Document:

EXHIBIT
10.8

 

THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN APPROPRIATE EXCEPTION
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT
TO RULE 144 OR RULE 144A UNDER SAID ACT. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. 
ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTION 4(c)(viii) HEREOF.

 

AMENDED AND RESTATED SUBORDINATED CONVERTIBLE NOTE

 

THIS
AMENDED AND RESTATED SUBORDINATED CONVERTIBLE NOTE (THIS “NOTE”) IS AN
AMENDMENT AND RESTATEMENT TO THAT CERTAIN PROMISSORY NOTE DATED APRIL 26, 2006
IN THE ORIGINAL PRINCIPAL AMOUNT OF THIRTY SEVEN MILLION FIFTY THOUSAND DOLLARS
($37,500,000.00) (THE “ORIGINAL NOTE”) MADE BY MEDICOR LTD., A DELAWARE
CORPORATION (THE “COMPANY”), AS SUCCESSOR TO INTERNATIONAL INTEGRATED
INCORPORATED, A BRITISH VIRGIN ISLANDS CORPORATION, IN FAVOR OF INTERNATIONAL
INTEGRATED INDUSTRIES, LLC, A NEVADA LIMITED LIABILITY COMPANY (“IIINV”),
AND SUBSEQUENTLY ASSIGNED AND TRANSFERRED BY IIINV PURSUANT TO THAT CERTAIN
ALLONGE TO PROMISSORY NOTE DATED APRIL 26, 2006 TO SIRIUS CAPITAL LLC, A
DELAWARE LIMITED LIABILITY COMPANY (“SIRIUS”).  IN CONSIDERATION OF THE AMENDMENT AND
RESTATEMENT OF THE ORIGINAL NOTE,  THE
COMPANY IS ISSUING AS OF THE DATE HEREOF TO SIRIUS A WARRANT TO PURCHASE
2,343,750 SHARES OF THE COMPANY’S COMMON STOCK, PAR VALUE $0.001 PER
SHARE.  THIS NOTE IS MADE IN PLACE OF THE
ORIGINAL NOTE.

 

ALL
INDEBTEDNESS EVIDENCED BY THIS NOTE IS SUBORDINATED TO OTHER INDEBTEDNESS
PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE SUBJECT TO THE TERMS
OF, THE SUBORDINATION AGREEMENT, DATED APRIL 26, 2006 (AS AMENDED, SUPPLEMENTED
OR OTHERWISE MODIFIED FROM TIME TO TIME, THE “SUBORDINATION AGREEMENT”),
BY AND AMONG THE COMPANY, SILVER OAK CAPITAL, L.L.C., A DELAWARE LIMITED
LIABILITY COMPANY, AS “COLLATERAL AGENT”, AND THE HOLDERS FROM TIME TO
TIME OF THE SUBORDINATED OBLIGATIONS (AS DEFINED THEREIN), INCLUDING, WITHOUT
LIMITATION, THIS NOTE.

 

	
  April 26, 2006

  	
   

  	
  $37,500,000.00

  

 

FOR VALUE
RECEIVED, the Company
hereby promises to pay to the order of Sirius or registered assigns (the “Holder”)
the principal amount of Thirty Seven Million Five Hundred Thousand United
States Dollars ($37,500,000.00) when due, whether upon maturity, acceleration,
redemption or otherwise, and to pay interest (“Interest”) on the unpaid
principal balance hereof on each Interest Payment

 

 

Date (as defined in Section
3(a)) and upon maturity, or earlier upon conversion, acceleration or redemption
pursuant to the terms hereof, at the Applicable Interest Rate (as defined in
Section 3(a)).  Interest on this Note
payable on each Interest Payment Date and upon maturity, or earlier upon
conversion, acceleration or redemption pursuant to the terms hereof, shall
accrue from the Issuance Date (as defined in Section 3(a)) and shall be
computed on the basis of a 360-day year and actual days elapsed.

 

1.             Other Notes.  This Note and all Other Notes
(as defined in Section 3(a)) issued by the Company and all notes issued in
exchange therefor or replacement thereof are collectively referred to in this
Note as the “Notes.”

 

2.             Payments; Subordination.  In
accordance with the Subordination Agreement and notwithstanding anything to the
contrary herein, prior to the indefeasible payment in full in cash of the
Senior Notes (as defined below), all interest on this Note shall be paid only
by adding such interest to the principal amount of this Note.  Subject to the foregoing sentence, all
payments of principal of, and interest on, this Note (to the extent such
principal or interest is not converted into Shares (as defined in Section
3(a)), in accordance with the terms hereof) shall be made in lawful money of
the United States of America by wire transfer of immediately available funds to
such account as the Holder may from time to time designate by written notice in
accordance with the provisions of this Note. 
The Company has no right, but under certain circumstances may have an
obligation, to make payments of principal of this Note in cash prior to the
Maturity Date (as defined in Section 3(a)). 
Whenever any amount expressed to be due by the terms of this Note is due
on any day that is not a Business Day (as defined in Section 3(a)), the same
shall instead be due on the next succeeding day that is a Business Day (unless
in the case of interest, such next succeeding Business Day would be in the
following calendar month, in which case such payment will be made on the
immediately preceding Business Day). 
Each capitalized term used herein, and not otherwise defined, shall have
the meaning ascribed thereto in that certain Securities Purchase Agreement
dated as of April 26, 2006 among the Company and the Persons (as defined above)
referred to therein (as such agreement may be amended from time to time as
provided in such agreement (the “Securities Purchase Agreement”)).

 

The Holder of this Note
agrees, for itself and each future holder of this Note, that this Note is
expressly “subordinate and junior in right of payment” (as that phrase is
defined in the Subordination Agreement) to those certain Senior Secured Convertible
Notes dated as of April 26, 2006 (as amended, supplemented or otherwise
modified from time to time, the “Senior Notes”) made by the Company in
favor of those persons listed in the Schedule of Purchasers attached to the
Securities Purchase Agreement.

 

3.             Definitions.

 

(a)           Certain Defined Terms.  For
purposes of this Note, the following terms shall have the following meanings:

 

“€” means Euros.

 

“£” means Pound
Sterling.

 

“3-Month LIBOR Rate”
means the London Interbank Offered Rate of LIBOR with respect to a three-month
period for deposits of Dollars as reported by Bloomberg Financial Markets (or
any successor thereto, “Bloomberg”) at approximately 10:00 a.m. (New
York City time) through its “LIBOR Rates” function (accessed by typing “LR”
[GO] on a Bloomberg terminal, and looking at the row entitled “3 MONTH” and
under the column entitled “DOLLAR LIBOR”) (or such other page as may replace
that page on that service, or such other service as may be selected jointly by
the Company and the holders of at least a majority of the aggregate principal
amount of the Notes then Outstanding). 
If such rate appears on the Bloomberg LIBOR Rates page on any date of
determination of the 3-Month LIBOR Rate (a

 

2

 

“LIBOR Determination Date”),
the 3-Month LIBOR Rate for such date of determination will be such rate.  If on any LIBOR Determination Date such rate
does not appear on the Bloomberg LIBOR Rates page, the Company and such holders
of the Notes will jointly request each of four major reference banks in the
London interbank market, as selected jointly by the Company and the holders of
at least a majority of the aggregate principal amount of the Notes then
Outstanding, to provide the Company with its offered quotation for United
States dollar deposits for the upcoming three-month period, to prime banks in
the London interbank market at approximately 4:00 p.m., London time on any such
LIBOR Determination Date and in a principal amount that is representative for a
single transaction in Dollars in such market at such time.  If at least two reference banks provide the
Company with offered quotations, 3-Month LIBOR Rate on such LIBOR Determination
Date will be the arithmetic mean of all such quotations.  If on such LIBOR Determination Date fewer
than two of the reference banks provide the Company with offered quotations,
3-Month LIBOR Rate on such LIBOR Determination Date will be the arithmetic mean
of the offered per annum rates that three major banks in New York City selected
jointly by the Company and the holders of at least a majority of the aggregate
principal amount of the Notes then Outstanding quote at approximately 11:00
A.M. in New York City on such LIBOR Determination Date for three-month Dollar
loans to leading European banks, in a principal amount that is representative
for a single transaction in Dollars in such market at such time.  If these New York City quotes are not
available, then the 3-Month LIBOR Rate determined on such LIBOR Determination
Date will continue to be the 3-Month LIBOR Rate as then currently in effect on
such LIBOR Determination Date.

 

“Affiliate” has the
meaning ascribed to such term in Rule 12b-2 of the General Rules and
Regulations under the 1934 Act; provided, that for purposes of this Note
no holder hereof shall be deemed an Affiliate of the Company by virtue of
holding this Note.

 

“Allocation Percentage”
means, with respect to each holder of Notes as of the date of any
determination, a fraction of which the numerator is the aggregate principal
amount of the Notes held by such holder on such date, and of which the
denominator is the aggregate principal amount of the Notes Outstanding on such
date.

 

“Applicable Interest Rate”
initially shall mean the per annum interest rate equal to the sum of (a) the
3-Month LIBOR Rate in effect on the LIBOR Determination Date that is two
Business Days preceding the Issuance Date and (b) six percent (6.00%); provided,
however, that on each Interest Payment Date, such rate shall be adjusted
to the per annum interest rate equal to the sum of (a) the 3-Month LIBOR Rate
in effect on the LIBOR Determination Date that is two Business Days preceding
such Interest Payment Date and (b) six percent (6.00%).  Each Applicable Interest Rate will be
applicable as of and after the Interest Payment Date to which it relates to,
but not including, the next succeeding Interest Payment Date.

 

“Approved Stock Plan”
means any employee benefit plan that has been approved by the board of
directors and stockholders of the Company prior to the Issuance Date, pursuant
to which the Company’s securities may be issued to any employee, officer or
director for services provided to the Company.

 

“Business Day” means
any day other than Saturday, Sunday or other day on which commercial banks in
the city of New York are authorized or required by law to remain closed;
provided that if such date is a LIBOR Determination Date, it shall also be a
day on which banks in London, England are open for dealings in U.S. Dollars in
the London Interbank Market.

 

“Capital Lease Obligation”
means, as to any Person, any obligation that is required to be classified and
accounted for as a capital lease on a balance sheet of such Person prepared in
accordance with GAAP and the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with GAAP.

 

3

 

“Capital Expenditures”
means for any period, with respect to any Person, the aggregate of all
expenditures by such Person and its Subsidiaries for the acquisition or leasing
(pursuant to a capital lease) of fixed or capital assets or additions to
equipment (including replacements, capitalized repairs and improvements during
such period) that should be capitalized under GAAP on a consolidated balance
sheet of such Person and its Subsidiaries.

 

“Change of Control”
means (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of
the Company (including, for the avoidance of doubt, the sale of all or
substantially all of the assets of the Company’s Subsidiaries in the aggregate)
to any Person or group of related Persons (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “1934 Act”), (ii) the
approval by the holders of the Company’s capital stock of any plan or proposal
to effect the liquidation, dissolution or winding up of the Company, (iii) any
Person or group of related Persons (other than Permitted Holders) shall become
the beneficial owner (as defined in Rule 13d-3 under the 1934 Act) of the
outstanding Shares representing more than 50% of the aggregate voting power of
all classes of the voting securities of the Company or (iv) the consolidation,
merger or other business combination of the Company with or into another Person
(other than (A) a consolidation, merger or other business combination in which
holders of the Company’s voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, a majority of
the combined voting power of the surviving entity or entities entitled to vote
generally for the election of a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company).

 

“Common Stock” means
(A) the Company’s common stock, $0.001 par value per share, and (B) any capital
stock resulting from a reclassification of such common stock.

 

“Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or
otherwise, of that Person with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.

 

“Conversion Amount”
means either (A) in the case of a conversion pursuant to Section 4, the sum of
(1) the Principal to be converted, redeemed or otherwise with respect to which
the determination is being made and (2) the Interest Amount with respect to the
amount referred to in the immediately preceding clause (1), or (B) in the case
of an Interest Conversion (as defined in Section 8), the Interest
Conversion Amount.

 

“Conversion Price”
means, as of any Conversion Date or other date of determination, the Fixed
Conversion Price; provided that for purposes of an Interest Conversion
pursuant to Section 8, the Conversion Price shall mean 93% of the Weighted
Average Price of the Common Stock on each of the five (5) Trading Days ending
on the Trading Day immediately preceding the Interest Conversion Date
applicable to any such Interest Conversion for which such determination is
being made.

 

“Convertible Securities”
means any stock or securities (other than Options) directly or indirectly
convertible into or exchangeable or exercisable for Shares.

 

“Default” means any
event or circumstance that is, or with the giving of notice or lapse of time or
both, would be an Event of Default.

 

“Dollars” or “$”
means United States Dollars.

 

4

 

“Eurosilicone Agreement”
means that certain Agreement for the Sale and Purchase of the Shares of
Laboratories Eurosilicone SA, dated May 17, 2004, by and among the Company
and the sellers named therein, which agreement has not been amended,
supplemented or otherwise modified since such date.

 

“Excluded Taxes”
means, with respect to the Holder, or any other recipient of payment to be made
by or on account of any obligations of the Company or any of its Subsidiaries
under the Notes or the Warrants, (A) income or franchise taxes imposed on (or
measured by) its net income by the United States of America or any other
jurisdiction under the laws of which such recipient is organized, its principal
offices are located, it is resident for tax purposes or to which it has a
connection giving rise to such taxes other than by reason of the transactions
contemplated by this Note, including the holding of the Notes, and enforcing
its rights thereunder (B) any branch profits taxes imposed by the United States
of America or any similar tax imposed by any other jurisdiction in which the
Holder or recipient is treated as doing business, (C) any Taxes imposed by
reason of a Holder or recipient failing to provide forms or certifications it
is legally able to provide that would reduce or eliminate such Taxes and that
are reasonably requested by the Company.

 

“Exempted Issuances”
means (A) Shares issued or deemed to have been issued by the Company
pursuant to an Approved Stock Plan; (B) Shares issued or deemed to have been
issued upon the conversion, exchange or exercise of any Option or Convertible
Security outstanding on the date prior to the Issuance Date, provided
that the terms of such Option or Convertible Security are not amended or
otherwise modified on or after the Issuance Date, and provided that the
conversion price, exchange price, exercise price or other purchase price is not
reduced, adjusted or otherwise modified and the number of Shares issued or
issuable is not increased (whether by operation of, or in accordance with, the
relevant governing documents or otherwise) on or after the Issuance Date; (C)
Shares issued or deemed to have been issued by the Company upon conversion of
the Notes or exercise of the Warrants; and (D) Shares issued or deemed to have been
issued by the Company upon conversion of the Senior Notes or exercise of the
warrants issued to the holders of the Senior Notes (the “Senior Warrants”).

 

“Fixed Conversion Price”
means, as of any Conversion Date or other date of determination, $4.00, subject
to adjustment as provided herein.

 

“Forced Conversion”
means an Interest Conversion or a Company Conversion, as applicable.

 

“Forced Conversion Date”
means an Interest Conversion Date or a Company Conversion Date, as applicable.

 

“Forced Conversion Notice”
means an Interest Conversion Notice or a Company Conversion Notice, as
applicable.

 

“Forced Conversion Notice
Date” means an Interest Conversion Notice Date or a Company Conversion
Notice Date, as applicable.

 

“Fundamental Conditions”
when used in reference to a Forced Conversion, means, as of any date of
determination, (i) with respect to any Interest Conversion, the aggregate
Interest Conversion Amount of all the Notes shall not exceed fifteen (15%) of
the product of (A) the arithmetic average of the daily dollar trading volume
(as reported by Bloomberg) of the Common Stock on its Principal Market over the
twenty (20) consecutive Trading Days ending on and including the date that is
immediately preceding the Interest Conversion Notice Date, multiplied by (B)
the number of expected Trading Days during the Interest Conversion Period to
which the Interest Conversion Notice relates, as set forth therein; (ii) on
each day during the period beginning forty-five (45) days prior to the Forced
Conversion Notice Date and ending on and including the applicable Forced
Conversion Date, the Common Stock
shall be listed on the American Stock Exchange or another nationally recognized
stock exchange or quoted on The NASDAQ

 

5

 

Stock Market, Inc. (“NASDAQ”)
and the Common Stock shall not have been suspended from trading on any such
market or exchange nor shall delisting or suspension by any such market or
exchange have been threatened either (A) in writing by such market or
exchange or (B) by falling below the minimum listing maintenance requirements
of such market or exchange; (iii) during the period beginning on and including
the Issuance Date and ending on and including the Forced Conversion Date, there
shall not have occurred either (x) the public announcement of a pending,
proposed or intended Change of Control that has not been abandoned, terminated
or consummated and publicly disclosed as such at least twenty (20) Trading Days
prior to the Forced Conversion Date or (y) any other Triggering Event (as
defined in Section 5(c)) or an Event of Default (as defined in Section 13(a));
(iv) during the period beginning on the Issuance Date and ending on and
including the Forced Conversion Date, the Company shall have delivered Shares
upon conversion of the Notes and upon exercise of the Warrants on a timely
basis as set forth in Section 4(c)(ii) of the Notes and Section 3(a) of the
Warrants; (v) on each day during the period beginning ninety (90) days prior to
the Forced Conversion Notice Date and ending on and including the applicable
Forced Conversion Date, the Company and its Subsidiaries otherwise shall have
been in material compliance with in all respects and shall not have materially
breached or been in breach of any provision or covenant of the Notes or the
Warrants; and (vi) the Company shall have obtained all requisite approvals (if
any) of its stockholders for the issuance of the Shares to the holders of the
Notes and the Warrants.

 

“GAAP” means United
States generally accepted accounting principles.

 

“Governmental Authority”
means the government of any nation, state or other political subdivision
thereof, any entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any corporation or
other entity owned or controlled, through stock or capital ownership or
otherwise, by any of the foregoing.

 

“Guarantee and Collateral
Agreement” means that certain Guarantee and Collateral Agreement dated as
of April 26, 2006 made by the Company and certain of its Subsidiaries (the “Guarantors”)
in favor of the Collateral Agent (as defined in the Securities Purchase
Agreement).

 

“IIINV Note” means
that certain amended and restated subordinated promissory note dated April 26,
2006 in the original principal amount of $31,039,186.11 made by the Company to
IIINV.

 

“Indebtedness” of any
Person means, without duplication (A) all indebtedness for borrowed money, (B)
all obligations issued, undertaken or assumed as the deferred purchase price of
property or services (other than unsecured account trade payables that are (i)
entered into or incurred in the ordinary course of the Company’s and its
Subsidiaries’ business, (ii) on terms that require full payment within ninety
(90) days, (iii) not unpaid in excess of fifteen (15) days beyond invoice due
date or are being contested in good faith and as to which such reserve as is
required by GAAP has been made and (iv) not exceeding at any one time an
aggregate among the Company and its Subsidiaries of $500,000), (C) all
reimbursement or payment obligations with respect to letters of credit,
banker’s acceptances, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures, redeemable capital stock or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any
property or assets acquired with the proceeds of such indebtedness (even though
the rights and remedies of the seller or bank under such agreement in the event
of default are limited to repossession or sale of such property), (F) all
Capital Lease Obligations, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien upon or
in any property or assets (including accounts and contract rights) owned by any
Person, even though the Person that owns such assets or property has not
assumed or become liable for the payment of such indebtedness and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above.

 

6

 

“Indemnified Taxes”
means Taxes other than Excluded Taxes.

 

“Interest Amount”
means, with respect to any Principal, all accrued and unpaid Interest
(including any Default Interest as defined in Section 8(a) on such Principal
through and including such date of determination.

 

“Interest Payment Date”
means (i) September 30 and March 31 of each year (or if such date is not a
Business Day, the immediately preceding Business Day), beginning with September
30, 2006, (ii) the Maturity Date and (iii) each other date on which any
Principal of this Note is paid in accordance with the terms of this Note.

 

“Issuance Date” means
the original date of issuance of this Note, regardless of any exchange or
replacement hereof.

 

“Liens” means, with
respect to any asset, any mortgage, lien, pledge, hypothecation, charge,
security interest, encumbrance or adverse claim of any kind and
any restrictive covenant, condition, restriction or exception of any kind
that has the practical effect of creating a mortgage, lien, pledge,
hypothecation, charge, security interest, encumbrance or adverse
claim of any kind (including any of the foregoing created by, arising
under or evidenced by any conditional sale or other title retention agreement,
the interest of a lessor with respect to a Capital Lease Obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing).

 

“Maturity Date” means
the date that is six (6) months beyond the date that is the earlier of: (i) the
maturity date of the Senior Notes; or (ii) the date in which the entire
principal amount of Senior Notes have been: (y) converted pursuant to Sections
4 or 9 of the Senior Notes; or (z) redeemed pursuant to Section 5 of the Senior
Notes.

 

“New Securities”
means any authorized but unissued securities of the Company other than (i)
Exempted Issuances; (ii) securities issued pursuant to the acquisition of
another Person by the Company or its Subsidiaries by merger, purchase of all or
substantially all of the assets of such Person or other transaction whereby the
Company shall become directly or indirectly the owner of more than 50% of the
aggregate voting power of all classes of the voting securities of such Person;
(iii) shares of Common Stock or Preferred Stock issued pursuant to any pro
rata stock split or stock dividend; and (iv) shares of Common Stock or
Preferred Stock issued pursuant to a Qualified Public Offering.

 

“Options” means any
rights, warrants or options to subscribe for or purchase Shares or Convertible
Securities.

 

“Other Notes” means
any subordinated convertible notes, other than this Note, issued by the Company
in connection with any assignment or transfer by the Holder of any portion of
this Note to another Person and all notes issued in exchange therefor or
replacement thereof.

 

“Outstanding” when
used with reference to the Notes, means, as of any date of determination, any
Note, or portion thereof (a) which is held by any Person other than the Company
or its Affiliates and (b) for which all principal and other amounts due
thereunder have not been repaid in full by the Company.

 

“Permitted Holders”
means the Donald K. McGhan, Jim J. McGhan, Nikki M. Pomeroy and 1991 III Equity
Performance II, LP and their respective Affiliates.

 

“Permitted Lien”
means (a)  Liens created by the Security
Documents; (b) Liens existing on the Issuance Date not otherwise described in
any other clause of this definition; (c) Liens for taxes, assessments or other
governmental charges not at the time due and payable so long as the Company and

 

7

 

its Subsidiaries maintain
adequate reserves in accordance with GAAP in respect of such taxes and charges;
(d) statutory liens of landlords and Liens arising in the ordinary course of
business in favor of carriers, warehousemen, mechanics, suppliers, repairmen
and materialmen, or other similar Liens imposed by law, which remain payable
without penalty or which are being contested in good faith by appropriate
proceedings diligently prosecuted, which proceedings have the effect of
preventing the forfeiture or sale of the property subject thereto, and in each
case for which adequate reserves in accordance with GAAP are being maintained;
(e) Liens arising in the ordinary course of business in connection with
worker’s compensation, unemployment compensation, unemployment insurance and
other types of social security (excluding Liens arising under ERISA); (f)
attachments, appeal bonds (and cash collateral securing such bonds), judgments
and other similar Liens, for sums not exceeding $500,000 in the aggregate for
the Company and its Subsidiaries, arising in connection with court proceedings,
provided that the execution or other enforcement of such Liens is
effectively stayed; (g) easements, rights of way, restrictions, minor defects
or irregularities in title and other similar Liens arising in the ordinary
course of business and not materially detracting from the value of the property
subject thereto and not interfering in any material respect with the ordinary
conduct of the business of the Company or any Subsidiary; (h) Liens arising
solely by virtue of any statutory or common law provision relating to banker’s
liens, rights of set-off or similar rights and remedies and burdening only
deposit accounts or other funds maintained with a creditor depository
institution, provided that no such deposit account is a dedicated cash
collateral account or is subject to restrictions against access by the
depositor in excess of those set forth by regulations promulgated by the Board
of Governors of the Federal Reserve System and no such deposit account is
intended by the Company or any Subsidiary to provide collateral to the
depository institution; and (i) Liens, including capital leases, solely
securing tangible personal property material to the business that has been
purchased through the incurrence of Indebtedness in an amount not to exceed
$250,000 at any one time outstanding.

 

“Person” means any
individual, firm, corporation, partnership, limited liability company, trust,
incorporated or unincorporated association, joint venture, joint stock company,
Governmental Authority or other entity of any kind, and shall include any
successor (by merger or otherwise) of such entity.

 

“Principal” means the
outstanding principal amount of this Note as of any date of determination.

 

“Principal Market”
means, with respect to the Common Stock or any other security, the principal
securities exchange or trading market for the Common Stock or such other
security.

 

“promptly” shall mean
as soon as reasonably possible, and in any event within two (2) Business Days.

 

“Qualified Public
Offering” means a bona fide firm commitment underwritten public offering of
the Company’s equity securities pursuant to an effective registration statement
under the 1933 Act, and in which the underwriting is lead managed by an
internationally recognized investment banking firm (which has been approved by
the holders of Notes representing at least a majority of the aggregate
principal amount of the Notes then Outstanding) in which the net price per
share (after deduction of underwriting discounts and commissions) is equal to
or greater than $8.00 (subject to adjustments for stock splits, stock
dividends, combinations, reclassifications and other events) and which results
in gross proceeds of at least $75,000,000.

 

“SEC” means the
United States Securities and Exchange Commission, or any successor thereto.

 

“Security Documents”
means the Guarantee and Collateral Agreement and any other agreements,
documents and instruments executed concurrently herewith or at any time
hereafter pursuant to which the Company, its Subsidiaries or any other Person
either (i) guarantees payment or performance of all or any portion of the
obligations hereunder or under any other instruments delivered in connection
with the

 

8

 

transactions contemplated by
the Securities Purchase Agreement and/or (ii) provides, as security for all or
any portion of such obligations, a Lien on any of its assets in favor of the
Senior Notes, as any or all of the same may be amended, supplemented, restated
or otherwise modified from time to time.

 

“Shares” means shares
of Common Stock.

 

“Subsidiary” means
any entity in which the Company, directly or indirectly, owns twenty percent
(20%) or more of the outstanding capital stock, equity or similar interests or
voting power of such entity as of the Issuance Date or at any time thereafter.

 

“Taxes” means any
federal, state, provincial, county, local, foreign and other taxes (including,
without limitation, income, profits, windfall profits, alternative, minimum,
accumulated earnings, personal holding company, capital stock, premium,
estimated, excise, sales, use, occupancy, gross receipts, franchise, ad
valorem, severance, capital levy, production, transfer, withholding,
employment, unemployment compensation, payroll and property taxes, import
duties and other governmental charges and assessments), whether or not measured
in whole or in part by net income, and including deficiencies, interest,
additions to tax or interest, and penalties with respect thereto.

 

“Trading Day” means
any day on which the Common Stock is traded on its Principal Market; provided
that “Trading Day” shall not include any day on which the Principal Market is
open for trading for less than 4.5 hours.

 

“Warrants” means the
warrant to purchase 2,343,750 Shares issued to Sirius, any warrants, other than
such warrant, issued by the Company in connection with any assignment or
transfer by the holder thereof of any portion of such warrant to another Person
and all warrants issued in exchange or substitution therefor or replacement
thereof.

 

“Weighted Average Price”
means, for any security as of any date, the dollar volume-weighted average
price for such security on its Principal Market during the period beginning at
9:30 a.m. New York City time (or such other time as its Principal Market
publicly announces is the official open of trading) and ending at 4:00 p.m. New
York City time (or such other time as its Principal Market publicly announces
is the official close of trading) as reported by Bloomberg through its “Volume
at Price” functions, or if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market
on the electronic bulletin board for such security during the period beginning
at 9:30 a.m. New York City time (or such other time as such over-the-counter
market publicly announces is the official open of trading), and ending at 4:00
p.m. New York City time (or such other time as such over-the-counter market
publicly announces is the official close of trading) as reported by Bloomberg,
or, if no dollar volume-weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as
reported in the “pink sheets” by the National Quotation Bureau, Inc.  If the Weighted Average Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then Outstanding as to which such determination is being made.  If the Company and the holders of the Notes
representing at least a majority of the aggregate principal amount of the Notes
then Outstanding as to which such determination is being made are unable to
agree upon the fair market value of the Common Stock, then such dispute shall
be resolved pursuant to Section 4(c)(iii) below with the term “Weighted Average
Price” being substituted for the term “Conversion Price.”  All such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock combination
or other similar transaction during any period during which the Weighted
Average Price is being determined.

 

9

 

4.             Conversion of this Note.  This
Note shall be converted into Shares on the terms and conditions set forth in
this Section 4.

 

(a)           Conversion at Option of the Holder. 
Subject to the provisions of Section 7, at any time or times on or after
the Issuance Date, the Holder shall be entitled to convert all or any part of
the Principal (and the Interest Amount relating thereto) into fully paid and
nonassessable Shares in accordance with this Section 4, at the Conversion Rate
(as defined in Section 4(b)).  The
Company shall not issue any fraction of a Share upon any conversion.  If the issuance would result in the issuance
of a fraction of a Share, then the Company shall round such fraction of a Share
up or down to the nearest whole share (with 0.5 rounded up).  If any Principal remains outstanding on the
Maturity Date, then all such Principal (and the Interest Amount relating thereto)
shall be repaid as of such date in accordance with Section 4(c)(vii).

 

(b)           Conversion Rate.  The
number of Shares issuable upon a conversion of any portion of this Note
pursuant to Section 4 shall be determined according to the following formula
(the “Conversion Rate”):

 

Conversion
Amount

Conversion Price

 

(c)           Mechanics of Conversion.  The
conversion of this Note shall be conducted in the following manner:

 

(i)            Holder’s Delivery Requirements.  To
convert a Conversion Amount into Shares on any date (the “Conversion Date”),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m. New York City time on such date, a copy of an
executed conversion notice in the form attached hereto as Exhibit I (the
“Conversion Notice”) to the Company (attention:  Corporate Secretary) and (B) if required by
Section 4(c)(viii), surrender to a common carrier for delivery to the Company,
no later than three (3) Business Days after the Conversion Date, the original
Note being converted (or an indemnification undertaking reasonably acceptable
to the Company with respect to this Note in the case of its loss, theft or
destruction).  Such Conversion Notice
shall specify whether and in what amounts the Conversion Amount relates to (i)
a conversion at the election of the Holder pursuant to Section 4(a) at the
Fixed Conversion Price, (ii) an Interest Conversion pursuant to Section 8 or
(iii) a Company Conversion pursuant to Section 9, and any such conversion shall
be applied as so specified.

 

(ii)           Company’s Response.  Upon
receipt by the Company of a copy of a Conversion Notice, the Company (I) shall
promptly send, via facsimile, a confirmation of receipt of such Conversion
Notice to the Holder and the Company’s designated transfer agent (the “Transfer
Agent”), which confirmation shall constitute an instruction to the Transfer
Agent to process such Conversion Notice in accordance with the terms herein and
(II) on or before the second (2nd) Business Day following the date
of receipt by the Company of such Conversion Notice (the “Share Delivery
Date”) (A) provided that the Transfer Agent is participating in The
Depository Trust Company (“DTC”) Fast Automated Securities Transfer
Program and provided that the Holder is eligible to receive Shares through
DTC, credit such aggregate number of Shares to which the Holder shall be
entitled to the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system, or (B) if the foregoing shall not
apply, issue and deliver to the address as specified in the Conversion Notice,
a certificate, registered in the name of the Holder or its designee, for the
number of Shares to which the Holder shall be entitled.  If this Note is submitted for conversion, as
may be required by Section 4(c)(viii), and the Principal represented by this
Note is greater than the Principal being converted, then the Company shall, as
soon as practicable and in no event later than three (3) Business Days after
receipt of this Note

 

10

 

(the “Note Delivery Date”)
and at its own expense, issue and deliver to the Holder a new Note representing
the Principal not converted and cancel this Note.

 

(iii)          Dispute Resolution.  In
the case of a dispute as to the determination of the Conversion Price or the
arithmetic calculation of the Conversion Rate, the Company shall instruct the
Transfer Agent to issue to the Holder the Shares representing the number of
Shares that is not disputed and shall transmit an explanation of the disputed
determinations or arithmetic calculations to the Holder via facsimile within
two (2) Business Days of receipt of the Holder’s Conversion Notice or other
date of determination.  If the Holder and
the Company are unable to agree upon the determination of the Conversion Price
or arithmetic calculation of the Conversion Rate within one (1) Business Day of
such disputed determination or arithmetic calculation being transmitted to the
Holder, then the Company shall promptly (and in any event within two (2)
Business Days) submit via facsimile (A) the disputed determination of the
Conversion Price to an independent, reputable investment banking firm agreed to
by the Company and the holders of the Notes representing at least a majority of
the aggregate principal amounts of the Notes then Outstanding as to which such
determination is being made, or (B) the disputed arithmetic calculation of the
Conversion Rate to the Company’s independent, outside accountant, as the case
may be.  The Company shall direct the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than two (2) Business Days from the time it receives the
disputed determinations or calculations. 
Such investment bank’s or accountant’s determination or calculation, as
the case may be, shall be binding upon all parties absent demonstrable
error.  The costs and expenses of the
investment bank or accountant engaged pursuant to this Section 4(e)(iii) shall
be borne by the Company.

 

(iv)          Record Holder.  The
Person or Persons entitled to receive the Shares issuable upon a conversion of
this Note shall be treated for all purposes as the legal and record holder or
holders of such Shares on the Conversion Date.

 

(v)           Company’s Failure to Timely Convert.

 

(A)          Cash Damages.  If
within three (3) Business Days after the Company’s receipt of the facsimile
copy of a Conversion Notice the Company shall fail to issue and deliver a
certificate to the Holder for, or credit the Holder’s or its designee’s balance
account with DTC with, the number of Shares to which the Holder is entitled
upon the Holder’s conversion of any Conversion Amount, or if the Company fails
to issue and deliver a new Note representing the Principal to which such Holder
is entitled on or before the Note Delivery Date pursuant to Section 4(c)(ii),
then in addition to all other available remedies that the Holder may pursue
hereunder, the Company shall pay additional damages to the Holder for each day
after the Share Delivery Date such conversion is not timely effected and/or
each day after the Note Delivery Date such Note is not delivered in an amount
equal to 0.5% of the sum of (a) in the event the Company has failed to issue
and deliver or credit the Shares to the Holder on or prior to the Share
Delivery Date, the product of (I) the number of Shares not issued to the Holder
or its designee on or prior to the Share Delivery Date and to which the Holder
is entitled and (II) the Weighted Average Price of the Common Stock on the
Share Delivery Date (such product is referred to herein as the “Share
Product Amount”) and (b) in the event the Company has failed to deliver a
Note to the Holder on or prior to the Note Delivery Date, the product of (y)
the number of Shares issuable upon conversion of the Principal represented by
the Note as of the Note Delivery Date and (z) the Weighted Average Price of the
Common Stock on the Note Delivery Date (such product is referred to herein as
the “Note Product Amount”); provided that in no event shall cash
damages accrue pursuant to this Section 4(c)(v)(A) with respect to the Share
Product Amount or the Note Product Amount during the period, if any, in which
the Conversion Price or the arithmetic calculation of the Conversion Rate is
subject to a bona fide dispute that is subject to and being resolved pursuant
to, and in compliance with the time periods and other provisions of, the
dispute resolution provisions of Section 4(c)(iii), provided that the
Shares and/or the Note are delivered to the Holder within two (2) Business Days
of the resolution of such 

 

11

 

bona fide dispute.  Alternatively, subject to Section 4(c)(iii),
at the election of the Holder made in the Holder’s sole discretion, the Company
shall pay to the Holder, in lieu of the additional damages referred to in the
preceding sentence (but in addition to all other available remedies that the
Holder may pursue hereunder), 120% of the amount by which (A) the Holder’s
total purchase price (including brokerage commissions, if any) for the Shares
purchased to make delivery in satisfaction of a sale by the Holder of the
Shares to which the Holder is entitled but has not received upon a conversion
exceeds (B) the net proceeds received by the Holder from the sale of the Shares
to which the Holder is entitled but has not received upon such conversion.  If the Company fails to pay the additional
damages set forth in this Section 4(c)(v)(A) within five (5) Business Days of
the date incurred, then the Holder entitled to such payments shall have the
right at any time, so long as the Company continues to fail to make such
payments, to require the Company, upon written notice, to promptly issue, in
lieu of such cash damages, the number of Shares equal to the quotient of (X)
the aggregate amount of the damages payments described herein divided by (Y)
the Conversion Price in effect on such Conversion Date as specified by the
Holder in the Conversion Notice.

 

(B)           Notice of Void Conversion; Adjustment to
Conversion Price.  If for any reason the Holder has not received
all of the Shares prior to the tenth (10th) Business Day after the Share
Delivery Date with respect to a conversion of this Note, other than due to the
pendency of a dispute being resolved in accordance with Section 4(c)(iii) (a “Conversion
Failure”), then the Holder, upon written notice to the Company, may void
its Conversion Notice with respect to, and retain or have returned, as the case
may be, any portion of this Note that has not been converted pursuant to the
Holder’s Conversion Notice; provided that the voiding of the Holder’s
Conversion Notice shall not affect the Company’s obligations to make any
payments that have accrued prior to the date of such notice pursuant to Section
4(c)(v)(A) or otherwise.

 

(C)           Redemption.  In the event of a Conversion
Failure, the Holder, upon written notice to the Company, may require that the
Company redeem, in accordance with Section 5, all of the Principal, including
the Principal previously submitted for conversion and with respect to which the
Company has not delivered Shares; provided that the Holder shall not be
entitled to require redemption of any Principal pursuant to this clause (C)
solely as a result of a Conversion Failure caused by any Principal being the
subject of a bona fide dispute that is subject to and being resolved pursuant
to, and in compliance with the time periods and other provisions of, the
dispute resolution provisions of Section 4(c)(iii), provided the Shares
are delivered to the Holder promptly following the resolution of such bona fide
dispute.

 

(vi)          Pro Rata Conversion.  In
the event the Company receives a Conversion Notice from more than one holder of
the Notes for the same Conversion Date and the Company can convert some, but
not all, of such Notes, then, subject to Section 7, the Company shall convert
from each holder of the Notes electing to have Notes converted at such time a
pro rata amount of such holder’s Note submitted for conversion based on the
principal amount of the Note submitted for conversion on such date by such
holder relative to the aggregate principal amount of the Notes submitted for
conversion on such date.

 

(vii)         Mechanics of Maturity Date Repayment.  If
any Principal remains outstanding on the Maturity Date, then the Holder shall
surrender this Note, duly endorsed for cancellation, to the Company, and such
Principal shall be repaid by the Company as of the Maturity Date by payment on
the Maturity Date to the Holder of an amount equal to the sum of (A) 100% of
such Principal plus (B) the Interest Amount with respect to such Principal.

 

(viii)        Book-Entry.  Notwithstanding anything to
the contrary set forth herein, upon conversion or redemption of this Note in
accordance with the terms hereof, the Holder shall not be required to
physically surrender this Note to the Company unless all of the Principal is
being converted or

 

12

 

redeemed.  The Holder and the Company shall each
maintain records showing the Principal converted or redeemed and the dates of
such conversions or redemptions or shall use such other method, reasonably
satisfactory to the other, so as not to require physical surrender of this Note
upon each such conversion or redemption. 
In the event of any dispute or discrepancy, such records of the Company
establishing the Principal to which the Holder is entitled shall be controlling
and determinative in the absence of demonstrable error.  Notwithstanding the foregoing, if this Note
is converted or redeemed as aforesaid, the Holder may not transfer this Note
unless the Holder first physically surrenders this Note to the Company,
whereupon the Company will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder may request,
representing in the aggregate the remaining Principal represented by this
Note.  The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion or redemption of any portion
of this Note, the Principal of this Note may be less than the principal amount
stated on the face hereof.

 

(d)           Taxes.  The Company shall pay any and
all Taxes (excluding income taxes, franchise taxes or other taxes levied on
gross earnings, profits or the like of the Holder) that may be payable with
respect to the issuance and delivery of Shares upon the conversion of this
Note.

 

(e)           Adjustments to Fixed Conversion Price.  The
Fixed Conversion Price, and the number and type of securities to be received
upon conversion of this Note, shall be adjusted from time to time as provided
in this Section 4(e).

 

(i)            In the event that the Company shall at any
time or from time to time, on or after the Issuance Date and prior to the
conversion of this Note, (A) pay a dividend or make a distribution payable in
Shares on any class of shares of capital stock of the Company, (B) subdivide
its outstanding Shares into a greater number of shares, (C) combine its
outstanding Shares into a smaller number of shares or (D) issue any shares of
capital stock by reclassification of its Shares, the Fixed Conversion Price in
effect at the opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such dividend or distribution
or at the opening of business on the day following the day on which such
subdivision, combination or reclassification becomes effective, as the case may
be, shall be adjusted so that the holder of any Notes thereafter surrendered
for conversion shall be entitled to receive the number of Shares that such
holder would have owned or have been entitled to receive after the happening of
any of the events described above had such Notes been converted immediately
prior to the record date in the case of a dividend or distribution or the
effective date in the case of a subdivision, combination or
reclassification.  An adjustment made
pursuant to this Section 4(e)(i) shall become effective immediately upon the
opening of business on the day next following the record date (subject to
Section 4(e)(viii) below) in the case of a dividend or distribution and shall
become effective immediately upon the opening of business on the day next
following the effective date in the case of a subdivision, combination or
reclassification.

 

(ii)           In the event that the Company shall at any
time or from time to time, on or after the Issuance Date and prior to the
conversion of this Note, (A) issue Shares, Convertible Securities, or
Options entitling the recipient thereof to subscribe for or purchase Shares, at
a price per share or (B) amend or otherwise modify the terms of any
Convertible Securities or Options to a price per share (such issuance,
subscription or purchase price or amended or modified price being referred to
as the “New Issue Price”), in either case, less than the Fixed
Conversion Price then in effect, then the Fixed Conversion Price in effect at
the opening of business on the day next following such issuance shall be
adjusted to equal the New Issue Price. 
Such adjustment shall become effective immediately upon the opening of
business on the day next following such issuance.  In determining whether any Shares are issued
or issuable, or Convertible Securities or Options entitle the holders of Notes
to subscribe for or purchase Shares at less than such Fixed Conversion Price,
there shall be taken into account any consideration received by the Company
upon issuance of any such securities, the conversion of any such

 

13

 

Convertible Securities and upon
exercise of such Options the value of such consideration, if other than cash,
to be determined in good faith by the board of directors of the Company (the “Board
of Directors”) in the exercise of their fiduciary duty, with the
concurrence of the holders of at least a majority of the aggregate principal
amount of the Notes then Outstanding. 
Notwithstanding the foregoing or any other provision herein to the contrary,
no adjustment to the Fixed Conversion Price will be required as a result of any
Exempted Issuance.

 

(iii)          In case the Company shall at any time or from
time to time, on or after the Issuance Date and prior to conversion of this
Note, distribute to all holders of Shares (including any such distribution made
in connection with a merger or consolidation in which the Company is the
resulting or surviving Person and the Common Stock is not changed or exchanged)
cash, evidences of indebtedness of the Company, any Subsidiary or another issuer,
securities of the Company (including Convertible Securities), any Subsidiary or
another issuer or other assets (excluding dividends payable in Shares for which
adjustment is made under another paragraph of this Section 4(e) and any
distribution in connection with an Exempted Issuance) or Options to subscribe
for or purchase of any of the foregoing, then, and in each such case,
the Fixed Conversion Price then in effect shall be adjusted (and any other
appropriate actions shall be taken by the Company) by multiplying the Fixed
Conversion Price in effect immediately prior to the date of such distribution
by a fraction (x) the numerator of which shall be the Weighted Average Price of
the Common Stock for the five (5) consecutive Trading Days immediately prior to
the date of distribution less the then fair market value (as determined by the
Board of Directors in the exercise of their fiduciary duties with the
concurrence of the holders of at least a majority of the aggregate principal
amount of the Notes then Outstanding) of the portion of the cash, evidences of
indebtedness, securities or other assets so distributed or of such Options to
subscribe applicable to one Share and (y) the denominator of which shall be the
Weighted Average Price of the Common Stock for the five (5) consecutive Trading
Days immediately prior to the date of distribution (but such fraction shall not
be greater than one).  Such adjustment
shall be made whenever any such distribution is made and shall become effective
retroactively to a date immediately following the close of business on the
record date for the determination of stockholders entitled to receive such
distribution.

 

(iv)          In the event that the Company shall at any
time or from time to time, on or after the Issuance Date and prior to the
conversion of this Note, make a payment of cash or other consideration to the
holders of Shares in respect of a tender offer or exchange offer, other than an
odd-lot offer, and the value of the sum of (i) the aggregate cash and other
consideration paid for such Shares, and (ii) any other consent or other fees
paid to holders of Shares in respect of such tender offer or exchange offer
expressed as an amount per share of Common Stock validly tendered or exchanged
pursuant to such tender offer or exchange offer, exceeds the Weighted Average
Price of the Common Stock on the Trading Day immediately prior to the date any
such tender offer or exchange offer is first publicly announced (the “Announcement
Date”), then the Fixed Conversion Price shall be adjusted in accordance
with the formula:

 

R’ = R x     O’ x P

F + (P x O)

 

For purposes of the
foregoing formula:

 

R = the Fixed Conversion
Price in effect at the expiration time of the tender offer or exchange offer
that is the subject of this Section 4(e)(iv) (the “Expiration Time”);

 

R’ = the Fixed Conversion
Price in effect immediately after the Expiration Time;

 

F = the fair market value
(as determined by the Board of Directors in the exercise of their fiduciary
duties with the concurrence of the holders of at least a majority of the
aggregate

 

14

 

principal amount of the
Notes then Outstanding) of the aggregate value of all cash and any other
consideration paid or payable for Shares validly tendered or exchanged
(including any consent or other fees) and not withdrawn prior to the Expiration
Time (the “Purchased Shares”);

 

O = the number of Shares
outstanding immediately after the Expiration Time less any Purchased Shares;

 

O’ = the number of Shares
outstanding immediately after the Expiration Time, plus any Purchased Shares;
and

 

P = the Weighted Average
Price of the Common Stock on the Trading Day next succeeding the Announcement
Date.

 

Such decrease, if any, shall become effective immediately upon the
opening of business on the day next following the Expiration Time.  In the event that the Company is obligated to
purchase shares pursuant to any tender offer, but the Company is prevented by
applicable law from effecting any such purchases or all such purchases are
rescinded, the Fixed Conversion Price shall again be adjusted to the Fixed
Conversion Price that would then be in effect if such tender or exchange offer
had not been made.  If the application of
this Section 4(e)(iv) to any tender or exchange offer would result in an
increase in the Fixed Conversion Price, no adjustment shall be made for such
tender or exchange offer under this Section 4(e)(iv).

 

(v)           No adjustment in the Fixed Conversion Price
shall be required unless such adjustment would require a cumulative decrease of
at least $0.01 in such price; provided, however, that any
adjustments that by reason of this Section 4(e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment
until made.  All calculations under this
Section 4(e)(v) shall be made to the nearest cent (with $.005 being rounded
upward) or to the nearest one-tenth of a share (with.05 of a share being
rounded upward), as the case may be.

 

(vi)          Whenever the Fixed Conversion Price is
adjusted as herein provided, the Company shall promptly file with the Transfer
Agent an officer’s certificate setting forth the Fixed Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment, which certificate shall be conclusive evidence of the correctness
of such adjustment absent manifest error. 
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Fixed Conversion Price setting forth the
adjusted Fixed Conversion Price and the effective date of such adjustment and
shall mail such notice of such adjustment of the Fixed Conversion Price to the
holders of the Notes at such holder’s last address as shown on the stock
records of the Company.

 

(vii)         In any case in which Section 4(e) provides
that an adjustment shall become effective on the day next following the record
date for an event, the Company may without penalty defer until the occurrence
of such event issuing to the holders of any Notes converted after such record
date and before the occurrence of such event the additional Shares issuable
upon such conversion by reason of the adjustment required by such event over
and above the Shares issuable upon such conversion before giving effect to such
adjustment.

 

(viii)        If any action or transaction would require
adjustment of the Fixed Conversion Price pursuant to more than one subsection
of this Section 4(e), only one adjustment shall be made, and such adjustment
shall be the amount of adjustment that has the highest absolute value.

 

15

 

(ix)           If, at any time and from time to time on or
after the Issuance Date and prior to the conversion of this Note, any event
occurs of the type contemplated by the provisions of this Section 4(e) but not
expressly provided for by such provisions (including the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate
adjustment in the Fixed Conversion Price so as to protect the rights of the
Holder; provided that no such adjustment will increase the Fixed Conversion
Price as otherwise determined pursuant to this Section 4(e).

 

5.             Redemption at Option of the Holder.

 

(a)           [Intentionally Left Blank].

 

(b)           Redemption Option Upon Triggering Event.  In
addition to all other rights of the Holder contained herein, after a Triggering
Event (as defined in Section 5(c)), the Holder shall have the right, at the
Holder’s option, to require the Company to redeem all or a portion of the
Principal at a price (the “Redemption Price”) equal to the sum of (i)
120% of such Principal plus (ii) the Interest Amount with respect to such
Principal.

 

(c)           Triggering Event.  A “Triggering
Event” shall be deemed to have occurred at such time as any of the
following events:

 

(i)            Upon the Holder’s receipt of a Notice of
Change of Control (as defined below);

 

(ii)           [Intentionally Left Blank];

 

(iii)          [Intentionally Left Blank];

 

(iv)          the Common Stock is not listed on the OTC
Bulletin Board or listed on a national securities exchange or quoted on the
NASDAQ National Market (or successor thereto) or the NASDAQ Capital Market, or
if the Common Stock has been listed on a national securities exchange or quoted
on the NASDAQ National Market (or successor thereto) or the NASDAQ Capital
Market, the trading of the Common Stock on such exchange or market is
terminated or suspended for a period of five (5) consecutive Trading Days or
for more than an aggregate of ten (10) Trading Days in any 365-day period;

 

(v)           the Company’s or the Transfer Agent’s notice
to any holder of the Notes, including by way of public announcement, at any
time, of its intention not to comply with a request for conversion of any Notes
into Shares that is tendered in accordance with the provisions of the Notes
(excluding, however, a notice that relates solely to a bona fide dispute that
is subject to and being resolved pursuant to, and in compliance with the time
periods and other provisions of the dispute resolution provisions of Section
4(c)(iii), provided neither such dispute nor such notice is publicly
disclosed);

 

(vi)          a Conversion Failure;

 

(vii)         [Intentionally Left Blank].

 

(viii)        except as provided in clause (ix) below, the
Company or any of its Subsidiaries breaches any representation, warranty,
covenant or other term or condition of the Warrants, this Note or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated thereby and hereby, except to the extent
that such breach would not have a Material Adverse Effect (as defined in
Section 3(a) of the Securities Purchase Agreement) and except, in

 

16

 

the case of a breach of a
covenant or other term that is curable, only if such breach continues for a
period of at least twenty (20) days; or

 

(ix)           the Company does not comply with the
provisions of Section 11 hereof or any other Event of Default occurs and is
continuing.

 

(d)           Mechanics of Redemption Upon Notice of Change
of Control.  No sooner than thirty (30) nor later than
fifteen (15) Business Days prior to the consummation of a Change of Control,
but not prior to the public announcement of such Change of Control, the Company
shall deliver written notice thereof via facsimile and overnight courier (a “Notice
of Change of Control”) to the Holder. 
At any time during the period beginning after receipt of a Notice of
Change of Control (or, in the event a Notice of Change of Control is not
delivered at least twenty (20) Business Days prior to a Change of Control, at
any time on or after the date which is twenty (20) Business Days prior to a
Change of Control) and ending on the date that is two (2) Business Days prior
to the consummation of such Change of Control, the Holder may require the
Company to redeem all or a portion of the Principal by delivering written
notice thereof via facsimile and overnight courier (a “Notice of Redemption
Upon Change of Control”) to the Company, which Notice of Redemption Upon
Change of Control shall indicate (i) the Principal that the Holder is
submitting for redemption and (ii) the applicable Redemption Price, as
calculated pursuant to Section 4(b).  The
Company shall deliver the Redemption Price simultaneously with the consummation
of the Change of Control; provided that, if required by Section
4(c)(viii), this Note shall have been so delivered to the Company.  The Company shall not enter into any binding
agreement or other arrangement with respect to a Change of Control unless the
Company provides that the payments provided for in this Section 5(d) shall have
priority to payments to stockholders in connection with such Change of Control
and the Company complies with such provision.

 

(e)           Mechanics of Other Redemptions at Option of
Holder.  Within one (1) Business Day after the
occurrence of a Triggering Event (other than upon the Holder’s receipt of a
Notice of Change of Control), the Company shall deliver written notice thereof
via facsimile and overnight courier (“Notice of Triggering Event”) to
the Holder and each holder of the Other Notes. 
At any time after either (x) March 31, 2010 in the case of a redemption
pursuant to Section 5(a) or (y) the earlier of the Holder’s receipt of a Notice
of Triggering Event and the Holder’s becoming aware of a Triggering Event in
the case of a redemption pursuant to Section 5(b), the Holder may require the
Company to redeem up to all of the Principal by delivering written notice
thereof via facsimile and overnight courier (“Notice of Redemption at Option
of Holder”) to the Company, which Notice of Redemption at Option of Holder
shall indicate (i) the Principal that the Holder is submitting for redemption,
(ii) the applicable Optional Redemption Price or Redemption Price, as the case
may be, as determined and calculated pursuant to Sections 5(a) or 5(b) above
and (iii) in the case of a redemption pursuant to Section 5(b), the nature of
the Triggering Event to the extent the Holder did not receive a Notice of
Triggering Event; provided that a Notice of Redemption at Option of
Holder with respect to a redemption pursuant to Section 5(b) may only be sent
during the period beginning on and including the date of the Triggering Event
and ending on and including the date which is the later of (I) twenty (20)
Business Days after the date on which the Holder receives a Notice of
Triggering Event from the Company with respect to such Triggering Event and
(II) five (5) Business Days after the date on which such Triggering Event is
cured and the Holder receives written notice from the Company confirming such
Triggering Event has been cured.

 

(f)            Payment of Redemption Price other than in
Connection with a Change of Control.  Upon the Company’s receipt of
a Notice(s) of Redemption at Option of the Holder from any holder of the Other
Notes, the Company shall promptly notify the Holder by facsimile of the
Company’s receipt of such notice(s). 
Each holder that has sent such a notice shall, if required pursuant to
Section 4(c)(viii), promptly submit to the Company such holder’s Note that such
holder has elected to have redeemed.  The
Company shall deliver the applicable Optional Redemption Price or Redemption
Price to the Holder within five (5) Business Days after the Company’s receipt
of a Notice of Redemption at

 

17

 

Option of Holder, provided that
the Holder’s Note shall have been so delivered to the Company.  If the Company is unable to redeem all of the
Notes submitted for redemption, the Company shall (i) redeem a pro rata amount
from each holder of the Notes based on the principal amount of the Notes
submitted for redemption by such holder relative to the aggregate principal
amount of the Notes submitted for redemption by all holders of the Notes and
(ii) in addition to any remedy the Holder may have under this Note, pay to the
Holder interest at a rate equal to the lesser of 2.0% per month (prorated for
partial months) or the highest lawful interest rate in respect of the unpaid
Optional Redemption Price or Redemption Price, as the case may be, until paid
in full or until delivery of a Void Optional Redemption Notice (as defined in
Section 5(g)).

 

(g)           Void Redemption.  In
the event that the Company does not pay the Optional Redemption Price or the
Redemption Price, as the case may be, within the time period set forth in
Section 5(f), at any time thereafter and until the Company pays such unpaid
Optional Redemption Price or Redemption Price in full, the Holder shall have
the option to, in lieu of redemption, require the Company to promptly credit to
the Holder the Principal that was submitted for redemption by the Holder under
this Section 5 and for which the Optional Redemption Price or the Redemption
Price (together with any interest thereon) has not been paid (or return any or
all of the Note or any portion thereof representing such Principal) by sending
written notice thereof to the Company via facsimile (the “Void Optional
Redemption Notice”).  Upon the
Company’s receipt of such Void Optional Redemption Notice, (i) the Notice of
Redemption at Option of Holder shall be null and void with respect to the
Principal subject to the Void Optional Redemption Notice, (ii) the Company
shall promptly return or credit to the Holder any Principal or Note, as
applicable, subject to the Void Optional Redemption Notice and (iii) the Fixed
Conversion Price with respect to all the Principal shall be adjusted to the
lesser of (A) the Fixed Conversion Price as in effect on the date on which the
Void Optional Redemption Notice is delivered to the Company and (B) the lowest
Weighted Average Price of the Common Stock during the period beginning on and
including the date on which the Notice of Redemption at Option of Holder is
delivered to the Company and ending on and including the date on which the Void
Redemption Notice is delivered to the Company.

 

(h)           Disputes; Miscellaneous.  In
the event of a bona fide dispute as to the determination of the arithmetic
calculation of the Optional Redemption Price or Redemption Price, such dispute
shall be resolved pursuant to Section 4(c)(iii) above, with the term “Optional
Redemption Price” or “Redemption Price” being substituted for the term
“Conversion Rate.”  The Holder’s delivery
of a Void Optional Redemption Notice and exercise of its rights following such
notice shall not affect the Company’s obligations to make any payments that
have accrued prior to the date of such notice. 
In the event of a redemption pursuant to this Section 5 of less than all
of the Principal, the Company shall promptly cause to be issued and delivered
to the Holder a replacement note representing the remaining Principal that has
not been redeemed, if required pursuant to Section 4(c)(viii).

 

6.             Other Rights of the Holder.

 

(a)           Reorganization, Reclassification,
Consolidation, Merger or Sale.  Any recapitalization, reorganization,
reclassification, consolidation, merger, self tender offer for all or
substantially all Shares, sale of all or substantially all of the Company’s
assets to another Person or other transaction that is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as “Organic Change.”  In addition to the rights of the Holder under
Section 5, prior to the consummation of any (i) sale of all or substantially
all of the Company’s assets to an acquiring Person (including, for the
avoidance of doubt, the sale of all or substantially all of the assets of the
Company’s Subsidiaries in the aggregate) or (ii) other Organic Change following
which the Company is not a surviving entity, the Company will secure from the
Person purchasing such assets or the successor resulting from such Organic
Change (in each case, the “Acquiring Entity”) a written

 

18

 

agreement, in form and
substance satisfactory to the holders representing at least a majority of the
aggregate principal amount of the Notes then Outstanding, to deliver to the
Holder in exchange for this Note, a security of the Acquiring Entity evidenced
by a written instrument substantially similar in form and substance to this
Note and satisfactory to the holders representing at least a majority of the
aggregate principal amount of the Notes then Outstanding.  Subject to Section 4(e), prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance satisfactory to the holders representing at
least a majority of the aggregate principal amount of the Notes then
Outstanding) to ensure that the Holder will thereafter have the right to
acquire and receive in lieu of or in addition to (as the case may be) the
Shares immediately theretofore acquirable and receivable upon the conversion of
this Note (without regard to any limitations or restrictions on conversion)
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number of
Shares that would have been acquirable and receivable upon the conversion of
this Note as of the date of such Organic Change (without taking into account
any limitations or restrictions on the conversion of this Note).

 

7.             Limitations on Conversion.

 

(a)           4.99% Limitation.  The
Company shall not effect any conversion of this Note and the Holder shall not
have the right to convert Principal or any Interest Amount in excess of that
portion of the Principal Amount or any Interest Amount that, upon giving effect
to such conversion, would cause the aggregate number of Shares beneficially
owned by the Holder and its Affiliates to exceed 4.99% (the “Maximum
Percentage”) of the total outstanding Shares following such conversion or
issuance of Interest Shares; provided, however, that the Maximum
Percentage shall be of no further force and effect on the Company Conversion
Date, solely for purposes of effecting a Company Conversion pursuant to Section
9.  For purposes of the foregoing proviso,
the aggregate number of Shares beneficially owned by the Holder and its
Affiliates shall include the Shares issuable upon conversion of this Note, with
respect to which the determination of such proviso is being made, but shall
exclude the Shares that would be issuable upon (i) conversion of the remaining,
unconverted Principal and any Interest Amount with respect thereto beneficially
owned by the Holder and its Affiliates and (ii) exercise, conversion or
exchange of the unexercised, unconverted or unexchanged portion of any other securities
of the Company (including any warrants or convertible preferred stock) subject
to a limitation on conversion, exercise or exchange analogous to the limitation
contained herein beneficially owned by the Holder and its Affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 7, beneficial ownership shall be
calculated in accordance with Section 13(d) of the 1934 Act.  For purposes of this Section 7(a), in
determining the number of outstanding Shares the Holder may rely on the number
of outstanding Shares as reflected in (1) the Company’s most recent quarterly
report on Form 10-QSB or 10-Q, or annual report on Form 10-KSB or 10-K, as the
case may be, (2) a more recent public announcement by the Company or (3) any
other notice by the Company or the transfer agent for the common stock setting
forth the number of Shares outstanding. 
Upon the written request of the Holder, the Company shall promptly, but
in no event later than two (2) Business Days following the receipt of such
request, confirm in writing to the Holder the number of Shares outstanding as
of the date of such request.  In any
case, the number of outstanding Shares shall be determined after giving effect
to the conversion, exercise or exchange of securities of the Company, including
the Notes and the Warrants by the Holder and its Affiliates since the date as
of which such number of outstanding Shares was reported.  For purposes of determining the maximum
number of Shares that the Company may issue to the Holder pursuant to Section
7(a) upon conversion of this Note on a particular Conversion Date other than a
Company Conversion Date pursuant to Section 9, the Holder’s delivery of a
Conversion Notice with respect to such conversion shall constitute a
representation (on which the Company may rely without investigation) by the
Holder that, upon the issuance of the Shares to be issued to it on such
Conversion Date or Forced Conversion Date, the shares of Common Stock
beneficially owned by the Holder and its Affiliates shall not exceed the
Maximum Percentage of the total outstanding Shares immediately after giving
effect to such conversion, as determined in accordance with this
Section 7(a).  By written notice to
the Company, the Holder may from

 

19

 

time to time increase or
decrease the Maximum Percentage to any other percentage not in excess of 9.99%
specified in such notice; provided, however, that (i) any such
increase will not be effective until the date which is sixty one (61) days
after such notice is delivered to the Company and (ii) any such increase or
decrease will apply only to the Holder and not to any other holder of Notes.

 

(b)           The Company shall not be obligated to issue
any Shares upon conversion of this Note until the Company obtains the approval
by the Company’s stockholders of the Company’s issuance of all of the Shares
issuable upon conversion of the Notes and the Senior Notes and exercise of the
Warrants and the Senior Warrants in accordance with the rules and regulations
applicable to companies on the Principal Market (“Stockholder Approval”).  Until such Stockholder Approval is obtained,
Sirius shall not be issued any Shares, at any time, upon conversion of any of
the Notes.

 

8.             Interest.

 

(a)           Interest shall be payable on each Interest
Payment Date, including the Maturity Date, to the record holder of this Note on
such Interest Payment Date, in cash or, provided that each of the
Fundamental Conditions are satisfied, by converting such Interest equal to the
entire Interest Amount (the “Interest Conversion Amount”) to Shares (“Interest
Shares”) by giving the record holder an Interest Conversion Notice (as
defined below) in accordance with, and subject to the conditions and
requirements of, this Section 8 (an “Interest Conversion”).  The Company may not elect an Interest
Conversion with respect to Interest payable on the Maturity Date or on any
other Interest Payment Date occurring less than thirty-one (31) Trading Days
prior to the Maturity Date.  If the
Company does not elect an Interest Conversion with respect to such Interest,
such Interest shall be paid in cash.  Any
accrued and unpaid Interest which is not paid within five (5) Business Days of
such accrued and unpaid Interest’s Interest Payment Date shall bear interest at
a rate equal to the lesser of 2.0% per month (prorated for partial months) or
the highest lawful rate per annum from such Interest Payment Date until the
same is paid in full (the “Default Interest”).  The Company shall pay any and all Taxes
(excluding income taxes, franchise taxes or other taxes levied on gross
earnings, profits or the like of the Holder) that may be payable with respect
to the issuance and delivery of Interest Shares.

 

(b)           Exercise of Interest Conversion.  The
Company may exercise its right to elect an Interest Conversion by delivering to
the Holder written notice thereof (an “Interest Conversion Notice”) at
least five (5) Business Days prior to the applicable Interest Payment
Date.  If the Company elects an Interest
Conversion, then it must simultaneously take the same action with respect to
all of the Other Notes.  An Interest
Conversion shall be irrevocable by the Company. 
The Interest Conversion Notice shall indicate (I) the number of
consecutive Trading Days during which the Holder must convert its Interest
Conversion Amount (the “Interest Conversion Period”), which shall be at
least ten (10) Trading Days and no more than twenty (20) Trading Days, as
selected by the Company, and shall be the same as any Interest Conversion
Period set forth in any Interest Conversion Notice given pursuant to any Other
Notes on the same day, (II) the date of the first Trading Day of the Interest
Conversion Period, (III) the date of the last Trading Day of the Interest
Conversion Period, which is the last date by which the Holder must convert its
Interest Conversion Amount (the “Final Interest Conversion Date”), (IV)
the Interest Conversion Amount (such Interest Conversion Amount with respect to
each such holder is referred to as its “Pro Rata Interest Conversion Amount”),
(V) each holder’s Pro Rata Interest Conversion Amount.  The date on which the Holder receives an
Interest Conversion Notice is referred to as the “Interest Conversion Notice
Date” and (VI) the Allocation Percentage of each Holder as of the Interest
Conversion Notice Date.

 

(c)           Mechanics of Interest Conversion.  If
the Company has exercised its right to an Interest Conversion in accordance
with Section 8(a) and the Fundamental Conditions are satisfied (or waived in
writing by the Holder), on the Company Conversion Notice Date and at each time
the Holder delivers a Conversion Notice with respect to any portion of the Pro
Rata Interest Conversion Amount (an 

 

20

 

“Interest Conversion Date”),
then, subject to Section 7, the Holder shall convert the Pro Rata Interest
Conversion Amount, in whole or in
part and at such time or times as the Holder, in its sole discretion
determines, during the Interest Conversion Period; provided, however,
that the Holder shall not be permitted to convert during the Interest
Conversion Period, any portion of the Interest Conversion Amount that exceeds
the product of (i) the Holder’s Allocation Percentage as of the Interest
Conversion Notice Date and (ii) twenty percent (20%) of the sum of the
daily dollar trading volume (as reported by Bloomberg) of the Common Stock on
its Principal Market on each of the Trading Days during the Interest Conversion
Period (such limitation, the “Volume Conversion Restriction Amount”).  In the event any Pro Rata Interest Conversion
Amount has not been converted by the Holder prior to the end of the Interest
Conversion Period, then, subject to the limitations set forth in
Section 8(d), the remaining Pro Rata Conversion Amount shall be converted
as of the Interest Conversion Date, as if the Holder had delivered a Conversion
Notice pursuant to Section 4 with respect to such Pro Rata Interest
Conversion Amount on the Interest Conversion Date but without the Holder being
required to actually deliver such Conversion Notice, provided that the
Fundamental Conditions are satisfied (or waived in writing by the Holder) on
the Interest Conversion Date (and, for the avoidance of doubt, on each day
during the Interest Conversion Period). 
In the event that the Fundamental Conditions are not satisfied on the
Interest Conversion Date (or on any other day during the Interest Conversion
Period), then the Interest Conversion shall be null and void with respect to
all or any part designated by the Holder of the unconverted Pro Rata Interest
Conversion Amount and the Company shall pay such amount in cash within five (5)
Business Days in accordance with Section 8(a). 
Notwithstanding anything contained herein to the contrary, no notice
delivered by the Company to any Holder regarding a Fundamental Condition shall
contain any material non-public information.

 

(d)           Notwithstanding anything contained in this
Section 8 to the contrary, on the Final Interest Conversion Date, (i) the
Holder shall not be required (but shall be permitted subject to clause (ii) of
this Section 8(d)) to convert (and shall not be deemed, solely as a result of
Section 8(c), to have converted) any portion of the Pro Rata Interest
Conversion Amount on the applicable Final Interest Conversion Date in excess of
the difference between (A) the product of (I) the Holder’s Allocation
Percentage as of the Interest Conversion Notice Date and (II) ten percent (10%)
of the sum of the daily dollar trading volume (as reported by Bloomberg) of the
Common Stock on its Principal Market on each of the Trading Days during the
Interest Conversion Period, minus (B) any Pro Rata Interest Conversion
Amount converted by the Holder during the Interest Conversion Period and (ii)
the Holder shall neither be required nor permitted to convert (and shall not be
deemed, solely as a result of Section 8(c) to have converted) any portion of
the Pro Rata Interest Conversion Amount on the applicable Final Interest
Conversion Date in excess of the difference between (A) the applicable Volume
Conversion Restriction Amount, minus (B) any Pro Rata Interest Conversion
Amount converted by the Holder during the Interest Conversion Period.  Following the Final Interest Conversion Date,
the Interest Conversion shall be null and void with respect to the unconverted
Pro Rata Interest Conversion Amount and the Company shall pay such amount in
cash within five (5) Business Days in accordance with Section 8(a).

 

9.             Company Conversion.

 

(a)           General.  The Company shall have the
right, in accordance with the terms and subject to the conditions of this
Section 9 and provided that (i) the Fundamental Conditions are
satisfied, (ii) the Company shall have consummated a Qualified Public
Offering and (iii) the Weighted Average Price of the Common Stock shall
have been at least $8.00 (subject to adjustments for stock splits, stock
dividends combinations, reclassifications and other events) on each of the
twenty (20) consecutive Trading Days immediately preceding the Company
Conversion Date (as defined below) (clauses (i), (ii) and (iii)
collectively, the “Company Conversion Conditions”), to require that all
of the Principal, together with the Interest Amount with respect thereto, due
to the Holder upon maturity of this Note be converted to Shares at the
applicable Conversion Price (a “Company Conversion”).

 

21

 

(b)           Exercise of Company Conversion.  The
Company may exercise its right to elect a Company Conversion by delivering to
the Holder written notice thereof (a “Company Conversion Notice”).  The date on which the Holder receives the
Company Conversion Notice is referred to as the “Company Conversion Notice
Date”).  If the Company elects a
Company Conversion, then it must simultaneously take the same action with
respect to all of the Other Notes.  The
Company Conversion Notice shall be irrevocable by the Company.  The Company shall require conversion of a
conversion amount from each holder of Notes equal to the product of (I) the
aggregate principal amount of Notes then Outstanding, together with the
Interest Amount thereon, multiplied by (II) such holder’s Allocation Percentage
(such Conversion Amount with respect to each such holder is referred to as its
“Pro Rata Conversion Amount”). 
The Company Conversion Notice shall indicate (I) the date of
conversion, which date be shall be at least twenty (20) Trading Days after the
closing date of a Qualified Public Offering (the “Company Conversion Date”),
(II) the aggregate principal amount of Notes then Outstanding, together with
the Interest Amount thereon and (III) each holder’s Pro Rata Conversion Amount.

 

(c)           Mechanics of Company Conversion.  If
the Company has exercised its right to Company Conversion in accordance with
Section 9(a) and the Company Conversion Conditions are satisfied (or waived in
writing by the Holder), the Holder will convert its Pro Rata Conversion Amount,
together with any Interest Amount with respect thereto accruing through and
including the Forced Conversion Date on such Forced Conversion Date.  In the event that the Company Conversion
Conditions are not satisfied on the Forced Conversion Date, then the Company
Conversion shall be null and void with respect to all or any part designated by
the Holder of the unconverted Pro Rata Conversion Amount and the Holder shall
be entitled to all the rights of a holder of this Note with respect to such amount
of the Pro Rata Conversion Amount and, accordingly, shall be subject to all the
other provisions of this Note, including that if such amount remains
outstanding on the Maturity Date, then the Company shall repay the Principal
represented by such amount in accordance with Section 4(c)(vii).  Notwithstanding anything contained herein to
the contrary, no notice delivered by the Company to any Holder regarding a
Company Conversion Condition shall contain any material non-public information.

 

10.           Right of First Refusal.

 

(a)           Subject in all cases to the Rights of First
Refusal granted to the holders of the Senior Notes and only if the holders of
the Senior Notes do not exercise their rights of first refusal in respect of
the amount of New Securities offered, the Company hereby grants to the Holder a
right of first refusal to purchase any New Securities that the Company may,
from time to time, propose to issue and sell; provided, however,
that at the time of any such offer or sale the Holder shall qualify as an
“accredited investor” as that term is defined in Rule 501(a) of the 1933
Act.  Such right of first refusal shall
allow the Holder to purchase pro rata among such other holders of the Notes so
electing to purchase the New Securities (determined immediately prior to such
issuance and sale of New Securities and based upon each holder’s Allocation
Percentage) proposed to be issued.  In
the event a holder of the Notes does not purchase any or all of its pro rata
portion of New Securities, each of the remaining holders of the Notes shall
have the right to purchase its pro rata portion (determined at such time) of
such unpurchased New Securities until all of the New Securities are purchased,
or until no other holder of the Notes desires to purchase any additional New
Securities, in which case the Company may sell such unpurchased New Securities
to prospective purchasers on the terms described in the New Issue Notice (as
defined below) for a period of seventy-five (75) days, but thereafter may sell
additional New Securities only after delivering another New Issue Notice as
described herein.  The right of first
refusal granted hereunder shall terminate if unexercised within fifteen (15)
Business Days after receipt of the New Issue Notice.  Notwithstanding anything contained herein to
the contrary, no New Issue Notice shall contain any material non-public
information.

 

(b)           In the event that the Company proposes to
undertake an issuance of New Securities, it shall give the Holder written
notice of its intention (the “New Issue Notice”), describing the

 

22

 

class and number of securities
it intends to issue as New Securities, the purchase price therefor (which shall
be payable solely in cash) and the terms upon which the Company proposes to
issue the same.  Each holder of Notes
shall have fifteen (15) Business Days from the date of its receipt of the New
Issue Notice to elect to purchase all or any portion of such holder’s pro rata portion
of such New Securities (calculated as described in Section 9(a)) for the
purchase price and upon the terms specified in the New Issue Notice by giving
written notice to the Company, stating therein the quantity of New Securities
to be purchased.

 

11.           Covenants.

 

(a)           Corporate Existence.  From
the Issuance Date and for so long as any of the Notes are outstanding, the
Company shall, and shall cause each of its Subsidiaries to (i) conduct its
operations in the ordinary course of business consistent with past practice,
(ii) maintain its corporate existence and (iii) maintain and protect
all material Intellectual Property used in the business of the Company and its
Subsidiaries.

 

(b)           Reservation of Shares.

 

(i)            The Company shall, so long as any of the
Notes or Warrants are outstanding, take all action necessary to reserve and
keep available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes and the exercise of the
Warrants, such number of Shares as shall from time to time be sufficient to
effect the conversion of all of the principal amount then Outstanding under the
Notes (together with accrued and unpaid Interest thereon) and the exercise of
all then outstanding Warrants; provided that the number of Shares so
reserved shall at no time be less than 200% of the number of Shares for which
the Notes are at any time convertible and 150% of the number of Shares for
which the Warrants are at any time exercisable (without regard to any
limitations on conversions) (the “Required Reserve Amount”).  The initial number of Shares reserved for
conversions of the Notes and exercises of the Warrants and each increase in the
number of Shares so reserved shall be allocated pro rata among the holders of
the Notes or holders of the Warrants, as applicable, based on the principal
amount of the Notes held by each holder at the time of issuance of the Notes
(or, in the case of the Warrants, the number of Warrants then held by each
holder of the Warrants) or increase in the number of reserved Shares, as the case
may be.  In the event the Holder (or any
holder of the Warrants) shall sell or otherwise transfer any portion of the
Holder’s Notes (or any portion of such holder’s Warrants), each transferee
shall be allocated a pro rata portion of the number of Shares reserved for such
transferor.  Any Shares reserved and
allocated to any Person that ceases to hold any Notes or any Warrants, as
applicable, shall be allocated to the remaining holders of the Notes (or in the
case of the Warrants, the remaining holders of the Warrants), pro rata based on
the principal amount of the Notes (or in the case of the Warrants, the number
of Warrants) then held by such holders.

 

(ii)           Insufficient Authorized Shares.  If
at any time while any of the Notes remain outstanding the Company does not have
a sufficient number of authorized and unreserved Shares to satisfy its
obligation to reserve for issuance upon conversion of the Notes or exercise of
the Warrants at least a number of Shares equal to the Required Reserve Amount,
then the Company shall immediately take all action necessary to increase the
Company’s authorized Shares to an amount sufficient to allow the Company to
reserve the Required Reserve Amount for the Notes and the Warrants then
outstanding.

 

(c)           Limitations on Indebtedness; Liens.  From
the Issuance Date and for so long as any of the Notes are outstanding, subject
in all respects to the provisions of Section 11(p) hereof, the Company shall
not, and shall not permit any of its Subsidiaries to, (a) issue, incur,
assume, maintain, suffer to exist or extend the term of any Indebtedness,
except for (i) Indebtedness under the Senior Notes, (ii) Indebtedness
(A) the holders of which agree in writing to be subordinate and junior in
right of payments to the Notes on terms and conditions acceptable to the
Purchasers, including expressly agreeing not to take, demand or receive from
the Company, any payment of (whether as principal, interest or any

 

23

 

other amount) or security for
the whole or any part of such Indebtedness, including any letter of credit or
similar credit support facility to support the payment thereof, (B) which
does not mature or otherwise require or permit redemption or repayment prior to
or on the first anniversary of the Maturity Date, and (C) which is not
secured by any of the assets of the Company or any of its Subsidiaries (“Permitted
Subordinated Indebtedness”) in an amount not to exceed $10,000,000, (iii)
the two Subsequent Payments (as defined in the Eurosilicone Agreement) due
under the Eurosilicone Agreement or (iv) the principal due under that certain
Loan Agreement dated September 10, 2004, by and between BNP Paribas and ES
Holdings SAS, a Subsidiary of the Company (the “BNP Facility”);
(b) issue any capital stock of the Company or any Subsidiary redeemable
prior to or on the one-year anniversary of the Maturity Date of any Notes then
Outstanding; (c) directly or indirectly, create, assume or suffer to exist
any Lien on any asset now owned or hereafter acquired by the Company or any of
its Subsidiaries other than a Permitted Lien, or (d) redeem, retire, defease or
otherwise repay or prepay in cash any principal of any Indebtedness (other than
Indebtedness under the Notes, Indebtedness under the Senior Notes, Indebtedness
under the IIINV Note, principal due under the BNP facility or the two
Subsequent Payments due under the Eurosilicone Agreement).  The provisions of this Section 11(c) are
in furtherance of Section 11(p) hereof, and in no way limit the other restrictions
on or obligations of the Company pursuant thereto or otherwise.

 

(d)           Restrictions on Issuance of Securities.  From
the date hereof and for so long as any of the Notes or Warrants are
outstanding, the Company shall not in any manner issue or sell any Options or
Convertible Securities that are convertible into or exchangeable or exercisable
for shares of Common Stock other than Exempted Issuances.

 

(e)           Restriction on Loans; Investments; Subsidiary
Equity.  From the Issuance Date and for so long as any
of the Notes are outstanding, the Company shall not, and shall not permit any
of its Subsidiaries to, (i) except for Permitted Investments (as defined
below), make any loans to, or investments in, any other Person, including
through lending money, deferring the purchase price of property or services
(other than trade accounts receivable on terms of ninety (90) days or less),
purchasing any note, bond, debenture or similar instrument, providing any
letter of credit, guaranteeing (or taking any action that has the effect of
guaranteeing) any obligations of any other Person, or acquiring any equity
securities of, or other ownership interest in, or making any capital
contribution to any other Person (provided, however, that the
Company and its Subsidiaries may make loans to each other to the extent the
incurrence of the Indebtedness represented by such loans would be permitted by
Section 11(c)(a)(ii) and not otherwise be prohibited by
Section 11(c), and may make investments in any domestic Subsidiary; and provided
that the Company and any domestic Subsidiary may make investments in any
foreign Subsidiary; provided  further, that any investments in a
foreign Subsidiary shall be in the form of debt securities to the maximum
extent possible), (ii) other than pursuant to the Guarantee and Collateral
Agreement, issue, transfer or pledge any capital stock or equity interest in
any Subsidiary to any Person other than the Company, any domestic Subsidiary or
any wholly-owned foreign Subsidiary or (iii) permit any foreign Subsidiary
other than Integrated International Incorporated to own, directly or
indirectly, any capital stock of, or equity interest in, a domestic
Subsidiary.  “Permitted Investments”
means (a) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States or issued by any agency thereof and backed by
the full faith and credit of the United States, in each case maturing within
180 days from the date of acquisition; (b) certificates of deposit, time
deposits, eurodollar time deposits or overnight bank deposits having maturities
of six months or less from the date of acquisition issued by any Purchaser or
by any commercial bank organized under the laws of the United States or any
state thereof having combined capital and surplus of not less than
$500,000,000; (c) commercial paper of an issuer rated at least A-1 by Standard
& Poor’s Ratings Services (“S&P”) or P-1 by Moody’s Investors Service,
Inc. (“Moody’s”), or carrying an equivalent rating by a nationally recognized
rating agency, if both of the two named rating agencies cease publishing
ratings of commercial paper issuers generally, and maturing within six months
from the date of acquisition; (d) repurchase obligations of any Purchaser or of
any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than 30 days, with respect to securities
issued or fully guaranteed or insured by the United States;

 

24

 

(e) securities with maturities
of 180 days or less from the date of acquisition issued or fully guaranteed by
any state, commonwealth or territory of the United States, by any political
subdivision or taxing authority of any such state, commonwealth or territory or
by any foreign government, the securities of which state, commonwealth,
territory, political subdivision, taxing authority or foreign government (as
the case may be) are rated at least AA by S&P or Aa by Moody’s; (f)
securities with maturities of six months or less from the date of acquisition
backed by standby letters of credit issued by any Purchaser or any commercial
bank satisfying the requirements of clause (b) of this definition; or (g)
shares of money market mutual or similar funds which invest exclusively in
assets satisfying the requirements of clauses (a) through (f) of this
definition or money market funds that ( i) comply with the criteria set forth
in Securities and Exchange Commission Rule 2a-7 under the Investment Company
Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by Moody’s and
(iii) have portfolio assets of at least $5,000,000,000.

 

(f)            Restriction on Purchases or Payments.  From
the Issuance Date and for so long as any of the Notes are outstanding, the
Company shall not, and shall not permit any of its Subsidiaries to,
(i) declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any capital stock or set any record date with
respect to any of the foregoing; provided, however, that any
Subsidiary may declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any of its capital stock that is held solely by the Company or by a
Subsidiary, (ii) purchase, redeem or otherwise acquire, directly or indirectly,
any shares of the Company’s capital stock or the capital stock of any of its
Subsidiaries, except as long as no Event of Default has occurred and is
continuing, repurchases of unvested shares at cost in connection with the
termination of the employment relationship with any employee pursuant to stock
option or purchase agreements in effect on the Issuance Date or
(iii) grant, issue or sell any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property pro rata to the
record holders of any class of its capital stock.  From the Issuance Date and for so long as any
of the Notes or Warrants are outstanding, the Company and its Subsidiaries
shall not enter into any agreement which would limit or restrict the Company’s
or any of its Subsidiaries’ ability to perform under, or take any other
voluntary action to avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed by it under, this Note and the
Warrants.

 

(g)           Restrictions on Capital Expenditures.  From
the Issuance Date and for so long as any of the Notes are outstanding, the
Company and its Subsidiaries shall not authorize or make any Capital
Expenditures in excess of $500,000 per year in the aggregate.

 

(h)           Disposition of Assets.  From
the Issuance Date and for so long as any of the Notes are Outstanding, the
Company shall not, and shall not cause or permit any of its Subsidiaries to,
sell, transfer, assign, dispose, consign, lease or remove from their respective
business locations any property or assets except that, until the holders of at
least a majority of the Notes then Outstanding give the Company notice to the
contrary during the existence of any Event of Default in the case of clauses
(ii) and (iii) below, the Company or any Subsidiary may (i) sell inventory
in the ordinary course of its business consistent with past practice (any sale
or exchange of inventory in satisfaction of Indebtedness of the Company or any
Subsidiary shall not be deemed a sale of inventory in the ordinary course of
business); (ii) sell or dispose of obsolete assets which the Company or
such Subsidiary has determined, in good faith, not to be useful in the conduct
of its business and which, in any fiscal year, do not have an aggregate fair
market value in excess of $50,000 (with respect to such sales or dispositions
by the Company and its Subsidiaries in the aggregate); and (iii) sell or
dispose of accounts in the course of collection in the ordinary course of
business consistent with past practice.

 

25

 

(i)            Mergers, Consolidations, Acquisitions.  In
addition to the other rights the Holder has hereunder, from the Issuance Date
and for so long as any of the Notes are outstanding, the Company shall not sell
all or substantially all of the assets of the Company (including, for the
avoidance of any doubt, all or substantially all of the assets of the Company’s
Subsidiaries in the aggregate), except in the event of an Organic Change where
(x) the Acquiring Entity (A) assumes the Company’s obligations
hereunder and under the agreements and instruments entered into in connection
herewith and (B) is a publicly traded corporation whose common stock is
quoted on or listed for trading on the American Stock Exchange or another
nationally recognized stock exchange or the NASDAQ National Market (or a
successor thereto), and (y) immediately before and immediately after
giving effect to such transaction, no Triggering Event or Event of Default
shall have occurred and be continuing.

 

(j)            Affiliate Transactions.  From
Issuance Date and for so long as any of the Notes are outstanding, the Company
shall not, and shall cause each of its Subsidiaries not to, enter into or be a
party to any agreement or transaction with any Affiliate (other than a
wholly-owned Subsidiary), including transfer of any assets to any such
Affiliate, except in the ordinary course of the Company or such Affiliate’s
business and upon fair and reasonable terms that are no less favorable to the
Company or such Affiliate, as the case may be, than such Person would obtain in
a comparable arms’-length transaction with a Person not an Affiliate of the
Company, and on terms consistent with the business relationship of the Company
or such Subsidiary and such Affiliate prior to the date of this Note, if any.

 

(k)           SEC Filings.  From the Issuance Date and for
so long as any of the Notes are outstanding, (i) the Company shall timely file
with the SEC, within the time periods specified in the SEC’s rules and
regulations, all quarterly and annual financial information required to be
filed with the SEC on Forms 10-Q or 10-QSB and 10-K or 10-KSB, all current
reports required to be filed with the SEC on Form 8-K and any other information
required to be filed with the SEC; (ii) the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if
the 1934 Act or the rules and regulations thereunder would otherwise
permit such termination and (iii) the Company shall deliver (A) copies of all
such filings with the SEC to each holder of Notes then Outstanding within one
(1) day after the filing thereof with the SEC, unless the foregoing are filed
with the SEC through EDGAR and are immediately available to the public through
EDGAR and (B) facsimile copies of all press releases issued by the Company or
any of its Subsidiaries on the same day as the release thereof, except to the
extent any such release is available through Bloomberg Financial Markets (or
any successor thereto) contemporaneously with such issuance.

 

(l)            Compliance with Laws.  From
the Issuance Date and for so long as any of the Notes are outstanding, the
Company will comply, and cause each Subsidiary to comply, in all material
respects with all applicable laws, ordinances, rules, regulations and
requirements of Governmental Authorities (including ERISA and the rules and
regulations thereunder and all Environmental Laws) except where the necessity
of compliance therewith is contested in good faith by appropriate proceedings
diligently conducted.

 

(m)          Maintenance of Assets; Insurance.  From
the Issuance Date and for so long as any of the Notes are outstanding, the
Company will keep, and will cause each Subsidiary to keep, all assets useful
and necessary in its business in good working order and condition, ordinary
wear and tear excepted; will maintain, and will cause each Subsidiary to
maintain (either in the name of the Company or in such Subsidiary’s own name),
with financially sound and reputable insurance companies, product liability insurance
and insurance on all their assets in at least such amounts and against at least
such risks as are usually insured against in the same general area by companies
of established repute engaged in the same or a similar business; and will
furnish to the holders of the Notes, upon reasonable written request, full
information as to the insurance carried.

 

26

 

(n)           Payment of Taxes.  From
the Issuance Date and for so long as any of the Notes are outstanding, the
Company will, and will cause each of its Subsidiaries to, pay and discharge,
before the same shall become delinquent, all income and all other material
Taxes, assessments and other governmental charges or levies, imposed upon them
or any of their properties or assets or in respect of their businesses or
incomes except for those being contested in good faith by proper proceedings
diligently conducted and against which adequate reserves, in accordance with
GAAP, have been established.

 

(o)           [Intentionally Left Blank.]

 

(p)           Other Indebtedness. 
Payments of principal and other payments due under this Note shall not
be subordinated to any obligations of the Company and shall rank senior to all
other Indebtedness other than (i) payments of (A) principal and interest
due under the BNP Facility and (B) the two Subsequent Payments (as defined
in the Eurosilicone Agreement) due under the Eurosilicone Agreement; provided,
however, that the aggregate amount of all such payments shall not exceed
€16,400,000, (ii) the Senior Obligations (as defined in the Guarantee and
Collateral Agreement), (iii) payments of principal and interest due under the
IIINV Note, and (iv) trade accounts payable of the Company and other
Indebtedness that is preferred by operation of law.

 

(q)           [Intentionally Left Blank.]

 

(r)            [Intentionally Left Blank.]

 

12.           Voting Rights.  The
holders of the Notes shall have no voting rights in respect of the Shares prior
to conversion, except as required by law and as expressly provided in this
Note.

 

13.           Defaults and Remedies.

 

(a)           Events of Default.  An “Event
of Default” is (i) default in payment of any Principal of this Note, any
Redemption Price or any Change of Control Redemption Price, when and as due;
(ii) default in payment of any Interest on this Note that is not included in an
amount described in the immediately preceding clause (i) that is not cured
within two (2) Business Days from the date such Interest was due; (iii) any
default in the observance or performance of any covenant or agreement contained
in clauses (c) through (j) of Section 11 (iv) failure by the Company to comply
with any other provision of this Note or the Warrants in all material respects
within ten (10) days after the earlier of (x) the Company’s receipt of notice
to comply with such provision or (y) the Company becoming aware of such
default; (v) any representation, warranty, certification or statement of fact
made or deemed made by or on behalf of the Company in this Note, the Warrants
or in any certificate or other document delivered pursuant hereto or thereto,
shall be incorrect in any material respect when made or deemed made; (vi) any
default in payment of at least $500,000, individually or in the aggregate,
under or acceleration prior to maturity, or any event or circumstances arising
such that, any Person is entitled, or could, with the giving of notice and/or
lapse of time and/or the fulfillment of any condition and/or the making of any determination,
become entitled, to require repayment before its stated maturity of, or to take
any step to enforce any security for, any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness of at least $500,000 by the Company or any of its
Subsidiaries, whether such Indebtedness now exists or shall be created
hereafter; (vii) the Warrants or any subordination provisions in any
subordinated indebtedness shall cease, for any reason, to be in full force and
effect, or the Company or any of its Subsidiaries shall so assert; (viii) if
the Company or any of its Subsidiaries pursuant to or within the meaning of any
Bankruptcy Law (as defined below); (A) commences a voluntary case; (B) consents
to the entry of an order for relief against it in an involuntary case; (C)
consents to the appointment of a Custodian of it or any of its Subsidiaries for
all or substantially all of its property; (D) makes a general assignment for
the benefit of its creditors; or (E) admits in writing

 

27

 

that it is generally unable to
pay its debts as the same become due; (ix) an involuntary case or other
proceeding is commenced directly against the Company or any of its Subsidiaries
seeking liquidation, reorganization or other relief with respect to it or its
Indebtedness under any Bankruptcy Law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and such involuntary
case or other Bankruptcy Law proceeding remains undismissed and unstayed for a
period of thirty (30) days, or an order of relief is entered against the
Company or any of its Subsidiaries as debtor under the Bankruptcy Laws as are
now or hereafter in effect; or (x) one or more judgments, non interlocutory
orders or decrees shall be entered by a U.S. state or federal or a foreign
court or administrative agency of competent jurisdiction against any the
Company or any of its Subsidiaries involving in the aggregate a liability (to
the extent not covered by independent third party insurance as to which the
insurers has not denied coverage) as to any single or related series of
transactions, incidents or conditions, of $500,000 or more, and the same shall
remain unsatisfied, unvacated, unbonded or unstayed pending appeal for a period
of thirty (30) days after the entry thereof. 
The term “Bankruptcy Law” means Title 11, U.S. Code, or any
similar federal, state or foreign law for the relief of debtors.  The term “Custodian” means any
receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.  Within five (5) Business
Days after the occurrence of any Event of Default set forth in clause (vi),
(ix), (x) or (xi) above, the Company shall deliver written notice thereof to
the Holder.

 

(b)           Remedies.  If any Event of Default has
occurred and is continuing, the holders of a majority of the principal amount
of Notes then outstanding may, upon written notice to the Company, except in
the case of events described in Sections 13(a)(viii) or 13(a)(ix), in which
case no notice shall be required, (i) declare all of the Principal then
outstanding together with the Interest Amount with respect to such Principal
and all other amounts, including the amounts due under Sections 4(c)(v)(A) and
5(b), owing or payable hereunder and under the Other Notes (the “Acceleration
Amount”) immediately due and payable, in cash, all without presentment,
demand, protest or further act or notice of any kind, all of which are
expressly waived by the Company and (ii) exercise any and all rights and
remedies available to the holder of this Note under this Note, at law or in
equity.  In addition to any remedy the
Holder may have under this Note, such Acceleration Amount shall bear interest
at a rate equal to the lesser of 2.0% per month (prorated for partial months)
or the highest lawful interest rate until paid in full.  Nothing in this Section 12 shall limit any
other rights the Holder may have under this Note, including Sections 3 and 4 of
this Note.

 

(c)           Void Acceleration.  In
the event that the Company does not pay the Acceleration Amount within five (5)
Business Days of this Note becoming due under Section 13(b), at any time
thereafter and until the Company pays such unpaid Acceleration Amount in full,
the Holder shall have the option to, in lieu of redemption, require the Company
to promptly return this Note (to the extent this Note has been previously
delivered to the Company), in whole or any portion thereof, to the Holder, by
sending written notice thereof to the Company via facsimile (the “Void
Acceleration Notice”).  Upon the
Company’s receipt of such Void Acceleration Notice, (i) the acceleration
pursuant to Section 13(b) shall be null and void with respect to the
portion of this Note subject to such Void Acceleration Notice, (ii) the
Company shall promptly return the portion of this Note (to the extent this Note
has been previously delivered to the Company) subject to such Void Acceleration
Notice and (iii) the Fixed Conversion Price with respect to all of the
Principal shall be adjusted to the lesser of (A) the Fixed Conversion Price as
in effect on the date on which the Void Acceleration Notice is delivered to the
Company and (B) the lowest Weighted Average Price of the Common Stock during
the period beginning on and including the date on which this Note became due
under Section 13(b) and ending on and including the date on which the Void
Acceleration Notice is delivered to the Company.

 

14.           Notice of Certain Events.  The
Company will give written notice to the Holder at least ten (10) Business Days
prior to the date on which the Company closes its books or takes a record (i)
with respect to any dividend or distribution upon the Common Stock, (ii) with
respect to any pro rata

 

28

 

subscription offer to holders
of Common Stock or (iii) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder. 
The Company will also give written notice to the Holder at least ten
(10) Business Days prior to the date on which any Organic Change, dissolution
or liquidation will take place, provided that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.

 

15.           Vote to Change the Terms of the Notes.  The
written consent of the Company and the holders representing at least a majority
of the principal amount then Outstanding under all of the Notes shall be
required for any change in the Notes (including this Note) and upon receipt of
such consent, each Note shall be deemed amended thereby.

 

16.           Lost or Stolen Notes.  Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Note and, in the case of
loss, theft or destruction, of an indemnification undertaking by the Holder to
the Company in customary form and reasonably satisfactory to the Company and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver a new Note of like tenor and date; provided,
however, the Company shall not be obligated to re-issue a Note if the
Holder contemporaneously requests the Company to convert this Note in its
entirety into Shares as permitted hereunder.

 

17.           Remedies, Characterizations, Other
Obligations, Breaches and Injunctive Relief.  The remedies provided in this
Note shall be cumulative and in addition to all other remedies available under
this Note, at law or in equity (including a decree of specific performance
and/or other injunctive relief), no remedy contained herein shall be deemed a
waiver of compliance with the provisions giving rise to such remedy and nothing
herein shall limit the Holder’s right to pursue actual damages for any failure
by the Company to comply with the terms of this Note.  The Company covenants to the Holder that
there shall be no characterization concerning this instrument other than as
expressly provided herein.  Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be received by the Holder
thereof and shall not, except as expressly provided herein, be subject to any
other obligation of the Company (or the performance thereof).  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that
the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.

 

18.           Specific Shall Not Limit General;
Construction.  No specific provision contained in this Note
shall limit or modify any more general provision contained herein.  This Note shall be deemed to be jointly
drafted by the Company and Sirius and shall not be construed against any Person
as the drafter hereof.

 

19.           Failure or Indulgence Not Waiver.  No
failure or delay on the part of the Holder in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.

 

20.           Notice.  Any notices, consents, waivers
or other communications required or permitted to be given under the terms of
this Note must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one (1) Business Day after deposit with a
nationally recognized overnight delivery service, in each case 

 

29

 

properly addressed to the party
to receive the same.  The addresses and
facsimile numbers for such communications shall be:

 

If to the Company:

 

MediCor Ltd.

4560 South Decatur Blvd., Suite 300

Las Vegas, Nevada  89103-5253

Facsimile:               (702) 932-4561

Attention:              General Counsel/Secretary

If to Sirius:

 

Sirius Capital LLC

4560 S. Decatur Blvd., Suite
300

Las Vegas, Nevada 89103 

Facsimile:               (702) 932-4561

Attention:              Corporate Secretary/General Counsel

 

Or, in the case of a Holder or any other party named above, at such
other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party in accordance with this Section 20 five (5) days prior to the
effectiveness of such change.  Written
confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date,
recipient facsimile number and an image of the first page of such transmission
or (C) provided by a nationally recognized overnight delivery service
shall be rebuttable evidence of personal service, receipt by facsimile or
deposit with a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

 

21.           Transfer of this Note.  The
Holder may assign or transfer some or all of its rights hereunder only upon the
terms and conditions set forth in the Subordination Agreement and with the
prior written consent of the Company. 
Any purported transfer in violation of this Section 21 shall be null and
void.

 

22.           Payment of Collection, Enforcement and Other
Costs.  If (a) this Note is placed in the hands of an
attorney for collection or enforcement or is collected or enforced through any
legal proceeding; or (b) an attorney is retained to represent the Holder in any
bankruptcy, reorganization, receivership of the Company or other proceedings
affecting Company creditors’ rights and involving a claim under this Note, then
the Company shall pay the costs incurred by the Holder for such collection,
enforcement or action, including reasonable attorneys’ fees and disbursements.

 

23.           Cancellation. 
After all Principal and other amounts at any time owed under this Note
have been paid in full or converted into Shares in accordance with the terms
hereof, this Note shall automatically be deemed canceled, shall be surrendered
to the Company for cancellation and shall not be reissued.

 

24.           Note Exchangeable for Different Denominations. 
Subject to Section 4(c)(viii), in the event of a conversion or
redemption pursuant to this Note of less than all of the Principal, the Company
shall promptly cause to be issued and delivered to the Holder, upon tender by
the Holder of this Note, a new Note of like tenor representing the remaining
Principal that has not been so converted or redeemed.

 

30

 

This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for
a new Note or Notes containing the same terms and conditions and representing
in the aggregate the Principal, and each such new Note will represent such
portion of such Principal as is designated by the Holder at the time of such
surrender.  The date the Company issued
this Note shall be the Issuance Date hereof regardless of the number of times a
new Note shall be issued.

 

25.           Taxes.

 

(a)           Payments Free of Taxes.  Any
and all payments by or on account of any obligation of the Company or any of
its Subsidiaries under the Notes or the Warrants shall be made without any
set-off, counterclaim or deduction and free and clear of and without deduction
for any Indemnified Taxes; provided that if the Company or any of its
Subsidiaries shall be required to deduct any Indemnified Taxes from such
payments, then (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section 25(a)), the Holder receives an
amount equal to the sum it would have received had no such deductions been
made, (ii) the Company or such Subsidiary, as applicable, shall make such
deductions and (iii) the Company or such Subsidiary shall pay the full amount
deducted to the relevant Governmental Authority in accordance with applicable
law; provided, further, that if the Company or any of its Subsidiaries
is required to make an additional payment to the Holder under this Section
25(a), and if the Holder is entitled to a cash refund or credit against cash
Taxes payable which is both identifiable and quantifiable by the Holder as
being attributable to the imposition of such Indemnified Taxes (a “Tax
Refund”), and such Tax Refund may be obtained without increased liability
or obligation to the Holder (including any obligation of the Holder to file Tax
returns in jurisdictions where it would not otherwise be obligated to file Tax
returns), then, upon the written request of the Company, the Holder shall apply
for such Tax Refund and, to the extent such Tax Refund is received by the
Holder, shall reimburse the Company or such Subsidiary for such amount as the
Holder shall determine to be the proportion of the Tax Refund attributable to
such additional payment as will leave the Holder after the reimbursement in the
same position as it would have been if the additional payment had not been
required; provided that, if any Tax Refund reimbursed by the Holder to
the Company or such Subsidiary is subsequently disallowed, the Company shall
repay the Holder such amount (together with interest and any applicable penalty
payable to the Holder to the relevant taxing authority) promptly after the
Holder notifies the Company of such disallowance.  The Company agrees to reimburse the Holder
for the Holder’s reasonable out-of-pocket expenses, if any, incurred in
complying with any request hereunder and agrees that all costs incurred by the
Holder in respect of this Section 25(a) may be deducted from the amount of any
reimbursement to the Company or any of its Subsidiaries in respect of any Tax
Refund pursuant to this Section 25(a). 
Nothing in this Section 25(a) shall require the Holder to disclose to
the Company any of its Tax returns or any other Tax-related information that it
deems to be confidential.

 

(b)           Indemnification by the Company.  The
Company shall indemnify the Holder, within thirty (30) days after written
demand therefor, for the full amount of any Indemnified Taxes paid by the
Holder, on or with respect to any payment by or on account of any obligation of
the Company or any of its Subsidiaries under the Notes and the Warrants
(including Indemnified Taxes imposed or asserted on or attributable to amounts
payable under this Section 25) arising therefrom or with respect thereto,
whether or not such Indemnified Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.  A certificate of the Holder as to the amount
of such payment or liability under this Section 25 shall be delivered to the
Company and shall be conclusive absent demonstrable error.

 

26.           Waiver of Notice.  To
the extent permitted by law, the Company hereby waives demand, notice, protest
and all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note and the Warrants.

 

31

 

27.           Governing Law; Jurisdiction.  This
Note shall be construed and enforced in accordance with, and all questions
concerning the construction, validity, interpretation and performance of this
Note shall be governed by, the internal laws of the State of New York,
including Section 5-1401 of the New York General Obligations Law.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper.  Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof
to such party at the address for such notices to it under this Note 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.

 

28.           WAIVER OF JURY TRIAL.  THE
COMPANY, ON BEHALF OF ITSELF AND ITS SUBSIDIARIES, AND THE HOLDER OF THIS NOTE
HEREBY IRREVOCABLY WAIVE ANY RIGHTS THEY MAY HAVE TO, AND AGREE NOT TO REQUEST,
A TRIAL BY JURY IN RESPECT OF ANY ACTION BASED UPON, OR ARISING OUT OF THIS
NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

29.           Effect of Redemption or Conversion; No
Prepayment.  Upon payment of the Redemption Price or the
Change of Control Redemption Price, each in accordance with the terms hereof
with respect to any portion of the Principal of this Note, or delivery of
Shares upon conversion of any portion of the Principal in accordance with the
terms hereof, such portion of the Principal of this Note shall be deemed paid
in full and shall no longer be deemed Outstanding for any purpose.  Except as specifically set forth in this
Note, including Section 4, the Company does not have any right, option, or
obligation, to pay any portion of the Principal at any time prior to the
Maturity Date.

 

30.           Purchase of Notes by the Company.  The
Company shall not, and shall not permit any Subsidiary or Affiliate to,  voluntarily purchase or acquire any portion
of any Note, unless concurrently with such action, the Company, such Subsidiary
or Affiliate makes an offer to all Holders to acquire the same portion of their
Notes on the same terms.  So long as
there is at least $25,000,000 in Principal, this Section 30 may not be amended
except with the written consent of the holders of two-thirds (2/3) of the
aggregate principal amount of all the Notes then Outstanding.

 

31.           Other Payments to Holders of Notes.  The
Company will not directly or indirectly pay or cause to be paid any
remuneration, whether by way of supplemental or additional interest, fee or
otherwise, or grant any security, to any holder of Notes as consideration for
or as an inducement to the entering into by any holder of Notes or any waiver
or amendment of any of the terms and provisions hereof unless such remuneration
is concurrently paid, or security is concurrently granted, on the same terms,
ratably to each holder of Notes then outstanding that consented to such waiver
or amendment.

 

32.           Payment Set Aside.  To
the extent that the Company makes a payment or payments to the Holder hereunder
or the Holder enforces or exercises its rights hereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, by a trustee, receiver or any other person
under any law (including any bankruptcy law, U.S. state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

 

32

 

33.           Interpretative Matters. 
Unless the context otherwise requires, (a) all references to Sections,
Schedules or Exhibits are to sections, schedules or exhibits contained in or
attached to this Note, (b) each accounting term not otherwise defined in this
Note has the meaning assigned to it in accordance with GAAP, (c) words in the
singular or plural include the singular and plural and pronouns stated in either
the masculine, the feminine or neuter gender shall include the masculine,
feminine and neuter and (d) the use of the word “including” in this Note
shall be by way of example rather than limitation.  If a stock split, stock dividend, stock
combination or other similar event occurs during any period over which an
average price is being determined, then an appropriate adjustment will be made
to such average to reflect such event.

 

* * * * * *

 

33

 

IN WITNESS
WHEREOF, the Company
has caused this Note to be executed on its behalf by the undersigned as of the
26th day of April 2006.

 

	
   

  	
  MEDICOR LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Theodore R. Maloney

  	
   

  
	
   

  	
   

  	
  Name: Theodore R. Maloney

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  

 

 

EXHIBIT I

 

MEDICOR
LTD.

CONVERSION NOTICE

 

Reference is made to the
Convertible Note (the “Note”) of MEDICOR
LTD., a Delaware corporation (the “Company”), in the original
principal amount of $37,500,000.00.  In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Common Stock, par value $0.001 per share (the “Common
Stock”), of the Company, as of the date specified below.  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Note.

 

Date of Conversion:

 

Aggregate Conversion Amount
to be converted at the Fixed Conversion Price (as defined in the Note): 

 

Principal, applicable
thereto, to be converted:  

 

Aggregate Conversion Amount
to be converted pursuant to a Company Conversion (as defined in the Note): 

 

Principal, applicable
thereto, to be converted: 

 

Aggregate Interest
Conversion Amount to be converted pursuant to a Company Conversion: 

 

Please confirm the following information:

 

Conversion Price: 

 

Number of shares of Common
Stock to be issued: 

 

Please issue the Common Stock into which the Note is
being converted in the following name and to the following address:

 

	
  Issue to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Facsimile Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Authorization:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  
								

 

DTC Participant
Number and Name (if electronic book entry transfer): 

 

Account Number (if
electronic book entry transfer): 

 

I-1

 

ACKNOWLEDGMENT

 

The Company hereby
acknowledges this Conversion Notice and hereby directs [Transfer Agent] to
issue the above indicated number of shares of Common Stock in accordance with
the Transfer Agent Instructions dated
              
      , 200   from the Company and
acknowledged and agreed to by U.S. Stock Transfer Corp.

 

	
   

  	
  MEDICOR LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

I-2Exhibit 10.42

March 21, 2006

Mr. Joseph L. Fischer

61 Lake Road

Far Hills, NJ  07931

Dear Joe,

The
purpose of this letter (the “Letter Agreement”)
is to set forth our agreement with respect to your employment with ImClone Systems Incorporated (“ImClone”) as its Interim Chief Executive Officer,
which position you assumed on January 24, 2006 (the “Effective
Date”).

	
  Title/Location

  	
   

  	
  You will serve as ImClone’s Interim Chief Executive
  Officer. Your primary place of business will be ImClone’s Branchburg, NJ
  office and is subject to business travel.

  
	
   

  	
   

  	
  You
  have also been previously elected to serve as a member of the Board, which
  service you will perform at no additional compensation, other than
  (x) the award of a stock option in respect of 20,000 shares of common
  stock which you were previously granted on January 18, 2006 in respect
  of your service on the Board and (y) a pro-rated portion of the annual
  $20,000 fee payable to non-employee directors in respect of 2006 service
  (with such pro-ration reflecting service on the Board through
  January 23, 2006) and payments for Board committee meetings attended through
  January 23, 2006.

  
	
  Salary

  	
   

  	
  ImClone will pay you a
  base salary at a rate of $40,000 per month, payable in accordance with
  ImClone’s customary payroll practices.

  
	
  Benefits

  	
   

  	
  You will be eligible to
  participate in the employee benefit plans and arrangements of ImClone,
  subject to their terms and procedures (including election procedures), as
  they may be modified from time to time. You will be eligible for one hundred
  sixty (160) hours of vacation per year, subject to the terms and conditions
  of ImClone’s vacation policy.

  
	
  Annual Bonus

  	
   

  	
  The Compensation
  Committee of the Board of Directors of ImClone (respectively, the “Compensation Committee” and the “Board”)
  has approved a 2006 annual bonus opportunity for you, with a target of
  $500,000 and a maximum opportunity of $1 million, payable under and subject
  to the terms of ImClone’s Annual Incentive Plan. The criteria for your 2006
  annual bonus will be established by the Compensation Committee at the time
  annual bonus criteria for 2006 are established for other senior executives
  under ImClone’s Annual Incentive Plan.

  

 

	
  

  	
   

  	
  Any annual bonus
  opportunities in respect of future years will be established by the
  Compensation Committee in its discretion.

  
	
  Employment

  Term

  	
   

  	
  

  You will be an at-will employee of ImClone. Your employment may be terminated
  at any time by ImClone. You may terminate your employment at any time,
  provided that you give ImClone at least 60 days’ advance written notice of
  your intent to terminate your employment.

  
	
  Severance

  	
   

  	
  In the event your employment is terminated by
  ImClone without “Cause” (as defined on Appendix A), or in the event
  you terminate your employment with ImClone with “Good Reason” (as defined on Appendix
  A) following a “Change in Control” (as defined on Appendix A), you
  will be entitled to a lump sum cash severance payment of not less than
  $500,000, payable no later than 10 days following your termination of
  employment (subject to six months’ delay as and if required under
  Section 409A of the Internal Revenue Code of 1968, as amended (the “Code”)).

  
	
   

  	
   

  	
  In the event of your
  termination of employment with ImClone for any other reason, you will not be
  entitled to any severance or termination payments or benefits (other than
  those vested accrued benefits to which you may be entitled under the ImClone
  employee benefit plans in which you were participating at the time of your
  termination of employment). As Interim Chief Executive Officer you will be
  designated as a “limited duration” employee for purposes of ImClone’s Senior
  Executive Severance Plan and will, therefore, not be covered under that plan.
  You also will not be covered (by virtue of rank or otherwise) under ImClone’s
  Change-In-Control Plan unless the Compensation Committee specifically
  designates you in writing as a covered employee under that plan.

  
	
  Release

  	
   

  	
  Your severance
  entitlements, as described herein, will be subject to your execution and
  non-revocation of a general release of all claims against ImClone and its
  Subsidiaries, affiliates and related persons (other than claims for
  indemnification, claims for vested accrued benefits under the employee
  benefit plans in which you were participating at the time of your termination
  of employment, and claims for the severance amounts described herein), in
  such form as is required by ImClone.

  
	
  Gross-Up

  	
   

  	
  In the event that you
  become subject to the excise tax imposed by Code Section 4999 (the
  “Parachute Excise Tax”), then you will be entitled to gross-up payments from
  ImClone on the terms, and subject to the conditions and limitations, set
  forth in Appendix B.

  
	
  Equity

  Incentives

  	
   

  	
  

  The Compensation Committee previously granted you, in respect of your
  appointment as Interim Chief Executive Officer, a non-qualified stock option
  under ImClone’s 2002 Stock Option Plan to purchase 100,000 shares of
  ImClone’s common stock at an exercise price equal to the closing price of
  ImClone’s common stock on the date of grant (i.e., February 28, 2006). This award is subject to the
  terms and conditions of the applicable plan and award agreement.

  

 2
 

 

	
  Covenants

  	
   

  	
  The confidentiality, non-competition
  and non-solicitation provisions set forth in Appendix C (and other
  applicable Company policies) will apply to you in all events and regardless
  of the reason for your termination of employment.

  
	
  Indemnification

  	
   

  	
  You will be entitled to be indemnified, in
  accordance with, and subject to the terms and conditions of, ImClone’s
  by-laws, for actions and omissions as an officer of ImClone.

  
	
  Notice

  	
   

  	
  Communications relating
  to this Letter Agreement will be in writing and will be deemed to have been duly
  given when delivered either personally or by United States certified mail,
  return receipt requested, addressed as follows:

  
	
   

  	
   

  	
  If to you:

  
	
   

  	
   

  	
  at the address listed in
  ImClone’s personnel records

  
	
   

  	
   

  	
  If to ImClone:

  
	
   

  	
   

  	
  ImClone Systems
  Incorporated

  
	
   

  	
   

  	
  180 Varick Street

  
	
   

  	
   

  	
  New York, New York 10014

  
	
   

  	
   

  	
  Attention: General Counsel

  
	
  Miscellaneous

  	
   

  	
  This Letter Agreement
  (which includes the Appendices hereto) represents the entire agreement
  between the parties with respect to the subject matters herein. Any rights and
  obligations you may have as a result of this Letter Agreement may not be
  transferred, except that any amounts constituting earned but unpaid base
  salary as of the time of your death may be paid to your estate. This Letter
  Agreement will be governed by the laws of the State of New York without
  regard to its conflicts of law principles. This Letter Agreement may be
  executed in one or more counterparts, each of which will be deemed to be an
  original but all of which together will constitute one and the same instrument.
  This Letter Agreement may be amended only by a written instrument signed by
  the parties hereto.

  

 

Kindly acknowledge the terms above by signing below
and returning this form to me.

Sincerely,

ImClone
Systems Incorporated

	
  /s/ LISA M. CAMMY

  	
   

  
	
  Lisa M. Cammy, Vice President, Human Resources

  	
   

  

 

ACCEPTED
AND ACKNOWLEDGED

	
  /s/ JOSEPH
  L. FISCHER

  	
   

  
	
  Joseph L. Fischer

  	
   

  

 

 3
 

Appendix A - Definitions

1)               “Cause”
will mean the occurrence of any of the following:

(a)          an indictment for, a
conviction of, or a plea of guilty or nolo contendere to, a felony or a
misdemeanor involving fraud, embezzlement, or moral turpitude;

(b)         willful misconduct or
gross negligence by you resulting, in either case, in harm to ImClone or any Subsidiary
(reputational or economic);

(c)          failure by you to attempt
in good faith to (x) perform your duties to ImClone or (y) carry out
the directions of the Board, in either case after written notice to you of such
failure; or

(d)         fraud, embezzlement,
theft or dishonesty by you against ImClone or any Subsidiary or a material
violation by you of a policy or procedure of ImClone, resulting, in any case,
in harm to ImClone or any Subsidiary (reputational or economic).

2)               “Change in Control” will mean the
occurrence of one of the following events during your employment with ImClone
under this Letter Agreement:

(a)          individuals who, on the Effective
Date, constitute the Board (the “Incumbent Directors”)
cease for any reason to constitute at least a majority of the Board, provided
that any person becoming a director subsequent to the Effective Date whose
election or nomination for election was approved by a vote of at least
two-thirds of the Incumbent Directors then on the Board (either by a specific
vote or by approval of the proxy statement of ImClone in which such person is
named as a nominee for director, without objection to such nomination) will be
an Incumbent Director; provided, however, that no individual initially elected
or nominated as a director of ImClone as a result of an actual or threatened
election contest with respect to directors or as a result of any other actual
or threatened solicitation of proxies by or on behalf of any person other than
the Board will be an Incumbent Director;

(b)         any “person” (as such
term is defined in Section 3(a)(9) of the Securities Exchange Act of
1934 (the “Exchange Act”) and as used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes, after the
Effective Date, a “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of ImClone
representing 40% or more of the combined voting power of ImClone’s then
outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that an
event described in this paragraph (b) will not be deemed to be a Change in
Control if any of following becomes such a beneficial owner:

(i)             ImClone or any
majority-owned Subsidiary (provided, that this exclusion applies solely to the
ownership levels of ImClone or the majority-owned Subsidiary);

(ii)         any tax-qualified,
broad-based employee benefit plan sponsored or maintained by ImClone or any
majority-owned Subsidiary;

(iii)     any underwriter temporarily
holding securities pursuant to an offering of such securities; or

(iv)       any person pursuant to a
Non-Qualifying Transaction (as defined below);

(c)          the consummation of a
merger, consolidation, statutory share exchange or similar form of corporate
transaction involving ImClone or any of its Subsidiaries that requires the
approval of ImClone’s stockholders, whether for such transaction or the
issuance of securities in the transaction (a “Business
Combination”), unless immediately following such Business
Combination:

(i)             50% or more of the
total voting power of:

 4
 

(A)       the corporation resulting
from such Business Combination (the “Surviving Corporation”),
or

(B)        if applicable, the
ultimate parent corporation that directly or indirectly has beneficial
ownership of 100% of the voting securities eligible to elect directors of the
Surviving Corporation (the “Parent Corporation”),

is represented by
Company Voting Securities that were outstanding immediately prior to such
Business Combination (or, if applicable, is represented by shares into which
such Company Voting Securities were converted pursuant to such Business
Combination), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Company Voting
Securities among the holders thereof immediately prior to the Business
Combination;

(ii)         no person (other than any
employee benefit plan (or related trust) sponsored or maintained by the
Surviving Corporation or the Parent Corporation), is or becomes the beneficial
owner, directly or indirectly, of 40% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation);
and

(iii)     at least a majority of the
members of the board of directors of the Parent Corporation (or if there is no
Parent Corporation, the Surviving Corporation) following the consummation of
the Business Combination were Incumbent Directors at the time of the Board’s
approval of the execution of the initial agreement providing for such Business
Combination;

(any Business
Combination which satisfies all of the criteria specified in (i), (ii) and
(iii) above will be deemed to be a “Non-Qualifying Transaction”);
or

(d)         stockholder approval of a
liquidation or dissolution of ImClone, unless the voting common equity
interests of an ongoing entity (other than a liquidating trust) are
beneficially owned, directly or indirectly, by ImClone’s shareholders in substantially
the same proportions as such shareholders owned ImClone’s outstanding voting
common equity interests immediately prior to such liquidation and such ongoing
entity assumes all existing obligations of ImClone under this Letter Agreement.

Notwithstanding the
foregoing, a Change in Control of ImClone will not be deemed to occur solely
because any person acquires beneficial ownership of more than 40% of ImClone
Voting Securities as a result of the acquisition of Company Voting Securities
by ImClone which reduces the number of Company Voting Securities outstanding;
provided, that, if after such acquisition by ImClone such person becomes the
beneficial owner of Company Voting Securities that increases the percentage of
outstanding Company Voting Securities beneficially owned by such person, a
Change in Control of ImClone will then occur.

3)               “Good Reason” will mean the occurrence of
any of the following events after a Change in Control, provided you notify
ImClone in writing at least 60 days after such event of your intent to
terminate your employment as a result thereof and ImClone does not cure such
event within 30 days after such notice:

(a)          a material adverse
diminution of your titles, authority, duties or responsibilities, or the
assignment to you of titles, authority, duties or responsibilities that are
materially inconsistent with your titles, authority, duties and/or
responsibilities in a manner materially adverse to you; or

(b)         a reduction in your base
salary, or a reduction in your target bonus opportunity in respect of 2006 as
described in the Letter Agreement, without your prior written consent; or

 5
 

(c)          an actual change in your
principal work location by more than 75 miles and more than 75 miles from your principal
place of abode as of the date of such change in job location without your prior
written consent; or

(d)         a failure of ImClone to
obtain the assumption in writing of its obligation under this Letter Agreement by
any successor to all or substantially all of the assets of ImClone within 45
days after a merger, consolidation, sale or similar transaction that qualifies
as a Change in Control.

4)               “Subsidiary” will mean a corporation of
which ImClone directly or indirectly owns more than 50 percent of the “voting
stock” (meaning the capital stock of any class or classes having general voting
power under ordinary circumstances, in the absence of contingencies, to elect
the directors of a corporation) or any other business entity in which ImClone directly
or indirectly has an ownership interest of more than 50 percent.

 6
 

 

Appendix B—Tax Provisions

1)   Withholding Taxes.   ImClone
will be entitled to withhold from any and all payments made to you under this
Letter Agreement all federal, state, local and/or other taxes or imposts which ImClone
determines are required to be so withheld from such payments.

2)   Golden Parachute Taxes.   In
the event that you become subject to the excise tax imposed by Code Section 4999
(the “Parachute Excise Tax”), then you and ImClone
will carry out the following:

(a)    If the
aggregate “parachute payment” (as such term is used under Code Section 280G)
exceeds 299.99% of the “base amount” (as such term is used under Code Section 280G)
(the “Safe Harbor Amount”) by less than 10% of
the Safe Harbor Amount, then the parachute payment will be reduced to the Safe
Harbor Amount, with you determining in your sole discretion which portion of
the aggregate parachute payment will be so reduced; or

(b)   If the
aggregate parachute payment exceeds the Safe Harbor Amount by 10% or more of
the Safe Harbor Amount, then ImClone will pay you a tax gross-up payment so
that after payment by you of all federal, state, and local excise, income,
employment, Medicare and any other taxes (including any related penalties and
interest) resulting from the payment of the parachute payments and the tax
gross-up payments to you by ImClone, you retain on an after-tax basis an amount
equal to the amount that you would have retained had you not been subject to
the Parachute Excise Tax.

3)   Section 409A.   ImClone
intends that all payments under this Letter Agreement be made on a basis that
complies with Section 409A of the Code. Accordingly, in the event that you
are considered a “Specified Employee” as defined in Section 409A of the
Code or the guidance issued thereunder (“Section 409A”),
and any payments to you under this Letter Agreement are considered “deferred
compensation” under Section 409A of a type requiring payment six months
after the date of your separation from service (within the meaning of Section 409A),
then to the extent required by Section 409A, such payment will be delayed
until six (6) months after the date of your separation from service.

4)   No Representations.   ImClone
makes no representation, commitment or guarantee with respect to the tax
treatment of any payments hereunder, including, but not limited to, federal,
state and local income, estate and gift tax treatment, and ImClone will not be
responsible in any event with regard to non-compliance with Code Section 409A.

 7
 

Appendix C—Covenants

1)   Noncompetition.   During your employment with ImClone and
for a period of 12 months following your termination of employment for any
reason (the “Noncompetition/Nonsolicitation Period”)
you will not at any time, directly or indirectly, engage in “Competitive
Activity.”  For purposes of this Letter
Agreement, “Competitive Activity”
will mean your engaging in an activity, whether as an employee, consultant, principal,
member, agent, officer, director, partner or shareholder (except as a less than
1% shareholder of a publicly traded company) that is competitive with any
business of ImClone or any Subsidiary conducted by ImClone or such Subsidiary
at any time during the Noncompetition/Nonsolicitation Period; provided, however, that you may be
employed by or otherwise associated with (a) a business of which a Subsidiary,
division, segment or unit is in competition with ImClone or any Subsidiary but
as to which such Subsidiary, division, segment or unit you have absolutely no
direct or indirect responsibilities or involvement, or (b) a company where
the Competitive Activity is (i) from the perspective of such company, de minimis with respect to the business
of such company and its affiliates, and (ii) from the perspective of
ImClone or any Subsidiary, not in material competition with ImClone or any Subsidiary.

2)   Nonsolicitation.   During
the Noncompetition/Nonsolicitation Period, you will not at any time, directly
or indirectly, solicit (x) any customer or client of ImClone or any Subsidiary
with respect to a Competitive Activity or (y) any employee of ImClone or
any Subsidiary for the purpose of causing such employee to terminate his or her
employment with ImClone or such Subsidiary.

3)   Enforcement.   You acknowledge and agree that if you
violate or threaten to violate Section 1 or Section 2 of this
Appendix C, ImClone will not have an adequate remedy at law. Accordingly, you
and ImClone agree that ImClone will be entitled to such equitable and
injunctive relief as may be available to restrain you and any business, firm,
partnership, individual, corporation or entity participating in the breach or
threatened breach from the violation of the provisions of Section 1 or Section 2
of this Appendix C.  Nothing in this
Letter Agreement will be construed as prohibiting ImClone from pursuing any
other remedies available at law or in equity for breach or threatened breach of
Section 1 or Section 2 of this Appendix C, including the recovery of
damages.

4)   Confidentiality.   At
all times prior to and after the termination of your service with ImClone for
any reason, you will not disclose to anyone or make use of any trade secret or
proprietary or confidential information of ImClone, including such trade secret
or proprietary or confidential information of any customer or other entity to
which ImClone owes an obligation not to disclose such information, which you acquire
during your service with ImClone, including but not limited to records kept in
the ordinary course of business, except: (i) as such disclosure or use may
be required or appropriate in connection with your service as an employee of ImClone;
(ii) when required to do so by a court of law, by any governmental agency
having supervisory authority over the business of ImClone or by any
administrative or legislative body (including a committee thereof) with
apparent jurisdiction to order you to divulge, disclose or make accessible such
information; (iii) as to such confidential information that becomes
generally known to the public or trade without your violation of this Section 4
of this Appendix C; or (iv) to your spouse and/or your personal tax and
financial advisors as reasonably necessary or appropriate to advance your tax,
financial and other personal planning (each an “Exempt
Person”), provided, however,
that any disclosure or use of any trade secret or proprietary or confidential
information of ImClone by an Exempt Person will be deemed to be a breach of
this Section 4 of this Appendix C by you.

5)   Return of Company Property.   Immediately
following your termination of employment with ImClone for any reason, you will
immediately return all Company property in your possession, including but not
limited to all computer equipment (hardware and software), telephones,
facsimile machines, palm pilots and other communication devices, credit cards,
office keys, security access cards, badges, 

 8
 

identification cards and
all copies (including drafts) of any documentation or information (however
stored) relating to the business of ImClone, its customers and clients or its
prospective customers and clients.

6)   Cooperation.   Following
your termination of employment with the Company for any reason, you will give your
assistance and cooperation willingly, upon reasonable advance notice with due
consideration for your other business or personal commitments, in any matter
relating to your position with ImClone, or your expertise or experience as ImClone
may reasonably request, including your attendance and truthful testimony where
deemed appropriate by ImClone, with respect to any investigation or ImClone’s
defense or prosecution of any existing or future claims or litigations or other
proceeding relating to matters in which you were involved or potentially had
knowledge by virtue of your service with ImClone. In no event will your cooperation
materially interfere with your services for a subsequent employer or other
similar service recipient. ImClone agrees that (i) it will promptly
reimburse you for your reasonable and documented expenses in connection with your
rendering assistance and/or cooperation under this Section 6 of this
Appendix C, upon your presentation of documentation for such expenses and (ii) you
will be reasonably compensated for any continued material services as required
under this Section 6 of this Appendix C.

 9

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