Document:

EXHIBIT 10.17

 

SIXTH
AMENDMENT TO

NOTE
PURCHASE AGREEMENT

 

THIS SIXTH AMENDMENT (this “Amendment”), dated
as of August 13, 2004, to the Note Purchase Agreement, dated as of March 27,
1998, by and among DRESDNER KLEINWORT BENSON PRIVATE EQUITY PARTNERS LP, a
Delaware limited partnership (the “Purchaser”), and GARDENBURGER, INC.,
an Oregon corporation (the “Company”).

 

WHEREAS, the parties hereto have entered into the Note
Purchase Agreement, dated as of March 27, 1998 (as amended, modified or
restated from time to time, the “Agreement”), a First Amendment to Note
Purchase Agreement dated as of December 23, 1999 (the “First Amendment”),
a Second Amendment to Note Purchase Agreement dated as of January 10, 2002
(the “Second Amendment”), a Third Amendment to Note Purchase Agreement
dated as of September 20, 2002 (the “Third Amendment”), and a
Fourth Amendment to Note Purchase Agreement dated as of December 31, 2002
(the “Fourth Amendment”), and a Fifth Amendment to Note Purchase
Agreement dated as of December 29, 2003 (the “Fifth  Amendment”);
unless otherwise defined herein, all capitalized terms used herein (including
the recitals) shall have the meanings assigned to such terms in the Agreement,
as amended by the First, Second, Third, Fourth and Fifth Amendments and hereby;

 

WHEREAS, the Company has entered into a Revolving
Credit and Term Loan Agreement dated as of January 10, 2002, with CapitalSource Finance LLC as a lender and as agent (“CapitalSource”);

 

WHEREAS, the Company and CapitalSource
are contemporaneously entering into a Sixth Amendment to Revolving Credit and
Term Loan Agreement dated as of August    , 2004, in
substantially the form attached hereto as Exhibit A (the “CapitalSource Sixth Amendment”); and

 

WHEREAS, the Company has requested the Purchaser to
amend the Agreement on the terms and conditions set forth in this Amendment;

 

NOW, THEREFORE, in consideration of the premises and
the agreements, provisions, and covenants contained herein, the parties hereto
agree as follows:

 

1.     Amendments.  Effective as of August    ,
2004, subject to the conditions herein, the Agreement is amended as follows:

 

(a)   The financial covenant contained in
subparagraph 2D(b)(iii) of the Agreement as amended by
the Second, Fourth and Fifth Amendments is hereby amended and restated in its
entirety to read as follows:

 

 

“(iii)                         SENIOR
FIXED CHARGE COVERAGE RATIO

 

The
Senior Fixed Charge Coverage Ratio for each Quarterly Test Period set forth
below shall be not less than the ratios specified below:

 

	
  Quarterly
  Test Period

  	
   

  	
  Amount

  	
   

  
	
  September 30, 2004

  	
   

  	
  1.215:1.00

  	
   

  
	
  December 31, 2004

  	
   

  	
  1.13:1.00

  	
   

  
	
  March 31, 2005

  	
   

  	
  1.33:1.00

  	
   

  
	
  June 30, 2005

  	
   

  	
  1.41:1.00”

  	
   

  

 

(b)   The financial covenant contained in
subparagraph 2D(b)(v) of the Agreement as amended by the Second, Fourth and
Fifth Amendments is hereby amended and restated in its entirety to read as
follows:

 

“(v)                           CAPITAL
EXPENDITURES

 

The Company shall not
permit its Capital Expenditures in the aggregate to exceed (i) $1,600,000
for the fiscal year ending on September 30, 2004,  and (ii) $1,200,000 for each
fiscal year ending on or after September 30, 2005.”

 

2.     Conditions.  This Amendment shall be subject to
satisfaction of the following conditions precedent, after giving effect to this
Amendment, including the waivers contained in Section 3 below:  (a) the Company shall have delivered to the
Purchaser an executed original copy of this Amendment and each other agreement,
document or instrument reasonably requested by the Purchaser in connection with
this Amendment; and (b) CapitalSource and the Company
shall have executed the CapitalSource Sixth
Amendment.

 

3.     Waivers.  The Purchaser hereby acknowledges that, as of
June 30, 2004, the Company has been in breach of one or more financial
covenants contained in subparagraph 2(D)(b) of the Agreement, and hereby
waives all such breaches and noncompliance by the Company with
subparagraph 2(D)(b) occurring prior to the date of this Amendment.  This waiver does not apply to any breach or
Event of Default under the Agreement or the Convertible Notes to the extent it
comes into or continues in existence on or after the date of this Amendment.

 

4.     Ratification of Agreement.

 

(a)   To induce the Purchaser to enter into this
Amendment, the Company represents and warrants that, after giving effect to this
Amendment, no violation of the terms of the Agreement exist and all
representations and warranties contained in the Agreement are true, correct,
and complete in all material respects on and as of the date hereof except as (i) reflected in any schedule to the Senior Credit
Agreement, (ii) disclosed in the Company’s reports filed with the Securities
and Exchange Commission, or (iii) disclosed to Purchaser’s representative on
the Board during a meeting of the Board, and except to the extent such
representations and warranties specifically relate to an earlier date in which
case they were true, correct, and complete in all material respects on and as
of such earlier date.

 

 

(b)   Except as expressly set forth in this
Amendment, the terms, provisions and conditions of the Agreement and the
Investment Documents are unchanged, and said agreements, as amended, shall
remain in full force and effect and are hereby confirmed and ratified.

 

5.     Consent to CapitalSource
Sixth Amendment.  The Purchaser
consents to the execution and delivery by the Company of the CapitalSource Sixth Amendment and affirms that the
provisions of the CapitalSource Sixth Amendment do
not constitute a breach or Event of Default under the Agreement or the
Convertible Notes.

 

6.     Binding on Successors and Assigns.  All the terms and provisions of this
Amendment shall be binding upon and inure to the benefit of the parties hereto,
their respective successors, assigns and legal representatives.  Whenever in this Amendment any of the parties
hereto is referred to, such reference shall be deemed to include the successors
and assigns of such party.

 

7.     Further Assurances.  Each of the Company and the Purchaser, as the
case may be, shall duly execute and deliver, or cause to be executed and
delivered, such further instruments and perform or cause to be performed such
further acts as may be necessary or proper in the reasonable opinion of the
Purchaser to carry out the provisions and purposes of this Amendment.

 

8.     Effect of Amendment.  To the extent any terms and conditions in the
Agreement shall contradict or be in conflict with any provisions of this
Amendment, the provisions of this Amendment shall govern.

 

9.     Expenses.  All expenses of the Purchaser incurred in
connection with this Amendment, including reasonable expenses of the Purchaser’s
counsel, will be paid by the Company.

 

10.   Governing Law.  This Amendment shall be governed by, and
shall be construed in accordance with, the laws of the state of New York,
without giving effect to any choice of law or conflict of law rules or
provisions (whether of the state of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
state of New York.

 

11.   Counterparts.  This Amendment may be executed in separate
counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same agreement.

 

 

IN
WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the
date first written above.

 

 

	
   

  	
  DRESDNER KLEINWORT BENSON PRIVATE

  EQUITY PARTNERS LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Dresdner Kleinwort Capital LLC

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Private Equity Employees LLC

  
	
   

  	
   

  	
  Its:

  	
  Managing Member

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Alex Coleman

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Its:

  	
  Managing Member

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  GARDENBURGER, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/Scott C. Wallace

  	
   

  
	
   

  	
   

  	
  Scott C. Wallace

  
	
   

  	
  Its:

  	
  President and Chief Executive OfficerEXHIBIT 10.20

 

EXECUTION COPY

 

THE
SECURITY REPRESENTED BY THIS INSTRUMENT WAS ORIGINALLY ISSUED ON MARCH 27,
1998, AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.  THE TRANSFER OF SUCH SECURITY
IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE NOTE PURCHASE AGREEMENT DATED AS
OF MARCH 27, 1998, AS IN EFFECT FROM TIME TO TIME (THE “NOTE PURCHASE
AGREEMENT”), BETWEEN THE ISSUER (THE “COMPANY”) AND CERTAIN
INVESTOR(S), AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH
SECURITY UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH
TRANSFER.  UPON WRITTEN REQUEST, A COPY
OF SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF
WITHOUT CHARGE.

 

THE
SECURITY REPRESENTED BY THIS INSTRUMENT AND THE INDEBTEDNESS EVIDENCED HEREBY
ARE SUBJECT TO THE SUBORDINATION PROVISIONS OF THE NOTE PURCHASE AGREEMENT,
WHICH AMONG OTHER THINGS SUBORDINATES THE COMPANY’S OBLIGATIONS TO THE
INVESTOR(S) TO THE COMPANY’S OBLIGATION TO THE HOLDERS OF SENIOR INDEBTEDNESS
AS DEFINED IN THE NOTE PURCHASE AGREEMENT. 
EACH HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY
THE PROVISIONS OF SUCH NOTE PURCHASE AGREEMENT.

 

GARDENBURGER,
INC.

 

SECOND AMENDED
AND RESTATED

CONVERTIBLE
SENIOR SUBORDINATED NOTE

 

	
  Original
  Date of Issuance: March 27, 1998

  	
   

  	
   

  
	
  New
  Date of Issuance: September 2, 2004

  	
   

  	
  $

  	
  16,905,643

  

 

Gardenburger, Inc., an
Oregon corporation (the “Company”), for value received, hereby promises
to pay to the order of Annex Holdings I LP (“Annex”), or registered
assigns, the principal amount of Sixteen Million Nine Hundred Five Thousand Six
Hundred Forty-Three dollars ($16,905,643) on June 15, 2007 (the “Maturity
Date”) together with interest thereon calculated from September 30, 2001
in accordance with the provisions contained herein.  The Company will maintain a register in which
it will record the initial ownership of the Convertible Notes (as defined
below) and changes in the ownership of Convertible Notes of which it receives
notice.  The holder of this Convertible
Note indicated at any time in such register will be the “Registered Holder”
of this Convertible Note.

 

This Second Amended and
Restated Convertible Senior Subordinated Note (the “Convertible Note”)
is issued to Annex, as the transferee of the Convertible Note from Dresdner
Kleinwort Benson Private Equity Partners, LP, a Delaware limited partnership (“Dresdner”).  The Amended and Restated Convertible Senior
Subordinated Note was issued to Dresdner in exchange for the Convertible Senior
Subordinated Note issued to Dresdner on March 27, 1998 (as amended,
the “Original Note”) pursuant to a Note Purchase Agreement, dated as of
March 27, 1998, as amended (as in effect from time to time, the “Purchase
Agreement”), among the Company and Dresdner, and this Convertible Note is
one of the “Convertible Notes” referred to in the Purchase
Agreement.  The Purchase Agreement
contains terms governing the rights of the holder of this Convertible Note, and
all provisions of the Purchase Agreement are hereby incorporated in this
Convertible Note in full by reference. 
Except as defined in Section 9 of this Convertible Note or
otherwise indicated in this Convertible Note, each capitalized term used in
this Convertible Note has the meaning set forth in the Purchase Agreement.

 

 

1.             Payment of Principal.

 

(a)           Scheduled Payment.  The
Company will pay the entire unpaid principal amount of this Convertible Note on
the Maturity Date plus a premium equal to twenty percent (20%) of the sum of
(i) the unpaid principal amount of this Convertible Note, plus (ii) all accrued
and unpaid interest thereon as of the date of payment.

 

(b)           Optional Prepayment. 
Subject to paragraph 2H of the Purchase Agreement, the Company may
prepay the principal amount of this Convertible Note, in whole or in any $1,000
increment, at any time and from time to time; provided,
however, if any such optional prepayment occurs (which shall not
include any prepayment made under Section 1(d), and 1(e) and 1(f),
then the Company shall pay a pre-payment premium to the then Registered Holder
equal to twenty percent (20%) of the sum of (i) the principal amount of this
Convertible Note being prepaid, plus (ii) all accrued and unpaid interest
thereon as of the date of prepayment. 
The holder of this Convertible Note may convert all or any portion of
the outstanding principal amount of this Convertible Note pursuant to Section
5 until such time as such amount has been paid.  The Company shall mail written notice by
overnight delivery (with a copy sent by facsimile on the date mailed) of each
such optional prepayment (which shall not include any prepayment made under Section
1(d), 1(e) and 1(f) of any Convertible Note to each
Registered Holder of the Convertible Notes not more than 20 nor less than 5
business days prior to the date on which such optional prepayment is to be
made.  Upon mailing any such notice of
optional prepayment, the Company shall become obligated to prepay the principal
amount of Convertible Notes specified in such notice, together with the
applicable pre-payment premium and all unpaid accrued interest thereon, at the
time of the optional prepayment specified therein.

 

(c)           Other Prepayments or Acquisitions.  The
Company shall not, nor shall it permit any Subsidiary to, prepay any principal
amount of any Convertible Note or otherwise acquire any Convertible Notes,
except as expressly authorized herein.

 

(d)           Special Prepayments for a Change of Control or Sale
Event.  If a Change of Control has occurred, the
Company obtains knowledge that a Change of Control is proposed to occur or a
Sale Event is proposed to occur, the Company shall give written notice within
five business days of such Change of Control or the date it obtains knowledge
of such proposed Change of Control or Sale Event describing in reasonable
detail the material terms and date of consummation or proposed consummation
thereof to the Registered Holder of this Convertible Note, and the Company
shall give the Registered Holder of this Convertible Note prompt written notice
of any material change in the terms or timing of any such transaction.  The Registered Holder of this Convertible
Note may require the Company to prepay all or any portion of the unpaid
principal amount of this Convertible Note (along with a pre-payment premium
equal to 20% of the sum of (i) the principal amount of this Convertible Note
the Registered Holder has elected to have pre-paid and (ii) all accrued and
unpaid interest thereon) by giving written notice to the Company of such
election prior to the later of (a) the twenty-first day after receipt of the
Company’s notice and (b) the fifth day prior to the consummation of the Change
of Control or Sale Event, as the case may be.

 

Upon receipt of any such
election, the Company shall be obligated to prepay the unpaid principal amount
of this Convertible Note as specified therein, together with the applicable
pre-payment premium and all unpaid accrued interest thereon, on the later of
(a) the occurrence of the Change of Control or Sale Event, as the case may be,
and (b) the fifth day after the Company’s receipt of such election.  If any proposed Change of Control or Sale
Event does not occur, all requests for prepayment in connection therewith shall
be automatically rescinded; provided, that,
if there has been a material change in the terms or the timing of the
transaction, the Registered Holder of this Convertible Note may rescind such
Registered Holder’s request for prepayment by giving written notice of such
rescission to the Company. 
Notwithstanding the foregoing, at any time prior to the date the Company
makes a pre-payment pursuant to this Section 1(d), the Registered Holder
may elect (by delivery of written notice to the Company) to receive such
payment, in whole or in part, in shares of Common Stock with a Market Price as
of the date of payment equal to the amount of principal, premium and/or
interest the Registered Holder has elected to receive in shares of Common Stock
rather than cash.  Notwithstanding that
the payment to the Registered Holders under this Section 1(d) is
restricted by the Senior Credit Agreement, failure to make such payment shall
constitute an Event of Default.  In
addition, the provisions of this Section 1(d) shall in any event be
subject to the subordination provisions set forth in the Purchase Agreement.

 

(e)           Special Prepayments for a Management Change.  If a
Management Change has occurred or the Company obtains knowledge that a
Management Change is about to occur, the Company shall give 

 

2

 

written notice within five business days of such Management Change to
the Registered Holder of this Convertible Note. 
The Registered Holder of this Convertible Note may require the Company
to prepay all or any portion of the unpaid principal amount of this Convertible
Note (along with a pre-payment premium equal to 20% of the sum of (i) the
principal amount of this Convertible Note the Registered Holder has elected to
have prepaid and (ii) all accrued and unpaid interest thereon) by giving
written notice to the Company of such election prior to the twenty-first day
after receipt of the Company’s notice of such Management Change.  Upon receipt of any such election, the
Company shall be obligated to prepay the unpaid principal amount of this
Convertible Note as specified therein, together with the applicable pre-payment
premium and all unpaid accrued interest thereon, on the fifth day after the
Company’s receipt of such election. 
Notwithstanding the foregoing, at any time prior to the date the Company
makes a pre-payment pursuant to this Section 1(e), the Registered Holder
may elect (by delivery of written notice to the Company) to receive such
payment, in whole or in part, in shares of Common Stock with a Market Price as
of the date of payment equal to the amount of principal, premium and/or
interest the Registered Holder has elected to receive in shares of Common Stock
rather than cash.  Notwithstanding that
the payment to the Registered Holders under this Section 1(e) is
restricted by the Senior Credit Agreement, failure to make such payment shall
constitute an Event of Default.  In
addition, the provisions of this Section (e) shall in any event be
subject to the subordination provisions set forth in the Purchase Agreement.

 

(f)            Special Prepayments out of Excess Cash Flow; Asset Sales;
Insurance Proceeds; Debt and Equity Offerings.  In
addition to and without limiting any provision of this Convertible Note or the
Purchase Agreement, (i) after the Senior Indebtedness has been indefeasibly
paid in full in cash, if Company sells any of its assets or properties (other
than sales of inventory in the ordinary course of business or sales of other
assets the proceeds of which are reinvested within 20 Business Days in similar
assets constituting “Collateral” under the Senior Credit Agreement), sells or
issues any securities (debt or equity), capital stock, or ownership interests,
receives any property damage or insurance award which is not used to repair or
replace the property covered thereby, incurs any Indebtedness, except for
Permitted Indebtedness or receives life insurance proceeds, then it shall,
apply 100% of the proceeds thereof to the prepayment of this Convertible Note,
to be applied in the manner set forth below, such payment to be made at such
time as the Registered Holder shall decide in its sole discretion, and (ii)
until such time as the principal of this Convertible Note, all accrued and
unpaid interest thereon, and all other obligations of the Company hereunder and
thereunder are indefeasibly paid in full in cash and fully performed, the
Applicable ECF Percentage of the Company’s Excess Cash Flow for each fiscal
year shall be paid by the Company to the Registered Holder as a prepayment of
this Convertible Note to be applied in the manner set forth below.  Such payments described in the foregoing
clause (ii) shall be made no later than thirty (30) calendar days after
preparation of the Company’s audited financial statements, but in any event not
later than one hundred and twenty (120) calendar days after the end of the
fiscal year to which such Excess Cash Flow relates.  All prepayments of this Convertible Note
required by this Section 1(f) shall first be applied to all unpaid
accrued interest thereon, with 83.33% of the remainder of such prepayment
amount to be applied to unpaid principal, and 16.67% of such remainder to be
paid as a prepayment premium (i.e., a 20% pre-payment premium on the principal
amount so prepaid).

 

2.             Interest.  Beginning on January 10, 2002,
interest will accrue at the rate of ten percent (10%) per annum thereafter (in
each case, computed on the basis of a 360-day year, as appropriate, and the
actual number of days elapsed in any year) on the unpaid principal amount of
this Convertible Note outstanding from time to time, or (if less) at the
highest rate then permitted under applicable law.  Interest which accrued prior to January 10,
2002 shall be payable as set forth in the Original Note.  Interest accruing hereunder, and any interest
accruing as provided in Section 4(b)(iii), will be payable to the
Registered Holder to the extent any Excess Availability (as defined in the
Senior Credit Agreement) exists in cash (and any interest not so paid shall
accrue in accordance with the terms hereof), in arrears, on each March 31 and
September 30 (each an “Interest Payment Date”) and will be payable to
the Registered Holder in cash in any event on the Maturity Date in the manner
described herein (including Section 1(a)).  Any accrued interest which is not paid in
cash on any March 31 or September 30 will bear interest at such rate as
provided herein until such interest is paid. 
Interest will accrue on any amount of principal or interest until such
time as payment therefor is actually delivered to the Registered Holder of this
Convertible Note.

 

Notwithstanding
the foregoing, on any Interest Payment Date, if, and to the extent that, the
payment of interest in cash would cause the Company to have no Excess
Availability (as defined in the Senior Credit Agreement) or be in breach of Section
7.1 of the Senior Credit Agreement, the Company may, at its election,

 

3

 

pay the interest payable to
the Registered Holder on such Interest Payment Date by delivery to the
Registered Holder of a number of shares of Common Stock equal to (A) the amount
of interest accrued as of such Interest Payment Date divided by (B) the lesser
of (x) the Conversion Price and (y) the Market Price per share of the Common
Stock, in each case, as of such Interest Payment Date; provided,
that the Company may make such election only if the Liquidity Test (as herein
defined) has been met as of such Interest Payment Date.  If the Company makes such election, the
Company may pay the Registered Holder cash in lieu of issuing any fractional
shares of Common Stock.  As of any
Interest Payment Date, the “Liquidity Test” shall be met if the
Registered Holder receives shares of Common Stock which the Registered Holder
can immediately sell to any Person without violating the Securities Act and
such shares are received by the Registered Holder no later than the fifth day
after the applicable Interest Payment Date; provided, however,
that, notwithstanding the foregoing, the Liquidity Test shall not be met if
either (i) the Market Price per share of Common Stock has been below $5.00 per
share (such number to be appropriately adjusted for any stock split, reverse
stock split, stock dividend or other subdivision or combination of Common Stock
after the original date of issuance of this Convertible Note) for each of the
90 days prior to such Interest Payment Date, (ii) the average daily trading
volume of the Common Stock as quoted in the NASDAQ System for the 30 business
days prior to such Interest Payment Date is less than 15,000 shares per day,
(iii) at any time prior to such Interest Payment Date, the Company has received
a notice from a Person with the requisite authority which states that the
Common Stock has been delisted from the NASDAQ System and the Common Stock is
not listed on the New York or American Stock Exchange, or (iv) an Event of
Default (as herein defined) has occurred at or prior to and is continuing as of
such Interest Payment Date.

 

3.             Application of Payments; Pro Rata Payments. 
Subject to Section 1(f), all payments (whether schedules,
optional or special) shall include payment of accrued interest and pre-payment
premium with respect to all pre-payments on the principal amount so paid, and
shall be applied to payment of interest before application to principal.  Except as otherwise permitted by Sections
1(d), 1(e) or 1(f) hereof, all payments to the holders of the Convertible Notes
(whether for principal, interest, premium or otherwise) will be made pro rata
among such holders based upon the aggregate unpaid principal amount of the
Convertible Notes held by each such holder. 
By its acceptance of this Convertible Note, the holder of this
Convertible Note agrees that if any holder of a Convertible Note obtains any
payment (whether voluntary, involuntary, by application of offset or otherwise)
of principal, interest or any other amount with respect to any Convertible Note
in excess of such holder’s pro rata share of such payments obtained by all
holders of the Convertible Notes (unless permitted by Sections 1(d), 1(e)
or 1(f) hereof)), such holder will purchase from the other holders of
the Convertible Notes such participation in the Convertible Notes held by them
as is necessary to cause such holders to share the excess payment ratably among
each of them as provided in this Section 3.

 

4.             Events of Default.

 

(a)           Definition.  An “Event of Default”
will be deemed to have occurred if:

 

(i)            the
Company fails to pay any amount of the principal of any Convertible Note as and
when required pursuant to the terms of such Convertible Note or the Purchase
Agreement;

 

(ii)           the
Company fails to pay any amount of the interest on any Convertible Note within
five (5) days of when such payment is required pursuant to the terms of such
Convertible Note or the Purchase Agreement; provided however, that no
Event of Default will be deemed to have occurred pursuant to this section by
reason of the Company’s failure to pay all or any portion of (i) the payment of
interest due December 31, 2003, under a letter agreement dated September 25,
2003, between Dresdner and the Company (the “December 2003 Interest Payment”),
or any interest accrued thereon or (ii) any interest due and payable on any
Interest Payment Date occurring after December 31, 2003, up to but not
including the Maturity Date, or any interest accrued thereon; provided
that the Company pays to the Registered Holder in cash on each Interest Payment
Date occurring on or after September 30, 2004, the amount of interest that has
accrued and become payable through such date pursuant to Section 2
hereof to the extent and only if permitted under Section 7.11 of the Revolving
Credit and Term Loan Agreement dated as of January 10, 2002, between
CapitalSource Finance LLC and the Company, as amended by the Fourth Amendment
thereto dated as of December 29, 2003; and provided further that, beginning
October 1, 2003, and continuing until the Company has paid in full the December
2003 Interest Payment and all interest due and payable on any Interest Payment
Date occurring after December 31, 2003, through the date on which the Company 

 

4

 

is no longer in arrears with respect to any interest that became due
and payable on or before the Interest Payment Date immediately preceding such
date (at which time the interest rate on this Convertible Note will revert to
ten percent (10%)), interest will accrue on the unpaid principal amount of the
Convertible Note outstanding from time to time, together with all accrued and
unpaid interest as of the Interest Payment Date immediately preceding the
determination of the amount of interest thus accrued, at the rate of thirteen
percent (13%) per annum (in each case, computed on the basis of a 360-day year,
as appropriate, and the actual number of days elapsed in any year), or (if
less) at the highest rate then permitted under applicable law;

 

(iii)         the Company fails to perform or observe any
covenant or agreement contained in paragraphs 2C or 2G of the Purchase
Agreement;

 

(iv)          the Company fails to perform or observe any
other covenant or agreement contained in the Convertible Notes, the Purchase
Agreement or any of the other Investment Documents, and such failure is not
cured within ten (10) days after the occurrence of such failure;

 

(v)            any representation, warranty, statement or
information contained in the Purchase Agreement or any other Investment
Document or required to be furnished to any holder of the Convertible Notes
pursuant to the Purchase Agreement or any other Investment Document is false or
misleading in any material respect on the date made or furnished;

 

(vi)          the Company or any Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; or an order, judgment or decree is
entered adjudicating the Company or any Subsidiary bankrupt or insolvent; or
any order for relief with respect to the Company or any Subsidiary is entered
under the Federal Bankruptcy Code; or the Company or any Subsidiary petitions
or applies to any tribunal for the appointment of a custodian, trustee, receiver
or liquidator of the Company or any Subsidiary, or of any substantial part of
the assets of the Company or any Subsidiary, or commences any proceeding (other
than a proceeding for the voluntary liquidation and dissolution of any
Subsidiary) relating to the Company or any Subsidiary under any bankruptcy
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction; or any such petition or application is
filed, or any such proceeding is commenced, against the Company or any
Subsidiary and either (A) the Company or any such Subsidiary by any act
indicates its approval thereof, consent thereto or acquiescence therein or (B)
such petition, application or proceeding is not dismissed within 30 days;

 

(vii)         a judgment in excess of $250,000 (exclusive
of insurance) is rendered against the Company or any Subsidiary and, within 30
days after entry thereof, such judgment is not discharged in full or execution
thereof stayed pending appeal, or within 30 days after the expiration of any
such stay, such judgment is not discharged in full; or

 

(viii)        the Company or any Subsidiary defaults in the
performance of any obligation or agreement, including with respect to any
Indebtedness, if the effect of such default is to cause an amount exceeding
$250,000 to become due prior to its stated maturity or to permit the holder or
holders of any obligation or agreement to cause an amount exceeding $250,000 to
become due prior to its stated maturity.

 

The foregoing will
constitute Events of Default whatever the reason or cause for any such Event of
Default and whether it is voluntary or involuntary or is effected by operation
of law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body.

 

(b)           Consequences of Events of Default.

 

(i)            If any Event of Default (other than an Event
of Default of a type described in Sections 4(a)(iii) and 4(a)(vi))
has occurred and is continuing, then the holder or holders of a majority of the
unpaid principal amount of the Convertible Notes then outstanding may declare
(by written notice delivered to the Company) all or any portion of the
outstanding principal amount of the Convertible Notes (together with all
accrued interest thereon) to be immediately due and payable and may demand
immediate payment of all or any portion of the 

 

5

 

outstanding principal amount of the Convertible Notes and interest
thereon in accordance with paragraph 2H of the Purchase Agreement.

 

(ii)           If an Event of Default of the type described
in Sections 4(a)(iii) or 4(a)(vi) has occurred, then the
aggregate principal amount of the Convertible Notes (together with all accrued
interest thereon and all other amounts due and payable with respect thereto)
will become immediately due and payable without any action on the part of the
holders of the Convertible Notes. 
Subject to paragraph 2H of the Purchase Agreement, the Company will
immediately pay to the holders of the Convertible Notes all amounts due and
payable with respect to the Convertible Notes upon the occurrence of such Event
of Default.  If an Event of Default of
the type described in Section 4(a)(iii) or 4(a)(vi) has occurred
and has not been waived by the Registered Holder in writing, then this Section
4(b)(ii) will also apply to all amounts of unpaid interest as to which an
Event of Default had not otherwise occurred.

 

(iii)         If any Event of Default of a type described
in Sections 4(a)(i) or 4(a)(ii) has occurred and is continuing,
the interest rate on the Convertible Notes will increase immediately by an
increment of 3 percentage points (i.e., 300 basis points), to the extent
permitted by applicable law.  Any such
increase of the interest rate resulting from the operation of this Section
4(b)(iii) will terminate as of the close of business on the next date on
which no Event of Default exists (subject to subsequent increases pursuant to
this Section).

 

(iv)          Each holder of the Convertible Notes will
also have any other rights which such holder may have been afforded under any
contract or agreement at any time and any other rights which such holder may
have pursuant to applicable law.  The
Company hereby waives diligence, presentment, protest and demand and notice of
protest and demand, dishonor and nonpayment of the Convertible Notes, and
expressly agrees that the Convertible Notes, or any payment thereunder, may be
extended from time to time and that the holders thereof may accept security for
the Convertible Notes or release security for the Convertible Notes, all
without in any way affecting the liability of the Company thereunder.

 

5.             Conversion.

 

(a)           Conversion Procedure.

 

(i)            Voluntary Conversion.  At
any time and from time to time prior to the payment of this Convertible Note in
full, the holder of this Convertible Note may convert all or any portion of the
unpaid principal amount of this Convertible Note plus any unpaid accrued
interest thereon into a number of shares of the Conversion Stock determined by
dividing (A) the unpaid principal and interest amount designated by such holder
to be converted, by (B) the Conversion Price then in effect.

 

(ii)           Effectiveness of Conversion. 
Except as otherwise provided herein, each conversion of this Convertible
Note will be deemed to have been effected as of the close of business on the
date on which this Convertible Note has been surrendered for conversion at the
office of the Company specified for delivery of notices pursuant to the
Purchase Agreement.  At such time as such
conversion has been effected, the rights of the holder of this Convertible Note
as such holder to the extent of the conversion will cease, and the Person or
Persons in whose name or names any certificate or certificates for shares of
Conversion Stock are to be issued upon such conversion will be deemed to have
become the holder or holders of record of the shares of Conversion Stock
represented thereby.

 

(iii)         Contingent Conversion. 
Notwithstanding any other provision hereof, if a conversion of all or any
portion of this Convertible Note is to be made in connection with a registered
public offering, a Change of Control, a Sale Event, a Management Change, a
proposed sale of the underlying Conversion Stock or any other transaction or
event, then such conversion may, at the election of the holder of this
Convertible Note, be conditioned upon the consummation of such transaction or
the occurrence of such event, in which case such conversion will not be deemed
to be effective until such consummation or occurrence.

 

6

 

(iv)          Actions by the Company.  As
soon as possible after a conversion has been effected (but in any event within
five business days thereafter), the Company will deliver to the converting
holder a certificate or certificates representing the number of shares of
Conversion Stock issuable by reason of such conversion, in such name or names
and such denomination or denominations as the converting holder has specified,
and a new Convertible Note representing any portion of the principal amount
which was represented by this Convertible Note but which was not converted.

 

(v)            Charges, etc.  The issuance of certificates
for shares of Conversion Stock upon conversion of any principal amount of this
Convertible Note will be made without charge to the holder of this Convertible
Note or the Conversion Stock to be issued for any issuance tax in respect
thereof or other cost incurred by the Company in connection with such
conversion and the related issuance of shares of Conversion Stock.  Upon conversion of this Convertible Note, the
Company will take all such actions as are necessary in order to insure that the
Conversion Stock issuable with respect to such conversion will be validly
issued, fully paid and nonassessable, free and clear of all taxes, liens,
charges and encumbrances with respect to the issuance thereof.  The Company will not close its books against
the transfer of this Convertible Note or of Conversion Stock issued or issuable
upon conversion of this Convertible Note in any manner which interferes with
the timely conversion of this Convertible Note. 
The Company will assist and cooperate with any holder of this
Convertible Note or Conversion Stock issuable upon any such conversion which is
required to make any governmental filings or obtain any governmental approval
prior to or in connection with the conversion of this Convertible Note
(including making any filings required to be made by the Company).

 

(vi)          Reservation.  The Company will at all times
reserve and keep available out of its authorized but unissued shares of
Conversion Stock, solely for the purpose of issuance upon the conversion of the
Convertible Notes, such number of shares of Conversion Stock issuable upon the
conversion of all outstanding Convertible Notes.  All shares of Conversion Stock which are so
issuable will, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges.  The Company will take all such actions as may
be necessary to assure that all such shares of Conversion Stock may be so
issued without violation of any applicable law or governmental regulation or
any requirements of any domestic securities exchange upon which shares of
Conversion Stock may be listed (except for official notice of issuance which
will be immediately delivered by the Company upon each such issuance).  The Company will not take any action which
would cause the number of authorized but unissued shares of Conversion Stock to
be less than the number of such shares issuable upon conversion in full of the
Convertible Notes and the conversion, exercise or exchange in full of all other
Equity Securities of the Company then outstanding.

 

(vii)         Related Conversion.  If
any Conversion Stock issuable by reason of conversion of this Convertible Note
is immediately convertible into or immediately exchangeable for any other stock
or securities of the Company, then the Company will, at the converting holder’s
option and upon surrender of this Convertible Note by such holder as provided
herein together with any notice, statement or payment required to effect such
conversion or exchange of such Conversion Stock, deliver to such holder (or as
otherwise specified by such holder) a certificate or certificates representing
the stock or securities into which the shares of Conversion Stock issuable by
reason of such conversion are so convertible or exchangeable, registered in
such name or names and in such denomination or denominations as such holder has
specified.

 

(b)           Conversion Price.

 

(i)            The
initial Conversion Price as of the original issuance date was $12.90.  In order to prevent dilution of the
conversion rights granted under the Convertible Notes, the Conversion Price
will be subject to adjustment from time to time as provided in this Section
5(b), it being acknowledged and agreed that since such date, the Conversion
Price has been adjusted from time to time as is reflected on the Company’s
books and records.

 

(ii)           If
and whenever on or after the original date of issuance of this Convertible Note
the Company issues or sells, or in accordance with Section 5(c) is
deemed to have issued or sold, any Conversion Stock for a consideration per
share which is less than the Conversion Price in effect immediately prior to
such issuance or sale, then immediately upon such issue or sale or deemed issue
or sale the Conversion Price will be 

 

7

 

reduced to the Conversion Price determined by dividing (A) an amount
equal to the sum of (x) the product derived by multiplying the Conversion Price
in effect immediately prior to such issue or sale or deemed issue or sale by
the number of shares of Conversion Stock Deemed Outstanding immediately prior
to such issue or sale or deemed issue or sale, plus (y) the consideration, if
any, received by the Company upon such issue or sale or deemed issue or sale,
by (B) the number of shares of Conversion Stock Deemed Outstanding immediately
after such issue or sale or deemed issue or sale; provided that no adjustment
in the Conversion Price will be made pursuant to this Section 5(b) in
connection with any Exempt Issuance.

 

(c)           Effect on Conversion Price of Certain Events.  For
purposes of determining the adjusted Conversion Price under Section 5(b)
and only if an adjustment to the Conversion Price is required under Section
5(b), the following will be applicable:

 

(i)            Issuance of Rights or Options.  If
the Company in any manner grants or sells any Options and the price per share
for which Conversion Stock is issuable upon the exercise of such Options, or
upon conversion or exchange of any Convertible Securities issuable upon
exercise of such Options, is less than the Conversion Price in effect
immediately prior to the time of the granting or sale of such Options, then the
maximum number of shares of Conversion Stock issuable upon the exercise of such
Options, or upon conversion or exchange of the maximum amount of such
Convertible Securities issuable upon the exercise of such Options, will be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Options for such price per share.  For purposes of this Section 5(c)(i),
the “price per share for which Conversion Stock is issuable upon exercise of
such Options, or upon conversion or exchange of any Convertible Securities
issuable upon exercise of such Options” will be determined by dividing (A) the
total amount, if any, received or receivable by the Company as consideration
for the granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all such
Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the issuance or sale of such Convertible Securities
and the conversion or exchange thereof, by (B) the maximum number of shares of
Conversion Stock issuable upon the exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options.  No adjustment
of the Conversion Price will be made upon the actual issuance of such
Conversion Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Conversion Stock upon conversion or
exchange of such Convertible Securities.

 

(ii)           Issuance of Convertible Securities.  If
the Company in any manner issues or sells any Convertible Securities and the
price per share for which Conversion Stock is issuable upon conversion or
exchange thereof is less than the Conversion Price in effect immediately prior
to the time of such issue or sale, then the maximum number of shares of
Conversion Stock issuable upon conversion or exchange of all such Convertible
Securities will be deemed to be outstanding and to have been issued and sold by
the Company at the time of the issuance or sale of such Convertible Securities
for such price per share.  For the
purposes of this Section 5(b)(ii), the “price per share for which
Conversion Stock is issuable upon conversion or exchange thereof’ will be
determined by dividing (A) the total amount received or receivable by the
Company as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange thereof, by (B) the maximum
number of shares of Conversion Stock issuable upon the conversion or exchange
of all such Convertible Securities.  No
adjustment of the Conversion Price will be made upon the actual issue of such
Conversion Stock upon conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 5(c), no
further adjustment of the Conversion Price will be made by reason of such issue
or sale.

 

(iii)         Change in Option Price or Conversion Rate.  If
the purchase price provided for in any Option, the additional consideration (if
any) payable upon the issue, conversion or exchange of any Convertible
Security, the quantity of Conversion Stock issuable directly or indirectly upon
the exercise, conversion or exchange of any Option or Convertible Security, or
the rate at which any Convertible Security is convertible into or exchangeable
for Conversion Stock changes at any time, then the Conversion Price in effect
immediately prior to the time of such change will be adjusted immediately to
the Conversion Price which would have been in effect at such time had such
Option or Convertible Security originally provided for such changed purchase
price, additional 

 

8

 

consideration, changed quantity or changed conversion rate, as the case
may be, at the time initially granted, issued or sold; provided that in no
event will the Conversion Price be increased pursuant to this Section
5(c)(iii).  For purposes of this Section
5(c), if the terms of any Option or Convertible Security which was
outstanding as of the date of the original issuance of this Convertible Note
are changed in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the Conversion Stock deemed issuable
upon exercise, conversion or exchange thereof will be deemed to have been
issued as of the date of such change; provided that in no event will the
Conversion Price be increased pursuant to this Section 5(c)(iii).

 

(iv)          Calculation of Consideration Received.  If
any Conversion Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, then the consideration received
therefor will be deemed to be the net amount received by the Company
therefor.  If any Conversion Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, then 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.  If any Conversion Stock, Options
or Convertible Securities are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is the surviving entity,
then 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 entity as
is attributable to such Conversion Stock, Options or Convertible Securities, as
the case may be.  The fair value of any
consideration other than cash and securities will be determined jointly by the
Company and the holder or holders of a majority of the outstanding unpaid
principal amount of the Convertible Notes. 
If such parties are unable to reach agreement within a reasonable period
of time, then such fair value will be determined by an appraiser jointly
selected by the Company and the holder or holders of a majority of the
outstanding unpaid principal amount of the Convertible Notes.  The determination of such appraiser will be
final and binding upon the Company and all holders of Convertible Notes, and
the fees and expenses of such appraiser will be borne by the Company.

 

(v)            Integrated Transactions.  If
any Option is issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued without consideration.

 

(vi)          Treasury Shares.  The disposition of any
Conversion Stock owned or held by the Company or any Subsidiary (including in
treasury) will be considered an issue or sale of Conversion Stock.

 

(vii)         Record Date.  If the Company takes a record
of the holders of Conversion Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Conversion Stock, Options
or Convertible Securities or (B) to subscribe for or purchase Conversion Stock,
Options or Convertible Securities, then such record date will be deemed to be
the date of the issue or sale of the shares of Conversion Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

 

(d)           Subdivision or Combination of Conversion Stock.  If
the Company at any time subdivides (by any stock split, stock dividend or
otherwise) one or more classes of its outstanding shares of Conversion Stock
into a greater number of shares, then the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced.  If the Company at any time combines (by
reverse stock split or otherwise) one or more classes of its outstanding shares
of Conversion Stock into a smaller number of shares, then the Conversion Price
in effect immediately prior to such combination will be proportionately
increased.

 

(e)           Reorganization,
Reclassification, Consolidation, Merger or Sale.

 

(i)            Organic Change Defined.  Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company’s assets or other transaction, which
in each case is effected in such a manner that holders of Conversion Stock are
entitled to receive (either directly or upon subsequent liquidation) stock,
securities or cash or other assets with respect to or in exchange for
Conversion Stock is referred to herein as an “Organic Change.”

 

9

 

(ii)           Provisions for Organic Change. 
Prior to the consummation of any Organic Change, the Company will make
lawful and adequate provision (in form and substance satisfactory to the holder
or holders of a majority of the outstanding unpaid principal amount of the
Convertible Notes then outstanding) to insure that each holder of any
Convertible Note will thereafter have the right to acquire and receive, in lieu
of or addition to (as the case may be) shares of Conversion Stock immediately
theretofore acquirable and receivable upon the conversion of such holder’s
Convertible Note, such shares of stock, securities, cash or other assets as may
be issued or payable with respect to or in exchange for the number of shares of
Conversion Stock immediately theretofore acquirable and receivable upon
conversion of such holder’s Convertible Note had such Organic Change not taken
place.  In any such case, appropriate
provision (in form and substance satisfactory to the holder or holders of a
majority of the outstanding unpaid principal amount of the Convertible Notes
then outstanding) will be made with respect to such holder’s rights and
interests to insure that the provisions of this Section 5 and Sections
6 and 7 hereof will thereafter be applicable in relation to any
shares of stock, securities, cash or other assets thereafter deliverable upon
the conversion of the Convertible Notes (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing
entity is other than the Company, an immediate adjustment of the Conversion
Price to the value for the Conversion Stock reflected by the terms of such
consolidation, merger or sale, and a corresponding immediate adjustment in the
number of shares of Conversion Stock acquirable and receivable upon conversion
of the Convertible Notes; provided that
no such adjustment will increase the Conversion Price as otherwise determined
pursuant to this Section 5 or decrease the number of shares of
Conversion Stock issuable upon conversion of the Convertible Notes then
outstanding).  The Company will not
effect any such consolidation, merger or sale, unless prior to the consummation
thereof, the successor entity (if other than the Company) resulting from
consolidation or merger or the entity purchasing such assets assumes by written
instrument (in form satisfactory to the holder or holders of a majority of the
outstanding unpaid principal amount of the Convertible Notes then outstanding),
the obligation to deliver to each such holder such shares of stock, securities,
cash or other assets as, in accordance with the foregoing provisions, such holder
may be entitled to acquire.

 

(f)            Certain Events.  If any event occurs of the
type contemplated by the provisions of this Section 5 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights or securities with equity or profit
participation features), then the Company’s board of directors in good faith
will make an appropriate adjustment in the Conversion Price so as to protect
the rights of the holders of the Convertible Notes; provided that no such adjustment will increase the
Conversion Price as otherwise determined pursuant to this Section 5 or
decrease the number of shares of Conversion Stock issuable upon conversion of
the Convertible Notes then outstanding.

 

(g)           Notices.  Immediately upon any
adjustment of the Conversion Price, the Company will send written notice
thereof to the holder of this Convertible Note, setting forth in reasonable
detail and certifying the calculation of such adjustment.  The Company will send written notice to the
holder of this Convertible Note at least 20 days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Conversion Stock, (B) with respect to any pro rata
subscription offer to holders of Conversion Stock or (C) for determining rights
to vote with respect to or to participate in any Organic Change, dissolution or
liquidation.  The Company will also give
at least 20 days prior written notice to the holder of this Convertible Note of
the date on which any Organic Change, dissolution or liquidation will take
place.

 

6.             Liquidating Dividends.  If
the Company declares a dividend upon the Conversion Stock payable otherwise
than in cash out of earnings or earned surplus (determined in accordance with
generally accepted accounting principles, consistently applied) except for a
stock dividend payable in shares of Conversion Stock (a “Liquidating
Dividend”), then the Company will pay to the holder of this Convertible
Note at the time of payment thereof the Liquidating Dividend which would have
been paid to the holder of this Convertible Note on the Conversion Stock had
this Convertible Note been fully converted immediately prior to the date on
which a record is taken for such Liquidating Dividend (or, if no record is
taken, the date as of which the record holders of Conversion Stock entitled to
such dividends are to be determined).

 

7.             Purchase Rights.  If at any time the Company
grants, issues or sells any Equity Securities or other property pro rata to the
holders of any class of Conversion Stock, then each holder of the Convertible
Notes will be entitled to acquire, upon the terms applicable to such holders of
Conversion Stock, the aggregate Equity Securities or other property which such
holder could have acquired if such holder had held the number of shares of
Conversion 

 

10

 

Stock acquirable upon conversion of such holder’s Convertible Note
immediately before the date on which a record is taken for the grant, issuance
or sale of such Equity Securities or other property (or, if no such record is
taken, the date as of which the record holders of Conversion Stock are to be
determined for the grant, issue or sale of such Equity Securities or other
property).

 

8.             Amendment and Waiver.  The
provisions of the Convertible Notes may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holder or holders of a majority of the unpaid principal amount of the
outstanding Convertible Notes at the time such action is taken, and any matter
as to which such written consent has been obtained will be effective as against
all holders of Convertible Notes; provided that
no such action will (a) decrease the rate at which or the manner in which
interest accrues on the Convertible Notes or the times at which such interest
becomes payable, (b) change any provision relating to the scheduled payments of
principal on the Convertible Notes, (c) increase the Conversion Price or
decrease the number of shares or the class of stock into which the Convertible
Notes are convertible, or (d) the percentage required to approve any change
described in clauses (a), (b) and (c) above and this clause (d), without the
written consent of the holders at least 90% of the unpaid principal amount of
the Convertible Notes then outstanding.

 

9.             Definitions.  For purposes of the
Convertible Notes, the following capitalized terms have the following meaning.

 

“Applicable ECF
Percentage” shall mean the applicable percentage indicated below based on
the applicable fiscal year end and the amount of Excess Cash Flow for such period:

 

	
  Fiscal Year End

  	
   

  	
  Excess Cash Flow

  	
   

  	
  Applicable ECF Percentage

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  September
  30, 2002

  	
   

  	
  $0  $2,000,000

  	
   

  	
  37.5%

  
	
   

  	
   

  	
  >
  $2,000,000

  	
   

  	
  25.0%
  of Excess Cash Flow over

  
	
   

  	
   

  	
   

  	
   

  	
  $2,000,000
  and 37.5% of Excess

  
	
   

  	
   

  	
   

  	
   

  	
  Cash
  Flow up to $2,000,000

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  September
  30, 2003

  	
   

  	
  $0  $6,000,000

  	
   

  	
  37.5%

  
	
   

  	
   

  	
  >
  $6,000,000

  	
   

  	
  25.0%
  of Excess Cash Flow over

  
	
   

  	
   

  	
   

  	
   

  	
  $6,000,000
  and 37.5% of Excess

  
	
   

  	
   

  	
   

  	
   

  	
  Cash
  Flow up to $6,000,000

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  September
  30, 2004 and

  	
   

  	
  $0  $8,000,000

  	
   

  	
  37.5%

  
	
  each year thereafter

  	
   

  	
  >
  $8,000,000

  	
   

  	
  25.0%
  of Excess Cash Flow over

  
	
   

  	
   

  	
   

  	
   

  	
  $8,000,000
  and 37.5% of Excess

  
	
   

  	
   

  	
   

  	
   

  	
  Cash
  Flow up to $8,000,000

  

 

“Capital Expenditures”
shall mean, for any Quarterly Test Period, the sum (without duplication) of all
expenditures (whether paid in cash or accrued as liabilities) during the Quarterly
Test Period that are or should be treated as capital expenditures under GAAP.

 

“Common Stock” means
the Company’s Common Stock, no par value, and any capital stock of any class of
the Company hereafter authorized which is not limited to a fixed sum or
percentage of par or stated value in respect to the rights of the holders
thereof to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the Company.

 

11

 

“Conversion Stock”
means Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Convertible Notes are issued by an entity other than the Company or there is a
change in the type or class of securities so issuable, then the term “Conversion
Stock” will mean shares of the security issuable upon conversion of this
Convertible Note if such security is issuable in shares, or the smallest unit
in which such security is issuable if such security is not issuable in shares.

 

“Conversion Stock Deemed
Outstanding” means, at any given time, the number of shares of Conversion
Stock actually outstanding at such time, plus the number of shares of
Conversion Stock deemed to be outstanding pursuant to Sections 5(c) (i)
and 5(c)(ii) hereof, regardless of whether or not the applicable Options
and Convertible Securities are actually exercisable at such time, but excluding
any shares of Conversion Stock issuable upon conversion of the Convertible
Notes.

 

“Convertible Securities”
means any Equity Securities directly or indirectly convertible into or
exchangeable for Conversion Stock.

 

“Excess Cash Flow”
shall mean, for any fiscal year, without duplication, an amount equal to the
sum of (i) consolidated net income or loss of the Company for such period, plus
(ii) an amount equal to the amount of depreciation expenses, amortization
expense (including the amortization of goodwill), accrued non-cash interest
expense and all other noncash charges deducted in arriving at such consolidated
net income or loss, plus (iii) an amount equal to the aggregate net cash
proceeds of the sale, lease, transfer or other disposition of assets by the
Company during such period to the extent not (a) reinvested in other assets
constituting “Collateral” pursuant to and as defined in the Senior Credit
Agreement upon which Agent has a first and prior Lien pursuant to and as
defined in the Senior Credit Agreement, or (b) required to be applied to
special prepayments or payments on the Senior Indebtedness or this Convertible
Note, plus (iv) an amount equal to the net loss on the sale, lease,
transfer or other disposition of assets by the Company during such period to
the extent deducted in arriving at such consolidated net income or loss, plus
(v) the other amount of any tax refunds or credits received by the Company
during such period, less (vi) an amount equal to the non-financed
Capital Expenditures of the Company for such period less (vii) an amount
equal to the sum of payments required by and actually paid pursuant to Section
2.8(a) of the Senior Credit Agreement, k~ (viii) all voluntary prepayments
on the Convertible Note in excess of required payments actually made during
such period to the extent permitted under the Senior Credit Agreement, less
(ix) an amount equal to the net gain on the sale, lease, transfer or other
disposition of assets, other than sales in the ordinary course of business, by
the Company during such period to the extent included in arriving at such
consolidated net income or loss less (x) an amount equal to the increase
in the Company’s working capital during such period.

 

“Exempt Issuance”
means the issuance of any Common Stock or other securities upon the exercise of
any ID Warrant, any Management Options or the Wenner Stock Option, in each
case, in accordance with its terms, or upon the conversion of any Convertible
Notes or any issuance of any ID Warrant, any Permitted ESO Issuances, the
warrants issued to the Registered Holder on the New Date of Issuance or any
issuance of shares of the Company’s Preferred Stock, no par value, in exchange
for shares of the Company’s Preferred Stock outstanding on January 10, 2002
(and warrants issued to holders thereof on January 10, 2002).

 

“GAAP” means
generally accepted accounting principles in the United States of America in
effect from time to time as applied by nationally recognized accounting firms.

 

“Market Price” of any
security means the average of the closing prices of such security’s sales on
all securities exchanges on which such security may at the time be listed, or,
if there has been no sale on any such exchange on any day, then the average of
the highest bid prices of such security on all such exchanges at the end of
such day, or, if on any day such security is not so listed, then the
representative bid price of such security quoted in the NASDAQ System as of
4:00 P.M., New York time, on such day, or, if on any day such security is not
quoted in the NASDAQ System, then the highest bid price of such security on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case, averaged over a period of 5 days consisting of the day as of which “Market
Price” is being determined and the 4 consecutive business days prior to
such day.  If at any time such security
is not listed on any securities exchange or quoted in the NASDAQ System or the
over-the-counter market, then the “Market Price” will be the fair value
thereof determined jointly by the Company and the Registered Holder or Holders
of a majority of the unpaid principal amount of the Convertible Notes
outstanding at the time of such determination. 
If such parties are unable 

 

12

 

to reach agreement within a
reasonable period of time, then such fair value will be determined by an
appraiser jointly selected by the Company and the Registered Holder or Holders
of a majority of the unpaid principal amount of the Convertible Notes
outstanding at the time of such determination. 
The determination of such appraiser will be final and binding upon the
parties, and the fees and expenses of such appraiser will be borne by the
Company.

 

“New Date of Issuance”
means September 2, 2004.

 

“Options” means any
Equity Securities directly or indirectly to subscribe for or purchase
Conversion Stock or Convertible Securities.

 

“Permitted Indebtedness”
has the meaning set forth in the Senior Credit Agreement.

 

“Person” means an
individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.

 

“Quarterly Test Period”
means the twelve month period ending on the last day of each March, June,
September and December of each year.

 

10.          Note Transferable. 
Subject to the transfer conditions referred to in the legend endorsed on
this Convertible Note, this Convertible Note and all rights hereunder are
transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Convertible Note, properly endorsed for transfer, at the
office of the Company specified for delivery of notices pursuant to the
Purchase Agreement.

 

11.          Note Exchangeable for Different Denominations.  This
Convertible Note is exchangeable, upon the surrender of this Convertible Note
by the holder at the office of the Company specified for delivery of notices
pursuant to the Purchase Agreement, for new Convertible Notes of like tenor
representing in the aggregate the rights under this Convertible Note, and each
of such new Convertible Notes will represent such portion of such rights as is
designated by the holder at the time of such surrender.

 

12.          Replacement.  Upon receipt of evidence
reasonably satisfactory to the Company (it being agreed that an affidavit of
the Registered Holder will be satisfactory) of the ownership and the loss,
theft, destruction or mutilation of any certificate evidencing this Convertible
Note, and in the case of any such loss, theft or destruction, upon receipt of
indemnity reasonably satisfactory to the Company (it being agreed that if the
holder is a financial institution or other institutional investor its own
agreement will be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the Company will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the same rights represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.

 

13.          Cancellation.  After all principal and
accrued interest at any time owed on this Convertible Note have been paid in
full, this Convertible Note will be surrendered to the Company for cancellation
and will not be reissued.

 

14.          Payments and Notices.  All
cash payments to be made to the holders of the Convertible Notes will be made
in the lawful money of the United States of America in immediately available
funds.  Payments of principal and
interest in respect of this Convertible Note will be delivered to the
Registered Holder at such Registered Holder’s address as it appears in the
records of the Company, or at such other address as the Registered Holder may
specify by written notice to the Company. 
Notices to be given pursuant to this Convertible Note will be given in
the manner provided in the Purchase Agreement.

 

15.          Descriptive Headings; Governing Law.  The
descriptive headings of the several Sections of this Convertible Note are
inserted for convenience only and do not constitute a part of this Convertible
Note.  The corporate law of the State of
Oregon (as in effect from time to time) will govern all issues concerning the relative
rights of the Company and its securityholders to the extent of matters
addressed therein.  All other questions
concerning the construction, validity, enforcement and interpretation of this
Convertible Note will be governed by 

 

13

 

the internal law of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New
York or any other jurisdiction) that would cause the application of law of any
jurisdiction other than the State of New York. 
As used in this Convertible Note, the term “including” is used by way of
example or illustration, and not as a limitation.

 

16.          Business Days.  If any payment is due, or any
time period for giving notice or taking action expires, on a day which is a
Saturday, Sunday or legal holiday in the State of New York or the State of
Oregon, then the payment will be due and payable on, and the time period will
automatically be extended to, the next business day immediately following such
Saturday, Sunday or legal holiday, and interest will continue to accrue at the
required rate under this Convertible Note until any such payment is made.

 

17.          Usury Laws.  It is the intention of the
Company and the holder of this Convertible Note to conform strictly to all
applicable usury laws now or hereafter in force, and any interest payable under
this Convertible Note will be subject to reduction to the amount not in excess
of the maximum legal amount allowed under the applicable usury laws as now or
hereafter construed by the courts having jurisdiction over such matters.  If the maturity of this Convertible Note is
accelerated by reason of an election by the holder hereof resulting from an
Event of Default, voluntary prepayment by the Company or otherwise, then earned
interest may never include more than the maximum amount permitted by law,
computed from the date hereof until payment, and any interest in excess of the
maximum amount permitted by law will be canceled automatically and, if
theretofore paid, will at the option of the holder hereof either be rebated to
the Company or credited on the principal amount of this Convertible Note, or if
this Convertible Note has been paid, then the excess will be rebated to the
Company.  The aggregate of all interest
(whether designated as interest, service charges, points or otherwise)
contracted for, chargeable, or receivable under this Convertible Note will
under no circumstances exceed the maximum legal rate upon the unpaid principal balance
of this Convertible Note remaining unpaid from time to time.  If such interest does exceed the maximum
legal rate, it will be deemed a mistake and such excess will be canceled
automatically and, if theretofore paid, rebated to the Company or credited on
the principal amount of this Convertible Note, or if this Convertible Note has
been repaid, then such excess will be rebated to the Company.

 

18.          Severability.  If any provision of this
Convertible Note is held by any court of competent jurisdiction to be illegal,
void or unenforceable, such provision will be of no force and effect, but such
holding shall have no effect upon the enforceability of any other provision.

 

19.          General.  This Convertible Note:

 

(a)           constitutes,
together with the Purchase Agreement and the Ancillary Agreements, the entire
agreement among the parties with respect to the subject matter hereof;

 

(b)           supersedes
any and all prior understandings relating to such subject matter; and

 

(c)           will
be binding upon and inure to the benefit of the parties and their respective
heirs, executors, administrators, successors and assigns.

 

20.          Waiver of Jury Trial.  THE
COMPANY (AND, BY ITS ACCEPTANCE OF THIS CONVERTIBLE NOTE, THE HOLDER HEREOF)
HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY
LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF
THIS CONVERTIBLE NOTE OR ANY OTHER INVESTMENT DOCUMENT OR THE VALIDITY,
PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.

 

21.          No Strict Construction.  The
Company and the initial holder of this Convertible Note have participated
jointly in the negotiation and drafting of this Convertible Note.  In the event an ambiguity or question of
intent or interpretation arises, this Convertible Note will be construed as if
drafted jointly by the Company and the holder hereof, and no presumption or
burden of proof will arise favoring or disfavoring any Person by virtue of the
authorship of any of the provisions of this Convertible Note.

 

14

 

22.          U.S. 
Withholding Tax.  It is intended that interest paid on the
obligation qualify for the exemption from U.S. 
withholding tax as a portfolio debt instrument under Section 871(h) or
881(c) of the IRC.

 

23.          Subordination.  The indebtedness evidenced by
this Convertible Note (i) is and shall be senior to any and all Indebtedness of
the Corporation other than the Senior Indebtedness (to the extent provided in
the Purchase Agreement) and all other Convertible Notes, (ii) shall rank pari-passu with all other Convertible Notes, and (iii) is
not and shall not be pari-passu with
or subordinated to claims of any trade or similar creditors of the Company
except as may be required by bankruptcy or other laws affecting the rights of
creditors generally.

 

* * * * *

 

IN WITNESS WHEREOF, the
Company has executed and delivered this Second Amended and Restated Convertible
Senior Subordinated Note on the date specified above.

 

 

	
   

  	
  GARDENBURGER,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Scott C. Wallace

  	
   

  
	
   

  	
  Name:

  	
  Scott
  C. Wallace

  
	
   

  	
  Title:

  	
  President
  & CEO

  
					

 

15

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