealthCare Corporation (the “Company”)
approved the adoption of a Stockholder Rights Plan and declared a dividend distribution of one
right (a “Right”) for each outstanding share of the Company’s Common Stock to stockholders of
record at the close of business on August 2, 2007 (the “Dividend Date”). Each Right entitles the
registered holder to purchase from the Company a unit consisting of one ten-thousandth of a share
(a “Unit”) of Series B Junior Participating Preferred Stock, $0.01 par value (the “Preferred
Stock”), at a purchase price of $250 per Unit, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement between the Company and Computershare Trust Company,
N.A., as Rights Agent, dated as of August 2, 2007, as may be amended, restated or otherwise
modified from time to time (the “Rights Agreement”).

     Certificates. Initially, the Rights will not be exercisable, the Rights will be attached to
all Common Stock certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. Subject to extension by the Board of Directors in certain
circumstances, the Rights will separate from the Common Stock and a distribution date (the
“Distribution Date”) will occur upon the earlier of (i) ten (10) days following a public
announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has
acquired, or obtained the right to acquire, beneficial ownership of twenty percent (20%) or more of
the outstanding shares of Common Stock (the “Stock Acquisition Date”), or (ii) ten (10) business
days following the commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning twenty percent (20%) or more of the outstanding shares of Common
Stock. Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock certificates, (ii) new
Common Stock certificates issued will contain a notation incorporating the Rights Agreement by
reference, and (iii) the surrender for transfer of any certificates for Common Stock outstanding
will also constitute the transfer of the Rights associated with the Common Stock represented by
such certificate.

     Expiration and Exercise. The Rights are not exercisable until the Distribution Date, if any
such date shall occur, and will expire at the close of business on tenth anniversary of the record
date of the plan (August 2, 2017), unless previously redeemed or exchanged by the Company as
described below.

     As soon as practicable after a Distribution Date, if any such date shall occur, the Rights
Certificates will be mailed to holders of record of the Common Stock as of the close of business on
the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the
Rights. Except as otherwise determined by the Board of Directors, only shares of Common Stock
issued prior to the Distribution Date will be issued with Rights.

     “Flip-In” Events. In the event that (i) the Company is the surviving Company in a merger with
an Acquiring Person and its Common Stock is not changed or exchanged, (ii) an Acquiring Person
becomes the beneficial owner of more than twenty percent (20%) of the outstanding

8

 

shares of Common Stock, (iii) an Acquiring Person engages in one or more “self-dealing”
transactions as set forth in the Rights Agreement, or (iv) during such time as there is an
Acquiring Person, an event occurs which results in such Acquiring Person’s ownership interest being
increased by more than one percent (1%) (e.g., a reverse stock split), each holder of a Right will
thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value equal to two (2) times the
exercise price of the Right. However, the Rights are not exercisable following the occurrence of
any of the events set forth above until such time as the Rights are no longer redeemable as set
forth below. Notwithstanding any of the foregoing, following the occurrence of any of the events
set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring Person will become null and void.

     For example, at an exercise price of $250 per Right, each Right not owned by an Acquiring
Person (or by certain related parties) following an event set forth in the preceding paragraph
would entitle its holder to purchase $500 worth of Common Stock (or other consideration, as noted
above) for $250. Assuming that the Common Stock had a per share value of $50 at such time, the
holder of each valid Right would be entitled to purchase ten shares of Common Stock for $250.

     “Flip-Over” Events. In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in which the Company
is not the surviving Company, or (ii) fifty percent (50%) or more of the Company’s assets or
earning power is sold or transferred, each holder of a Right (except Rights which previously have
been voided as set forth above) shall thereafter have the right to receive, upon exercise, common
stock of the acquiring company having a value equal to two (2) times the exercise price of the
Right.

     Exchange Feature. At any time after any person becomes an Acquiring Person and prior to the
acquisition by such person or group of fifty percent (50%) or more of the outstanding Common Stock,
the Board of Directors may exchange the Rights (other than Rights owned by such person or group
which will have become void), in whole or in part, at an exchange rate of one share of Common Stock
(or a combination of cash, property, Common Stock or other securities having an equal value) per
Right (subject to adjustment).

     Adjustment for Dilution. The purchase price payable, and the number of Units of Preferred
Stock or other securities or property issuable upon exercise of the Rights, are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if holders of the
Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or
convertible securities at less than the current market price of the Preferred Stock, or (iii) upon
the distribution to holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular cash dividends) or of subscription rights or warrants (other than those referred
to above).

     With certain exceptions, no adjustment in the purchase price will be required until cumulative
adjustments amount to at least one percent (1%) of the purchase price. No fractional

9

 

Units will be issued and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Preferred Stock on the last trading date prior to the date of exercise.

     Redemption. At any time until ten (10) days following the Stock Acquisition Date or such later
date as may be determined by action of the Board of Directors then in office and publicly announced
by the Company, the Company may redeem the Rights in whole, but not in part, at a price of $0.01
per Right (the “Redemption Price”). Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.

     Stockholder Rights. Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right to vote or to
receive dividends. While the distribution of the Rights will not be taxable to stockholders or to
the Company, stockholders may, depending upon the circumstances, recognize taxable income in the
event that the Rights become exercisable for Common Stock (or other consideration) of the Company
or for common stock of the acquiring company as set forth above.

     Amendments. Any of the provisions of the Rights Agreement may be amended by the Board of
Directors prior to the Distribution Date. After the Distribution Date, the provisions of the Rights
Agreement may be amended by the Board of Directors in order to cure any ambiguity, to make changes
which do not adversely affect the interests of holders of Rights (excluding the interests of any
Acquiring Person), or to shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall be made at such
time as the Rights are not redeemable.

     Five-Year Independent Director Review of Rights Plan. Under Rights Plan, the Board of the
Directors will establish a Shareholder Rights Plan Committee (which shall consist of non-management
directors) that will periodically consider whether the maintenance of the Rights Plan continues to
be in the best interests of the Company and its shareholders. The Shareholder Rights Plan
Committee will conduct such review when and in such manner as such committee deems appropriate and
will conduct its review at least once every five years.

     Availability of Rights Agreement. A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to Registration Statement on Form 8-A dated August
3, 2007. A copy of the Rights Agreement is available free of charge from the Company. This Summary
of Rights does not purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is incorporated herein by reference.

10EX-10.1 SECURITIES PURCHASE AGREEMENT

 

Exhibit 10.1

EXECUTION COPY

SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of August 2, 2007, by and among
Stinger Systems, Inc., a Nevada corporation, with headquarters located at 2701 N. Rocky Point
Drive, Suite 1130, Tampa, Florida 33607 (the “Company”), and the investors listed on the Schedule
of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

     WHEREAS:

     A. The Company and each Buyer is executing and delivering this Agreement in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

     B. The Company has authorized a new series of senior secured convertible notes of the Company
which notes shall be convertible into the Company’s common stock, par value $0.001 per share (the
“Common Stock”), in accordance with the terms of the Notes (as defined below).

     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) that aggregate principal amount of the Notes, in
substantially the form attached hereto as Exhibit A (the “Notes”), set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers attached hereto (which aggregate amount for
all Buyers shall be $3,000,000 (as converted, collectively, the “Conversion Shares”), and (ii)
warrants, in substantially the form attached hereto as Exhibit B (the “Warrants”), to
acquire that number of shares of Common Stock set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers (as exercised, collectively, the “Warrant Shares”).

     D. The Notes bear interest, which at the option of the Company, subject to certain conditions,
may be paid in shares of Common Stock (the “Interest Shares”).

     E. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the form attached hereto
as Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company has
agreed to provide certain registration rights with respect to the Registrable Securities (as
defined in the Registration Rights Agreement) under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.

     F. The Notes, the Conversion Shares, the Interest Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the “Securities”.

     G. The Notes will rank senior to all outstanding and future indebtedness of the Company and
will be secured by a first priority, perfected security interest in all of the assets of the
Company and the stock and assets of each of the Company’s subsidiaries, as evidenced by the the
security agreement attached hereto as Exhibit D (the “Security Agreement”).

 

 

     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

     1. PURCHASE AND SALE OF NOTES AND WARRANTS.

          (a) Purchase of Notes and Warrants. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6(a) and 7(a) below, the Company shall issue and sell to each
Buyer, and each Buyer severally, but not jointly, agrees to purchase from the Company on the
Closing Date (as defined below), (x) a principal amount of Notes as is set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers and (y) Warrants to acquire that number of
Warrant Shares as is set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers
(the “Closing”).

          (b) Closing. The Closing shall occur on the Closing Date at the offices of Schulte
Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.

          (c) Purchase Price. The purchase price for each Buyer of the Notes and the Warrants
to be purchased by each such Buyer at the Closing shall be the amount set forth opposite such
Buyer’s name in column (5) of the Schedule of Buyers (the “Purchase Price”). Each Buyer shall pay
$1.00 for each $1.00 of principal amount of Notes and the related Warrants to be purchased at the
Closing.

          (d) Closing Date. The date and time of the Closing (the “Closing Date”) shall be
10:00 a.m., New York City Time, on the date hereof after notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6(a) and 7(a) below (or such later date as
is mutually agreed to by the Company and each Buyer).

          (e) Form of Payment. On the Closing Date, each Buyer shall pay the Purchase Price to
the Company for the Notes and the Warrants to be issued and sold to such Buyer at the Closing (A)
by wire transfer of immediately available funds in accordance with the Company’s written wire
instructions. At the Closing, the Company shall deliver to each Buyer (A) the Notes (in the
principal amounts as such Buyer shall request) which such Buyer is then purchasing and (B) the
Warrants (in the amounts as such Buyer shall request) such Buyer is purchasing, in each case duly
executed on behalf of the Company and registered in the name of such Buyer or its designee.

     2. BUYER’S REPRESENTATIONS AND WARRANTIES.

          Each Buyer represents and warrants with respect to only itself that:

          (a) No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and the
Warrants and (ii) upon conversion of the Notes and exercise of the Warrants (other than pursuant to
a Cashless Exercise (as defined in the Warrants)) will acquire the Conversion Shares issuable upon
conversion of the Notes and the Warrant Shares issuable upon exercise of the Warrants for its own
account and not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does not
agree to hold any of the Securities for any minimum or other specific term and reserves the right
to dispose of the Securities at any time in accordance with or pursuant to a registration statement

- 2 -

 

or an exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the
ordinary course of its business. Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the Securities.

          (b) Accredited Investor Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.

          (c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine
the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.

          (d) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.

          (e) No Governmental Review. Such Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities or the fairness or suitability of the investment in
the Securities nor have such authorities passed upon or endorsed the merits of the offering of the
Securities.

          (f) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to
the Company an opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an
exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance
that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act, as amended, (or a successor rule thereto) (collectively, “Rule
144”); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance
with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities
under circumstances in which the seller (or the Person (as defined in Section 3(s)) through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person

- 3 -

 

is under any obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder. The Securities may be
pledged in connection with a bona fide margin account or other loan or financing arrangement
secured by the Securities and such pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Buyer effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any delivery to the
Company pursuant to this Agreement or any other Transaction Document (as defined in Section 3(b)),
including, without limitation, this Section 2(f).

          (g) Legends. Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of the Conversion Shares
and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky” laws of any state
and a restrictive legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such stock certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE]
[EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped or issue to such holder by
electronic delivery at the applicable balance account at DTC (as defined below), unless otherwise
required by state securities laws, (i) such Securities are registered for resale under the 1933
Act, (ii) in connection with a sale, assignment or other transfer, such holder provides the Company
with an opinion of counsel, in a generally acceptable form, to the effect that such sale,
assignment or transfer of the Securities may be made without registration under the applicable
requirements of the 1933 Act, or (iii) such holder provides the Company with reasonable assurance
that the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A.

- 4 -

 

          (h) Validity; Enforcement. This Agreement, the Registration Rights Agreement and the
Security Agreement to which such Buyer is a party have been duly and validly authorized, executed
and delivered on behalf of such Buyer and shall constitute the legal, valid and binding obligations
of such Buyer enforceable against such Buyer in accordance with their respective terms, except as
such enforceability may be limited by general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and remedies.

          (i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement, the Registration Rights Agreement and the Security Agreement to which such Buyer is a
party and the consummation by such Buyer of the transactions contemplated hereby and thereby will
not (i) result in a violation of the organizational documents of such Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which such Buyer is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree (including federal
and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii)
above, for such conflicts, defaults, rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to
perform its obligations hereunder.

          (j) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.

     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

          The Company represents and warrants to each of the Buyers that:

          (a) Organization and Qualification. Each of the Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity in which the Company, directly or indirectly, owns
any of the capital stock or holds an equity or similar interest) are entities duly organized and
validly existing in good standing under the laws of the jurisdiction in which they are formed, and
have the requisite power and authorization to own their properties and to carry on their business
as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign
entity to do business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification necessary, except
to the extent that the failure to be so qualified or be in good standing would not have a Material
Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse
effect on the business, properties, assets, operations, results of operations, condition (financial
or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and the other Transaction Documents or by the agreements and
instruments to be entered into in connection herewith or therewith, or on the authority or ability
of the Company to perform its obligations under the Transaction Documents (as defined below). The
Company has no Subsidiaries except as set forth on Schedule 3(a).

- 5 -

 

          (b) Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Notes, the
Registration Rights Agreement, the Security Agreement, the Irrevocable Transfer Agent Instructions
(as defined in Section 5(b)), the Warrants, and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by this Agreement (collectively,
the “Transaction Documents”) and to issue the Securities in accordance with the terms hereof and
thereof. The execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Notes and the Warrants, the reservation for issuance and the
issuance of the Conversion Shares issuable upon conversion of the Notes, the reservation for
issuance and issuance of Warrant Shares issuable upon exercise of the Warrants, the reservation for
issuance and issuance of Interest Shares, if any, and the granting of a security interest in the
Collateral (as defined in the Security Agreement) have been duly authorized by the Company’s Board
of Directors and (other than (i) the filing of appropriate UCC financing statements with the
appropriate states and other authorities pursuant to the Security Agreement, and (ii) the filing
with the SEC of one or more Registration Statements in accordance with the requirements of the
Registration Rights Agreement) no further filing, consent, or authorization is required by the
Company, its Board of Directors or its stockholders. This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or similar laws relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.

          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the applicable Closing, a number of shares of Common Stock shall have been duly authorized and
reserved for issuance which equals at least 130% of the sum of the maximum number of shares Common
Stock issuable (i) as Interest Shares pursuant to the terms of the Notes, (ii) upon conversion of
the Notes issued at such Closing and issued at all prior Closings and (iii) upon exercise of the
Warrants. Upon conversion or payment in accordance with the Notes or exercise in accordance with
the Warrants, as the case may be, the Conversion Shares, the Interest Shares and the Warrant
Shares, respectively, will be validly issued, fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. The offer and issuance
by the Company of the Securities is exempt from registration under the 1933 Act.

          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants, the
granting of a security interest in the Collateral and reservation for issuance and issuance of the
Conversion Shares, the Interest Shares and the Warrant Shares) will not (i) result in a violation
of the Articles of Incorporation (as defined in Section 3(r)) of the Company or any of its
Subsidiaries, any capital stock of the Company or Bylaws (as defined in Section 3(r)) of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event
which

- 6 -

 

with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the OTC Bulletin Board (the
“Principal Market”)) applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries is bound or affected.

          (e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other Person in order for it
to execute, deliver or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All consents,
authorizations, orders, filings and registrations which the Company is required to obtain pursuant
to the preceding sentence have been obtained or effected on or prior to the Closing Date, and the
Company and its Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or filings pursuant to the
preceding sentence. The Company is not in violation of the listing requirements of the Principal
Market and has no knowledge of any facts which would reasonably lead to delisting or suspension of
the Common Stock in the foreseeable future.

          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges
and agrees that each Buyer is acting solely in the capacity of arm’s length purchaser with respect
to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer
is (i) an officer or director of the Company, (ii) an “affiliate” of the Company (as defined in
Rule 144) or (iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of the
shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the “1934 Act”)). The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by
a Buyer or any of its representatives or agents in connection with the Transaction Documents and
the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of
the Securities. The Company further represents to each Buyer that the Company’s decision to enter
into the Transaction Documents has been based solely on the independent evaluation by the Company
and its representatives.

          (g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of
its affiliates, nor any Person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D) in connection with the
offer or sale of the Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for persons engaged by
any Buyer or its investment advisor) relating to or arising out of the transactions contemplated
hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim. The Company acknowledges that it has engaged Midtown Partners &
Co. LLC as placement agent (the “Placement Agent”) in

- 7 -

 

connection with the sale of the Securities. Other than the Placement Agent, the Company has
not engaged any placement agent or other agent in connection with the sale of the Securities.

          (h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under circumstances that would
require registration of any of the Securities under the 1933 Act or cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their affiliates and any
Person acting on their behalf will take any action or steps referred to in the preceding sentence
that would require registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.

          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares issuable upon
exercise of the Warrants will increase in certain circumstances. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Notes in accordance with this
Agreement and the Notes and its obligation to issue the Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants, in each case, is absolute and
unconditional regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

          (j) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws
of the jurisdiction of its formation which is or could become applicable to any Buyer as a result
of the transactions contemplated by this Agreement, including, without limitation, the Company’s
issuance of the Securities and any Buyer’s ownership of the Securities. The Company has not
adopted a stockholder rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.

          (k) SEC Documents; Financial Statements. Except as disclosed in Schedule
3(k), during the two (2) years prior to the date hereof, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof
and all exhibits included therein and financial statements, notes and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”).
The Company has delivered to the Buyers or their respective representatives true, correct and
complete copies of the SEC Documents not available on the EDGAR system. As of their respective
dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act
and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of

- 8 -

 

the circumstances under which they were made, not misleading. As of their respective dates,
the financial statements of the Company included in the SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the
case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial position of the
Company as of the dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).
No other information provided by or on behalf of the Company to the Buyers which is not included in
the SEC Documents, including, without limitation, information referred to in Section 2(d) of this
Agreement, contains any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the circumstance under which
they are or were made, not misleading.

          (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since
December 31, 2006, there has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise), results of operations or
prospects of the Company or its Subsidiaries. Except as disclosed in Schedule 3(l), since
December 31, 2006, the Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of the ordinary course of business
or (iii) had capital expenditures, individually or in the aggregate, in excess of $100,000. The
Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor
to do so. The Company is not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent” means with respect to any Person, (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay such Person’s total
Indebtedness (as defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute
and matured, (iii) the Company intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small capital
with which to conduct the business in which it is engaged as such business is now conducted and is
proposed to be conducted.

          (m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is contemplated to occur with
respect to the Company, its Subsidiaries or their respective business, properties, prospects,
operations or financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to
an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

          (n) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under any certificate of designations of

- 9 -

 

any outstanding series of preferred stock of the Company, its Articles of Incorporation or
Bylaws or their organizational charter or certificate of incorporation or bylaws, respectively.
Neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or
any statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in violation of any of
the foregoing, except for possible violations which would not, individually or in the aggregate,
have a Material Adverse Effect. Without limiting the generality of the foregoing, the Company is
not in violation of any of the rules, regulations or requirements of the Principal Market and has
no knowledge of any facts or circumstances which would reasonably lead to delisting or suspension
of the Common Stock by the Principal Market in the foreseeable future. During the two years prior
to the date hereof, the Common Stock has been designated for quotation on the Principal Market.
During the two years prior to the date hereof, (i) trading in the Common Stock has not been
suspended by the SEC or the Principal Market and (ii) the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the
Common Stock from the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities necessary to conduct
their respective businesses, except where the failure to possess such certificates, authorizations
or permits would not have, individually or in the aggregate, a Material Adverse Effect, and neither
the Company nor any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.

          (o) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor
any director, officer, agent, employee or other Person acting on behalf of the Company or any of
its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its
Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

          (p) Sarbanes-Oxley Act. The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any
and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of
the date hereof.

          (q)  Transactions With Affiliates. Except as set on Schedule 3(q), none of
the officers, directors or employees of the Company is presently a party to any transaction with
the Company or any of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any such officer, director or employee or, to the knowledge
of the Company or any of its Subsidiaries, any corporation, partnership, trust or other entity in
which any such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

- 10 -

 

          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 50,000,000 shares of Common Stock, of which as of the date hereof,
17,484,171 are issued and outstanding, 2,000,000 shares are reserved for issuance
pursuant to the Company’s stock option and purchase plans and 2,120,001 shares are reserved for
issuance pursuant to securities (other than the aforementioned options, the Notes and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock. All of such
outstanding shares have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Except as disclosed in Schedule 3(r): (i) none of the Company’s capital
stock is subject to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iii)
there are no outstanding debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there
are no financing statements securing obligations in any material amounts, either singly or in the
aggregate, filed in connection with the Company or any of its Subsidiaries; (v) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except pursuant to the
Registration Rights Agreement); (vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries;
(vii) there are no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities; (viii) the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosed
in the SEC Documents but not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its Subsidiaries’ respective businesses and which, individually
or in the aggregate, do not or would not have a Material Adverse Effect. The Company has furnished
to the Buyers true, correct and complete copies of the Company’s Articles of Incorporation, as
amended and as in effect on the date hereof (the “Articles of Incorporation”), and the Company’s
Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of Common Stock and the
material rights of the holders thereof in respect thereto.

          (s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument would result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults

- 11 -

 

would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the performance of
which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Schedule 3(s) provides a detailed description of the material terms of any such
outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services (other than trade payables
entered into in the ordinary course of business), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments, (D) all obligations
evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all monetary
obligations under any leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for the payment of such
indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person
with respect to any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is
to provide assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or that the holders of
such liability will be protected (in whole or in part) against loss with respect thereto; and (z)
“Person” means an individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any department or agency
thereof.

          (t) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries, the Common Stock or any of the
Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers or directors in their
capacities as such, except as set forth in Schedule 3(t).

          (u) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance

- 12 -

 

coverage as and when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a Material Adverse
Effect.

          (v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No executive officer of
the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or otherwise
terminate such officer’s employment with the Company or any such Subsidiary. No executive officer
of the Company or any of its Subsidiaries, to the knowledge of the Company, is, or is now expected
to be, in violation of any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other contract or agreement or
any restrictive covenant, and the continued employment of each such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to any of the
foregoing matters.

               (ii) The Company and its Subsidiaries are in compliance with all federal, state, local and
foreign laws and regulations respecting labor, employment and employment practices and benefits,
terms and conditions of employment and wages and hours, except where failure to be in compliance
would not, either individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

          (w) Title. The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each case free and clear
of all liens, encumbrances and defects except such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under lease by the
Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.

          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now conducted. Except as set
forth in Schedule 3(x), none of the Company’s Intellectual Property Rights have expired or
terminated, or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the Company or its
Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company, being threatened, against the Company or
its Subsidiaries regarding its Intellectual Property Rights. The Company is unaware of any facts
or circumstances which might give rise to any of the foregoing infringements or claims, actions or
proceedings. The Company and its Subsidiaries

- 13 -

 

have taken reasonable security measures to protect the secrecy, confidentiality and value of
all of their intellectual properties.

          (y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with
any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply
could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution
or protection of human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including, without limitation, laws
relating to emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into
the environment, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or
approved thereunder.

          (z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or
one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.

          (aa) Investment Company Status. The Company is not, and upon consummation of the sale
of the Securities will not be, an “investment company,” a company controlled by an “investment
company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment
company” as such terms are defined in the Investment Company Act of 1940, as amended.

          (bb) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

          (cc) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in

- 14 -

 

accordance with management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any difference. The Company
maintains disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934
Act) that are effective in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the 1934 Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed in to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the 1934 Act is accumulated and
communicated to the Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely decisions regarding
required disclosure.

          (dd) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
required to be disclosed by the Company in its Exchange Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.

          (ee) Ranking of Notes. Except as set forth on Schedule (ee), no Indebtedness
of the Company is senior to or ranks pari passu with the Notes in right of payment, whether with
respect of payment of redemptions, interest, damages or upon liquidation or dissolution or
otherwise.

          (ff) Form S-1 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under the 1933 Act.

          (gg) Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other
than income or similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully
paid or provided for by the Company, and all laws imposing such taxes will be or will have been
complied with.

          (hh) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) other than the Placement Agent, sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii)
other than the Placement Agent, paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.

          (ii) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company that, except as provided in Section 4(s), (i) none of the Buyers have
been asked to agree, nor has any Buyer agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on securities issued by the
Company or to hold the Securities for any specified term; (ii) any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or indirectly,

- 15 -

 

presently may have a “short” position in the Common Stock, and (iii) each Buyer shall not be
deemed to have any affiliation with or control over any arm’s length counter-party in any
“derivative” transaction. The Company further understands and acknowledges that (a) one or more
Buyers may engage in hedging and/or trading activities at various times during the period that the
Securities are outstanding, including, without limitation, during the periods that the value of the
Conversion Shares, the Warrant Shares and any Interest Shares deliverable with respect to
Securities are being determined and (b) such hedging and/or trading activities, if any, can reduce
the value of the existing stockholders’ equity interest in the Company both at and after the time
the hedging and/or trading activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the
Notes, the Warrants or any of the documents executed in connection herewith.

          (jj) U.S. Real Property Holding Corporation. The Company is not, nor has ever been, a
U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue
Code of 1986, as amended, and the Company shall so certify upon Buyer’s request.

          (kk) Bank Holding Company Act Neither the Company nor any of its Subsidiaries or
affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to
regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
Neither the Company nor any of its Subsidiaries or affiliates owns or controls, directly or
indirectly, five percent or more of the outstanding shares of any class of voting securities or
twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA
and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or
affiliates exercises a controlling influence over the management or policies of a bank or any
entity that is subject to the BHCA and to regulation by the Federal Reserve.

          (ll) Disclosure. The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic information other
than as set forth in the following sentence. The Company understands and confirms that each of the
Buyers will rely on the foregoing representations in effecting transactions in securities of the
Company. All disclosure provided to the Buyers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on
behalf of the Company is true and correct and does not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading. Each press release
issued by the Company during the twelve (12) months preceding the date of this Agreement did not at
the time of release contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. No event or circumstance has
occurred or information exists with respect to the Company or any of its Subsidiaries or its or
their business, properties, prospects, operations or financial conditions, which, under applicable
law, rule or regulation, requires public disclosure or announcement by the Company but which has
not been so publicly announced or disclosed.

- 16 -

 

     4. COVENANTS.

          (a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the
conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

          (b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company shall, on or before the Closing Date, take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify
the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall provide evidence of any such action so taken to the Buyers on or
prior to the Closing Date. The Company shall make all filings and reports relating to the offer
and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of
the United States following the Closing Date.

          (c) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold all the Conversion Shares, the Interest Shares and
Warrant Shares and none of the Notes or Warrants is outstanding (the “Reporting Period”), the
Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would otherwise permit such
termination.

          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, including general and administrative expenses, and not
for (i) the repayment of any outstanding Indebtedness of the Company or any of its Subsidiaries,
(ii) the redemption or repurchase of any of its or its Subsidiaries’ equity securities, or (iii)
the settlement of any claims, actions or proceedings against the Company or any of its
Subsidiaries.

          (e) Financial Information. The Company agrees to send the following to each Investor
(as defined in the Registration Rights Agreement) during the Reporting Period (i) unless the
following are filed with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day (as defined below) after the filing thereof with the SEC, a
copy of its Annual Reports on Form 10-K or 10-KSB, any interim reports or any consolidated balance
sheets, income statements, stockholders’ equity statements and/or cash flow statements for any
period other than annual, any Current Reports on Form 8-K and any registration statements (other
than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as the release
thereof, facsimile or e-mailed copies of all press releases issued by the Company or any of its
Subsidiaries, and (iii) copies of any notices and other information made available or given to the
stockholders of the Company generally, contemporaneously with the making available or giving
thereof to the stockholders. As used herein, “Business Day” means any day other than Saturday,
Sunday or other day on which commercial banks in The City of New York are authorized or required by
law to remain closed.

          (f) Listing. The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national

- 17 -

 

securities exchange and automated quotation system, if any, upon which the Common Stock is
then listed (subject to official notice of issuance) and shall maintain such listing of all
Registrable Securities from time to time issuable under the terms of the Transaction Documents.
The Company shall maintain the Common Stocks’ authorization for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on the Principal Market. The
Company shall pay all fees and expenses in connection with satisfying its obligations under this
Section 4(f).

          (g) Fees. The Company shall reimburse Castlerigg Master Investments Ltd.
(“Castlerigg”) (a Buyer) or its designee(s) (in addition to any other expense amounts paid to any
Buyer prior to the date of this Agreement) for all reasonable costs and expenses incurred in
connection with the transactions contemplated by the Transaction Documents (including all
reasonable legal fees and disbursements in connection therewith, documentation and implementation
of the transactions contemplated by the Transaction Documents and due diligence in connection
therewith), which amount shall be withheld by such Buyer from its Purchase Price at the Closing.
The Company shall be responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising
out of the transactions contemplated hereby, including, without limitation, any fees or commissions
payable to the Placement Agent. The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any claim relating to any such payment. Except
as otherwise set forth in the Transaction Documents, each party to this Agreement shall bear its
own expenses in connection with the sale of the Securities to the Buyers.

          (h) Pledge of Securities. The Company acknowledges and agrees that the Securities may
be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document, including, without limitation, Section 2(f)
hereof; provided that an Investor and its pledgee shall be required to comply with the provisions
of Section 2(f) hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities to such pledgee by
an Investor.

          (i) Disclosure of Transactions and Other Material Information. On or before 5:00
p.m., New York City time, on the first Business Day following the date of this Agreement, the
Company shall issue a press release and file a Current Report on Form 8-K describing the terms of
the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and
attaching the material Transaction Documents (including, without limitation, this Agreement (and
all schedules to this Agreement), the form of the Notes, the form of Warrant, the form of the
Registration Rights Agreement and the form of Security Agreement) as exhibits to such filing
(including all attachments, the “8-K Filing”). From and after the filing of the 8-K

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Filing with the SEC, no Buyer shall be in possession of any material, nonpublic information
received from the Company, any of its Subsidiaries or any of their respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing. The Company shall not, and shall
cause each of its Subsidiaries and its and each of their respective officers, directors, employees
and agents, not to, provide any Buyer with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express written consent of such Buyer. If a Buyer has, or believes it has, received any such
material, nonpublic information regarding the Company or any of its Subsidiaries, it shall provide
the Company with written notice thereof. The Company shall, within two (2) Trading Days of receipt
of such notice, make public disclosure of such material, nonpublic information. In the event of a
breach of the foregoing covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, employees and agents, in addition to any other remedy provided
herein or in the Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers, directors, employees,
stockholders or agents for any such disclosure. Subject to the foregoing, neither the Company, its
Subsidiaries nor any Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filings and
contemporaneously therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release). Without the prior written
consent of any applicable Buyer, neither the Company nor any of its Subsidiaries or affiliates
shall disclose the name of such Buyer in any filing, announcement, release or otherwise.

          (j) Restriction on Redemption and Cash Dividends. So long as any Notes are
outstanding, the Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or distribution on, the Common Stock without the prior express written consent of the
holders of Notes representing not less than a majority of the aggregate principal amount of the
then outstanding Notes.

          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes other than to the Buyers as
contemplated hereby and the Company shall not issue any other securities that would cause a breach
or default under the Notes. For long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary with the market price of the Common Stock,
including by way of one or more reset(s) to any fixed price unless the conversion, exchange or
exercise price of any such security cannot be less than the then applicable Conversion Price (as
defined in the Notes) with respect to the Common Stock into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into
which any Warrant is exercisable. For long as

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any Notes or Warrants remain outstanding, the Company shall not, in any manner, enter into or
affect any Dilutive Issuance (as defined in the Notes) if the effect of such Dilutive Issuance is
to cause the Company to be required to issue upon conversion of any Note or exercise of any Warrant
any shares of Common Stock in excess of that number of shares of Common Stock which the Company may
issue upon conversion of the Notes and exercise of the Warrants without breaching the Company’s
obligations under the rules or regulations of the Principal Market or any applicable Eligible
Market (as defined in the Registration Rights Agreement).

          (l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall not be party to any Fundamental Transaction (as defined in the Notes) unless the
Company is in compliance with the applicable provisions governing Fundamental Transactions set
forth in the Notes and the Warrants.

          (m) Reservation of Shares. So long as any Buyer owns any Securities, the Company
shall take all action necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 130% of the sum of the number of shares of Common Stock issuable (i) as
Interest Shares pursuant to the terms of the Notes, (ii) upon conversion of the Notes and (iii)
upon exercise of the Warrants then outstanding (without taking into account any limitations on the
conversion of the Notes or exercise of the Warrants set forth in the Notes and Warrants,
respectively).

          (n) Conduct of Business. The business of the Company and its Subsidiaries shall not
be conducted in violation of any law, ordinance or regulation of any governmental entity, except
where such violations would not result, either individually or in the aggregate, in a Material
Adverse Effect.

          (o) Additional Issuances of Securities.

               (i) For purposes of this Section 4(o), the following definitions shall apply.

               (1) “Convertible Securities” means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for shares of Common Stock.

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

               (3) “Common Stock Equivalents” means, collectively, Options and Convertible Securities.

               (ii) From the date hereof until the date that is 30 Business Days following the Effective Date
upon which all Registrable Securities (as such terms are defined in the Registration Rights
Agreement) have been registered (the “Trigger Date”), the Company will not, (i) directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any
offer, sale, grant or any option to purchase or other disposition of) any of its or its
Subsidiaries’ debt, equity or equity equivalent securities, including without limitation any debt,
preferred stock or other instrument or security that is, at any time during its life and under

- 20 -

 

any circumstances, convertible into or exchangeable or exercisable for shares of Common Stock
or Common Stock Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a “Subsequent Placement”) or (ii) be party to any solicitations, negotiations or
discussions with regard to the foregoing.

               (iii) From the Trigger Date until the second anniversary of the Trigger Date, the Company will
not, directly or indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(o)(iii).

               (1) The Company shall deliver to each Buyer written notice (the “Offer Notice”) of any
proposed or intended issuance or sale or exchange (the “Offer”) of the securities being
offered (the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or entities (if known)
to which or with which the Offered Securities are to be offered, issued, sold or exchanged
and (z) offer to issue and sell to or exchange with such Buyers all of the Offered
Securities, allocated among such Buyers (a) based on such Buyer’s pro rata portion of the
aggregate principal amount of Notes purchased hereunder (the “Basic Amount”), and (b) with
respect to each Buyer that elects to purchase its Basic Amount, any additional portion of
the Offered Securities attributable to the Basic Amounts of other Buyers as such Buyer shall
indicate it will purchase or acquire should the other Buyers subscribe for less than their
Basic Amounts (the “Undersubscription Amount”).

               (2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th) Business Day after such
Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such
Buyer’s Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Buyer
elects to purchase (in either case, the “Notice of Acceptance”). If the Basic Amounts
subscribed for by all Buyers are less than the total of all of the Basic Amounts, then each
Buyer who has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total of all the
Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription
Amount”), each Buyer who has subscribed for any Undersubscription Amount shall be entitled
to purchase only that portion of the Available Undersubscription Amount as the Basic Amount
of such Buyer bears to the total Basic Amounts of all Buyers that have subscribed for
Undersubscription Amounts, subject to rounding by the Company to the extent its deems
reasonably necessary.

               (3) The Company shall have five (5) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by the Buyers (the “Refused Securities”),
but only to the offerees described in the Offer Notice

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(if so described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the acquiring
person or persons or less favorable to the Company than those set forth in the Offer Notice.

               (4) In the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section 4(o)(iii)(3)
above), then each Buyer may, at its sole option and in its sole discretion, reduce the
number or amount of the Offered Securities specified in its Notice of Acceptance to an
amount that shall be not less than the number or amount of the Offered Securities that such
Buyer elected to purchase pursuant to Section 4(o)(iii)(2) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of Offered Securities the Company
actually proposes to issue, sell or exchange (including Offered Securities to be issued or
sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered Securities. In the event
that any Buyer so elects to reduce the number or amount of Offered Securities specified in
its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have again been
offered to the Buyers in accordance with Section 4(o)(iii)(1) above.

               (5) Upon the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company shall issue
to the Buyers, the number or amount of Offered Securities specified in the Notices of
Acceptance, as reduced pursuant to Section 4(o)(iii)(3) above if the Buyers have so elected,
upon the terms and conditions specified in the Offer. The purchase by the Buyers of any
Offered Securities is subject in all cases to the preparation, execution and delivery by the
Company and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Buyers and their respective counsel.

               (6) Any Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(o)(iii)(3) above may not be issued, sold or exchanged until they are again
offered to the Buyers under the procedures specified in this Agreement.

               (iv) The restrictions contained in subsections (ii) and (iii) of this Section 4(o) shall not
apply in connection with the issuance of any Excluded Securities (as defined in the Notes).

          (p) Additional Registration Statements. Until the Trigger Date, the Company will not
file a registration statement under the 1933 Act relating to securities that are not the
Securities, without the prior written consent of the Buyer.

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          (q) Collateral Agent.

               (i) Each Buyer hereby (a) appoints Castlerigg, as the collateral agent hereunder and under the
other Security Agreement (in such capacity, the “Collateral Agent”), and (b) authorizes the
Collateral Agent (and its officers, directors, employees and agents) to take such action on such
Buyer’s behalf in accordance with the terms hereof and thereof. The Collateral Agent shall not
have, by reason hereof or the Security Agreement, a fiduciary relationship in respect of any Buyer.
Neither the Collateral Agent nor any of its officers, directors, employees and agents shall have
any liability to any Buyer for any action taken or omitted to be taken in connection hereof or the
Security Agreement except to the extent caused by its own gross negligence or willful misconduct,
and each Buyer agrees to defend, protect, indemnify and hold harmless the Collateral Agent and all
of its officers, directors, employees and agents (collectively, the “Indemnitees”) from and against
any losses, damages, liabilities, obligations, penalties, actions, judgments, suits, fees, costs
and expenses (including, without limitation, reasonable attorneys’ fees, costs and expenses)
incurred by such Indemnitee, whether direct, indirect or consequential, arising from or in
connection with the performance by such Indemnitee of the duties and obligations of Collateral
Agent pursuant hereto or the Security Agreement.

               (ii) The Collateral Agent shall be entitled to rely upon any written notices, statements,
certificates, orders or other documents or any telephone message believed by it in good faith to be
genuine and correct and to have been signed, sent or made by the proper Person, and with respect to
all matters pertaining to this Agreement or any of the other Transaction Documents and its duties
hereunder or thereunder, upon advice of counsel selected by it.

               (iii) The Collateral Agent may resign from the performance of all its functions and duties
hereunder and under the Notes and the Agreement at any time by giving at least ten (10) Business
Days prior written notice to the Company and each holder of the Notes. Such resignation shall take
effect upon the acceptance by a successor Collateral Agent of appointment as provided below. Upon
any such notice of resignation, the holders of a majority of the outstanding principal under the
Notes shall appoint a successor Collateral Agent. Upon the acceptance of the appointment as
Collateral Agent, such successor Collateral Agent shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral
Agent shall be discharged from its duties and obligations under this Agreement, the Notes and the
Security Agreement. After any Collateral Agent’s resignation hereunder, the provisions of this
Section 4(q) shall inure to its benefit. If a successor Collateral Agent shall not have been so
appointed within said ten (10) Business Day period, the retiring Collateral Agent shall then
appoint a successor Collateral Agent who shall serve until such time, if any, as the holders of a
majority of the outstanding principal under the Notes appoint a successor Collateral Agent as
provided above.

          (r) Stockholder Approval. If the Common Stock is listed on an Eligible Market (as
defined in the Registration Rights Agreement) other than the Principal Market (the “New Principal
Market”) and the issuance of the Conversion Shares, the Interest Shares and Warrant Shares as
contemplated under the Transaction Documents would exceed that number of shares of Common Stock
which the Company may issue without breaching the Company’s

- 23 -

 

obligations under the rules or regulations of the New Principal Market, then the Company shall
obtain the approval of its stockholders as required by the applicable rules of the New Principal
Market for issuances of the Conversion Shares, Warrant Shares and any Interest Shares in excess of
such amount. At such time, the Company shall provide each stockholder entitled to vote at a
special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which shall
be promptly called and held not later than 75 days after the earlier of (i) the New Principal
Market indication of and (ii) the Company becoming aware of, any limitation imposed by the New
Principal Market on the issuance of Conversion Shares, Interest Shares or Warrant Shares (the
“Stockholder Meeting Deadline”), a proxy statement, substantially in the form which has been
previously reviewed by the Buyers and Schulte Roth & Zabel LLP at the expense of the Company,
soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of
resolutions providing for the Company’s issuance of all of the Securities as described in the
Transaction Documents in accordance with applicable law and the rules and regulations of the New
Principal Market and such affirmative approval being referred to herein as the “Stockholder
Approval”), and the Company shall use its reasonable best efforts to solicit its stockholders’
approval of such resolutions and to cause the Board of Directors of the Company to recommend to
the stockholders that they approve such resolutions. The Company shall be obligated to use its
reasonable best efforts to obtain the Stockholder Approval by the Stockholder Meeting Deadline.
If, despite the Company’s reasonable best efforts the Stockholder Approval is not obtained on or
prior to the Stockholder Meeting Deadline, the Company shall cause an additional Stockholder
Meeting to be held every six (6) months thereafter until such Stockholder Approval is obtained or
the Notes are no longer outstanding.

          (s) Trading in Common Stock. For the period commencing on the date hereof and ending
on the Initial Effective Date, each Buyer, severally and not jointly with the other Buyers,
covenants that neither it nor any affiliate acting on its behalf or pursuant to any understanding
with it will execute any “short sales” as defined in Rule 200 of Regulation SHO under the Exchange
Act), whether or not against the box, establish any “put equivalent position” (as defined in Rule
16a-l(h) under the 1934 Act) with respect to the Common Stock, or grant any other right (including
any put or call option) with respect to the Common Stock or with respect to any security that
includes, relates to or derived any significant part of its value from the Common Stock. For so
long as each Buyer owns any Notes, such Buyer shall not maintain a Net Short Position. For
purposes of this Section, a “Net Short Position” by a person means a position whereby such person
has executed one or more sales of Common Stock that is marked as a short sale and that is executed
at a time when such Buyer has no equivalent offsetting long position in the Common Stock or
contract for the foregoing. For purposes of determining whether a Buyer has an equivalent
offsetting long position in the Common Stock, all Common Stock (i) that is owned by such Buyer,
(ii) that may be issued as Interest Shares pursuant to the terms of the Notes to the Buyer or (iii)
that would be issuable upon conversion or exercise in full of all Securities then held by such
Buyer (assuming that such Securities were then fully convertible or exercisable, notwithstanding
any provisions to the contrary, and giving effect to any conversion or exercise price adjustments
that would take effect given only the passage of time) shall be deemed to be held long by such
Buyer.

          (t) Closing Documents. On or prior to fourteen (14) calendar days after the Closing
Date, the Company agrees to deliver, or cause to be delivered, to each Buyer and Schulte

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Roth & Zabel LLP executed copies of the Transaction Documents, Securities and any other
document required to be delivered to any party pursuant to Section 7 hereof.

          (u) Repayment of Indebtedness. No later than one (1) Business Day after the Closing
Date, the Company shall (i) repay in full the note referred to on Schedule 3(s) issued to
Douglas J. Hannah and James A. Glase and (ii) deliver to each Buyer written proof, such proof to be
reasonably satisfactory to each Buyer, that such note has been repaid in full and that all
obligations under such note has terminated.

     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

          (a) Register. The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to each holder of Securities),
a register for the Notes and the Warrants in which the Company shall record the name and address of
the Person in whose name the Notes and the Warrants have been issued (including the name and
address of each transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable upon conversion of the Notes and Warrant Shares issuable upon exercise
of the Warrants held by such Person. The Company shall keep the register open and available at all
times during business hours for inspection of any Buyer or its legal representatives.

          (b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to
the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of
each Buyer or its respective nominee(s), for the Conversion Shares, the Interest Shares and the
Warrant Shares issued at the Closing or upon conversion of the Notes or exercise of the Warrants in
such amounts as specified from time to time by each Buyer to the Company upon conversion of the
Notes or exercise of the Warrants in the form of Exhibit E attached hereto (the
“Irrevocable Transfer Agent Instructions”). The Company warrants that no instruction other than
the Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and stop transfer
instructions to give effect to Section 2(g) hereof, will be given by the Company to its transfer
agent, and that the Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the other Transaction Documents.
If a Buyer effects a sale, assignment or transfer of the Securities in accordance with Section
2(f), the Company shall permit the transfer and shall promptly instruct its transfer agent to issue
one or more certificates or credit shares to the applicable balance accounts at DTC in such name
and in such denominations as specified by such Buyer to effect such sale, transfer or assignment.
In the event that such sale, assignment or transfer involves Conversion Shares, Interest Shares or
Warrant Shares sold, assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to a Buyer. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations under this Section 5(b)
will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5(b), that a Buyer shall be entitled, in addition to all other available
remedies, to an order and/or injunction

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restraining any breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.

     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

          (a) Closing Date. The obligation of the Company hereunder to issue and sell the Notes
and the related Warrants to each Buyer at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole discretion by
providing each Buyer with prior written notice thereof:

               (i) Such Buyer shall have executed each of the Transaction Documents to which it is a party
and delivered the same to the Company.

               (ii) Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price
(less, in the case of Castlerigg, the amounts withheld pursuant to Section 4(g)) for the Notes and
the related Warrants being purchased by such Buyer at the Closing by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company.

               (iii) The representations and warranties of such Buyer shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date), and such Buyer shall
have performed, satisfied and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at
or prior to the Closing Date.

     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

          Closing Date. The obligation of each Buyer hereunder to purchase the Notes and the
related Warrants at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for each Buyer’s sole benefit
and may be waived by such Buyer at any time in its sole discretion by providing the Company with
prior written notice thereof:

               (i) The Company shall have executed and delivered to such Buyer (A) each of the Transaction
Documents, (B) the Notes (in such principal amounts as such Buyer shall request) being purchased by
such Buyer at the Closing pursuant to this Agreement, and (C) the Warrants (in such amounts as such
Buyer shall request) being purchased by such Buyer at the Closing pursuant to this Agreement.

               (ii) Such Buyer shall have received the opinion of DLA Piper US LLP, the Company’s outside
counsel, dated as of the Closing Date, in substantially the form of Exhibit F attached
hereto.

               (iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit E attached hereto, which

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instructions shall have been delivered to and acknowledged in writing by the Company’s
transfer agent.

               (iv) The Company shall have delivered to such Buyer a certificate evidencing the formation and
good standing of the Company and each of its Subsidiaries in such entity’s jurisdiction of
formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a
date within 10 days of the Closing Date.

               (v) The Company shall have delivered to such Buyer a certificate evidencing the Company’s
qualification as a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company conducts business, as of a date within
10 days of the Closing Date.

               (vi) The Company shall have delivered to such Buyer a certified copy of the Articles of
Incorporation as certified by the Secretary of State of the State (or comparable office of Nevada
within ten (10) days of the Closing Date.

               (vii) The Company shall have delivered to such Buyer a certificate, executed by the Secretary
of the Company and dated as of the Closing Date, as to (i) the resolutions consistent with Section
3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer,
(ii) the Articles of Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit G.

               (viii) The representations and warranties of the Company shall be true and correct as of the
date when made and as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have performed, satisfied
and complied in all respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by such Buyer in the form attached hereto as Exhibit
H.

               (ix) The Company shall have delivered to such Buyer a letter from the Company’s transfer agent
certifying the number of shares of Common Stock outstanding as of a date within five days of the
Closing Date.

               (x) The Common Stock (I) shall be designated for quotation or listed on the Principal Market
and (II) shall not have been suspended, as of the Closing Date, by the SEC or the Principal Market
from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal Market
or (B) by falling below the minimum listing maintenance requirements of the Principal Market.

               (xi) The Company shall have obtained all governmental, regulatory or third party consents and
approvals, if any, necessary for the sale of the Securities.

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               (xii) In accordance with the terms of the Security Agreement, the Company shall have delivered
to the Collateral Agent appropriate financing statements on Form UCC-1 to be duly filed in such
office or offices as may be necessary or, in the opinion of the Collateral Agent, desirable to
perfect the security interests purported to be created by each Security Agreement.

               (xiii) Within six (6) Business Days prior to the Closing, the Company shall have delivered or
caused to be delivered to each Buyer (A) certified copies of UCC search results, listing all
effective financing statements which name as debtor the Company or any of its Subsidiaries filed in
the prior five years to perfect an interest in any assets thereof, together with copies of such
financing statements, none of which, except as otherwise agreed in writing by the Buyers, shall
cover any of the Collateral (as defined in the Security Agreement) and the results of searches for
any tax lien and judgment lien filed against such Person or its property, which results, except as
otherwise agreed to in writing by the Buyers shall not show any such Liens (as defined in the
Security Agreement); and (B) a perfection certificate, duly completed and executed by the Company
and each of its Subsidiaries, in form and substance satisfactory to the Buyers.

               (xiv) The Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.

     8. TERMINATION. In the event that the Closing shall not have occurred with respect to
a Buyer on or before five (5) Business Days from the date hereof due to the Company’s or such
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching
party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the
option to terminate this Agreement with respect to such breaching party at the close of business on
such date without liability of any party to any other party; provided, however,
this if this Agreement is terminated pursuant to this Section 8, the Company shall remain obligated
to reimburse the non-breaching Buyers for the expenses described in Section 4(g) above.

     9. MISCELLANEOUS.

          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by mailing a copy thereof

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to such party at the address for such notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

          (b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an original, not a
facsimile signature.

          (c) Headings. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.

          (d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.

          (e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the Company, their
affiliates and Persons acting on their behalf with respect to the matters discussed herein, and
this Agreement, the other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such matters. No
provision of this Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate number of Registrable Securities
issued and issuable hereunder, and any amendment to this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders of Securities, as
applicable. No provision hereof may be waived other than by an instrument in writing signed by the
party against whom enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the applicable Securities then outstanding. No
consideration shall be offered or paid to any Person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of Notes or holders of
the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements
with any Buyers relating to the terms or conditions of the transactions contemplated by the
Transaction Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any
commitment or promise or has any other obligation to provide any financing to the Company or
otherwise.

- 29 -

 

          (f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:

If to the Company:

Stinger Systems, Inc.

2701 N. Rocky Point Drive

Suite 1130

Tampa, Florida 33607

Telephone: (410) 281-1061

Facsimile: (813) 288-9148

Attention: Chief Financial Officer

With a copy to:

DLA Piper US LLP

6225 Smith Avenue

Baltimore, Maryland 21209-3600

Telephone: (410) 580-4170

Facsimile: (410) 580-3170

Attention: Jason Harmon, Esq.

If to the Transfer Agent:

Colonial Stock Transfer

66 Exchange Place

Salt Lake City, UT 84111

Telephone: (801) 355-5740

Facsimile: (801) 355-6505

If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies
to such Buyer’s representatives as set forth on the Schedule of Buyers,

with a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.

- 30 -

 

or to such other address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party five (5) days prior
to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or electronically generated
by the sender’s facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above, respectively.

          (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the holders of at least a majority of the aggregate
number of Registrable Securities issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all
of its rights hereunder without the consent of the Company, in which event such assignee shall be
deemed to be a Buyer hereunder with respect to such assigned rights.

          (h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.

          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in Sections 2 and 3 and the
agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing. Each Buyer
shall be responsible only for its own representations, warranties, agreements and covenants
hereunder.

          (j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.

          (k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective
of whether any such Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or

- 31 -

 

relating to (a) any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document contemplated hereby
or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To
the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth
herein, the mechanics and procedures with respect to the rights and obligations under this Section
9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.

          (l) No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.

          (m) Remedies. Each Buyer and each holder of the Securities shall have all rights and
remedies set forth in the Transaction Documents and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or other security),
to recover damages by reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. Furthermore, the Company recognizes that in the event that it fails
to perform, observe, or discharge any or all of its obligations under the Transaction Documents,
any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond or other security.

          (n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Buyer exercises a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods therein provided, then
such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to
the Company, any relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights.

          (o) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments

- 32 -

 

or the proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or
are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy law, foreign, state
or federal law, common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied shall be revived and
continued in full force and effect as if such payment had not been made or such enforcement or
setoff had not occurred.

          (p) Individual Buyer. Notwithstanding anything in this agreement to the contrary, or
any references to “Buyers” herein, Castlerigg Master Investments Ltd. acknowledges and the Company
confirms that Castlerigg Master Investments Ltd. is the only Buyer party to the transactions
contemplated by this Agreement.

[Signature Page Follows]

- 33 -

 

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.

	 	 	 	 	 
	 	COMPANY:

STINGER SYSTEMS, INC.

 	 
	 	By:  	/s/ David J. Meador
 	 
	 	 	Name:  	David J. Meador 	 
	 	 	Title:  	Chief Financial Officer 	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.

	 	 	 	 	 
	 	BUYERS:

CASTLERIGG MASTER INVESTMENTS LTD.

By: Sandell Asset Management Corp.

 	 
	 	By:  	/s/ Timothy O’Brien
 	 
	 	 	Name:  	Timothy O’Brien 	 
	 	 	Title:  	Chief Financial Officer 	 
	 

 

 

SCHEDULE OF BUYERS

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		 		 	(3)	 		 		 	
	 	 	 	 	Aggregate	 	 	 	 	 	 	 	 
	 	 	(2)	 	Principal	 	(4)	 	 	 	 	 	(6)
	(1)	 	Address and	 	Amount of	 	Number of	 	(5)	 	Legal Representative’s Address
	Buyer	 	Facsimile Number	 	Notes	 	Warrant Shares	 	Purchase Price	 	and Facsimile Number
	Castlerigg Master Investments Ltd.

	 	c/o Sandell Asset Management

40 West 57th St 

26th Floor 

New York, NY 10019

Attention: Cem Hacioglu/Matthew

Pliskin 

Fax: 212-603-5710 

Telephone: 212-603-5700

Residence: British Virgin Islands
	 	$	3,000,000	 	 	 	5,912,961	 	 	$	3,000,000	 	 	Schulte Roth & Zabel LLP 

919 Third Avenue 

New York, New York 10022

Attention: Eleazer Klein, Esq.

Facsimile: (212) 593-5955 

Telephone: (212) 756-2376

 

 

EXHIBITS

	 	 	 
	Exhibit A

	 	Form of Notes
	Exhibit B

	 	Form of Warrants
	Exhibit C

	 	Registration Rights Agreement
	Exhibit D

	 	Form of Security Agreement
	Exhibit E

	 	Irrevocable Transfer Agent Instructions
	Exhibit F

	 	Form of Outside Company Counsel Opinion
	Exhibit G

	 	Form of Secretary’s Certificate
	Exhibit H

	 	Form of Officer’s Certificate

SCHEDULES

	 	 	 
	Schedule 3(a)

	 	Subsidiaries
	Schedule 3(k)

	 	SEC Documents; Financial Statements
	Schedule 3(l)

	 	Absence of Certain Changes
	Schedule 3(q)

	 	Transactions with Affiliates
	Schedule 3(r)

	 	Capitalization
	Schedule 3(s)

	 	Indebtedness and Other Contracts
	Schedule 3(t)

	 	Litigation
	Schedule 3(x)

	 	Intellectual Property
	Schedule 3(z)

	 	Subsidiary Rights
	Schedule 3(ee)

	 	Ranking of Notes

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