Document:

Form of Amended & Restated Convertible Subordinated Debenture

 
 
Exhibit 4.2 
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO K2 INC. THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE
144 UNDER THE SECURITIES ACT. 
 
AMENDED AND
RESTATED 
CONVERTIBLE SUBORDINATED DEBENTURE 
 

	 Originally Issued: February 14, 2003
	 	 $12,500,000

	 Amended and Restated: June 4, 2003
	 	 

 
FOR
VALUE RECEIVED, K2 INC., a corporation organized under the laws of the State of Delaware (hereinafter called the “Borrower”), hereby promises to pay to the order of SPORTING GOODS INVESTMENT II, LP or its registered assigns (the
“Holder”) the sum of Twelve Million Five Hundred Thousand Dollars ($12,500,000) on March 3, 2010 (the “Maturity Date”) and to pay interest on the unpaid principal balance hereof at the rate of seven and one quarter
percent (7.25%) per annum from February 14, 2003 (the “Issue Date”) and to pay Additional Interest, if any, until the same becomes due and payable (which interest shall accrue on a daily basis), whether on any payment date, maturity
or upon conversion, acceleration or otherwise. Any amount of principal of or interest on this Debenture which, to the extent not converted in accordance with the provisions hereof, is not paid when due (after giving effect to any applicable cure
periods) shall bear interest at the rate of ten percent (10%) per annum (“Default Interest”) from the due date thereof, if no cure period is applicable, and otherwise after the lapse of any applicable cure periods until the same is
paid. The interest to be paid pursuant to this Debenture shall be calculated based on a 360-day year and shall commence accruing on the Issue Date and shall be payable quarterly. All payments of principal and interest (to the extent not converted
into shares of the Borrower’s common stock, par value $1.00 per share (“Common Stock”), in accordance with the terms hereof) shall be made in, and all references herein to monetary denominations shall refer to, lawful money of
the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Debenture. The Maturity Date is subject to extension, at the
option of the Holder, as provided in Article IV hereof. This Debenture is being issued by the Borrower pursuant to the Securities Purchase Agreement, dated as of November     , 2002, among the Borrower and the persons
identified on the signature pages thereof as “Buyers” (the “Purchase Agreement”). Each capitalized term used, but not otherwise defined, herein shall have the meaning ascribed thereto in the Purchase Agreement. For
purposes hereof, the term “Debentures” shall be deemed to refer to this Debenture, all other convertible subordinated debentures issued pursuant to the Purchase 

 
Agreement and all convertible
subordinated debentures issued in replacement hereof or thereof or otherwise with respect hereto or thereto. 
 
I. REDEMPTION 
 
A. Mandatory Redemption. If any of the following events (each, a “Mandatory Redemption Event”) shall occur: 
 
1. The Borrower fails to pay the principal hereof or
interest thereon or any fee when due on this Debenture (and, in the case of the failure to pay any accrued interest or fee when due, such failure continues for a period of 30 days following the due date thereof), whether at maturity, on the
quarterly payment date, upon acceleration or otherwise; 
 
2. The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for all or substantially all of its property or business; or such a receiver
or trustee shall otherwise be appointed; 
 
3.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower (and, in the case of any proceeding
filed against the Borrower, such proceeding is not dismissed within 60 days of its commencement); 
 
4. (i) The consolidation, merger or other business combination of the Borrower with or into another person (other than a
consolidation, merger or other business combination in which holders of the Borrower’s voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities), (ii) the sale or transfer of all or substantially all of the Borrower’s assets, or
(iii) a purchase, tender or exchange offer made to and accepted by the holders of more than 50% of the aggregate voting power of the outstanding Common Stock unless holders of the Borrower’s voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such
entity (the occurrence of an event described in the preceding clauses (i), (ii) or (iii), being referred to herein as a “Change of Control”); 
 
5. The Borrower breaches any covenant contained in Article II.A.2 or Article III hereof or Sections 2(g), 4(c), 4(d), 4(h), 4(i),
4(k) or 5 of the Purchase Agreement or Section 2(a) of the Registration Rights Agreement or the registration statement required to be filed pursuant to Section 2(a) of the Registration Rights Agreement has not been declared effective by the date
that is 270 days following the Closing Date and any such breach continues uncured for a period of thirty (30) days after written notice thereof to the Borrower from any holder of Debentures; or 
 

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6. The
Borrower is in default in the payment of any principal or interest on any indebtedness for borrowed money that is outstanding in an aggregate principal amount of at least $5,000,000 beyond any period of grace provided with respect thereto and as a
consequence of such default such indebtedness has become, or has been declared, due and payable before its stated maturity. 
 
then, upon the occurrence and during the continuation of any Mandatory Redemption Event specified in subparagraphs 1, 4, 5 or 6 at the option of the
holders of at least 50% of the then outstanding principal amount of the Debentures exercisable by the delivery of written notice (the “Mandatory Redemption Notice”) to the Borrower of such Mandatory Redemption Event, or upon the
occurrence of any Mandatory Redemption Event specified in subparagraphs 2 or 3, the then outstanding Debentures shall become immediately redeemable and the Borrower shall purchase each holder’s outstanding Debentures for an amount equal to the
greater of: 
 
(i) 105% multiplied by the sum of
(a) the then outstanding principal amount of the Debentures, plus (b) all accrued and unpaid interest thereon for the period beginning on the Issue Date and ending on the date of payment of the Mandatory Redemption Amount (the “Mandatory
Redemption Date”), plus (c) Default Interest, if any, on the amounts referred to in clauses (a) and/or (b), plus (d) all other amounts owed to such holder pursuant to the terms of this Agreement, the Purchase Agreement or the Registration
Rights Agreement, and 
 
(ii) the “parity
value” of the Debentures to be redeemed, where parity value means, as of any date of determination, the product of (x) the number of shares of Common Stock issuable upon conversion of or otherwise pursuant to such Debentures in accordance
with the terms hereof (without giving any effect to any limitations on conversions of Debentures contained herein) multiplied by (y) the highest Closing Price (as defined below) for the Common Stock during the period beginning on the date of first
occurrence of the Mandatory Redemption Event and ending one day prior to the Mandatory Redemption Date (the greater of such amounts set forth in clauses (i) and (ii) above being referred to as the “Mandatory Redemption Amount”).

 
The Mandatory Redemption Amount, together with
all other ancillary amounts payable hereunder, shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, reasonable legal
fees and expenses of collection, and Holder shall be entitled to exercise all other rights and remedies available at law or in equity. “Closing Price,” as of any date, means the last sale price of the Common Stock on the NYSE as
reported by Bloomberg Financial Markets or an equivalent reliable reporting service mutually acceptable to and hereafter designated by the holders of a majority of the outstanding principal amount of the Debentures and the Borrower
(“Bloomberg”) or, if the NYSE is not the principal trading market for such security, the last sale price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by
Bloomberg, or, if no last sale price of such security is available in any of the foregoing manners, the average of the bid prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau,
Inc. If the Closing Price cannot be calculated for such security on such date in the manner provided above, the Closing Price shall be the fair market value as determined in good faith by the Board of Directors of the Borrower (and set forth in a
resolution). 
 

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B.
Failure to Pay Redemption Amounts. In the case of a Mandatory Redemption Event, if the Borrower fails to pay the Mandatory Redemption Amount within five (5) business days of written notice that such amount is due and payable, then
(assuming there are sufficient authorized shares) in addition to all other available remedies, the Holder shall have the right (and the Borrower shall have the obligation) at anytime, and from time to time after the failure to timely pay the
Mandatory Redemption Amount, so long as the Mandatory Redemption Event continues, to require the Borrower, upon written notice, to immediately issue (in accordance with and subject to the terms of Article II below), in lieu of the portion of the
Mandatory Redemption Amount with respect to which such election is made, the number of shares of Common Stock of the Borrower equal to such applicable redemption amount divided by the Conversion Price (as defined below). 
 
C. Optional Redemption by the Borrower.
From and after February 14, 2006 and so long as a Registration Statement (as defined in the Registration Rights Agreement) has been effective for the thirty (30) day period prior to the proposed redemption date, the Borrower may, at its option,
redeem all but not less than all of this Debenture, upon notice as set forth in Article I.E hereof, and the Borrower shall pay the Holder the appropriate redemption price (expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest thereon, if any, to, but not including, the date of redemption, if redeemed during the 12-month period beginning on February 14 of the years indicated below: 
 
 

	 Year

	    	 Redemption Price

	 2006
	    	     105%

	 2007
	    	 103.5%

	 2008
	    	 102.5%

	 2009
	    	    100%

	 2010
	    	    100%

 
D.
Optional Redemption by the Borrower Upon a Change of Control. The Borrower, or the successor entity as the case may be, shall have the right to redeem all but not less than all of this Debenture, upon notice as set forth in Article
I.E hereof, at any time on or after the occurrence of a Change of Control and so long as a Registration Statement (as defined in the Registration Rights Agreement) has been effective for the thirty (30) day period prior to the proposed redemption
date, at a price equal to 105% of the principal amount of the Debenture called for redemption, plus accrued and unpaid interest thereon, if any, to, but not including, the date of redemption. 
 
E. Notice of Optional Redemption; Payment of
Optional Redemption. In case the Borrower shall desire to exercise the right to redeem this Debenture pursuant to subsection (c) or (d) hereof, it shall fix a date for redemption, and it shall mail or cause to be mailed a notice of such
redemption at least fifteen (15) and not more than forty-five (45) days prior to the date fixed for redemption to the Holder. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder shall not affect the validity of the proceedings for the redemption of this
Debenture. 
 

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Each such
notice of redemption shall specify the aggregate principal amount of this Debenture to be redeemed (which shall be not less than the principal amount then outstanding), the date fixed for redemption, the redemption price at which this Debenture is
to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of this Debenture, that interest accrued to, but excluding, the date fixed for redemption will be paid as specified in said notice, and that on
and after said date interest thereon redeemed will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert this Debenture into Common Stock will expire (which date shall not be sooner
than the date fixed for redemption of this Debenture). 
 
If notice of redemption has been given as above provided, this Debenture shall, unless converted into Common Stock pursuant to the terms hereof, become due and payable on the date and at the place or places stated in such notice at
the applicable redemption price, and interest accrued to, but excluding, the date fixed for redemption, and on and after said date (unless the Borrower shall default in the payment of the Debenture at the redemption price and interest accrued to,
but excluding, said date) interest on this Debenture shall cease to accrue and the Debenture shall cease after the close of business on the Business Day next preceding the date fixed for redemption to be convertible into Common Stock and the Holder
shall have no rights in respect of this Debenture except the right to receive the redemption price thereof and unpaid interest to, but excluding, the date fixed for redemption. On presentation and surrender of this Debenture at a place of payment
specified in said notice, this Debenture shall be paid and redeemed by the Borrower at the applicable redemption price and interest accrued thereon to, but excluding, the date fixed for redemption; provided that, if the applicable redemption
date is an interest payment date, the quarterly payment of interest becoming due on such date shall be payable to the Holder on the relevant record date. 
 
F. Refinancing Event Put. Upon the occurrence of a Refinancing Event, the Holder may, in accordance with the
procedures set forth below, elect to cause the Borrower to repurchase all, but not less than all, of this Debenture (a “Refinancing Event Put”) at a purchase price equal to 101% of the aggregate principal amount of this Debenture then
outstanding plus accrued and unpaid interest thereon to the date of repurchase minus any Additional Interest that would have been paid absent the Holder’s election to exercise the Refinancing Event Put (the “Refinancing Event Put
Price”). Not less than 30 days and not more than 60 days after the Borrower has provided written notice to the Holder of the occurrence of a Refinancing Event, the Holder may elect to deliver a written notice to the Borrower stating:

 
(i) that the Holder has elected
to exercise its Refinancing Event Put in accordance with this Section; 
 
(ii) the purchase price and the purchase date, which will be no earlier than 30 days and not later than 60 days from the date such notice is received by the Borrower (the “Refinancing Event
Repurchase Date”); and 
 
(iii) the account to which the Refinancing Event Put Price should be deposited. 
 

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On the Refinancing Event
Repurchase Date, the Borrower shall, to the extent lawful and to the extent that such repurchase is not then prohibited by the terms of any Senior Indebtedness then outstanding, deposit the Refinancing Event Put Price into the account designated by
the Holder for such purpose and the Holder shall deliver this Debenture to the Borrower for cancellation. 
 
II. CONVERSION AT THE OPTION OF HOLDER 
 
A. Optional Conversion 
 
1. Conversion Amount. Subject to the restrictions set forth in Article II.A.2 below, the Holder may, at its option at
any time and from time to time prior to 5:00 pm, Eastern Standard Time, on the Maturity Date, convert all or any portion of this Debenture into Common Stock as set forth below (an “Optional Conversion”). This Debenture shall be
convertible into such number of fully paid and nonassessable shares of Common Stock as such Common Stock exists on the Issue Date, or any other shares of capital stock or other securities of the Borrower into which such Common Stock is thereafter
changed or reclassified, as is determined by dividing (a) the Conversion Amount (as defined below) by (b) the Conversion Price (as defined in Article II.B below); provided, however, that in no event shall Holder be entitled to convert
this Debenture in exercise of that dollar amount of Debentures upon conversion of which the sum of (x) the number of shares of Common Stock beneficially owned by Holder and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of this Debenture or the unexercised or unconverted portion of any other securities of the Borrower (excluding however the New Warrants but including, without limitation, the
warrants issued by the Borrower pursuant to the Purchase Agreement (the “Warrants”)) subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (y) the number of shares of Common Stock
issuable upon the conversion of the portion of this Debenture plus the number of shares of Common Stock issuable upon exercise of the New Warrants, in each case with respect to which the determination of this proviso is being made, would result in
beneficial ownership by Holder and Holder’s affiliates of more than 9.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, (i) beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (x) of such proviso and (ii) such proviso may not be amended without (a) the written consent of the Holder
and the Borrower and (b) the approval of the holders of a majority of Borrower’s Common Stock present, or represented by proxy, and voting at any meeting called to vote on such proviso. “Conversion Amount” means (i) the portion
of the principal amount of this Debenture being converted, plus (ii) all accrued and unpaid interest thereon for the period beginning on the Issue Date and ending on the Conversion Date (as defined in Article II.B.1), plus (iii) Default Interest, if
any, on the amounts referred to in the immediately preceding clauses (i) and/or (ii), plus (iv) all other amounts owed to Holder pursuant to this Debenture or the Registration Rights Agreement. 
 
2. Trading Market Limitation. Unless the
Borrower either (i) is permitted (or not prohibited) by the applicable rules and regulations of the principal securities market on which the Common Stock is listed or traded to issue shares of Common Stock upon conversion 
 

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of or otherwise pursuant to
the Debentures in excess of the Maximum Share Amount (as defined below) or (ii) has obtained stockholder approval of the issuance of shares of Common Stock upon conversion of or otherwise pursuant to the Debentures in excess of the Maximum Share
Amount in accordance with applicable law and the rules and regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Borrower or any of its securities (the “Stockholder
Approval”), in no event shall the total number of shares of Common Stock issued upon conversion of or otherwise pursuant to the Debentures (including any shares of capital stock or rights to acquire shares of capital stock issued by the
Borrower which are aggregated or integrated with the Common Stock issued or issuable upon conversion of or otherwise pursuant to the Debentures for purposes of any such rule or regulation) exceed the maximum number of shares of Common Stock which
the Borrower can so issue pursuant to any rule or regulation of the NYSE (or any other principal United States securities market on which the Common Stock trades) (the “Maximum Share Amount”), which as of the Issue Date shall be
3,586,620 (19.99% of the total shares of Common Stock outstanding on the Issue Date), subject to equitable adjustments from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the
Common Stock occurring after the Issue Date. With respect to each Holder of Debentures, the Maximum Share Amount shall refer to such Holder’s pro rata share thereof determined in accordance with Article V.I below. In the event that the sum of
(x) the aggregate number of shares of Common Stock actually issued upon conversion of or otherwise pursuant to the Debentures, plus (y) the aggregate number of shares of Common Stock that remain issuable upon conversion of or otherwise pursuant to
the then outstanding Debentures at the then effective Conversion Price represents at least one hundred percent (100%) of the Maximum Share Amount (the “Triggering Event”), the Borrower will use its best efforts to seek and obtain
Stockholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share Amount) as soon as practicable following the Triggering Event. 
 
B. Conversion Price 
 
1. Calculation of Conversion Price. Subject to subparagraph 2 below, the
“Conversion Price” shall mean $11.92. The Conversion Price shall be subject to adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock
occurring after the Issue Date. “Closing Bid Price” means, for any security as of any date, the closing bid price on the NYSE as reported by Bloomberg or, if the NYSE is not the principal trading market for such security, the
closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or, if no closing bid price of such security is available in any of the foregoing manners,
the average of the bid prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date in the manner
provided above, the Closing Bid Price shall be the fair market value as determined in good faith by the Board of Directors of the Borrower (and set forth in a resolution). “Trading Day” shall mean any day on which the Common Stock
is traded for any period on the NYSE, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. 
 
2. Conversion Price During Major Announcements. Notwithstanding anything contained in subparagraph 1 of this
Paragraph B to the contrary, if any time prior to the 
 

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date that is 90 days following
the Closing Date, the Borrower makes a public announcement that it intends to consummate a Change of Control, other than a Change of Control involving the acquisition by the Borrower of any person or all or substantially all of the assets of any
person (the date of such an announcement is referred to hereinafter as the “Announcement Date”), then the Conversion Price shall, effective on the Announcement Date and continuing through the Adjusted Conversion Price Termination
Date (as defined below), be equal, for each such date, to the lower of (x) the Closing Bid Price on the Announcement Date and (y) the Conversion Price that would otherwise be in effect on such date. From and after the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in subparagraph 1 of this Article II.B. For purposes hereof, “Adjusted Conversion Price Termination Date” shall mean, with respect to any proposed transaction
or tender offer (or takeover scheme) for which a public announcement as contemplated by this subparagraph 2 has been made, the date upon which the Borrower or such other counterpart to the proposed Change of Control transaction consummates or
publicly announces the termination or abandonment of the proposed Change of Control transaction which caused this subparagraph 2 to become operative. 
 
C. Adjustments to Conversion Price. The Conversion Price shall be subject to adjustment from time to time as follows:

 
1. Adjustment to Conversion Price
Due to Stock Split, Stock Dividend, Etc. If, at any time when this Debenture is outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, combination, reclassification or other
similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any Optional Conversion, then the Conversion Price shall be calculated giving appropriate effect to the stock split, stock
dividend, combination, reclassification or other similar event. In such event, the Borrower shall notify the Transfer Agent of such change on or before the effective date thereof. 
 
2. Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Debenture is
outstanding and prior to the conversion of all Debentures, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be
changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in
connection with a plan of complete liquidation of the Borrower (each, a “Change of Control Transaction”), then Holder shall thereafter have the right to receive upon conversion of this Debenture, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon such conversion, such stock, securities or assets which Holder would have been entitled to receive in such transaction had this Debenture
been converted in full immediately prior to such transaction (without regard to any limitations on conversion or exercise contained herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of Holder
to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares of Common Stock issuable upon conversion of this Debenture) shall thereafter be applicable, as nearly
as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion of this Debenture. The Borrower shall give, to the extent practical, thirty (30) days’ prior written notice 
 

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(but in any event at least
fifteen (15) business days prior written notice) of the record date of the special meeting of stockholders to approve, or if there is no such record date, the consummation of, such Change of Control Transaction (during which time Holder shall be
entitled to convert this Debenture). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges. 
 
3. Other Securities Offerings. If, on or after the Closing Date through the date that is 90 days following such date,
the Borrower sells Common Stock or securities convertible into, or exchangeable for, Common Stock, other than an Excluded Issuance (collectively, the “Full Ratchet Common Stock”), then, if the effective or maximum sales price of the
Common Stock with respect to such transaction (including the effective or maximum conversion, or exchange price) (the “Full Ratchet Price”) is less than the effective Conversion Price of the Debentures at such time and such Full
Ratchet Common Stock is eligible for resale prior to November 14, 2007, at the option of the Holder, the Borrower shall adjust the Conversion Price applicable to the portion of this Debenture not yet converted in form and substance reasonably
satisfactory to the Holder so that the Conversion Price applicable to this Debenture shall not, in any event, be greater, after giving effect to all other adjustments contained herein, than the Full Ratchet Price. 
 
If, at any time after the date that is 90 days following the
Closing Date, the Borrower sells Common Stock or securities convertible into, or exchangeable for, Common Stock, other than an Excluded Issuance (collectively, the “Other Common Stock”), then, if the effective or maximum sales price
of the Common Stock with respect to such transaction (including the effective or maximum conversion, or exchange price) (the “Other Price”) is less than the effective Conversion Price of the Debentures at such time and such Other
Common Stock is eligible for resale prior to November     , 2007, at the option of the Holder, the Conversion Price applicable to the portion of this Debenture not yet converted will be reduced to a price determined by
multiplying the Conversion Price in effect immediately prior to such transaction by a fraction, (i) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock Deemed Outstanding (as defined below) immediately
prior to such transaction, plus (y) the quotient of the aggregate consideration received by the Borrower in connection with such transaction divided by the Conversion Price in effect immediately prior to such transaction, and (ii) the denominator of
which is the total number of shares of Common Stock Deemed Outstanding immediately after such transaction. 
 
(a) Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Conversion Price under Article C.3
hereof, the following will be applicable: 
 
(i)
Issuance of Rights or Options. If the Borrower in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or
exchangeable for Common Stock (“Convertible Securities”) (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”) and the price per share for
which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price on the date of issuance or grant of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such

 

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Options will, as of the date
of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by the Borrower for such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable
upon the exercise of such Options” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of
Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable
upon exercise of such Options. 
 
(ii)
Issuance of Convertible Securities. If the Borrower in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price
per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price on the date of issuance of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Borrower for such price per share. For the purposes of
the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the
issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become
convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance
of such Common Stock upon conversion or exchange of such Convertible Securities. 
 
(iii) Change in Option Price or Conversion Rate. If there is a change at any time in (i) the amount of additional consideration payable to the Borrower upon the exercise of any Options;
(ii) the amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such change will be readjusted to the Conversion Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. 
 
(iv) Treatment of Expired Options and Unexercised Convertible Securities. If, in any case, the
total number of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is 
 

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not, in fact, issued and the
rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Conversion Price then in effect will be readjusted to the Conversion Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or
conversion thereof), never been issued. 
 
(v)
Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Debenture will be the amount received by the
Borrower therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Borrower in connection with such issuance, grant or sale. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Borrower will be the fair value of such consideration. In case any Common
Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Borrower is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be
determined in good faith by the Board of Directors of the Borrower and set forth in a resolution. 
 
As used herein: 
 
“Common Stock Deemed Outstanding” shall mean the number of shares of Common Stock actually outstanding (not
including shares of Common Stock held in the treasury of the Borrower), plus (x) the maximum total number of shares of Common Stock issuable upon the exercise of options, as of the date of such issuance or grant of such options, if any, and (y) the
maximum total number of shares of Common Stock issuable upon conversion or exchange of convertible securities, as of the date of issuance of such convertible securities, if any. 
 
“Excluded Issuance” shall mean (i) a sale pursuant to a bona fide firm commitment
underwritten public offering of Common Stock by the Borrower (not including a continuous offering pursuant to Rule 415 under the Securities Act), (ii) a sale in an aggregate amount not exceeding 538,262 shares (subject to adjustment for stock
splits, stock dividends, stock combination and similar transactions), (iii) any securities deemed to have been issued by the Borrower in connection with any stock option plan, restricted stock plan, or employee benefit plan which has been approved
by the Board of Directors of the Borrower, (iv) any securities deemed to have been issued upon issuance of the Debentures or issued upon conversion of the Debentures or the warrants issued pursuant to the Purchase Agreement or issued upon the
exercise thereof, (v) securities issued upon exercise of options or convertible securities which are outstanding on the date immediately preceding the Closing Date, (vi) securities issued by the Company in connection with an acquisition of a
business, operating assets or a person, (vii) securities issued to any strategic investors, vendors, financial institutions or other lenders in connection with commercial credit arrangements and similar financings, lessors, customers or

 

11 

 
suppliers, lease or similar
arrangements the primary purpose of which is not to raise equity capital, and (viii) the issuance of the Restated Warrants and the New Warrants. 
 
As used herein, the “New Warrants” means those warrants to purchase 243,260 shares of Common Stock of the Company
issuable pursuant to the Stock Purchase Warrant dated as of June 4, 2003 executed by the Company for the benefit of k1 Ventures Limited, as amended, restated, supplemented or otherwise modified from time to time, and the “Restated
Warrants” means those warrants to purchase 524,329 shares of Common Stock of the Company issuable pursuant to the Amended and Restated Stock Purchase Warrant dated as of June 4, 2003 executed by the Company for the benefit of k1
Ventures Limited, as amended, restated, supplemented or otherwise modified from time to time. 
 
4. Purchase Rights. If, at any time this Debenture is outstanding, the Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other
property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock and the record date for the issuance of such Purchase Rights is a date prior to the date of the Borrower’s declaration of its issuance
of such Purchase Rights or within ten (10) days of such declaration, then Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which Holder could have acquired if Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this Debenture (without regard to any limitations on conversion or exercise contained herein and based upon the Conversion Price as would then be in effect) immediately before
the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights. 
 
D. Mechanics of
Conversion. In order to convert this Debenture into shares of Common Stock, Holder shall: (1) submit a copy of the fully executed notice of conversion in the form attached hereto as Exhibit A (“Notice of Conversion”)
to the Borrower by facsimile dispatched prior to 10 A.M., New York City time (the “Conversion Notice Deadline”), on the date specified therein as the Conversion Date (as defined in Article II.D.5) (or by other means resulting in, or
reasonably expected to result in, written notice to the Borrower on the date specified therein as the Conversion Date) to the office of the Borrower or its designated Transfer Agent for the Debentures, which notice shall specify the principal amount
of this Debenture to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion; and (2) subject to Article II.D.1 below, surrender this Debenture along with a copy of the
Notice of Conversion to the office of the Borrower as soon as practicable thereafter. In the case of a dispute as to the calculation of the Conversion Price, the Borrower shall promptly issue that number of shares of Common Stock as is not disputed
in accordance with subparagraph (3) below. The Borrower shall submit the disputed calculations to its outside accountant via facsimile within five (5) business days of receipt of the Notice of Conversion. The accountant shall audit the calculations
and notify the Borrower and Holder of the results no later than two (2) business days from the time it receives the disputed calculations. The accountant’s calculation shall be deemed conclusive absent manifest error. 
 
1. Surrender of Debenture Upon
Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Debenture in accordance with the terms 
 

12 

hereof, Holder shall not be required to physically surrender this Debenture to the Borrower unless the
entire unpaid principal amount of this Debenture is so converted. Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to
Holder and the Borrower, so as not to require physical surrender of this Debenture upon each such conversion. In the event of any dispute or discrepancy, such records of the Borrower shall be controlling and determinative in the absence of manifest
error. Notwithstanding the foregoing, if any portion of this Debenture is converted as aforesaid, Holder may not transfer this Debenture unless Holder first physically surrenders this Debenture to the Borrower, whereupon the Borrower will forthwith
issue and deliver upon the order of Holder a new Debenture of like tenor, registered as Holder may request, representing in the aggregate the remaining unpaid principal amount of this Debenture. Holder and any assignee, by acceptance of this
Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face
hereof. 
 
2. Lost or Stolen
Debentures. Upon receipt by the Borrower of evidence of the loss, theft, destruction or mutilation of this Debenture, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Borrower, and upon surrender
and cancellation of this Debenture, if mutilated, the Borrower shall execute and deliver a new Debenture of like tenor and date. 
 
3. Delivery of Common Stock Upon Conversion. Upon the submission of a Notice of Conversion, the Borrower shall,
within three (3) business days after the Conversion Date (the “Delivery Period”), issue and deliver (or cause its Transfer Agent to so issue and deliver) in accordance with the terms hereof and the Purchase Agreement to or upon the
order of Holder that number of shares of Common Stock for the portion of this Debenture converted as shall be determined in accordance herewith. In the event the Borrower or the Transfer Agent, as applicable, fails to issue and deliver the number of
shares of Common Stock for the portion of this Debenture converted hereby, the Borrower shall pay to Holder $2,000 per day in cash for each day beyond a two (2) day grace period following the Delivery Period that the Borrower fails to deliver Common
Stock (a “Delivery Default”) issuable upon conversion of this Debenture pursuant to the Notice of Conversion until such time as the Borrower has delivered all such Common Stock (the “Delivery Default Payments”).
Such Delivery Default Payments shall be paid to Holder by the fifth (5th) day of the month following the month in which they have accrued or, at the option of Holder (by written notice to the Borrower by the first day of the month following the
month in which they have accrued), shall be convertible into Common Stock in accordance with the terms of this Article II. The payment of the Delivery Default Payments shall be the Holder’s sole remedy for the failure of the Borrower or the
Transfer Agent, as the case may be, to issue and deliver the requisite number of shares of Common Stock upon the conversion of this Debenture; provided, however, that if the Delivery Default giving rise to the payment of Delivery
Default Payments continues for more than thirty (30) days, the Holder may exercise its right to seek an order of specific performance with respect to such Delivery Default and otherwise seek to obtain a judgment with respect to any consequential
damages resulting from the occurrence and continuance of such Delivery Default. 
 

13 

 
In lieu of
delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower’s Transfer Agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer
(“FAST”) program, upon written request of Holder and its compliance with the provisions contained in Article II.A and in this Article II.D, the Borrower shall use its best efforts to cause its Transfer Agent to electronically
transmit the Common Stock issuable upon conversion to Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the electronic transmittals described herein. 
 
4. No Fractional Shares. If any conversion of this Debenture would result in a fractional share of Common Stock or
the right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion of this Debenture. 
 
5. Conversion Date. The “Conversion Date” shall be the date specified
in the Notice of Conversion, provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, written notice) to the Borrower or its Transfer Agent before Midnight, New York City
time, on the date so specified, otherwise the Conversion Date shall be the first business day after the date so specified on which the Notice of Conversion is actually received by the Borrower or its Transfer Agent. The person or persons entitled to
receive the shares of Common Stock issuable upon conversion of this Debenture shall be treated for all purposes as the record holder or holders of such securities as of the Conversion Date and all rights with respect to this Debenture (or portion
thereof) surrendered shall forthwith terminate except the right to receive the shares of Common Stock or other securities or property issuable on such conversion (or exercise) and except that the holders preferential rights as a Holder of this
Debenture shall survive to the extent the Borrower fails to deliver such securities. 
 
E. [Intentionally Omitted] 
 
F. Reservation of Shares. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion in full of the Debentures outstanding (based on
the Conversion Price in effect from time to time) shall at all times be reserved by the Borrower, free from preemptive rights, for such conversion or exercise. As of the Issue Date, 3,144,774 authorized and unissued shares of Common Stock have been
duly reserved for issuance upon conversion of the Debentures (the “Reserved Amount”). The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations pursuant to Section 4(g) of the
Purchase Agreement. In addition, if the Borrower shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which the Debentures shall be convertible, the Borrower shall at the
same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the Debentures. 
 
If at any time Holder submits a Notice of Conversion, and the
Borrower does not have sufficient authorized but unissued shares of Common Stock duly reserved and available for issuance to effect such conversion in accordance with the provisions of this Article II (a 
 

14 

“Conversion Default”), subject to Article V.I, the Borrower shall issue to Holder all of
the shares of Common Stock which are available to effect such conversion and exercise, if applicable. The portion of the principal amount of this Debenture (or the number of shares of Common Stock included in the Notice of Conversion which exceeds
the amount which is then convertible (or exercisable) into available shares of Common Stock (the “Excess Amount”) shall, notwithstanding anything to the contrary contained herein, not be convertible (or exercisable) into Common
Stock in accordance with the terms hereof until (and at Holder’s option at any time after) the date additional shares of Common Stock are authorized and duly reserved by the Borrower to permit such conversion (or exercise). The Borrower shall
use its best efforts to effect an increase in the authorized number of shares of Common Stock as soon as possible following the earlier of (x) such time that Holder notifies the Borrower or that the Borrower otherwise becomes aware that there are or
likely will be insufficient authorized and unissued shares to allow full conversion hereof and (y) a Conversion Default. In the event of the occurrence of a Conversion Default, the Borrower shall pay to Holder an amount equal to $2,000 per diem
(“Conversion Default Payments”) for each day commencing with the date of the occurrence of the Conversion Default (the “Conversion Default Date”) through but not including the date (the “Authorization
Date”) that the Borrower authorizes a sufficient number of shares of Common Stock to effect conversion of the Debentures. The Borrower shall send notice to Holder of the authorization of additional shares of Common Stock, the Authorization
Date and the amount of Holder’s accrued Conversion Default Payments. The accrued Conversion Default Payment for each calendar month shall be paid in cash or shall be convertible into Common Stock at the applicable Conversion Price, at the
Holder’s option, as follows: 
 
1. In
the event the Holder elects to take such payment in cash, cash payment shall be made to Holder by the fifth (5th) day of the month following the month in which it has accrued. 
 
2. In the event the Holder elects to take such payment in Common Stock, the Holder may convert such
payment amount into Common Stock at the Conversion Price (as in effect at the time of Conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article II (so long as
there is then a sufficient number of authorized shares of Common Stock). 
 
Holder’s election shall be made in writing to the Borrower at any time prior to 5:00 p.m., New York City time, on the third (3rd) day of the month following the month in which Conversion Default Payments have accrued.
If no election is made, Holder shall be deemed to have elected to receive cash. The payment of the Conversion Default Payments shall be the Holder’s sole remedy for the failure of the Borrower to have reserved a sufficient number of shares of
Common Stock to effect a Conversion; provided, however, that if the Conversion Default giving rise to the payment of Conversion Default Payments continues for more than sixty (60) days, the Holder may exercise its right to seek an
order of specific performance with respect to such Conversion Default and otherwise seek to obtain a judgment with respect to any consequential damages resulting from the occurrence and continuance of such Conversion Default. 
 

15 

 
G.
Notice of Conversion Price Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article II, the Borrower, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall,
upon the written request at any time of Holder, furnish or cause to be furnished to Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of this Debenture. 
 
III. CERTAIN COVENANTS 
 
A. Distributions on Capital Stock. So long as any payment obligation is outstanding under this Debenture, the
Borrower shall not, without the prior written consent of the holders of a majority of the then outstanding principal amount of the Debentures, pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property
or other securities) on shares of its capital stock. 
 
B. Advances and Loans. So long as any payment obligation is outstanding under this Debenture, the Borrower shall not, without the prior written consent of the holders of a majority of the then outstanding
principal amount of the Debentures, lend money, give credit or make advances to any unaffiliated person, firm, joint venture or corporation, except loans, credits or advances (a) in existence or committed on the date hereof or (b) made in the
ordinary course of business. 
 
C.
Contingent Liabilities. So long as any payment obligation is outstanding under this Debenture, the Borrower shall not, without the prior written consent of the holders of a majority of the then outstanding principal amount of the
Debentures, assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any unaffiliated person, firm, partnership, joint venture or corporation, except for (a) the endorsement of negotiable
instruments for deposit or collection, (b) assumptions, guarantees, endorsements and contingencies that are either (i) in existence or committed on the date hereof or (b) transactions made in the ordinary course of business. 
 
D. Borrowings. So long as any payment
obligation is outstanding under this Debenture, the Borrower shall not, without the written consent of the holders of a majority of the then outstanding principal amount of the Debentures, create, incur or assume any indebtedness for borrowed money
unless the Consolidated Debt Service Coverage Ratio for the period of four full fiscal quarters of the Borrower for which internal financial statements are available ended immediately prior to the date on which such additional indebtedness for
borrowed money is incurred, would have been at least 2.25 to 1.00 (except as otherwise provided in this paragraph), determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if (1) the
additional indebtedness for borrowed money had been incurred, (2) such net proceeds had been applied, and (3) if the Borrower or any subsidiary will have made an 
 

16 

investment in any subsidiary (or any person or entity which becomes a subsidiary or is merged with or into
the Borrower) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit, division or line
of business, indebtedness, Consolidated EBITDA and Consolidated Interest Expense for such period will be calculated after giving pro forma effect thereto as if such investment or acquisition occurred, at the beginning of such four quarter
period. The foregoing notwithstanding, the Borrower may create, incur or assume the following indebtedness for borrowed money: (a) refinancings, refundings, replacements or extensions from time to time of indebtedness for borrowed money that is
outstanding or committed as of February 13, 2003 or was permitted hereunder to be incurred thereafter, so long as the principal amount of such indebtedness does not exceed 120% of the principal amount of the indebtedness that is refinanced,
refunded, replaced or extended (and for purposes of this proviso, the 120% threshold shall be determined by reference to the indebtedness outstanding or committed on February 13, 2003) (“Refinancing Debt”), (b) indebtedness to trade
creditors incurred in the ordinary course of business, (c) indebtedness, the proceeds of which shall be used to repay this Debenture at maturity, upon optional redemption or following the occurrence of a Mandatory Redemption Event and (d)
indebtedness for borrowed money owing by the Borrower to any of it’s wholly-owned subsidiaries. 
 
E. Stock Repurchases. So long as any payment obligation is outstanding under this Debenture, the Borrower shall not
repurchase or otherwise acquire any of its capital stock unless such repurchase is permitted by the Borrower’s then existing senior credit facility. 
 
F. Additional Interest. If in connection with the incurrence of any Refinancing Debt (A) the Consolidated Debt
Service Coverage Ratio would be less than 2.00 to 1.00 following the incurrence of such indebtedness (determined on a pro forma basis as set forth in the first sentence of paragraph D) and (B) the Debt/Stockholders Equity Ratio would be
greater than 0.60 to 1.00 following the incurrence of such indebtedness (determined on a pro forma basis as set forth in the first sentence of paragraph D) (the occurrence of the foregoing being referred to herein as a “Refinancing
Event”), then the Borrower shall pay to the Holder additional interest in the amount of 75 basis points (pro rated for the actual number of days elapsed in the fiscal quarter) of the outstanding principal balance of this Debenture (such
additional interest, the “Additional Interest”) for each fiscal quarter (or portion thereof since the occurrence of the Refinancing Event), commencing with the fiscal quarter in which such Refinancing Debt is incurred to (but excluding)
the first fiscal quarter thereafter for which the Consolidated Debt Service Coverage Ratio is equal to or greater than 2.00 to 1.00 (determined as of the last day of such quarter for the period of four consecutive quarters then ended, on a pro
forma basis as set forth in the first sentence of paragraph D) or the Debt/Stockholders Equity Ratio is less than or equal to 0.60 to 1.00 (determined as of the last day of such quarter on a pro forma basis as set forth in the first
sentence of paragraph D). If any Additional Interest is payable by the Borrower the Borrower shall pay to the Holder all such Additional Interest that is then due and payable within 15 days after each fiscal quarter in which Additional Interest is
payable. 
 
As used in this Article III:

 
“Consolidated EBITDA”
means, for any period, Consolidated Net Income, plus to the extent deducted from revenues in determining Consolidated Net Income, (i) Consolidated 
 

17 

Interest Expense, (ii) income taxes, (iii) depreciation, (iv) amortization, (v) other non-recurring or
non-cash charges, and (vi) extraordinary losses, all for the Borrower and its subsidiaries on a consolidated basis determined in accordance with generally accepted accounting principles. 
 
“Consolidated Debt Service Coverage Ratio” means, for any period, the ratio of (i)
the aggregate amount of Consolidated EBITDA for such period to (ii) Consolidated Interest Expense for such period. 
 
“Consolidated Interest Expense” means, for any period, the interest expense of the Borrower and its subsidiaries
on a consolidated basis for such period, determined in accordance with generally accepted accounting principles. 
 
“Consolidated Net Income” means, for any period, the net income (or loss) of the Borrower and its subsidiaries on
a consolidated basis for such period, determined in accordance with generally accepted accounting principles. 
 
“Debt/Stockholders Equity Ratio” shall mean, as of the date of determination thereof, the ratio of (i) the
Borrower’s indebtedness for borrowed money to (ii) the sum of (A) the Borrower’s indebtedness for borrowed money plus (B) the Borrower’s stockholder’s equity, in each case determined in accordance with generally accepted
accounting principles as of such date of determination (except for the pro forma adjustments contemplated by the first sentence of Paragraph D). 
 
IV. MATURITY 
 
The entire principal amount of the Debentures then outstanding (together with any accrued and unpaid interest thereon, Default Interest
and all other amounts due and payable by the Borrower) on the Maturity Date, shall be paid by the Borrower to the Holder in immediately available funds. At the option of the Holder, the Maturity Date shall be delayed by one (1) Trading Day for each
Trading Day occurring prior thereto and prior to the full conversion of the Debentures that (i) any Registration Statement required to be filed and to be effective pursuant to the Registration Rights Agreement is not effective or sales of all of the
Registrable Securities otherwise cannot be made thereunder during the Registration Period (whether by reason of the Borrower’s failure to properly supplement or amend the prospectus included therein in accordance with the terms of the
Registration Rights Agreement or otherwise), (ii) any Mandatory Redemption Event exists, without regard to whether any cure periods shall have run or (iii) the Borrower is in breach of any of its obligations pursuant to Section 4(g) of the Purchase
Agreement. 
 
V. CONVERSION AT THE OPTION OF THE
BORROWER 
 
Subject to the limitations on
conversion set forth in Article II.A, the Borrower may, at its option, automatically convert this Debenture (an “Mandatory Conversion”) at any time after 
 

18 

February 14, 2006 if (i) the Trade Price per share of the Common Stock has exceeded 140% of the Conversion
Price then in effect for at least fifteen (15) Trading Days within a period of twenty (20) consecutive Trading Days ending five (5) Trading Days prior to the mandatory conversion date, (ii) a registration statement covering the resale of the Common
Stock issuable upon such conversion is effective (and has been effective for the thirty (30) days prior to the automatic conversion date set forth in the Mandatory Conversion Notice described below) and available for resale of the Common Stock
issuable upon conversion of this Debenture, (iii) the Common Stock issuable upon conversion of this Debenture is authorized and reserved for issuance, (iv) the shares of Common Stock issuable upon conversion are listed for trading on the NYSE and
(v) no Mandatory Redemption Event then exists. Unless the Borrower shall have theretofore called for redemption this Debenture in full, the Borrower shall give to the Holder by mailing, first class postage prepaid, a notice (the “Mandatory
Conversion Notice”) of the Mandatory Conversion not more than thirty (30) days and not less than five (5) days before the automatic conversion date. Any notice that is mailed in the manner herein provided shall be conclusively presumed to
have been duly given, whether or not the Holder receives the notice. Each Mandatory Conversion Notice shall state: (a) the automatic conversion date, (b) the place or places where the Debenture is to be surrendered for conversion and (c) the
Conversion Price then in effect. If any of the foregoing provisions or other provisions of this Section are inconsistent with applicable law, such law shall govern. In the event of a Mandatory Conversion, the Borrower shall issue and deliver a
certificate or certificates for the number of full shares of Common Stock issuable upon conversion of this Debenture along with any cash in respect of any fractional shares of Common Stock otherwise issuable upon conversion as promptly after the
Mandatory Conversion Date as practicable in accordance with the provisions of this Article V. The Debenture subject to the Mandatory Conversion shall be delivered to the Borrower to be canceled. Notwithstanding notice of a Mandatory Conversion, the
Holder shall at all times prior to the Mandatory Conversion Date maintain the right to convert all or any portion of this Debenture in accordance with Article II. “Trade Price” means, for any security as of any date, the highest
sale price of the Common Stock on the NYSE as reported by Bloomberg or, if NYSE is not the principal trading market for such security, the sale price of such security on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or, if no sale price of such security is available in any of the foregoing manners, the bid price of any market maker for such security that is listed in the “pink sheet” by the National Quotation
Bureau, Inc. If the Trade Price cannot be calculated for such security on such date in the manner provided above, the Trade Price shall be the fair market value as determined in good faith by the Board of Directors of the Borrower and set forth in a
resolution. If, due to the limitations set forth in Article II.A, the holder of this Debenture is unable to convert any portion of this Debenture pursuant to this Article V, holder shall not convert any such portion of this Debenture not converted
as a result of such limitation until the holder’s beneficial ownership (as calculated in accordance with Article II.A) of Borrower is below 9.9% of the outstanding shares of Common Stock. If (i) a Mandatory Conversion Notice has been delivered,
(ii) holder’s beneficial ownership (as calculated in accordance with Article II.A.1) of Borrower decreases below 9.9% of the outstanding shares of Common Stock, and (iii) amounts (either principal or interest) remain outstanding under this
Debenture, at any time the holder’s beneficial ownership of Borrower decreases below 9.9% of the outstanding shares of Common Stock, without any further notice to the Borrower, the holder shall resume conversion of this Debenture pursuant to
this Article V until (i) holder’s beneficial ownership (as 
 

19 

 
calculated in accordance with
Article II.A.1) of Borrower increases to 9.9% of the outstanding shares of Common Stock or (ii) all amounts outstanding under this Debenture have been converted. 
 
VI. SUBORDINATION 
 
A. Subordination to Senior Indebtedness. The Borrower covenants and agrees, and each
Holder of this Debenture, by his or her acceptance thereof, likewise covenants and agrees, that this Debenture shall be issued subject to the provisions of this Article VI and to the extent and in the manner hereinafter set forth in this Article VI,
the indebtedness represented by this Debenture and the payment of the principal amount, and interest thereon, or any other amounts in respect of this Debenture are hereby expressly made subordinate and junior and subject in right of payment to the
prior payment in full in cash or cash equivalents of all Senior Indebtedness of the Borrower now outstanding or hereinafter incurred. “Senior Indebtedness” means the principal of, make-whole amount, if any, and premium, if
any, and interest on, fees, costs and expenses in connection with and other amounts due on (i) all indebtedness and other obligations of the Borrower under the Credit Agreement (the Credit Agreement dated as of December 21, 1999, among the Borrower,
the lenders from time to time party thereto, and Bank of America, as administrative agent (the “Administrative Agent”), as amended by the First Amendment to Credit Agreement dated as of March 28, 2002, as such agreement is
amended, restated, refinanced or replaced from time to time, is referred to herein as the “Credit Agreement”), (ii) all indebtedness and other obligations of the Borrower under the Note Agreements dated as of October 15, 1992
among the Borrower and the institutional investors named therein as amended by the Fourth Amendment to the Note Agreements, dated as of March 27, 2002 (said agreements as from time to time hereafter amended or restated, the “1992 Note
Agreements”), (iii) all indebtedness and other obligations of the Borrower under the Note Purchase Agreement dated as of December 1, 1999 among the Borrower and the institutional investors named therein amended by the Third Amendment
dated as of March 27, 2002 (said agreement as from time to time hereafter amended and restated, the “1999 Note Agreements”), (iv) all indebtedness of the Borrower for monies borrowed, including, without limitation, accounts
receivable sold or assigned by the Borrower, (v) all obligations of the Borrower evidenced by any notes, debentures, bonds or other instruments issued to banks, trust companies, insurance companies, other financial institutions and other entities
that in the ordinary course of business make loans, (vi) all obligations of the Borrower under any interest or currency swap agreements, hedging agreements, cap, floor and collar agreements, spot and forward contracts and other similar agreements,
(vii) obligations in respect of letters of credit, bank guarantees and bankers acceptances, (viii) principal of, and interest on any indebtedness or obligations of others of the kinds described in (i) through (vii) above assumed or guaranteed in any
manner by the Borrower, and (ix) deferrals, renewals, extensions and refundings of any such indebtedness or obligations described in (i) through (viii) above, in each case unless the instrument creating or evidencing the same or pursuant to which
the same is outstanding expressly provides that the same is not senior in right of payment to this Debenture. Senior Indebtedness includes, with respect to the foregoing, interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Borrower, whether or not post-filing interest is allowed in such proceeding. Notwithstanding the foregoing, “Senior Indebtedness” shall not include (a) indebtedness of the Borrower evidenced by any other
Debenture issued pursuant to the Purchase 
 

20 

 
Agreement, each of which shall
rank equally and ratably with this Debenture, (b) any obligation of the Borrower to any subsidiary of the Borrower, (c) any liability for Federal, state, local or other taxes owed or owing by the Borrower, (d) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities), (e) any indebtedness or obligation of the Borrower (and any accrued and unpaid interest in respect thereof) that
by its terms is subordinate or junior in right of payment to any other indebtedness or obligation of the Borrower (but excluding the effect of intercreditor arrangements among the Borrower and the holders of Designated Senior Debt (as hereinafter
defined)), or (f) any obligation with respect to any shares, interest, rights to purchase, warrants, options, participations or other equivalents of, or interests in, the equity of the Borrower or any subsidiary, including any preferred stock or
other preferred equity. 
 
B. No
Payment or Enforcement Actions if Default in Senior Indebtedness. No payment on account of principal of, or interest on this Debenture shall be made, and this Debenture shall not be redeemed or purchased directly or indirectly by the
Borrower (or any of its subsidiaries), if at the time of such payment or purchase or immediately after giving effect thereto, (i) a default in the payment of principal, make-whole amount, if any, premium, if any, interest, or other obligations in
respect of any Senior Indebtedness occurs and is continuing (a “Payment Default”), unless and until such Payment Default shall have been cured or waived or shall have ceased to exist or (ii) the Borrower shall have received
notice (a “Payment Blockage Notice”) from the holder or holders of Designated Senior Debt that there exists under such Designated Senior Debt a default, which shall not have been cured or waived in writing by the holders of
the requisite percentage of the Senior Indebtedness in accordance with the terms of such Senior Indebtedness, permitting the holder or holders thereof to declare such Designated Senior Debt due and payable, but only for the period (the
“Payment Blockage Period”) commencing on the date of receipt of the Payment Blockage Notice and ending on the earlier of (a) the date such default shall have been cured or waived in writing by the holders of the requisite
percentage of the Senior Indebtedness in accordance with the terms of such Senior Indebtedness, or (b) the 180th day immediately following the Borrower’s receipt of such Payment Blockage Notice. The Borrower shall resume payments on and
distributions in respect of this Debenture, including any past scheduled payments of interest on such Debentures to which the Holder would have been entitled but for the provisions of this Article VI(B) in the case of a Payment Default, on the date
upon which such Payment Default is cured or waived or ceases to exist. In addition, notwithstanding clauses (i) and (ii), unless the holders of Designated Senior Debt shall have accelerated the maturity of such Designated Senior Debt, the Borrower
shall resume payments on this Debenture after the end of each Payment Blockage Period. Not more than one Payment Blockage Notice may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to Designated Senior
Debt during such period. “Designated Senior Debt” means any (i) Senior Indebtedness outstanding under the Credit Agreement, the 1992 Note Agreements and the 1999 Note Agreement and (ii) Senior Indebtedness the instruments or
agreements creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Borrower is a party) expressly provides that such indebtedness shall be “Designated Senior Debt” for
purposes of this Debenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of the holders of such Senior Indebtedness to exercise the rights of holders of Designated Senior Debt). If any
payment made to any holder of any Designated Senior Debt with respect to such Designated Senior Debt is rescinded or must otherwise be 
 

21 

 
returned by such holder upon
the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the reinstated indebtedness of the Borrower arising as a result of such rescission or return shall constitute Designated Senior Debt effective as of the date of such
rescission or return. So long as either a Payment Default shall exist or a Payment Blockage Period is then in effect, the Holder shall not (i) deliver any Mandatory Redemption Notice (unless the requisite percentage of the holders of the Senior
Indebtedness have accelerated the Senior Indebtedness), (ii) reduce any claim to judgment or otherwise institute any suit to enforce or collect any amount payable under this Debenture or the Purchase Agreement, (iii) commence or join with any other
creditor of the Borrower in commencing any bankruptcy, reorganization, receivership or insolvency proceeding against the Borrower or (iv) otherwise ask, demand, sue for, take or receive from the Borrower, by set off or in any other manner, the whole
or any part of any monies which may now or hereafter be owing by the Borrower to the Holder on account of any amounts payable under this Debenture (any such action being hereinafter referred to as an “Enforcement Action”).
The Holder shall not take any Enforcement Action unless the Holder shall have given the holders of Designated Senior Debt not less than 15 days prior written notice of such proposed Enforcement Action. 
 
C. Payment upon Dissolution, Etc.

 
(a) In the event of any bankruptcy, insolvency,
reorganization, receivership, composition, assignment for benefit of creditors or other similar proceeding initiated by or against the Borrower or any dissolution or winding up or total or partial liquidation or reorganization of the Borrower (being
hereinafter referred to as a “Proceeding”), the Holder, by his or her acceptance thereof, agrees that such Holder shall, upon request of a holder of Senior Indebtedness, and at such Holder’s own expense take all
reasonable actions (including but not limited to the execution and filing of documents and the giving of testimony in any Proceeding, whether or not such testimony could have been compelled by process) necessary to prove the full amount of all their
claims in any Proceeding and the holders of the other Debentures shall not waive any claim in any Proceeding without the written consent of such Holder. The Holder hereby irrevocably authorizes, empowers and appoints each holder of the Designated
Senior Debt as its attorney in fact to execute, verify and deliver or file any such proof of claim. 
 
(b) Upon payment or distribution to creditors in a Proceeding of assets of the Borrower of any kind or character, whether in cash,
property or securities, all Senior Indebtedness shall first be paid in full in cash or cash equivalents before the Holder shall be entitled to receive or, if received, to retain any payment or distribution on account of this Debenture, and upon any
such Proceeding, any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, to which the Holder would be entitled except for the provisions of this Article VI shall be paid by the
Borrower or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holder, if the Holder shall have received such payment or distribution, directly to the holders of the
Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of such Senior Indebtedness held by such holder) or their representatives to the extent necessary to pay all such Senior Indebtedness in full in cash or cash
equivalents after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Holder. 
 

22 

 
D.
Payments on Debenture. Subject to Article VI.C, the Borrower may make payments of the principal of, and any interest or premium on, or any other amounts due in respect of, this Debenture, if at the time of payment, and immediately
after giving effect thereto, (i) there exists no Payment Default or a Payment Blockage Period and (ii) the Borrower is permitted to make payments under Article VI.C. 
 
E. Certain Conversions Deemed Payment. For the purposes of this Article VI only (a) the
issuance and delivery of junior securities upon conversion of this Debenture in accordance with Articles II or V shall not be deemed to constitute a payment of distribution on account of the principal of or interest on this Debenture or on account
of the purchase or other acquisition of this Debenture, and (b) the payment, issuance or delivery of cash (except in satisfaction of fractional shares), property or securities (other than junior securities) upon conversion of this Debenture shall be
deemed to constitute payment on account of the principal of this Debenture. For the purposes of this Article VI.E, the term “junior securities” means (i) shares of any stock of any class of the Borrower which are not subject
to mandatory redemption or purchase by the Borrower, or (ii) securities of the Borrower which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, this Debenture is so subordinated as provided in this Article VI as determined in good faith by the requisite holder of Designated Senior Debt in accordance with the terms of such
Designated Senior Debt. Nothing contained in this Article VI or elsewhere in this Debenture is intended to or shall impair, as among the Borrower, its creditors other than holders of Senior Indebtedness and the Holder, the right, which is absolute
and unconditional, of the Holder to convert this Debenture in accordance with Article II. 
 
F. Subrogation. Subject to payment in full in cash or cash equivalents of all Senior Indebtedness, the Holder shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of the assets of the Borrower made on such Senior Indebtedness until all principal and interest on this Debenture shall be paid in full; and for purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness of any cash, property or securities to which any Holders of the Debentures would be entitled except for the subordination provisions of this Article VI shall, as between the Holder and the Borrower
and/or its creditors other than the holders of the Senior Indebtedness, be deemed to be a payment on account of the Senior Indebtedness. Each Holder waives and agrees not to assert against any holder of Senior Indebtedness any rights that a
guarantor or surety could exercise; provided, however that nothing herein is intended or shall be deemed to cause the Holder to be a guarantor or surety of the Borrower’s obligations to the holders of the Senior Indebtedness. 
 
G. Rights of Holder Unimpaired. The
provisions of this Article VI are and are intended solely for the purposes of defining the relative rights of the Holder and the holders of Senior Indebtedness and nothing in this Article VI shall impair, as between the Borrower and the Holder, the
obligation of the Borrower, which is unconditional and absolute, to pay to the Holder the principal thereof (and premium, if any) and interest thereon, in accordance with the terms hereof. 
 
H. Holders of Senior Indebtedness. These provisions regarding subordination will
constitute a continuing offer to all persons who, in reliance upon such provisions, become 
 

23 

 
holders of, or continue to
hold, Senior Indebtedness; such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are hereby made obligees under such provisions to the same extent as if they were named therein, and they or any of them
individually or through their representatives may proceed to enforce such subordination. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to any of the Holder, without incurring
responsibility to the Holder and without impairing or releasing the subordination provisions of this Article VI, (i) change the manner, terms or place of payment of, or renew or alter, any Senior Indebtedness, or otherwise amend (including any
amendment which has the effect of extending the maturity of the Senior Indebtedness or increasing the rate of interest thereon) or supplement the same, (ii) sell, exchange or release any collateral mortgaged, pledged or otherwise securing the Senior
Indebtedness, (iii) release any person liable in any manner for the Senior Indebtedness and (iv) exercise or refrain from exercising any rights against the Borrower or any other Person. 
 
I. Amendments to Debenture. Without the prior written consent of the Required Holders
(as defined in the 1992 Note Agreements and the 1999 Note Agreement) of Designated Senior Debt and the Administrative Agent, neither the Holder nor the Borrower will amend, supplement, alter or modify any provision of this Debenture or the Purchase
Agreement which (i) changes the dates upon which payments of principal or interest on this Debenture are due, (ii) changes, or adds any Mandatory Redemption Event to this Debenture, (iii) changes the redemption or prepayment provisions of this
Debenture, (iv) alters the provisions of this Article VI, or (v) shortens the maturity date of this Debenture or otherwise alters the repayment terms of this Debenture. 
 
VII. MISCELLANEOUS 
 
A. Failure of Indulgence Not Waiver. No failure or delay on the part of Holder in the
exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or
privilege. 
 
B. Notices. Any
notices required or permitted to be given under the terms of this Debenture shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by
facsimile, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier or by facsimile, in each case addressed to a party. The addresses for such
communications shall be: 
 
If to the Borrower:

 
2051 Palomar Airport Road 
Carlsbad, CA 92009 
Attention: General Counsel 
Facsimile: (760) 494-1099 
 
 
 

24 

 
With copy to: 
 
Gibson, Dunn & Crutcher LLP 
333 South Grand Avenue 
Los Angeles, California 90071 
Attention: Andy Bogen, Esq. 
Facsimile: (213) 229-7520 
 
If to Holder, to the address set forth immediately below Holder’s name on the signature pages to the Purchase Agreement or such other address as is communicated to the Borrower by notice by Holder in accordance with the
terms hereof. 
 
With copy to:

 
Martin T. Schrier, Esq.

Akerman Senterfitt 
One Southeast Third Avenue 
Miami, Florida 33131 
Facsimile: (305) 374-5095

 
C. Amendment Provision. The
Debentures may be amended only by an instrument in writing signed by the Borrower and the holders of a majority of the then outstanding principal amount of the Debentures. 
 
D. Assignability. This Debenture shall be binding upon the Borrower and its successors
and assigns and, in the case of Article VI, the holders of Senior Indebtedness and their respective successors and assigns, and shall inure to the benefit of Holder and its successors and assigns. In the event Holder shall sell or otherwise transfer
any portion of this Debenture, each transferee shall be allocated a pro rata portion of such transferor’s Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person
or entity which does not hold any Debentures shall be allocated to the remaining holders of Debentures, pro rata based on the total principal amount of Debentures then held by such holders. 
 
E. Cost of Collection. If default is made
in the payment of this Debenture, the Borrower shall pay Holder costs of collection, including reasonable attorneys’ fees. 
 
F. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the State of New
York applicable to contracts made and to be performed in the State of New York (without regard to principles of conflict of laws). The Borrower and Holder irrevocably consent to the exclusive jurisdiction of the United States federal courts and
state courts located in the City of New York, Borough of Manhattan, in any suit or proceeding based on or arising under this Debenture, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby and
irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The 
 

25 

Borrower and Holder irrevocably waive the defense of an inconvenient forum to the maintenance of such suit
or proceeding. The Borrower and Holder further agree that service of process upon a party mailed by first class mail shall be deemed in every respect effective service of process upon the party in any such suit or proceeding. Nothing herein shall
affect Holder’s right to serve process in any other manner permitted by law. The Borrower and Holder agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner. 
 
G. Denominations. At the request of Holder, upon surrender of this Debenture, the Borrower shall promptly issue new Debentures in the aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $25,000 as Holder shall request. 
 
H. Pro Rata Allocations. The Maximum Share Amount and the Reserved Amount (including any increases thereto) shall be allocated by the Borrower pro rata among the holders of the Debentures based on the total
principal amount of Debentures originally issued to each holder of the Debentures. Each increase to the Maximum Share Amount and the Reserved Amount shall be allocated pro rata among the holders of the Debentures based on the total principal amount
of Debentures held by each holder at the time of the increase in the Maximum Share Amount or Reserved Amount. In the event a holder shall sell or otherwise transfer any of such holder’s shares of the Debentures, each transferee shall be
allocated a pro rata portion of such transferor’s Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person or entity which does not hold any the Debentures shall
be allocated to the remaining holders of shares of the Debentures, pro rata based on the total principal amount of Debentures held by such holders. 
 
I. Status as Debentureholder. Upon submission of a Notice of Conversion by Holder, the principal amount of this
Debenture and the interest thereon covered thereby (other than any portion of this Debenture, if any, which cannot be converted because the conversion thereof would exceed such holder’s allocated portion of the Maximum Share Amount or Reserved
Amount) shall be deemed converted into shares of Common Stock as of the Conversion Date and Holder’s rights as a holder of this Debenture shall cease and terminate, excepting only the right to receive certificates for such shares of Common
Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Borrower to comply with the terms of this Debenture. Notwithstanding the foregoing, if Holder has not received
certificates for all shares of Common Stock prior to the tenth business day after the expiration of the Delivery Period with respect to a conversion for any reason, then (unless Holder otherwise elects to retain its status as a holder of Common
Stock by so notifying the Borrower) the portion of the principal amount and interest thereon subject to such conversion shall be deemed outstanding under this Debenture and the Borrower shall, as soon as practicable, return this Debenture to Holder.

 
In all cases, Holder shall retain all of its
rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Article II.F to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to
have the Conversion Price with respect to subsequent conversions determined in accordance with Article II.F) for the Borrower’s failure to convert this Debenture. 
 

26 

 
J.
Remedies Cumulative. The remedies provided in this Debenture shall be cumulative and in addition to all other remedies available under this Debenture, at law or in equity (including a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of compliance giving rise to such remedy and nothing herein shall limit Holder’s right to pursue actual damages for any failure by the Borrower to comply with the terms of
this Debenture. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to Holder and that the remedy at law for any such breach may be inadequate. The Borrower therefore agrees, in the event of any
such breach or threatened breach, Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

 
K. Board Determinations. In
the event the Board of Directors of the Borrower exercises its obligation to determine the fair market value of the Common Stock in accordance with the terms of this Debenture, the Borrower shall provide to the Holder hereof together with a copy of
resolution setting forth the Board of Directors’ good faith determination of the fair market value of such Common Stock a certificate setting forth in reasonable detail the process by which the Board of Directors of the Borrower made its
determination. 
 
L. Effect on
Original Debenture. This Debenture amends and restates the Borrower’s $12,500,000 aggregate principal amount Convertible Subordinated Debenture dated February 14, 2003 (the “Original Debenture”) issued to the Holder; and, the
Borrower and the Holder hereby agree that the execution and delivery of this Debenture shall not constitute or effect or be deemed to constitute or effect a novation, refinancing, discharge, extinguishment or refunding of the indebtedness evidenced
by the Original Debenture. 
 
[REMAINDER OF THIS
PAGE INTENTIONALLY LEFT BLANK] 
 

27 

 
IN WITNESS
WHEREOF, Borrower has caused this Debenture to be signed in its name by its duly authorized officer as of the date first above written. 
 

	 K2 INC.,
 a Delaware corporation

	
	 By:
	 	

	 Name:
	 	 
	 Title:
	 	 

 
 
 

28 

 
EXHIBIT A

 
NOTICE OF CONVERSION 
 
(To be Executed by the Registered Holder 
in order to Convert the Debentures) 
 
The undersigned hereby irrevocably elects to convert $            
principal amount of the Debenture (defined below) into shares of common stock, par value $1.00 per share (“Common Stock”), of K2 Inc., a Delaware corporation (the “Borrower”) according to the conditions of the
convertible subordinated debentures of the Borrower dated as of February     , 2003 (the “Debentures”), as of the date written below. If securities are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. 
 
The undersigned irrevocably elects to convert
[$             representing all principal, accrued but unpaid interest and other amounts due] [$            
representing a portion of the principal outstanding under the Debenture held by the undersigned] at the Conversion Price set forth below. 
 
The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”). 
 
Name of DTC Prime
Broker:                                       
                                        
                                        
                                       

Account
Number:                                       
                                        
                                        
                                        
                 
 

	 ̈	 	In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests that the
Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is
necessary, on an attachment hereto: 

 
Name:                                    
                                        
                                        
                                        
                                       
Address:                                    
                                        
                                        
                                        
                                     
 
The undersigned represents and warrants that all offers and
sales by the undersigned of the securities issuable to the undersigned upon conversion of the Debentures shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the “Act”), or pursuant
to an exemption from registration under the Act. 
 
Date of
Conversion:                                      
                                        
                           
Conversion
Price:                                       
                                        
                              
Number of Shares of Common Stock to be Issued
                                        
               
 
Signature:                                   
                                      
Name:                                    
                                         

Address:                                    
                                      
 

29Form of Amended & Restated Stock Purchase Warrant dated June 4, 2003

Exhibit 4.3 
 
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER     , 2002, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, REASONABLY SATISFACTORY TO K2 INC. THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS
SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. 
 

	 	  	 	  	 Right to
 Purchase
 524,329
 Shares of
 Common Stock,
 par value $1.00
 per share

 
AMENDED AND RESTATED STOCK PURCHASE WARRANT 
 
THIS CERTIFIES THAT, for value received, k1 Ventures Limited or its registered assigns, is entitled to purchase from K2 Inc., a Delaware corporation (the “Company”), at any time or from time to time during
the period specified in Paragraph 2 hereof, Five Hundred Twenty Four Thousand Three Hundred Twenty Nine (524,329) fully paid and nonassessable shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”), at an
exercise price of $11.92 per share (the “Exercise Price”). The term “Warrant Shares,” as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price are subject to adjustment
as provided in Paragraph 4 hereof. The term Warrants means this Warrant and the other warrants issued pursuant to that certain Securities Purchase Agreement, dated November         , 2002, among the
Company and the Buyers listed on the execution page thereof (the “Securities Purchase Agreement”). 
 
This Warrant is subject to the following terms, provisions, and conditions: 
 
1. Manner of Exercise; Issuance of Certificates; Payment for Shares. Subject to the provisions
hereof, this Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the “Exercise Agreement”), to the Company during
normal business hours on any business day at the Company’s principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), and upon payment to the Company in cash, by certified or
official bank check or by wire transfer for the account of the Company of the Exercise Price for the Warrant Shares specified in the Exercise Agreement. The Warrant 

 
Shares so purchased shall be
deemed to be issued to the holder hereof or such holder’s designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been
delivered, and payment shall have been made for such shares as set forth above. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder
hereof within a reasonable time, not exceeding three (3) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in
the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. 
 
Notwithstanding anything in this Warrant to the contrary, in no event shall the holder of this Warrant be entitled to exercise a number of
Warrants (or portions thereof) in excess of the number of Warrants (or portions thereof) upon exercise of which the sum of (i) the number of shares of Common Stock beneficially owned by the holder of this Warrant and its affiliates, including,
without limitation, the shares of Common Stock issuable upon exercise of the New Warrant (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised Warrants and the unexercised or unconverted
portion of any other securities of the Company (excluding however the New Warrants but including the Debentures (as defined in the Securities Purchase Agreement)) subject to a limitation on conversion or exercise analogous to the limitation
contained herein) and (ii) the number of shares of Common Stock issuable upon exercise of the Warrants and the New Warrants (or portions thereof) with respect to which the determination described herein is being made, would result in beneficial
ownership by the holder of this Warrant and its affiliates of more than 9.9% of the outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in clause (i) hereof. Notwithstanding anything in this Warrant to the contrary, the restrictions on exercise of this Warrant set forth in
this paragraph shall not be amended without (i) the written consent of the holder of this Warrant and the Company and (ii) the approval of the holders of a majority of the Common Stock present, or represented by proxy, and voting at any meeting
called to vote on the amendment of such restriction. 
 
As used herein the “New Warrants” means those warrants to purchase 243,260 shares of Common Stock of the Company issuable pursuant to the Stock Purchase Warrant dated as of June 4, 2003 executed by the Company for the
benefit of k1 Ventures Limited, as amended, restated, supplemented or otherwise modified from time to time. 
 
2. Period of Exercise. This Warrant is exercisable at any time or from time to time on or after the date on which this
Warrant is issued and delivered pursuant to the terms of the Securities Purchase Agreement (the “Issue Date”) and before 5:00 p.m., New York City time on the fifth (5th) anniversary of the Closing Date (the “Exercise Period”).

 

2 

 
3.
Certain Agreements of the Company. The Company hereby covenants and agrees as follows: 
 
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly
issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof. 
 
(b) Reservation of Shares. During the Exercise Period, the Company shall at all times have authorized, and reserved for the
purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant. 
 
(c) Listing. The Company shall promptly secure the listing of the shares of Common Stock issuable upon exercise of the
Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or
automated quotation system. 
 
(d) Certain
Actions Prohibited. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the
generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be necessary
or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. 
 
(e) Successors and Assigns. This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation,
or acquisition of all or substantially all the Company’s assets. 
 
4. Antidilution Provisions. During the Exercise Period, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Paragraph 4. 
 
In the event that any adjustment of the Exercise Price as
required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent. 
 
(a) Adjustment of Exercise Price and Number of Shares upon Issuance of Common Stock. Except as otherwise provided in
Paragraphs 4(c) and 4(e) hereof, if and 
 

3 

 
whenever on or after the Issue
Date of this Warrant, the Company issues or sells, or in accordance with Paragraph 4(b) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable
expenses or commissions or underwriting discounts or allowances in connection therewith) less than the then effective Exercise Price on the date of issuance (or deemed issuance) of such Common Stock (a “Dilutive Issuance”), then
immediately upon the Dilutive Issuance, the Exercise Price will be reduced to a price determined by multiplying the Exercise Price in effect immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of which is an amount equal to
the sum of (x) the number of shares of Common Stock Deemed Outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in Paragraph 4(b) hereof, received by the Company upon
such Dilutive Issuance divided by the Exercise Price in effect immediately prior to the Dilutive Issuance, and (ii) the denominator of which is the total number of shares of Common Stock Deemed Outstanding (as defined below) immediately after the
Dilutive Issuance. 
 
(b) Effect on Exercise
Price of Certain Events. For purposes of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the following will be applicable: 
 
(i) Issuance of Rights or Options. If the Company in any manner issues or grants any warrants, rights or
options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants, rights and options to purchase
Common Stock or Convertible Securities are hereinafter referred to as “Options”) and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Exercise Price on the date of issuance or grant
of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options will, as of the date of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount, if any, received or
receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Exercise Price will be made
upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options. 
 
(ii) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per 
 

4 

share for which Common Stock is issuable upon such conversion or exchange is less than the
Exercise Price on the date of issuance of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such
Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon such
conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities. No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. 
 
(iii) Change in Option Price or
Conversion Rate. If there is a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the
conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted, issued or sold. 
 
(iv) Treatment of Expired Options and Unexercised Convertible Securities. If, in any case, the total number
of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall
have expired or terminated, the Exercise Price then in effect will be readjusted to the Exercise Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued. 
 
(v) Calculation of Consideration Received. If any Common Stock, Options or
Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or
allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be

 

5 

 
other than
cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company and set forth in a resolution. 
 
(vi) Exceptions to Adjustment of Exercise Price. No adjustment to the Exercise
Price will be made (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the date of issuance of this Warrant; (ii) upon the grant or exercise of any stock or options which may hereafter be
granted or exercised under any stock option plan, restricted stock plan or employee benefit plan of the Company now existing or to be implemented in the future, so long as the issuance of such stock or options is approved by a majority of the
independent members of the Board of Directors of the Company or a majority of the members of a committee of independent directors established for such purpose; (iii) upon the exercise of the Warrants; (iv) upon the issuance or conversion of the
Debentures; (v) upon a sale pursuant to a bona fide firm commitment underwritten public offering of Common Stock by the Company (not including a continuous offering pursuant to Rule 415 under the Securities Act); (vi) upon sales in an aggregate
amount not exceeding 538,262 shares (subject to adjustment for stock splits, stock dividends, stock combination and similar transactions); (vii) upon securities issued by the Company in connection with an acquisition of a business, operating assets
or a person; (viii) securities issued to any strategic investors, vendors, financial institutions or other lenders in connection with commercial credit arrangements and similar financings, lessors, customers or suppliers, lease or similar
arrangements the primary purpose of which is not to raise equity capital; or (ix) upon the issuance or exercise of the New Warrant. 
 
(c) Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend,
recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller
number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased. 
 
(d) Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the
provisions of this Paragraph 4, the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares
of 
 

6 

 
Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 
 
(e) Consolidation, Merger or Sale. In case of any consolidation of the Company with, or merger of the Company into any other
corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such
case, the Company will make appropriate provision to insure that the provisions of this Paragraph 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of
this Warrant. 
 
(f) Notice of
Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price
resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.
Such calculation shall be certified by the chief financial officer of the Company. 
 
(g) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is
otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less
than 1% of such Exercise Price. 
 
(h) No
Fractional Shares. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant. If the exercise of this Warrant would result in a fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon exercise of the Warrant shall be the next higher number of shares. 
 
(i) Other Notices. In case at any time: 
 
(i) the Company shall declare any dividend upon the Common Stock payable in shares of stock
of any class or make any other distribution (including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock; 
 
(ii) the Company shall offer for subscription pro rata to the holders of the Common Stock any
additional shares of stock of any class or other rights; 
 

7 

 
(iii) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation
or entity; or 
 
(iv) there shall
be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; 
 
then, in each such case, the Company shall give to the holder of this Warrant (a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock
entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, notice of the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or
other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least 30 days prior to the record date or
the date on which the Company’s books are closed in respect thereto. Failure to give any such notice or any defect therein shall not affect the validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv) above. 
 
(j) Certain Definitions. 
 
(i) “Common Stock Deemed
Outstanding” shall mean the number of shares of Common Stock actually outstanding (not including shares of Common Stock held in the treasury of the Company), plus (x) pursuant to Paragraph 4(b)(i) hereof, the maximum total number
of shares of Common Stock issuable upon the exercise of Options, as of the date of such issuance or grant of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum total number of shares of Common Stock issuable upon
conversion or exchange of Convertible Securities, as of the date of issuance of such Convertible Securities, if any. 
 
(ii) “Market Price,” as of any date, (i) means the average of the last reported sale prices
for the shares of Common Stock on the New York Stock Exchange (the “NYSE”) for the five (5) trading days immediately preceding such date as reported by Bloomberg Financial Markets or an equivalent reliable reporting service mutually
acceptable to and hereafter designated by the holder of this Warrant and the Company (“Bloomberg”), or (ii) if NYSE is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably
determined in good faith by the Board of Directors of the Company and set forth in a resolution. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition 
 

8 

shall apply with respect to any other security in respect of which a determination as to
market value must be made hereunder. 
 
(iii) “Common Stock,” for purposes of this Paragraph 4, includes the Common Stock, par value $1.00 per share, and any additional class of stock of the Company having no preference as to dividends or
distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only shares of Common Stock, par value $1.00 per share, in respect of which this Warrant is exercisable, or shares resulting from any
subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Paragraph 4(e) hereof, the stock or other securities or property provided for in
such Paragraph. 
 
5. Issue Tax. The
issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant. 
 
6. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of
the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 
 
7. Transfer, Exchange, and Replacement of
Warrant. 
 
(a) Restriction on
Transfer. This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of
the Company referred to in Paragraph 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof and to the applicable provisions of the Securities Purchase Agreement. Until
due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary.
Notwithstanding anything to the contrary contained herein, the registration rights described in Paragraph 8 are assignable only in accordance with the provisions of that certain Registration Rights Agreement, dated as of February 14, 2003, by and
among the Company and the other signatories thereto (as the same may be amended, modified or restated, the “Registration Rights Agreement”). 
 
(b) Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at the office or agency of the Company referred to in Paragraph 7(e) below, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Common Stock which may be purchased 
 

9 

 
hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender. 
 
(c) Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction,
or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. 
 
(d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant in connection with any transfer, exchange, or
replacement as provided in this Paragraph 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 7. 
 
(e) 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 the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant. 
 
(f)
Exercise or Transfer Without Registration. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares
issuable hereunder), shall not be registered under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the holder or transferee
of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under said
Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an
“accredited investor” as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter or status as an “accredited investor” shall be required in connection with a transfer pursuant to Rule
144 under the Securities Act. The first holder of this Warrant, by taking and holding the same, represents to the Company that such holder is acquiring this Warrant for investment and not with a view to the distribution thereof. 
 
8. Registration Rights. The initial holder of
this Warrant (and certain assignees thereof) is entitled to the benefit of such registration rights in respect of the Warrant Shares as are set forth in Section 2 of the Registration Rights Agreement. 
 
9. Notices. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier,
postage prepaid and addressed, to such holder at the address shown for such holder 
 

10 

 
on the books of the Company,
or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall
be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at 2051 Palomar Airport Road, Carlsbad, California 92009, Attention:
General Counsel, or at such other address as shall have been furnished to the holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but shall in such case be subsequently
confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of
the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 9, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United
States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be. 
 
10. Governing Law. THE CORPORATE LAWS OF THE STATE OF DELAWARE SHALL GOVERN ALL ISSUES CONCERNING THE RELATIVE RIGHTS OF THE
COMPANY AND ITS STOCKHOLDERS. ALL OTHER QUESTIONS UNDER THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THE STATE OF NEW YORK (WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS). BOTH PARTIES IRREVOCABLY CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS AND THE STATE COURTS LOCATED IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, WITH RESPECT TO ANY SUIT OR
PROCEEDING BASED ON OR ARISING UNDER THIS STOCK PURCHASE WARRANT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY AND IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH SUIT OR PROCEEDING MAY
BE DETERMINED IN SUCH COURTS. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE
DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL
NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. 
 
11. Miscellaneous. 
 
(a) Amendments. This Warrant and any provision hereof may only be amended by an instrument in
writing signed by the Company and the holder hereof. 
 

11 

 
(b)
Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof. 
 
(c) Remedies. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to the holder of this Warrant by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or a threatened breach in writing by the Company of the provisions of this Warrant, that the holder of this Warrant shall be entitled, in addition
to all other available remedies in law or in equity, to an injunction or injunctions to prevent or cure any breaches of the provisions of this Agreement and to enforce specifically the terms and provisions of this Warrant, without the necessity of
showing economic loss and without any bond or other security being required. 
 
(d) Board Determinations. In the event the Board of Directors of the Company exercises its obligation to determine the fair market value of the Common Stock in accordance with the terms
of this Warrant, the Company shall provide to the holder hereof together with a copy of resolution setting forth the Board of Directors’ good faith determination of the fair market value of such Common Stock a certificate setting forth in
reasonable detail the process by which the Board of Directors of the Company made its determination. 
 
(e) Effect on Original Warrant. This Warrant amends and restates the Company’s Stock Purchase Warrant dated February
14, 2003 (the “Original Warrant”) concerning the right to purchase 524,329 shares of Common Stock by the Holder; and the Company and the Holder hereby agree that the execution and delivery of this Warrant shall not constitute or effect or
be deemed to constitute or effect and extinguishment or cancellation of the Original Warrant. 
 
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 
 

12 

 
IN WITNESS
WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. 
 

	 K2 INC.

	
	 By:
	 	

	 Name:
	 	 
	 Title:
	 	 

 
Dated as of June 4, 2003 
 

13 

 
FORM OF
EXERCISE AGREEMENT 
 
Dated:
                         ,          
 
To:
                                 
 
The undersigned, pursuant to the provisions set forth in the
within Warrant, hereby agrees to purchase              shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by
such Warrant in cash or by certified or official bank check in the amount of. Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to: 
 

	 Name:
	 	

	
	 Signature:
	 	

	
	 Address:
	 	

	
	

	
	

	
	 Note:
	 	 The above signature should correspond exactly with the name on the face of the within Warrant.

 
and, if said
number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share
paid in cash. 

 
FORM OF
ASSIGNMENT 
 
FOR VALUE RECEIVED, the
undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth hereinbelow, to: 
 

	 Name of Assignee

	  	 Address

	  	 No of Shares

	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 

 
, and hereby irrevocably
constitutes and appoints
                                        
             as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises. 
 
Dated:
                         , 200_ 
 
In the presence of: 
 

 

	
	 Name:
	 	

	
	 Signature:
	 	

	
	 Title of Signing Officer or Agent (if any):

	
	

	
	 Address:
	 	

	
	

	
	 Note: The above signature should correspond exactly with the name on the face of the within
Warrant.

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