Document:

exv10w1

 

Exhibit 10.1

Annual Incentive Plan

Plan Objectives

The primary objective of the America West Holdings Corporation Annual Incentive Plan (AIP)
is to achieve specific business and financial goals which are key to the organization’s
success. The Company believes these goals can best be accomplished by providing incentives
to key employees.

The AIP helps prioritize and focus efforts on the accomplishment of goals established each
year. This is achieved by linking a significant element of variable annual compensation to
the accomplishment of selected financial goals and individual performance. At target
performance levels, the AIP provides incentive compensation opportunities, which, in
combination with base salary, will yield competitive total cash compensation levels.

Basic Plan Concept

The plan concept provides for incentives to be paid based on performance in two main areas:
(i) Corporate Financial Performance, and (ii) Individual Performance. A minimum level of
Corporate Financial Performance must be achieved before any incentives will be
funded. The minimum level is set each year and approved by the Board of Directors.

Eligibility Criteria

Eligibility for participation in the AIP will be extended to officers and other key
employees who directly impact the Company’s success. The specific positions eligible to
participate in the plan will be reviewed annually by the Chairman and the Compensation
Committee of the Board of Directors. Employees hired or promoted into an eligible position
from January through September are eligible to participate on a prorated basis. Employees
hired or promoted into an eligible position after September 30 will not be eligible to
participate in that calendar year. Employees on leave for more than 3 months during the
program year may have their base salaries prorated for purposes of calculating incentive
payouts. The following positions are currently eligible to participate:

Chairman/President/CEO

Executive Vice President

Sr. Vice President

Vice President

Sr. Director

Director

Manager

Supervisor

Individual Contributors (grades 23 and higher)

 

 

Award Opportunities

On an annual basis, the Company will specify target awards for each eligible position. The
incentive award opportunities at target performance levels are intended to reflect
competitive annual incentive compensation opportunities for comparable positions in the
market. In all cases, the maximum award for participants equals two times the target
level. Target incentive award opportunities, as a percentage of base salary, are as
follows:

	 	 	 	 	 
	Level	 	Individual Target %	 
	Chairman/President/CEO
	 	 	80	%
	Executive Vice President
	 	 	60	%
	Sr. Vice President
	 	 	45	%
	Vice President
	 	 	35	%
	Sr. Director
	 	 	25	%
	Director
	 	 	20	%
	Manager
	 	 	7	%
	Supervisor
	 	 	6.25	%
	Individual Contributor
	 	 	5	%

These award opportunities will be reviewed annually by the Board of Directors.

Performance Measures and Bonus Calculation

The Company and each individual will be assigned accountability for performance on selected
performance measures.

The specific measurements used for corporate financial performance will be set by the Board
of Directors, but have generally been based on AWHC’s planned
operating income or loss. In
all cases, a minimum level of planned operating income or loss must be achieved for any
incentives to be funded.

AWHC’s financial performance compared against the approved financial plan will determine
the total bonus pool for 2005. This pool will equal the sum of all individual bonus
targets, with adjustments made based on AWHC’s financial performance versus plan. Bonus
payments will never exceed the established pool maximum.

	 	 	 	 	 
	Financial Performance v. Plan	 	Pool Funding %	 
	< Plan
	 	 	0	%
	Plan
	 	 	100	%
	Maximum (exceed plan by 60%)
	 	 	200	%

Straight-line interpolation is used to determine the payout when performance falls between
performance levels.

Each individual will be given a performance score, based upon his/her overall performance
and contribution towards AWHC’s plan performance.

 

 

	 	 	 	 	 
	Individual Performance	 	Score	 
	Poor Performance
	 	 	0	 
	Adequate Performance (room for improvement)
	 	 	50	 
	Meets Expectations
	 	 	100	 
	Exceeds Expectations
	 	 	150	 
	Superior Performance
	 	 	200	 

     Each individual’s annual bonus will be calculated using the following formula:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Base

Salary
	 	X
	 	Individual

Target %
	 	X
	 	Pool

Performance

Factor (%)
	 	X
	 	Individual

Performance

Score (%)
	 	=
	 	BONUS*

*Bonus payments will never exceed the established pool maximum; therefore, individual
performance scores may be adjusted to contain the total bonus payments within the total
bonus pool.

Award Payments

Awards will be paid in cash as soon as possible after the close of the fiscal year (but no
later than March 15th following the end of the fiscal year). Awards will be
paid based on audited financial results and approval by the Board of Directors. All awards
are subject to applicable taxes and other standard deductions. Employees must be in an
eligible position on date of payout, in order to receive a payment. Employees must be on
active, at-work status on date of payout, in order to receive a payment. Employees who are
on leave on date of payout, but otherwise eligible, will receive payment after they have
been on active, at-work status for 30 days.

Promotions

In the event that a person is promoted from an eligible position to a position with a
higher target payout, the award will be pro-rated according to the time spent in each
position and the base salary that apply. Employees promoted from a non-eligible position
to an eligible position during the year, but prior to October 1, will participate on a
similarly prorated basis.

Retirement and Terminations

To receive an award under the AIP, the participant generally must be employed at the time
of payout. Exceptions to this policy will be made for retirement, long-term disability or
death; in these cases, the award will be prorated to reflect the actual number of months of
service during the year.

 

 

Plan Administration, Modification and Adjustment

The AIP will be administered by the Chairman, who may delegate certain elements of program
administration to the Vice President, Human Resources. Actual performance goals,
standards, and award determinations will be approved by the Compensation Committee of the
Board of Directors (the “Committee”). The Committee has the discretion to adjust the
financial performance criteria to reflect effects of changes in U.S.
tax laws, generally
accepted accounting principles, or other laws or provisions affecting the Company’s
reported financial results and extraordinary non-recurring items as described in Accounting
Principles Board Opinion No. 30 and/or in Management’s
Discussion and Analysis of Financial
Condition and results of operations appearing in the Company’s annual report to
stockholders for fiscal year 2005. Any modifications, amendments, or adjustment to the
plan shall be recommended by the Chairman and approved by the Committee.exv4w3

 

Exhibit 4.3

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

Original Issue Date: April 20, 2005

Original Conversion Price (subject to adjustment herein): $1.57

$                    

7% CONVERTIBLE DEBENTURE

DUE APRIL 20, 2008

     THIS DEBENTURE is one of a series of duly authorized and issued 7% Convertible Debentures of
Brillian Corporation, a Delaware corporation, having a principal place of business at 1600 North
Desert Drive, Tempe, Arizona 85281 (the “Company”), designated as its 7% Convertible
Debenture, due April 20, 2008 (the “Debenture(s)”).

     FOR
VALUE RECEIVED, the Company promises to pay to _________ or its registered
assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal
sum of $___ by April 20, 2008, or such earlier date as the Debentures are required or
permitted to be repaid as provided hereunder (the “Maturity Date”), and to pay interest to
the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof. This Debenture is subject to the following additional
provisions:

     Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined herein have the
meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the
following meanings:

     “Alternate Consideration” shall have the meaning set forth in Section 5(d).

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     “Base Conversion Price” shall have the meaning set forth in Section 5(b).

     “Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States or a day on which banking institutions in the
State of New York are authorized or required by law or other government action to close.

     “Buy-In” shall have the meaning set forth in Section 4(d)(v).

     “Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 33% of the voting securities of the Company, or (ii) the
Company merges into or consolidates with any other Person, or any Person merges into or
consolidates with the Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 66% of the aggregate
voting power of the Company or the successor entity of such transaction, or (iii) the
Company sells or transfers its assets, as an entirety or substantially as an entirety, to
another Person and the stockholders of the Company immediately prior to such transaction own
less than 66% of the aggregate voting power of the acquiring entity immediately after the
transaction, (iv) a replacement at one time or within a three year period of more than
one-half of the members of the Company’s board of directors which is not approved by a
majority of those individuals who are members of the board of directors on the date hereof
(or by those individuals who are serving as members of the board of directors on any date
whose nomination to the board of directors was approved by a majority of the members of the
board of directors who are members on the date hereof), or (v) the execution by the Company
of an agreement to which the Company is a party or by which it is bound, providing for any
of the events set forth above in (i) or (iv).

     “Common Stock” means the common stock, par value $0.001 per share, of the
Company and stock of any other class of securities into which such securities may hereafter
have been reclassified or changed into.

     “Conversion Date” shall have the meaning set forth in Section 4(a).

     “Conversion Price” shall have the meaning set forth in Section 4(b).

     “Conversion Shares” means the shares of Common Stock issuable upon conversion
of Debentures or as payment of interest in accordance with the terms.

     “Debenture Register” shall have the meaning set forth in Section 2(c).

     “Dilutive Issuance” shall have the meaning set forth in Section 5(b).

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     “Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).

     “Effectiveness Period” shall have the meaning given to such term in the
Registration Rights Agreement.

     “Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notice of Conversions of the Holder, if any, (ii) all liquidated
damages and other amounts owing to the Holder in respect of the Debentures shall have been
paid; (iii) there is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares issuable pursuant
to the Transaction Documents (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (iv) the Common Stock
is trading on the Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company believes, in good
faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for
the foreseeable future), (v) the daily dollar trading volume of the Common Stock on the
Trading Market for each Trading Day is at least $200,000, (vi) there is a sufficient number
of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance
of all of the shares issuable pursuant to the Transaction Documents, (vii) there is then
existing no Event of Default or event which, with the passage of time or the giving of
notice, would constitute an Event of Default, (viii) the issuance of the shares in question
to the Holder would not violate the limitations set forth in Sections 4(c)(i) and 4(c)(ii)
and (ix) no public announcement of a pending or proposed Fundamental Transaction, Change of
Control Transaction or acquisition transaction has occurred that has not been consummated.

     “Event of Default” shall have the meaning set forth in Section 8.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

     “Fundamental Transaction” shall have the meaning set forth in Section 5(d).

     “Forced Conversion Notice” shall have the meaning set forth in Section 6(c).

     “Force Conversion Notice Date” shall have the meaning set forth in Section
6(c).

     “Interest Conversion Rate” means the lesser of (a) the Conversion Price and (b)
if Shareholder Approval has been obtained, 90% of the lesser of (i) the average of the 20
VWAPs immediately prior to the applicable Interest Payment Date or (ii) the average of the
20 VWAPs immediately prior to the date the applicable interest payment shares are issued and
delivered if after the Interest Payment Date.

     “Interest Payment Date” shall have the meaning set forth in Section 2(a).

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     “Late Fees” shall have the meaning set forth in Section 2(d).

     “Mandatory Prepayment Amount” for any Debentures shall equal the sum of (i) the
greater of: (A) 130% of the principal amount of Debentures to be prepaid, plus all accrued
and unpaid interest thereon, or (B) the principal amount of Debentures to be prepaid, plus
all other accrued and unpaid interest hereon, divided by the Conversion Price on (x) the
date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the VWAP on
(x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date
the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such Debentures.

     “New York Courts” shall have the meaning set forth in Section 9(d).

     “Notice of Conversion” shall have the meaning set forth in Section 4(a).

     “Optional Redemption” shall have the meaning set forth in Section 6(a).

     “Optional Redemption Amount” shall mean the sum of (i) (x) if an Optional
Redemption occurs prior to the one year anniversary of this Debenture, 120% of the principal
amount of the Debenture then outstanding, (y) if an Optional Redemption occurs on or after
the one year anniversary but prior to the two year anniversary of this Debenture, 140% of
the principal amount of the Debenture then outstanding or (z) if an Optional Redemption
occurs on or after the two year anniversary but prior to the Maturity Date, 160% of the
principal amount of the Debenture then outstanding, (ii) accrued but unpaid interest and
(iii) all liquidated damages and other amounts due in respect of the Debenture.

     “Optional Redemption Notice” shall have the meaning set forth in Section 6(a).

     “Optional Redemption Notice Date” shall have the meaning set forth in Section
6(a).

     “Original Issue Date” shall mean the date of the first issuance of the
Debentures regardless of the number of transfers of any Debenture and regardless of the
number of instruments which may be issued to evidence such Debenture.

     “Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a governmental
agency.

     “Purchase Agreement” means the Securities Purchase Agreement, dated as of April
18, 2005, to which the Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.

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     “Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the date of the Purchase Agreement, to which the Company and the original Holder are
parties, as amended, modified or supplemented from time to time in accordance with its
terms.

     “Registration Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering among other things the
resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.

     “Securities Act” means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.

     “Shareholder Approval” shall have the meaning given to such term in the
Purchase Agreement.

     “Subsidiary” shall have the meaning given to such term in the Purchase
Agreement.

     “Threshold Period” shall have the meaning given to such term in Section 6(d).

     “Trading Day” means a day on which the Common Stock is traded on a Trading
Market.

     “Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq National Market,
the American Stock Exchange, the New York Stock Exchange or the Nasdaq SmallCap Market.

     “Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.

     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to
4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading
Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the
volume weighted average price of the Common Stock for such date (or the nearest preceding
date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the
OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets”
published by the Pink Sheets, LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the Common Stock so
reported; or (d) in all other cases, the fair market value of a share of Common Stock as
determined by an

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independent appraiser selected in good faith by the Holders and reasonably acceptable
to the Company.

Section 2. Interest.

     a) Payment of Interest in Cash or Kind. The Company shall pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of this Debenture
at the rate of 7% per annum, payable quarterly on March 31, June 30, September 30 and
December 31, beginning on the first such date after the Original Issue Date, on each Monthly
Redemption Date, on each Conversion Date (as to that principal amount then being converted),
on each Optional Redemption Date (as to that principal amount being redeemed) and on the
Maturity Date (except that, if any such date is not a Business Day, then such payment shall
be due on the next succeeding Business Day) (each such date, an “Interest Payment
Date”), in cash or shares of Common Stock at the Interest Conversion Rate, or a
combination thereof; provided, however, payment in shares of Common Stock
may only occur if (i) during the 10 Trading Days immediately prior to the applicable
Interest Payment Date and through and including the date such shares of Common Stock are
issued to the Holder all of the Equity Conditions have been met, (ii) the Company has
obtained Shareholder Approval and (iii) the VWAP is equal to or greater than 115% of the
then applicable Conversion Price for the 10 Trading Days immediately prior to the applicable
Interest Payment Date and through and including the date such shares of Common Stock are
issued to the Holder and the Company shall have given the Holder notice in accordance with
the notice requirements set forth below.

     b) Company’s Election to Pay Interest in Kind. Subject to the terms and
conditions herein, the decision whether to pay interest hereunder in shares of Common Stock
or cash shall be at the discretion of the Company. Not less than 10 Trading Days prior to
each Interest Payment Date, the Company shall provide the Holder with written notice of its
election to pay interest hereunder either in cash or shares of Common Stock (the Company may
indicate in such notice that the election contained in such notice shall continue for later
periods until revised). Within 10 Trading Days prior to an Interest Payment Date, the
Company’s election (whether specific to an Interest Payment Date or continuous) shall be
irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions,
failure to timely provide such written notice shall be deemed an election by the Company to
pay the interest on such Interest Payment Date in cash.

     c) Interest Calculations. Interest shall be calculated on the basis of a
360-day year and shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum, together with all accrued and unpaid interest and other amounts
which may become due hereunder, has been made. Payment of interest in shares of Common
Stock shall otherwise occur pursuant to Section 4(d)(ii) and only for purposes of the
payment of interest in shares, the Interest Payment Date shall be deemed the Conversion
Date. Interest shall cease to accrue with respect to any principal amount converted,
provided that the Company in fact delivers the Conversion Shares within the time period
required by Section 4(d)(ii). Interest hereunder will be paid to the Person in whose name
this Debenture is registered on the records of the Company regarding

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registration and transfers of Debentures (the “Debenture Register”). Except as
otherwise provided herein, if at any time the Company pays interest partially in cash and
partially in shares of Common Stock, then such payment shall be distributed ratably among
the Holders based upon the principal amount of Debentures held by each Holder.

     d) Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at the rate of 18% per annum (or such lower maximum amount of
interest permitted to be charged under applicable law) (“Late Fees”) which will
accrue daily, from the date such interest is due hereunder through and including the date of
payment. Notwithstanding anything to the contrary contained herein, if on any Interest
Payment Date the Company has elected to pay interest in Common Stock and is not able to pay
accrued interest in the form of Common Stock because it does not then satisfy the conditions
for payment in the form of Common Stock set forth above, then, at the option of the Holder,
the Company, in lieu of delivering either shares of Common Stock pursuant to this Section 2
or paying the regularly scheduled cash interest payment, shall deliver, within three Trading
Days of each applicable Interest Payment Date, an amount in cash equal to the product of the
number of shares of Common Stock otherwise deliverable to the Holder in connection with the
payment of interest due on such Interest Payment Date and the highest VWAP during the period
commencing on the Interest Payment Date and ending on the Trading Day prior to the date such
payment is made.

     e) Prepayment. Except as otherwise set forth in this Debenture, the Company
may not prepay any portion of the principal amount of this Debenture without the prior
written consent of the Holder.

Section 3. Registration of Transfers and Exchanges.

     a) Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations, as requested
by the Holder surrendering the same. No service charge will be made for such registration
of transfer or exchange.

     b) Investment Representations. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations.

     c) Reliance on Debenture Register. Prior to due presentment to the Company for
transfer of this Debenture, the Company and any agent of the Company may treat the Person in
whose name this Debenture is duly registered on the Debenture Register as the owner hereof
for the purpose of receiving payment as herein provided and for all other purposes, whether
or not this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

Section 4. Conversion.

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     a) Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, this Debenture shall be convertible into shares of
Common Stock at the option of the Holder, in whole or in part at any time and from time to
time (subject to the limitations on conversion set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company the form of Notice of
Conversion attached hereto as Annex A (a “Notice of Conversion”), specifying
therein the principal amount of Debentures to be converted and the date on which such
conversion is to be effected (a “Conversion Date”). If no Conversion Date is
specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice
of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not
be required to physically surrender Debentures to the Company unless the entire principal
amount of this Debenture plus all accrued and unpaid interest thereon has been so converted.
Conversions hereunder shall have the effect of lowering the outstanding principal amount of
this Debenture in an amount equal to the applicable conversion. The Holder and the Company
shall maintain records showing the principal amount converted and the date of such
conversions. The Company shall deliver any objection to any Notice of Conversion within 1
Business Day of receipt of such notice. In the event of any dispute or discrepancy, the
records of the Holder shall be controlling and determinative in the absence of manifest
error. The 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.

     b) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $1.57 (subject to adjustment herein)(the “Conversion Price”).

     c) Conversion Limitations.

     i. [RESERVED].

     ii. Holder’s Restriction on Conversion. The Company shall not effect
any conversion of this Debenture, and the Holder shall not have the right to convert
any portion of this Debenture, pursuant to Section 4(a) or otherwise, to the extent
that after giving effect to such conversion, the Holder (together with the Holder’s
affiliates), as set forth on the applicable Notice of Conversion, would beneficially
own in excess of 4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder and
its affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) conversion of the remaining, nonconverted portion of this
Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other Debentures or the Warrants)
subject to a

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limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 4(c)(ii), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange Act.
To the extent that the limitation contained in this section applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder) and of which a portion of this Debenture is
convertible shall be in the sole discretion of such Holder. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company each
time it delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such determination. For purposes of
this Section 4(c)(ii), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may
be, (y) a more recent public announcement by the Company or (z) any other notice by
the Company or the Company’s Transfer Agent setting forth the number of shares of
Common Stock outstanding. Upon the written or oral request of the Holder, the
Company shall within two Trading Days confirm orally and in writing to the Holder
the number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to the
conversion or exercise of securities of the Company, including this Debenture, by
the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 4(c) may be
waived by the Holder, at the election of the Holder, upon not less than 61 days’
prior notice to the Company, and the provisions of this Section 4(c) shall continue
to apply until such 61st day (or such later date, as determined by the Holder, as
may be specified in such notice of waiver).

     d) Mechanics of Conversion

     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal amount
of this Debenture to be converted by (y) the Conversion Price.

     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after any Conversion Date, the Company will deliver or cause to be
delivered to the Holder (A) a certificate or certificates representing the
Conversion Shares which shall be free of restrictive legends and trading
restrictions (other than those required by the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of Debentures
(including, if so timely elected by the Company, shares of Common Stock representing
the payment of accrued interest) and (B) a bank check in the amount of accrued and
unpaid interest (if the Company is required to pay accrued

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interest in cash). The Company shall, if available and if allowed under
applicable securities laws, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions.

     iii. Failure to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion,
in which event the Company shall immediately return the certificates representing
the principal amount of Debentures tendered for conversion.

     iv. Obligation Absolute; Partial Liquidated Damages. If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1000 of principal amount being converted, $10 per Trading Day
(increasing to $20 per Trading Day after 5 Trading Days after such damages begin to
accrue) for each Trading Day after such third Trading Day until such certificates
are delivered. The Company’s obligations to issue and deliver the Conversion Shares
upon conversion of this Debenture in accordance with the terms hereof are absolute
and unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the recovery
of any judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged breach
by the Holder or any other Person of any obligation to the Company or any violation
or alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the Company to
the Holder in connection with the issuance of such Conversion Shares;
provided, however, such delivery shall not operate as a waiver by
the Company of any such action the Company may have against the Holder. In the
event a Holder of this Debenture shall elect to convert any or all of the
outstanding principal amount hereof, the Company may not refuse conversion based on
any claim that the Holder or any one associated or affiliated with the Holder has
been engaged in any violation of law, agreement or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining conversion of all
or part of this Debenture shall have been sought and obtained and the Company posts
a surety bond for the benefit of the Holder in the amount of 150% of the principal
amount of this Debenture outstanding, which is subject to the injunction, which bond
shall remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Holder to the extent it obtains
judgment. In the absence of an injunction precluding the same, the Company shall
issue

10

 

Conversion Shares or, if applicable, cash, upon a properly noticed conversion.
Nothing herein shall limit a Holder’s right to pursue actual damages or declare an
Event of Default pursuant to Section 8 herein for the Company’s failure to deliver
Conversion Shares within the period specified herein and such Holder shall have the
right to pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The exercise
of any such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the third Trading Day after the
Conversion Date, and if after such third Trading Day the Holder is required by its
brokerage firm to purchase (in an open market transaction or otherwise) Common Stock
to deliver in satisfaction of a sale by such Holder of the Conversion Shares which
the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any remedies available
to or elected by the Holder) the amount by which (x) the Holder’s total purchase
price (including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock that
such Holder anticipated receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation and (B) at the option
of the Holder, either reissue Debentures in principal amount equal to the principal
amount of the attempted conversion or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with its
delivery requirements under Section 4(d)(ii). For example, if the Holder purchases
Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of Debentures with respect to which the actual sale price
of the Conversion Shares at the time of the sale (including brokerage commissions,
if any) giving rise to such purchase obligation was a total of $10,000 under clause
(A) of the immediately preceding sentence, the Company shall be required to pay the
Holder $1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the Company to make payment
in respect of a Buy-In for the failure to timely deliver certificates hereunder and
the Company timely pays in full such payment, the Company shall not be required to
pay such Holder liquidated damages under Section 4(d)(iv) in respect of the
certificates resulting in such Buy-In.

     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its authorized
and unissued shares of Common Stock solely for the purpose of issuance upon

11

 

conversion of the Debentures and payment of interest on the Debenture, each as
herein provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holder (and the other Holders of the Debentures),
not less than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set forth in
the Purchase Agreement) be issuable (taking into account the adjustments and
restrictions of Section 5) upon the conversion of the outstanding principal amount
of the Debentures and payment of interest hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly and
validly authorized, issued and fully paid, nonassessable and, if the Registration
Statement is then effective under the Securities Act, registered for public sale in
accordance with such Registration Statement.

     vii. Fractional Shares. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the VWAP at such time. If the Company elects
not, or is unable, to make such a cash payment, the Holder shall be entitled to
receive, in lieu of the final fraction of a share, one whole share of Common Stock.

     viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of this Debenture shall be made without charge to the
Holder hereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.

Section 5. Certain Adjustments.

     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (A) pays a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company pursuant to this Debenture,
including as interest thereon), (B) subdivides outstanding shares of Common Stock into a
larger number of shares, (C) combines (including by way of reverse stock split) outstanding
shares of Common Stock into a smaller number of shares, or (D) issues by reclassification of
shares of the Common Stock any shares of capital stock of the

12

 

Company, then the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Debenture is outstanding, shall offer, sell, grant any
option to purchase or offer, sell or grant any right to reprice its securities, or otherwise
dispose of or issue (or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then Conversion Price
(such lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”), as adjusted hereunder (if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices or
otherwise, or due to warrants, options or rights per share which is issued in connection
with such issuance, be entitled to receive shares of Common Stock at an effective price per
share which is less than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the
Conversion Price shall be reduced by multiplying the Conversion Price by a fraction, the
numerator of which is the number of shares of Common Stock issued and outstanding
immediately prior to the Dilutive Issuance plus the number of shares of Common Stock and
Common Stock Equivalents which the aggregate consideration received or receivable by the
Company in connection with such Dilutive Issuance would purchase at the then effective
Conversion Price, and the denominator of which shall be the sum of the number of shares of
Common Stock issued and outstanding immediately prior to the Dilutive Issuance plus the
number of shares of Common Stock and Common Stock Equivalents so issued or issuable in
connection with the Dilutive Issuance; provided, however, until Shareholder
Approval is obtained and deemed effective, the Conversion Price shall not be adjusted to be
less than $1.57, subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock that occur
after the date of this Debenture. Such adjustment shall be made whenever such Common Stock
or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will
be made under this Section 5(b) in respect of an Exempt Issuance. The Company shall notify
the Holder in writing, no later than the Business Day following the issuance of any Common
Stock or Common Stock Equivalents subject to this section, indicating therein the applicable
issuance price, or of applicable reset price, exchange price, conversion price and other
pricing terms (such notice the “Dilutive Issuance Notice”). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to
this Section 5(b), upon the occurrence of any Dilutive Issuance, after the date

13

 

of such Dilutive Issuance the Holder is entitled to receive a number of Conversion
Shares based upon the Base Conversion Price regardless of whether the Holder accurately
refers to the Base Conversion Price in the Notice of Conversion.

     c) Pro Rata Distributions. If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences
of its indebtedness or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion Price shall be
adjusted by multiplying such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as determined by the
Board of Directors in good faith. In either case the adjustments shall be described in a
statement provided to the Holder of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

     d) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the Company with or into
another Person, (B) the Company effects any sale of all or substantially all of its assets
in one or a series of related transactions, (C) any tender offer or exchange offer (whether
by the Company or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or property, or (D)
the Company effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property (in any such case, a “Fundamental Transaction”),
then upon any subsequent conversion of this Debenture, the Holder shall have the right to
receive, for each Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction, the same kind and
amount of securities, cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of one share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price
among the Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any

14

 

conversion of this Debenture following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the Company or surviving
entity in such Fundamental Transaction shall issue to the Holder a new debenture consistent
with the foregoing provisions and evidencing the Holder’s right to convert such debenture
into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or surviving entity
to comply with the provisions of this paragraph (d) and insuring that this Debenture (or any
such replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.

     e) Calculations. All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding treasury
shares, if any) issued and outstanding.

     f) Notice to Holders.

     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 5, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. If the Company
issues a variable rate security, despite the prohibition thereon in the Purchase
Agreement, the Company shall be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion or exercise price at which such
securities may be converted or exercised in the case of a Variable Rate Transaction
(as defined in the Purchase Agreement).

     ii. Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution) on the Common Stock; (B) the Company
shall declare a special nonrecurring cash dividend on or a redemption of the Common
Stock; (C) the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or transfer of all
or substantially all of the assets of the Company, of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or property; (E)
the Company shall authorize the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company; then, in each case, the Company shall
cause to be filed at each office or agency maintained for the purpose of conversion
of the Debentures, and shall cause to be mailed to the Holders at their last
addresses as they shall appear upon the stock books of the Company, at least 20
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record

15

 

is to be taken for the purpose of such dividend, distribution, redemption,
rights or warrants, or if a record is not to be taken, the date as of which the
holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale, transfer or share
exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange;
provided, that the failure to mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice. Holders are entitled to convert Debentures during
the 20-day period commencing the date of such notice to the effective date of the
event triggering such notice.

Section 6. Redemption and Forced Conversion.

     a) Optional Redemption at Election of Company. Subject to the provisions of
this Section 6, at any time after the Effective Date, the Company may deliver a notice to
the Holders (an “Optional Redemption Notice” and the date such notice is deemed
delivered hereunder, the “Optional Redemption Notice Date”) of its irrevocable
election to redeem some or all of the then outstanding Debentures, for an amount, in cash,
equal to the Optional Redemption Amount on the 10th Trading Day following the
Optional Redemption Notice Date (such date, the “Optional Redemption Date” and such
redemption, the “Optional Redemption”). The Optional Redemption Amount is due in
full on the Optional Redemption Date. The Company may only effect an Optional Redemption if
during the period commencing on the Optional Redemption Notice Date through to the Optional
Redemption Date and through and including the date such shares of Common Stock are issued to
the Holder, each of the Equity Conditions shall have been met. If any of the Equity
Conditions shall cease to be satisfied at any time during the required period, then the
Holder may elect to nullify the Optional Redemption Notice by notice to the Company within 3
Trading Days after the first day on which any such Equity Condition has not been met
(provided that if, by a provision of the Transaction Documents the Company is obligated to
notify the Holder of the non-existence of an Equity Condition, such notice period shall be
extended to the third Trading Day after proper notice from the Company) in which case the
Optional Redemption Notice shall be null and void, ab initio. The Company
covenants and agrees that it will honor all Notice of Conversions tendered from the time of
delivery of the Optional Redemption Notice through the date all amounts owing thereon are
due and paid in full.

     b) Redemption Procedure. The payment of cash pursuant to the Optional
Redemption shall be made on the Optional Redemption Date. If any portion of the cash
payment for an Optional Redemption shall not be paid by the Company by its due date,
interest shall accrue thereon at the rate of 18% per annum (or the maximum rate permitted by
applicable law, whichever is less) until the payment of the Optional

16

 

Redemption Amount, plus all amounts owing thereon is paid in full. Alternatively, if
any portion of the Optional Redemption Amount, as applicable, remains unpaid after such
date, the Holders subject to such redemption may elect, by written notice to the Company
given at any time thereafter, to invalidate ab initio such redemption,
notwithstanding anything herein contained to the contrary, and, with respect the failure to
honor the Optional Redemption as applicable, the Company shall have no further right to
exercise such Optional Redemption. Notwithstanding anything to the contrary in this Section
6, the Company’s determination to redeem in cash or its elections under Section 6(b) shall
be applied among the Holders of Debentures ratably. The Holder may elect to convert the
outstanding principal amount of the Debenture pursuant to Section 4 prior to actual payment
in cash for any redemption under this Section 6 by fax delivery of a Notice of Conversion to
the Company.

     c) Forced Conversion. Notwithstanding anything herein to the contrary, if after
the 12 month anniversary of the Closing Date, each of the Closing Prices for the Common
Stock for any 30 consecutive Trading Days (such period commencing only after the one year
anniversary of the Closing Date, such period the “Threshold Period”)) exceeds $3.14
(subject to adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur after the
Original Issue Date), the Company may, within 1 Trading Day of the end of any such period,
deliver a notice to the Holder (a “Forced Conversion Notice” and the date such
notice is received by the Holder, the “Forced Conversion Notice Date”) to cause the
Holder to immediately convert all or part of the then outstanding principal amount of
Debentures pursuant to Section 4. The Company may only effect a Forced Conversion Notice if
all of the Equity Conditions are met through the applicable Threshold Period until the date
of the applicable Forced Conversion and through and including the date such shares of Common
Stock are issued to the Holder. Any Forced Conversion shall be applied ratably to all
Holders based on their initial purchases of Debentures pursuant to the Purchase Agreement.
For purposes of clarification, a Forced Conversion shall be subject to all of the provisions
of Section 4, including, without limitation, the provision requiring payment of liquidated
damages and limitations on conversions.

Section 7. Negative Covenants. So long as any portion of this Debenture is
outstanding, the Company will not and will not permit any of its Subsidiaries to directly or
indirectly:

     a) enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including but not limited to, a guarantee, on or with respect to
any of its property or assets now owned or hereafter acquired or any interest therein or any
income or profits therefrom that is senior to, or pari passu with, in any
respect, the Company’s obligations hereunder (other than pursuant to the Regenmacher
Transaction or pursuant to any capital lease or purchase money financing for items purchased
after the date hereof, the security for which is limited to the asset so leased or
financed);

17

 

     b) enter into, create, incur, assume or suffer to exist any liens of any kind, on or
with respect to any of its property or assets now owned or hereafter acquired or any
interest therein or any income or profits therefrom that is senior to, in any respect, the
Company’s obligations hereunder (other than pursuant to the Regenmacher Transaction or
pursuant to any capital lease or purchase money financing for items purchased after the date
hereof, the security for which is limited to the asset so leased or financed);

     c) amend its certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of the Holder;

     d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or Common Stock Equivalents other
than as to the Conversion Shares to the extent permitted or required under the Transaction
Documents or as otherwise permitted by the Transaction Documents;

     e) enter into any agreement with respect to any of the foregoing; or

     f) pay cash dividends on any equity securities of the Company.

Section 8. Events of Default.

     a) “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or 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):

     i. any default in the payment of (A) the principal amount of any Debenture, or
(B) interest (including Late Fees) on, or liquidated damages in respect of, any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which default,
solely in the case of an interest payment or other default under clause (B) above,
is not cured, within 3 Trading Days;

     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in this Debenture (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion which
breach is addressed in clause [(xi) below) which failure is not cured, if possible
to cure, within the earlier to occur of (A) 5 Trading Days after notice of such
default sent by the Holder or by any other Holder and (B)10 Trading Days after the
Company shall become or should have become aware of such failure;

     iii. a default or event of default (subject to any grace or cure period
provided for in the applicable agreement, document or instrument) shall occur under
(A) any of the Transaction Documents other than the Debentures, or (B)

18

 

any other material agreement, lease, document or instrument to which the
Company or any Subsidiary is bound;

     iv. any representation or warranty made herein, in any other Transaction
Documents, in any written statement pursuant hereto or thereto, or in any other
report, financial statement or certificate made or delivered to the Holder or any
other holder of Debentures shall be untrue or incorrect in any material respect as
of the date when made or deemed made;

     v. (i) the Company or any of its Subsidiaries shall commence, or there shall be
commenced against the Company or any such Subsidiary, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Subsidiary commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Company or any Subsidiary thereof or (ii) there
is commenced against the Company or any Subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of 60 days; or
(iii) the Company or any Subsidiary thereof is adjudicated by a court of competent
jurisdiction insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for it or any
substantial part of its property which continues undischarged or unstayed for a
period of 60 days; or (v) the Company or any Subsidiary thereof makes a general
assignment for the benefit of creditors; or (vi) the Company shall fail to pay, or
shall state that it is unable to pay, or shall be unable to pay, its debts generally
as they become due; or (vii) the Company or any Subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary thereof shall by
any act or failure to act expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or (ix) any corporate or other action is taken
by the Company or any Subsidiary thereof for the purpose of effecting any of the
foregoing;

     vi. the Company or any Subsidiary shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there may
be secured or evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Company in an amount exceeding
$150,000, whether such indebtedness now exists or shall hereafter be created and
such default shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable;

19

 

     vii. the Common Stock shall not be eligible for quotation on or quoted for
trading on a Trading Market and shall not again be eligible for and quoted or listed
for trading thereon within five Trading Days;

     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of 33%
of its assets in one or more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or other equity securities
of the Company (other than redemptions of Conversion Shares and repurchases of
shares of Common Stock or other equity securities of departing officers and
directors of the Company; provided such repurchases shall not exceed $100,000, in
the aggregate, for all officers and directors during the term of this Debenture);

     ix. a Registration Statement shall not have been declared effective by the
Commission on or prior to the 180th calendar day after the Closing Date;

     x. if, during the Effectiveness Period (as defined in the Registration Rights
Agreement), the effectiveness of the Registration Statement lapses for any reason or
the Holder shall not be permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Registration Statement, in either case,
for more than 10 consecutive Trading Days or 15 non-consecutive Trading Days during
any 12 month period; provided, however, that in the event that the
Company is negotiating a merger, consolidation, acquisition or sale of all or
substantially all of its assets or a similar transaction and in the written opinion
of counsel to the Company, the Registration Statement, would be required to be
amended to include information concerning such transactions or the parties thereto
that is not available or may not be publicly disclosed at the time, the Company
shall be permitted an additional 10 consecutive Trading Days during any 12 month
period relating to such an event;

     xi. the Company shall fail for any reason to deliver certificates to a Holder
prior to the third Trading Day after a Conversion Date or any Forced Conversion Date
pursuant to and in accordance with Section 4(d) or the Company shall provide notice
to the Holder, including by way of public announcement, at any time, of its
intention not to comply with requests for conversions of any Debentures in
accordance with the terms hereof;

     xii. the Company does not obtain Shareholder Approval by June 10, 2005.

     b) Remedies Upon Event of Default. If any Event of Default occurs, the full
principal amount of this Debenture, together with interest and other amounts owing in
respect thereof, to the date of acceleration shall become, at the Holder’s election,

20

 

immediately due and payable in cash. The aggregate amount payable upon an Event of
Default shall be equal to the Mandatory Prepayment Amount. Commencing 5 days after the
occurrence of any Event of Default that results in the eventual acceleration of this
Debenture, the interest rate on this Debenture shall accrue at the rate of 18% per annum, or
such lower maximum amount of interest permitted to be charged under applicable law. All
Debentures for which the full Mandatory Prepayment Amount hereunder shall have been paid in
accordance herewith shall promptly be surrendered to or as directed by the Company. The
Holder need not provide and the Company hereby waives any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder and the Holder shall have all rights as a
Debenture holder until such time, if any, as the full payment under this Section shall have
been received by it. No such rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon.

Section 9. Miscellaneous.

     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth above,
facsimile number 602-389-8809, Attn: Chief Financial Officer or such other
address or facsimile number as the Company may specify for such purposes by notice to the
Holders delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this Section later
than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by the party to
whom such notice is required to be given.

     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any) on, this

21

 

Debenture at the time, place, and rate, and in the coin or currency, herein prescribed.
This Debenture is a direct debt obligation of the Company. This Debenture ranks
pari passu with all other Debentures now or hereafter issued under the terms
set forth herein. This Debenture is expressly subordinated in right of payment of principal
(but, in the absence of an Event of Default under the Regenmacher Debenture, not in right of
payment of interest) to the Company’s prior repayment of the Regenmacher Debenture.

     c) Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for
and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft
or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested,
all reasonably satisfactory to the Company.

     d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the transactions contemplated by
any of the Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be commenced in
the state and federal courts sitting in the City of New York, Borough of Manhattan (the
“New York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such New York
Courts are improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to this
Debenture or the transactions contemplated hereby. If either party shall commence an action
or proceeding to enforce any provisions of this Debenture, then the prevailing party in such
action or proceeding shall be reimbursed by the other party for its attorneys fees and other
costs and expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.

22

 

     e) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this Debenture. The
failure of the Company or the Holder to insist upon strict adherence to any term of this
Debenture on one or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.

     f) Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain applicable to all
other persons and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates applicable laws governing usury, the applicable rate
of interest due hereunder shall automatically be lowered to equal the maximum permitted rate
of interest. The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension or usury law or other law which would prohibit or forgive
the Company from paying all or any portion of the principal of or interest on this Debenture
as contemplated herein, wherever enacted, now or at any time hereafter in force, or which
may affect the covenants or the performance of this indenture, and the Company (to the
extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the
execution of any power herein granted to the Holder, but will suffer and permit the
execution of every such as though no such law has been enacted.

     g) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the next succeeding
Business Day.

     h) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Debenture and shall not be deemed to limit or affect any of the
provisions hereof.

*********************

23

 

     IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.

	 	 	 	 	 
	 	BRILLIAN CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	Wayne A. Pratt 	 
	 	 	Title:  	Vice President and Chief Financial Officer 	 
	 

24

 

ANNEX A

NOTICE OF CONVERSION

     The undersigned hereby elects to convert principal under the 7% Convertible Debenture of
Brillian Corporation, a Delaware corporation (the
“Company”), due on April 20, 2008, into
shares of common stock, par value $0.001 per share (the “Common Stock”), of the Company
according to the conditions hereof, as of the date written below. If shares 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 and opinions as
reasonably requested by the Company in accordance therewith. No fee will be charged to the holder
for any conversion, except for such transfer taxes, if any.

     By the delivery of this Notice of Conversion the undersigned represents and warrants to the
Company that its ownership of the Common Stock does not exceed the amounts determined in accordance
with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.

     The undersigned agrees to comply with the prospectus delivery requirements under the
applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.

Conversion calculations:

Date to Effect Conversion:

Principal Amount of Debentures to be Converted:

Payment of Interest in Common Stock ___yes ___no

          If yes, $___of Interest Accrued on Account of

          Conversion at Issue.

Number of shares of Common Stock to be issued:

Signature:

Name:

Address:

25

 

Schedule 1

CONVERSION SCHEDULE

The 7% Convertible Debentures
due on April 20, 2008, in the aggregate principal amount of
$2,500,000 issued by Brillian Corporation. This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.

Dated:

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	Aggregate	 	 	 	 
	 	 	 	 	 	 	 	Principal	 	 	 	 
	 	 	 	 	 	 	 	Amount	 	 	 	 
	 	 	 	 	 	 	 	Remaining	 	 	 	 
	 	 	 	 	 	 	 	Subsequent to	 	 	 	 
	 	 	 	 	 	 	 	Conversion	 	 	 	 
	 	Date of Conversion	 	 	 	 	 	(or original	 	 	 	 
	 	(or for first entry,	 	 	Amount of	 	 	Principal	 	 	 	 
	 	Original Issue Date)	 	 	Conversion	 	 	Amount)	 	 	Company Attest	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 	 
	 	 	 
	 	 	 
	 	 	 	 
	 

26

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