Exhibit 10.2
 
[FORM OF SENIOR SECURED CONVERTIBLE NOTE]
 
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE 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 SECTIONS 3(c)(iii) AND 18(a)
HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.
 
Kandi Technologies, Corp.
 
Senior Secured Convertible Note
 
Issuance Date:  January __, 2010
Original Principal Amount: U.S. $[         ]       

FOR VALUE RECEIVED, Kandi Technologies, Corp., a Delaware corporation (the
“Company”), hereby promises to pay to the order of [HUDSON BAY FUND, LP][HUDSON
BAY OVERSEAS FUND, LTD.], [OTHER BUYERS] or its registered assigns (“Holder”)
the amount set out above as the Original Principal Amount (as reduced pursuant
to the terms hereof pursuant to redemption, conversion or otherwise, the
“Principal”) when due, whether upon the Maturity Date, acceleration, redemption
or otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any outstanding Principal (as defined below) at the
applicable Interest Rate (as defined below) from the date set out above as the
Issuance Date (the “Issuance Date”) until the same becomes due and payable,
whether upon the Maturity Date or acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof). This Senior
Secured Convertible Note (including all Senior Secured Convertible Notes issued
in exchange, transfer or replacement hereof, this “Note”) is one of an issue of
Senior Convertible Notes issued pursuant to the Securities Purchase Agreement
(as defined below) on the Closing Date (as defined below) (collectively, the
“Notes” and such other Senior Secured Convertible Notes, the “Other Notes”).
Certain capitalized terms used herein are defined in Section 30.
 
 
 

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1.           PAYMENTS OF PRINCIPAL. On the Maturity Date, the Company shall pay
to the Holder an amount in cash representing all outstanding Principal, accrued
and unpaid Interest and accrued and unpaid Late Charges on such Principal and
Interest.  Other than as specifically permitted by this Note, the Company may
not prepay any portion of the outstanding Principal, accrued and unpaid Interest
or accrued and unpaid Late Charges on Principal and Interest, if any.
 
2.           INTEREST; INTEREST RATE.  (a) Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 360-day
year and twelve 30-day months and shall be payable in arrears for each Quarter
on January 15, April 15, July 15 and October 15 of each year (each, an “Interest
Date”) with the first Interest Date being April 15, 2010.  Interest shall be
payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in shares of Common Stock (“Interest Shares”) so long
as there has been no Interest Conditions Failure; provided however, that the
Company may, at its option following notice to the Holder, pay Interest on any
Interest Date in cash (“Cash Interest”) or in a combination of Cash Interest and
Interest Shares.  The Company shall deliver a written notice (each, an “Interest
Election Notice”) to each holder of the Notes on or prior to the Interest Notice
Due Date (the date such notice is delivered to all of the holder, the “Interest
Notice Date”) which notice (i) either (A) confirms that Interest to be paid on
such Interest Date shall be paid entirely in Interest Shares or (B) elects to
pay Interest as Cash Interest or a combination of Cash Interest and Interest
Shares and specifies the amount of Interest that shall be paid as Cash Interest
and the amount of Interest, if any, that shall be paid in Interest Shares and
(ii) certifies that there has been no Interest Conditions Failure.  If an
Interest Conditions Failure has occurred as of the Interest Notice Date, then
unless the Company has elected to pay such Interest as Cash Interest, the
Interest Notice shall indicate that unless the Holder waives the Interest
Conditions Failure, the Interest shall be paid as Cash
Interest.  Notwithstanding anything herein to the contrary, if no Interest
Conditions Failure has occurred as of the Interest Notice Date but an Interest
Conditions Failure occurs at any time prior to the Interest Date, (A) the
Company shall provide the Holder a subsequent notice to that effect and (B)
unless the Holder waives the Interest Conditions Failure, the Interest shall be
paid in cash.  Interest to be paid on an Interest Date in Interest Shares shall
be paid in a number of fully paid and nonassessable shares (rounded to the
nearest whole share in accordance with Section 3(a)) of Common Stock equal to
the quotient of (1) the amount of Interest payable on such Interest Date less
any Cash Interest paid and (2) the Interest Conversion Price in effect on the
applicable Interest Date.
 
(b)           When any Interest Shares are to be paid on an Interest Date, the
Company shall (i) (A) provided that the Company's transfer agent (the “Transfer
Agent”) is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, credit such aggregate number of Interest Shares to
which the Holder shall be entitled to the Holder's or its designee's balance
account with DTC through its Deposit/Withdrawal at Custodian system, or (B) if
the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver on the applicable Interest Date, to the
address set forth in the register maintained by the Company for such purpose
pursuant to the Securities Purchase Agreement or to such address as specified by
the Holder in writing to the Company at least two (2) Business Days prior to the
applicable Interest Date, a certificate, registered in the name of the Holder or
its designee, for the number of Interest Shares to which the Holder shall be
entitled and (ii) with respect to each Interest Date, pay to the Holder, in cash
by wire transfer of immediately available funds, the amount of any Cash
Interest. 
 
 
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(c)           Prior to the payment of Interest on an Interest Date, Interest on
this Note shall accrue at the Interest Rate and be payable by way of inclusion
of the Interest in the Conversion Amount on each Conversion Date in accordance
with Section 3(b)(i) or upon any redemption in accordance with Section 11.  From
and after the occurrence and during the continuance of any Event of Default, the
Interest Rate shall automatically be increased to eighteen percent (18.0%).  In
the event that such Event of Default is subsequently cured, the adjustment
referred to in the preceding sentence shall cease to be effective as of the date
of such cure; provided that the Interest as calculated and unpaid at such
increased rate during the continuance of such Event of Default shall continue to
apply to the extent relating to the days after the occurrence of such Event of
Default through and including the date of such cure of such Event of
Default.  The Company shall pay any and all taxes that may be payable with
respect to the issuance and delivery of Interest Shares.
 
3.           CONVERSION OF NOTES. This Note shall be convertible into shares of
Common Stock (as defined below), on the terms and conditions set forth in this
Section 3.
 
(a)           Conversion Right. Subject to the provisions of Section 3(d), at
any time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below).  The Company shall
not issue any fraction of a share of Common Stock upon any conversion.  If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all transfer, stamp, issuance
and similar taxes that may be payable with respect to the issuance and delivery
of Common Stock upon conversion of any Conversion Amount.
 
(b)           Conversion Rate. The number of shares of Common Stock issuable
upon conversion of any Conversion Amount pursuant to Section 3(a) shall be
determined by dividing (x) such Conversion Amount by (y) the Conversion Price
(the “Conversion Rate”).
 
(i)           “Conversion Amount” means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, plus all accrued and unpaid Interest with respect to such portion of
the Principal amount and accrued and unpaid Late Charges with respect to such
portion of such Principal and such Interest.
 
(ii)           “Conversion Price” means, as of any Conversion Date or other date
of determination, $6.25, subject to adjustment as provided herein.
 
 
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(c)           Mechanics of Conversion.
 
(i)           Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion Date”), the Holder shall (A) deliver
(whether via facsimile or otherwise), for receipt on or prior to 11:59 p.m., New
York time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a nationally recognized
overnight delivery service for delivery to the Company (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction as contemplated by Section 18(b)). On or before the first (1st)
Trading Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile an acknowledgment of confirmation of receipt of such
Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer
Agent”). On or before the third (3rd) Trading Day following the date of receipt
of a Conversion Notice (the “Share Delivery Date”), the Company shall (1)
provided that the Transfer Agent is participating in The Depository Trust
Company’s (“DTC”) Fast Automated Securities Transfer Program, credit such
aggregate number of shares of Common Stock to which the Holder shall be entitled
to the Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal at Custodian system or (2) if the Transfer Agent is not participating
in the DTC Fast Automated Securities Transfer Program, issue and deliver (via
reputable overnight courier) 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 of Common Stock to which the Holder shall be entitled. If
this Note is physically surrendered for conversion as required by Section
3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Trading Days
after receipt of this Note and at its own expense, issue and deliver to the
Holder (or its designee) a new Note (in accordance with Section 18(d))
representing the outstanding Principal not converted. The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.
 
(ii)           Company’s Failure to Timely Convert. If the Company shall fail,
for any reason or for no reason, to issue to the Holder within three (3) Trading
Days after the Company’s receipt of a Conversion Notice (whether via facsimile
or otherwise), a certificate for the number of shares of Common Stock to which
the Holder is entitled and register such shares of Common Stock on the Company’s
share register or to credit the Holder’s or its designee’s balance account with
DTC for such number of shares of Common Stock to which the Holder is entitled
upon the Holder’s conversion of any Conversion Amount (as the case may be) (a
“Conversion Failure”), and if on or after such third (3rd) Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by the Holder of shares of Common
Stock issuable upon such conversion that the Holder anticipated receiving from
the Company, then, in addition to all other remedies available to the Holder,
the Company shall, within three (3) Trading Days after the Holder’s request and
in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal
to the Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such shares of Common Stock) shall terminate, or (ii)
promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such shares of Common Stock or credit the Holder’s
balance account with DTC for the number of shares of Common Stock to which the
Holder is entitled upon the Holder’s conversion hereunder (as the case may be)
and pay cash to the Holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Common Stock
multiplied by (B) the Closing Sale Price of the Common Stock on the Trading Day
immediately preceding the Conversion Date.
 
 
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(iii)           Registration; Book-Entry.  The Company shall maintain a register
(the “Register”) for the recordation of the names and addresses of the holders
of each Note and the principal amount of the Notes held by such holders (the
“Registered Notes”).  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the holders of
the Notes shall treat each Person whose name is recorded in the Register as the
owner of a Note for all purposes, including, without limitation, the right to
receive payments of Principal and Interest hereunder, notwithstanding notice to
the contrary.  A Registered Note may be assigned or sold in whole or in part
only by registration of such assignment or sale on the Register.  Upon its
receipt of a request to assign or sell all or part of any Registered Note by a
Holder, the Company shall record the information contained therein in the
Register and issue one or more new Registered Notes in the same aggregate
principal amount as the principal amount of the surrendered Registered Note to
the designated assignee or transferee pursuant to Section 18.  Notwithstanding
anything to the contrary set forth herein, upon conversion of any portion of
this Note in accordance with the terms hereof, the Holder shall not be required
to physically surrender this Note to the Company unless (A) the full Conversion
Amount represented by this Note is being converted or (B) the Holder has
provided the Company with prior written notice (which notice may be included in
a Conversion Notice) requesting reissuance of this Note upon physical surrender
of this Note.  The Holder and the Company shall maintain records showing the
Principal, Interest and Late Charges, if any, converted and/or paid (as the case
may be) the dates of such conversions and/or payments (as the case may be) or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon conversion
 
(iv)           Pro Rata Conversion; Disputes. In the event that the Company
receives a Conversion Notice from more than one holder of Notes for the same
Conversion Date and the Company can convert some, but not all, of such portions
of the Notes submitted for conversion, the Company, subject to Section 3(d),
shall convert from each holder of Notes electing to have Notes converted on such
date a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all Notes
submitted for conversion on such date. In the event of a dispute as to the
number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 23.
 
 
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(d)           Limitations on Conversions.
 
(i)           Beneficial Ownership.  Notwithstanding anything to the contrary
contained in this Note, this Note shall not be convertible by the Holder hereof,
and the Company shall not effect any conversion of this Note or otherwise issue
any shares of Common Stock pursuant hereto, to the extent (but only to the
extent) that the Holder or any of its affiliates would beneficially own in
excess of 4.99% (the “Maximum Percentage”) of the Common Stock. To the extent
the above limitation applies, the determination of whether this Note shall be
convertible (vis-à-vis other convertible, exercisable or exchangeable securities
owned by the Holder) shall, subject to such Maximum Percentage limitation, be
determined on the basis of the first submission to the Company for conversion,
exercise or exchange (as the case may be). No prior inability to convert this
Note, or to issue shares of Common Stock, pursuant to this paragraph shall have
any effect on the applicability of the provisions of this paragraph with respect
to any subsequent determination of convertibility. For purposes of this
paragraph, beneficial ownership and all determinations and calculations
(including, without limitation, with respect to calculations of percentage
ownership) shall be determined in accordance with Section 13(d) of the 1934 Act
(as defined in the Securities Purchase Agreement) and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in
a manner otherwise than in strict conformity with the terms of this paragraph to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Maximum Percentage beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such Maximum Percentage limitation. The
limitations contained in this paragraph shall apply to a successor Holder of
this Note. The holders of Common Stock shall be third party beneficiaries of
this paragraph and the Company may not waive this paragraph without the consent
of holders of a majority of its Common Stock. For any reason at any time, upon
the written or oral request of the Holder, the Company shall within one (1)
Business Day confirm orally and in writing to the Holder the number of shares of
Common Stock then outstanding, including by virtue of any prior conversion or
exercise of convertible or exercisable securities into Common Stock, including,
without limitation, pursuant to this Note or securities issued pursuant to the
Securities Purchase Agreement.  By written notice to the Company, any Holder may
increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the 61st day after such notice is delivered to the
Company, and (ii) any such increase or decrease will apply only to the Holder
sending such notice and not to any other holder of Notes.
 
 
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(ii)           Principal Market Regulation. The Company shall not issue any
shares of Common Stock upon conversion of this Note or otherwise pursuant to the
terms of this Note if the issuance of such shares of Common Stock would exceed
the aggregate number of shares of Common Stock which the Company may issue upon
conversion or exercise (as the case may be) of the Notes and the SPA Warrants or
otherwise pursuant to the terms of this Note without breaching the Company’s
obligations under the rules or regulations of the Principal Market (the number
of shares which may be issued without violating such rules and regulations, the
“Exchange Cap”), except that such limitation shall not apply in the event that
the Company (A) obtains the approval of its stockholders as required by the
applicable rules of the Principal Market for issuances of shares of Common Stock
in excess of such amount or (B) obtains a written opinion from outside counsel
to the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Holder. Until such approval or such written
opinion is obtained, no Buyer shall be issued in the aggregate, upon conversion
or exercise (as the case may be) of any Notes or any of the SPA Warrants or
otherwise pursuant to the terms of this Note, shares of Common Stock in an
amount greater than the product of (i) the Exchange Cap multiplied by (ii) the
quotient of (1) the original principal amount of Notes issued to such Buyer
pursuant to the Securities Purchase Agreement on the Closing Date divided by (2)
the aggregate original principal amount of all Notes issued to the Buyers
pursuant to the Securities Purchase Agreement on the Closing Date (with respect
to each Buyer, the “Exchange Cap Allocation”). In the event that any Buyer shall
sell or otherwise transfer any of such Buyer’s Notes, the transferee shall be
allocated a pro rata portion of such Buyer’s Exchange Cap Allocation with
respect to such portion of such Notes so transferred, and the restrictions of
the prior sentence shall apply to such transferee with respect to the portion of
the Exchange Cap Allocation so allocated to such transferee.  Upon conversion
and exercise in full of a holder’s Notes and SPA Warrants, the difference (if
any) between such holder’s Exchange Cap Allocation and the number of shares of
Common Stock actually issued to such holder upon such holder’s conversion in
full of such holder’s Notes and exercise in full of such SPA Warrants shall be
allocated to the respective Exchange Cap Allocations of the remaining holders of
Notes and SPA Warrants on a pro rata basis in proportion to the shares of Common
Stock underlying the Notes and SPA Warrants then held by each such holder.
 
4.           RIGHTS UPON EVENT OF DEFAULT.
 
(a)           Event of Default.  Each of the following events shall constitute
an “Event of Default”:
 
(i)           the failure of the applicable Registration Statement (as defined
in the Registration Rights Agreement) to be filed with the SEC on or prior to
the date that is ten (10) days after the applicable Filing Deadline (as defined
in the Registration Rights Agreement) or the failure of the applicable
Registration Statement to be declared effective by the SEC on or prior to the
date that is ten (10) days after the applicable Effectiveness Deadline (as
defined in the Registration Rights Agreement);
 
(ii)           while the applicable Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or such
Registration Statement (or the prospectus contained therein) is unavailable to
any holder of Registrable Securities (as defined in the Registration Rights
Agreement) for sale of all of such holder’s Registrable Securities in accordance
with the terms of the Registration Rights Agreement, and such lapse or
unavailability continues for a period of five (5) consecutive days or for more
than an aggregate of ten (10) days in any 365-day period (excluding days during
an Allowable Grace Period (as defined in the Registration Rights Agreement));
 
 
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(iii)           the suspension from trading or the failure of the Common Stock
to be trading or listed (as applicable) on an Eligible Market for a period of
five (5) consecutive days or for more than an aggregate of ten (10) days in any
365-day period;
 
(iv)           the Company’s (A) failure to cure a Conversion Failure or a
Delivery Failure (as defined in the Warrants) by delivery of the required number
of shares of Common Stock within five (5) Trading Days after the applicable
Conversion Date or exercise date (as the case may be) or (B) notice, written or
oral, to any holder of the Notes or Warrants, including, without limitation, by
way of public announcement or through any of its agents, at any time, of its
intention not to comply, as required, with a request for conversion of any Notes
into shares of Common Stock that is requested in accordance with the provisions
of the Notes, other than pursuant to Section 3(d), or a request for exercise of
any Warrants for Warrant Shares in accordance with the provisions of the
Warrants;
 
(v)           at any time following the tenth (10th) consecutive day that the
Holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that the Holder would be entitled to receive upon a conversion of the full
Conversion Amount of this Note (without regard to any limitations on conversion
set forth in Section 3(d) or otherwise);
 
(vi)           the Company’s or any Subsidiary’s failure to pay to the Holder
any amount of Principal, Interest, Late Charges or other amounts when and as due
under this Note (including, without limitation, the Company’s or any
Subsidiary’s failure to pay any redemption payments or amounts hereunder) or any
other Transaction Document (as defined in the Securities Purchase Agreement) or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby, except, in the
case of a failure to pay Interest and Late Charges when and as due, in which
case only if such failure remains uncured for a period of at least five (5)
days;
 
(vii)          the Company fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the Holder upon conversion
or exercise (as the case may be) of any Securities acquired by the Holder under
the Securities Purchase Agreement (including this Note) as and when required by
such Securities or the Securities Purchase Agreement, unless otherwise then
prohibited by applicable federal securities laws, and any such failure remains
uncured for at least five (5) days;
 
(viii)         the occurrence of any default under, redemption of or
acceleration prior to maturity of any Indebtedness (as defined in the Securities
Purchase Agreement) of the Company or any of its Subsidiaries, other than with
respect to (A) Permitted Senior Indebtedness and (B) any Other Notes;
 
(ix)           bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for the relief of debtors shall be instituted by or against
the Company or any Subsidiary and, if instituted against the Company or any
Subsidiary by a third party, shall not be dismissed within thirty (30) days of
their initiation;
 
 
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(x)            the commencement by the Company or any Subsidiary of a voluntary
case or proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree, order, judgment or other similar document in respect of
the Company or any Subsidiary in an involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a UCC foreclosure sale or any other similar action under federal, state
or foreign law;
 
(xi)           the entry by a court of (i) a decree, order, judgment or other
similar document in respect of the Company or any Subsidiary of a voluntary or
involuntary case or proceeding under any applicable federal, state or foreign
bankruptcy, insolvency, reorganization or other similar law or (ii) a decree,
order, judgment or other similar document adjudging the Company or any
Subsidiary as bankrupt or insolvent, or approving as properly filed a petition
seeking liquidation, reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Subsidiary under any applicable federal,
state or foreign law or (iii) a decree, order, judgment or other similar
document appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree, order, judgment or other
similar document or any such other decree, order, judgment or other similar
document unstayed and in effect for a period of thirty (30) consecutive days;
 
(xii)           a final judgment or judgments for the payment of money
aggregating in excess of $300,000 are rendered against the Company and/or any of
its Subsidiaries and which judgments are not, within thirty (30) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within thirty (30) days after the expiration of such stay; provided,
however, any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $300,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company or such Subsidiary (as the case may
be) will receive the proceeds of such insurance or indemnity within thirty (30)
days of the issuance of such judgment;
 
 
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(xiii)         the Company and/or any Subsidiary, individually or in the
aggregate, either (i) fails to pay, when due, or within any applicable grace
period, any payment with respect to any Indebtedness in excess of $300,000 due
to any third party (other than, with respect to unsecured Indebtedness only,
payments contested by the Company and/or such Subsidiary (as the case may be) in
good faith by proper proceedings and with respect to which adequate reserves
have been set aside for the payment thereof in accordance with GAAP) or is
otherwise in breach or violation of any agreement for monies owed or owing in an
amount in excess of $300,000, which breach or violation permits the other party
thereto to declare a default or otherwise accelerate amounts due thereunder, or
(ii) suffer to exist any other circumstance or event that would, with or without
the passage of time or the giving of notice, result in a default or event of
default under any agreement binding the Company or any Subsidiary, which default
or event of default would or is likely to have a material adverse effect on the
business, assets, operations (including results thereof), liabilities,
properties, condition (including financial condition) or prospects of the
Company or any of its Subsidiaries, individually or in the aggregate;
 
(xiv)         other than as specifically set forth in another clause of this
Section 4(a), the Company or any Subsidiary breaches any representation,
warranty, covenant or other term or condition of any Transaction Document
(including, without limitation, any Security Document (as defined in the
Securities Purchase Agreement)), except, in the case of a breach of a covenant
or other term or condition that is curable, only if such breach remains uncured
for a period of five (5) consecutive Trading Days;
 
(xv)          any strike, lockout, labor dispute, embargo, condemnation, act of
God or public enemy, or other casualty which causes, for more than fifteen (15)
consecutive days, the cessation or substantial curtailment of revenue producing
activities at any facility of the Company or any Subsidiary, if any such event
or circumstance could reasonably be expected to have a Material Adverse Effect
(as defined in the Securities Purchase Agreement);
 
(xvi)         a false or inaccurate certification (including a false or
inaccurate deemed certification) by the Company that the Equity Conditions are
satisfied, that there has been no Interest Conditions Failure, Redemption
Conditions Failure, Equity Conditions Failure, Dollar Failure, Volume Failure or
Price Failure or as to whether any Event of Default has occurred;
 
(xvii)        any breach or failure in any respect by the Company or any
Subsidiary to comply with any provision of Section 13 of this Note;
 
(xviii)       any Material Adverse Effect (as defined in the Securities Purchase
Agreement) occurs;
 
 
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(xix)          any provision of any Transaction Document (including, without
limitation, the Pledge Agreement (as defined in the Securities Purchase
Agreement)) shall at any time for any reason (other than pursuant to the express
terms thereof) cease to be valid and binding on or enforceable against the
parties thereto, or the validity or enforceability thereof shall be contested by
any party thereto, or a proceeding shall be commenced by the Pledgor (as defined
in the Pledge Agreement), the Company or any Subsidiary or any governmental
authority having jurisdiction over any of them, seeking to establish the
invalidity or unenforceability thereof, or the Pledgor, the Company or any
Subsidiary shall deny in writing that it has any liability or obligation
purported to be created under any Transaction Document (including, without
limitation, the Pledge Agreement);
 
(xx)           the Pledgor shall fail to perform or comply with any covenant or
agreement contained in the Pledge Agreement;
 
(xxi)          the Pledge Agreement shall for any reason fail or cease to create
a valid and perfected and, except to the extent permitted by the terms hereof or
thereof, first priority Lien in favor of the Secured Parties (as defined in the
Pledge Agreement) on the shares of Common Stock or other assets purported to be
covered thereby; or
 
(xxii)         any Event of Default (as defined in the Other Notes) occurs with
respect to any Other Notes.
 
Upon the occurrence of an Event of Default with respect to this Note or any
Other Note, the Company shall within one (1) Business Day deliver written notice
thereof via facsimile and overnight courier (with next day delivery specified)
(an “Event of Default Notice”) to the Holder.
 
(b)           Redemption Right. At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem (regardless of whether
such Event of Default has been cured) all or any portion of this Note by
delivering written notice thereof (the “Event of Default Redemption Notice”) to
the Company, which Event of Default Redemption Notice shall indicate the portion
of this Note the Holder is electing to redeem. Each portion of this Note subject
to redemption by the Company pursuant to this Section 4(b) shall be redeemed by
the Company at a price equal to the greater of (i) the product of (A) the
Conversion Amount to be redeemed multiplied by (B) the Redemption Premium and
(ii) the product of (X) the Conversion Rate with respect to the Conversion
Amount in effect at such time as the Holder delivers an Event of Default
Redemption Notice multiplied by (Y) the product of (1) the Equity Value
Redemption Premium multiplied by (2) the greatest Closing Sale Price of the
Common Shares during the period beginning on the date immediately preceding such
Event of Default and ending on the date the Holder delivers the Event of Default
Redemption Notice (the “Event of Default Redemption Price”). Redemptions
required by this Section 4(b) shall be made in accordance with the provisions of
Section 11. To the extent redemptions required by this Section 4(b) are deemed
or determined by a court of competent jurisdiction to be prepayments of this
Note by the Company, such redemptions shall be deemed to be voluntary
prepayments. Notwithstanding anything to the contrary in this Section 4, but
subject to Section 3(d), until the Event of Default Redemption Price (together
with any Late Charges thereon) is paid in full, the Conversion Amount submitted
for redemption under this Section 4(b) (together with any Late Charges thereon)
may be converted, in whole or in part, by the Holder into Common Stock pursuant
to Section 3.  In the event of the Company’s redemption of any portion of this
Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 4(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder’s actual loss of its investment opportunity
and not as a penalty.
 
 
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5.           RIGHTS UPON FUNDAMENTAL TRANSACTION.
 
(a)           Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Holder and approved
by the Holder prior to such Fundamental Transaction, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts then outstanding and the interest rates of the Notes held by such
holder, having similar conversion rights as the Notes and having similar ranking
to the Notes, and satisfactory to the Holder and (ii) the Successor Entity is a
publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Note and the other Transaction Documents referring to the “Company” shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under this
Note and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of a
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of this
Note at any time after the consummation of such Fundamental Transaction, in lieu
of the shares of the Company’s Common Stock (or other securities, cash, assets
or other property (except such items still issuable under Sections 6 and 15,
which shall continue to be receivable thereafter) issuable upon the conversion
or redemption of the Notes prior to such Fundamental Transaction, such shares of
the publicly traded common stock (or their equivalent) of the Successor Entity
(including its Parent Entity) which the Holder would have been entitled to
receive upon the happening of such Fundamental Transaction had this Note been
converted immediately prior to such Fundamental Transaction (without regard to
any limitations on the conversion of this Note), as adjusted in accordance with
the provisions of this Note. Notwithstanding the foregoing, the Holder may
elect, at its sole option, by delivery of written notice to the Company to waive
this Section 5(a) to permit the Fundamental Transaction without the assumption
of this Note.  The provisions of this Section 5 shall apply similarly and
equally to successive Fundamental Transactions and shall be applied without
regard to any limitations on the conversion of this Note.
 
 
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(b)           Redemption Right. No sooner than twenty (20) Trading Days nor
later than ten (10) Trading 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
to the Holder (a “Change of Control Notice”).  At any time and from time to time
during the period commencing on the earlier to occur of (x) any oral or written
agreement by the Company or any of its Subsidiaries, which upon consummation of
the transaction contemplated thereby would reasonably be expected to result in a
Change of Control and (y) the Holder's receipt of a Change of Control Notice and
ending on the later of twenty (20) Trading Days after (A) consummation of such
Change of Control or (B) the date of receipt of such Change of Control Notice,
the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (“Change of Control Redemption Notice”) to the
Company, which Change of Control Redemption Notice shall indicate the Conversion
Amount the Holder is electing to redeem.  The portion of this Note subject to
redemption pursuant to this Section 5 shall be redeemed by the Company in cash
at a price equal to the greater of (i) the product of (x) the Change of Control
Redemption Premium multiplied by (y) the Conversion Amount being redeemed, (ii)
the product of (x) the Equity Value Redemption Premium multiplied by (y) the
product of (A) the Conversion Amount being redeemed multiplied by (B) the
quotient determined by dividing (I) the greatest Closing Sale Price of the
Common Shares during the period beginning on the date immediately preceding the
earlier to occur of (1) the consummation of the Change of Control and (2) the
public announcement of such Change of Control and ending on the date the Holder
delivers the Change of Control Redemption Notice by (II) the Conversion
Price then in effect and (iii) the product of (y) the Equity Value Redemption
Premium multiplied by (z) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient of (I) the aggregate cash consideration
and the aggregate cash value of any non-cash consideration per share of Common
Stock to be paid to the holders of the shares of Common Stock upon consummation
of such Change of Control (any such non-cash consideration constituting
publicly-traded securities shall be valued at the highest of the Closing Sale
Price of such securities as of the Trading Day immediately prior to the
consummation of such Change of Control, the Closing Sale Price of such
securities on the Trading Day immediately following the public announcement of
such proposed Change of Control and the Closing Sale Price of such securities on
the Trading Day immediately prior to the public announcement of such proposed
Change of Control) divided by (II) the Conversion Price then in effect (the
“Change of Control Redemption Price”). Redemptions required by this Section 5
shall be made in accordance with the provisions of Section 11 and shall have
priority to payments to stockholders in connection with such Change of Control.
To the extent redemptions required by this Section 5(b) are deemed or determined
by a court of competent jurisdiction to be prepayments of this Note by the
Company, such redemptions shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5, but subject to
Section 3(d), until the Change of Control Redemption Price (together with any
Late Charges thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(b) (together with any Late Charges thereon) may
be converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3. In the event of the Company’s redemption of any portion of this Note
under this Section 5(b), the Holder’s damages would be uncertain and difficult
to estimate because of the parties’ inability to predict future interest rates
and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any redemption premium due under this
Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder’s actual loss of its investment opportunity and not as a
penalty.
 
 
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(c)           Adjustment to the Conversion Rate Upon a Change of Control.
 
(i)           In connection with a Change of Control, if the Holder converts its
Note at any time beginning on the date of the Change of Control Notice and
ending at the close of business on the Trading Day immediately prior to the
applicable Change of Control Date, the Company will increase the Conversion Rate
by a number of additional shares (the “Additional Shares”) for such Note as
described in Section 5(c)(ii) hereof; provided that (A) such increase in the
Conversion Rate shall not take place if such Change of Control is not
consummated, (B) the Company shall issue Common Shares at the Conversion Rate
(excluding such increase) on the earlier to occur of (x) the third (3rd) Trading
Day after the Conversion Date and (y) the time immediately prior to such Change
of Control and (C) the Company shall issue such Additional Shares at the time
immediately prior to such Change of Control; provided, that if the issuance of
any Additional Shares would cause the Holder or any of its affiliates to
beneficially own Common Shares (or securities of the Successor Entity or other
issuer upon the consummation of the Change of Control) in excess of the Maximum
Percentage (a “Maximum Percentage Event”), the Holder shall have the right,
exercisable by the delivery of one or more written notices to the Company, to
cause the Company to alternatively issue to the Holder such Additional Shares
(or the cash, securities and/or other consideration to be issued in exchange for
such Additional Shares in such Change of Control, if applicable), or such
portion thereof as set forth in the applicable notice, on or prior to the third
(3rd) Trading Day after the Holder delivers the applicable notice to the Company
(or the Public Successor Entity or other issuer, as applicable) that the
issuance of such Additional Shares (or the cash, securities and/or other
consideration to be issued in exchange for such Additional Shares in such Change
of Control, if applicable), or such portion thereof as set forth in the
applicable Notice, would not result in a Maximum Percentage Event.
 
(ii)           The number of Additional Shares will be determined by the
quotient of (x) the Additional Share Amount and (y) the lowest of (A) the
Conversion Price as in effect on the Trading Day immediately prior to the
applicable Conversion Date, (B) 90% of the lowest Closing Bid Price of the
Common Stock during the period beginning on and including the earlier to occur
of (I) any oral or written agreement by the Company or any of its Subsidiaries,
which upon consummation of the transaction contemplated thereby would reasonably
be expected to result in a Change of Control and (II) the Holder's receipt of a
Change of Control Notice and ending on and including the Trading Day immediately
prior to the applicable Conversion Date and (C) 90% of the VWAP for the five (5)
Trading Day period immediately preceding the applicable Conversion Date.
 
 
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6.           RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
 
(a)           Purchase Rights. In addition to any adjustments pursuant to
Section 7 below, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
“Purchase Rights”), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete conversion of this Note (without taking into
account any limitations or restrictions on the convertibility of this Note)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights (provided, however, to the extent that the
Holder’s right to participate in any such Purchase Right would result in the
Holder exceeding the Maximum Percentage, then the Holder shall not be entitled
to participate in such Purchase Right to such extent (or beneficial ownership of
such shares of Common Stock as a result of such Purchase Right to such extent)
and such Purchase Right to such extent shall be held in abeyance for the Holder
until such time, if ever, as its right thereto would not result in the Holder
exceeding the Maximum Percentage).
 
(b)           Other Corporate Events. In addition to and not in substitution for
any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant to which holders of shares of Common Stock are entitled to
receive securities or other assets with respect to or in exchange for shares of
Common Stock (a “Corporate Event”), the Company shall make appropriate provision
to insure that the Holder will thereafter have the right to receive upon a
conversion of this Note (i) in addition to the shares of Common Stock receivable
upon such conversion, such securities or other assets to which the Holder would
have been entitled with respect to such shares of Common Stock had such shares
of Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the
convertibility of this Note) or (ii) in lieu of the shares of Common Stock
otherwise receivable upon such conversion, such securities or other assets
received by the holders of shares of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion
rights for the form of such consideration (as opposed to shares of Common Stock)
at a conversion rate for such consideration commensurate with the Conversion
Rate. Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the Required Holders.  The provisions of this Section
6 shall apply similarly and equally to successive Corporate Events and shall be
applied without regard to any limitations on the conversion or redemption of
this Note.
 
 
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7.           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
 
(a)           Adjustment of Conversion Price upon Issuance of Common Stock.  If
and whenever on or after the Subscription Date the Company issues or sells, or
in accordance with this Section 7(a) is deemed to have issued or sold, any
shares of Common Stock (including the issuance or sale of shares of Common Stock
owned or held by or for the account of the Company, but excluding any Excluded
Securities issued or sold or deemed to have been issued or sold) for a
consideration per share (the “New Issuance Price”) less than a price equal to
the Conversion Price in effect immediately prior to such issue or sale or deemed
issuance or sale (such Conversion Price then in effect is referred to herein as
the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then, immediately
after such Dilutive Issuance, the Conversion Price then in effect shall be
reduced to an amount equal to the New Issuance Price. For purposes of
determining the adjusted Conversion Price under this Section 7(a), the following
shall be applicable:
 
(i)           Issuance of Options.  If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share. For
purposes of this Section 7(a)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. Except as contemplated below, no
further adjustment of the Conversion Price shall be made upon the actual
issuance of such share of Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such share of Common
Stock upon conversion, exercise or exchange of such Convertible Securities.
 
(ii)           Issuance of Convertible Securities.  If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share for
which one share of Common Stock is issuable upon the conversion, exercise or
exchange thereof is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such Convertible Securities for
such price per share. For the purposes of this Section 7(a)(ii), the “lowest
price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof” shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company
with respect to one share of Common Stock upon the issuance or sale of the
Convertible Security and upon conversion, exercise or exchange of such
Convertible Security. Except as contemplated below, no further adjustment of the
Conversion Price shall be made upon the actual issuance of such share of Common
Stock upon conversion, exercise or exchange of such Convertible Securities, and
if any such issue or sale of such Convertible Securities is made upon exercise
of any Options for which adjustment of the Conversion Price has been or is to be
made pursuant to other provisions of this Section 7(a), except as contemplated
below, no further adjustment of the Conversion Price shall be made by reason of
such issue or sale.
 
 
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(iii)           Change in Option Price or Rate of Conversion. If the purchase or
exercise price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exercise or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exercisable or exchangeable for shares of Common Stock increases or decreases
at any time, the Conversion Price in effect at the time of such increase or
decrease shall be adjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securities provided for such
increased or decreased purchase price, additional consideration or increased or
decreased conversion rate (as the case may be) at the time initially granted,
issued or sold. For purposes of this Section 7(a)(iii), if the terms of any
Option or Convertible Security that was outstanding as of the Subscription Date
are increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 7(a) shall be made if such adjustment would
result in an increase of the Conversion Price then in effect.
 
(iv)           Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction, (x) the Options will be deemed
to have been issued for a consideration equal to the Black-Scholes Consideration
Value and (y) the other securities issued or sold in such integrated transaction
shall be deemed to have been issued for the difference of (I) the aggregate
consideration received by the Company, less (II) the Black-Scholes Consideration
Value.  If any shares of Common Stock, Options or Convertible Securities are
issued or sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount received by the Company
therefor. If any shares of Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of such
consideration received by the Company will be the fair value of such
consideration, except where such consideration consists of publicly traded
securities, in which case the amount of consideration received by the Company
for such securities will be the average VWAP of such security for the five (5)
Trading Day period immediately preceding the date of receipt. If any shares of
Common Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such shares of Common Stock, Options or Convertible
Securities (as the case may be). The fair value of any consideration other than
cash or publicly traded securities will be determined jointly by the Company and
the Holder. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the “Valuation Event”),
the fair value of such consideration will be determined within five (5) Trading
Days after the tenth (10th) day following such Valuation Event by an
independent, reputable appraiser jointly selected by the Company and the Holder.
The determination of such appraiser shall be final and binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be borne
by the Company.
 
 
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(v)           Record Date. If the Company takes a record of the holders of
shares of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase shares of Common
Stock, Options or Convertible Securities, then such record date will be deemed
to be the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase (as the case may be).
 
(b)           Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock.  If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased. Any adjustment pursuant to
this Section 7(b) shall become effective immediately after the effective date of
such subdivision or combination. If any event requiring an adjustment under this
Section 7(b) occurs during the period that a Conversion Price is calculated
hereunder, then the calculation of such Conversion Price shall be adjusted
appropriately to reflect such event.
 
(c)           Other Events. In the event that the Company (or any direct or
indirect Subsidiary thereof) shall take any action to which the provisions
hereof are not strictly applicable, or, if applicable, would not operate to
protect the Holder from dilution or if any event occurs of the type contemplated
by the provisions of this Section 7 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company’s board of directors shall in good faith determine and implement an
appropriate adjustment in the Conversion Price so as to protect the rights of
the Holder, provided that no such adjustment pursuant to this Section 7(c) will
increase the Conversion Price as otherwise determined pursuant to this Section
7, provided further that if the Holder does not accept such adjustments as
appropriately protecting its interests hereunder against such dilution, then the
Company’s board of directors and the Holder shall agree, in good faith, upon an
independent investment bank of nationally recognized standing to make such
appropriate adjustments, whose determination shall be final and binding and
whose fees and expenses shall be borne by the Company.
 
 
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(d)           Adjustment.  If immediately following the close of business on the
twenty-first consecutive Trading Day immediately following (i) such date the
applicable Registration Statement filed pursuant to the Registration Rights
Agreement shall be effective and the prospectus contained therein shall be
available for the resale by the Holder of all of the Registrable Securities
(which, solely for clarification purposes, includes all shares of Common Stock
issuable upon conversion of the Notes or otherwise pursuant to the terms of the
Notes and upon exercise of the Warrants (without regard for any limitations on
conversion, issuance or exercise set forth therein) in accordance with the terms
of the Registration Rights Agreement) or, (ii) if earlier, each of (x) [     ]1
or such later date thereafter when the Company shall have satisfied its current
public information requirement under Rule 144(c)(1) and (y) the Initial
Effective Date (as defined in the Registration Rights Agreement) (each, as
applicable, an “Adjustment Date”), the Conversion Price then in effect exceeds
the Market Price as of such Adjustment Date (the “Adjusted Conversion Price”),
the Conversion Price hereunder shall be reset to the Adjusted Conversion Price
as of such Adjustment Date (each, a “Conversion Price
Adjustment”).  Notwithstanding the foregoing, to the extent the Holder delivers
one or more Conversion Notices to the Company during the Market Price Measuring
Period with respect to a Conversion Price Adjustment, in addition to the shares
of Common Stock issued or issuable to the Holder with respect to each such
Conversion Notice, on the later of (A) the applicable Share Delivery Date with
respect to such Conversion Notice and (B) the applicable Adjustment Date, the
Holder shall receive an additional number of shares of Common Stock equal to the
difference of (x) the quotient of (I) the Conversion Amount with respect to such
Conversion Notice, divided by (II) the Adjusted Conversion Price, less (y) the
number of shares of Common Stock issued or otherwise issuable to the Holder with
respect to such Conversion Notice.  Except as otherwise provided in this Section
7(d), the Adjusted Conversion Price, if any, shall not apply to any Conversion
Amount converted into Common Stock prior to such Adjustment Date.
 

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1 Insert six month anniversary of the Issuance Date

 
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8.           REDEMPTIONS AT THE COMPANY'S ELECTION.
 
(a)           Company Optional Redemption.  If at any time after the six month
anniversary of the Effective Date (the “Company Redemption Eligibility Date”),
(i) the Closing Sale Price of the Common Shares listed on the Principal Market
exceeds 175% of the Conversion Price as of the Issuance Date (as adjusted for
stock splits, stock dividends, stock combinations or other similar transactions)
for each of the fifteen (15) consecutive Trading Day period following the
applicable Company Redemption Eligibility Date (the “Company Optional Redemption
Measuring Period”), and (ii) no Redemption Conditions Failure exists, the
Company shall have the right to redeem all, but not less than all, of the
Conversion Amount then remaining under this Note (the “Company Optional
Redemption Amount”) on the Company Optional Redemption Date (each as defined
below) (a “Company Optional Redemption”).  The portion of this Note subject to
redemption pursuant to this Section 9(a) shall be redeemed by the Company in
cash at a price (the “Company Optional Redemption Price”) equal to the
Conversion Amount being redeemed together with any accrued and unpaid Interest
and Late Charges, if any, on such Conversion Amount and Interest through the
Company Optional Redemption Date (as defined below).  The Company may exercise
its right to require redemption under this Section 9(a) by delivering a written
notice thereof by facsimile and overnight courier to all, but not less than all,
of the holders of Notes (the “Company Optional Redemption Notice” and the date
all of the holders of Notes received such notice is referred to as the “Company
Optional Redemption Notice Date”).  The Company may deliver only one Company
Optional Redemption Notice hereunder and such Company Optional Redemption Notice
shall be irrevocable.  The Company Optional Redemption Notice shall (x) state
the date on which the Company Optional Redemption shall occur (the “Company
Optional Redemption Date”) which date shall not be less than ten (10) Trading
Days nor more than thirty (30) Trading Days following the Company Optional
Redemption Notice Date, (y) certify that there has been no Redemption Conditions
Failure, and (z) state the aggregate Conversion Amount of the Notes which is
being redeemed in such Company Optional Redemption from the Holder and all of
the other holders of the Notes pursuant to this Section 9(a) (and analogous
provisions under the Other Notes) on the Company Optional Redemption
Date.  Notwithstanding anything herein to the contrary, (i) if no Redemption
Conditions Failure has occurred as of the Company Optional Redemption Notice
Date but a Redemption Conditions Failure  occurs at any time prior to the
Company Optional Redemption Date, (A) the Company shall provide the Holder a
subsequent notice to that effect and (B) unless the Holder waives the Redemption
Conditions Failure, the Company Optional Redemption shall be cancelled and the
applicable Company Optional Redemption Notice shall be null and void and (ii) at
any time prior to the date the Company Optional Redemption Price is paid, in
full, the Company Optional Redemption Amount may be converted, in whole or in
part, by the Holders into Common Shares pursuant to Section 3.  All Conversion
Amounts converted by the Holder after the Company Optional Redemption Notice
Date shall reduce the Company Optional Redemption Amount of this Note required
to be redeemed on the Company Optional Redemption Date.  Redemptions made
pursuant to this Section 9(a) shall be made in accordance with Section 11.
 
(b)           Company Call Redemption.  At any time after the Company Redemption
Eligibility Date, provided that no Redemption Conditions Failure exists, the
Company shall have the right to redeem all, but not less than all, of the
Conversion Amount then remaining under this Note (the “Company Call Redemption
Amount”) on the Company Call Redemption Date (each as defined below) (a “Company
Call Redemption”).  The portion of this Note subject to redemption pursuant to
this Section 9(b) shall be redeemed by the Company in cash at a price (the
“Company Call Redemption Price”) equal to 125% of the sum of (x) the Conversion
Amount being redeemed and (y) any accrued and unpaid Interest and Late Charges,
if any, on such Conversion Amount and Interest through the Company Call
Redemption Date (as defined below).  The Company may exercise its right to
require redemption under this Section 9(b) by delivering a written notice
thereof by facsimile and overnight courier to all, but not less than all, of the
holders of Notes (the “Company Call Redemption Notice” and the date all of the
holders of Notes received such notice is referred to as the “Company Call
Redemption Notice Date”).  The Company may deliver only one Company Call
Redemption Notice hereunder and such Company Call Redemption Notice shall be
irrevocable.  The Company Call Redemption Notice shall (x) state the date on
which the Company Call Redemption shall occur (the “Company Call Redemption
Date”) which date shall not be less than ten (10) Trading Days nor more than
thirty (30) Trading Days following the Company Call Redemption Notice Date, (y)
certify that there has been no Redemption Conditions Failure and (z) state the
aggregate Conversion Amount of the Notes which is being redeemed in such Company
Call Redemption from the Holder and all of the other holders of the Notes
pursuant to this Section 9(b) (and analogous provisions under the Other Notes)
on the Company Call Redemption Date.  Notwithstanding anything herein to the
contrary, (i) if no Redemption Conditions Failure has occurred as of the Company
Call Redemption Notice Date but a Redemption Conditions Failure occurs at any
time prior to the Company Call Redemption Date, (A) the Company shall provide
the Holder a subsequent notice to that effect and (B) unless the Holder waives
the Redemption Conditions Failure, the Company Optional Redemption shall be
cancelled and the applicable Company Call Redemption Notice shall be null and
void and (ii) at any time prior to the date the Company Call Redemption Price is
paid, in full, the Company Call Redemption Amount may be converted, in whole or
in part, by the Holders into Common Shares pursuant to Section 3.  All
Conversion Amounts converted by the Holder after the Company Call Redemption
Notice Date shall reduce the Company Call Redemption Amount of this Note
required to be redeemed on the Company Call Redemption Date.  Redemptions made
pursuant to this Section 9(b) shall be made in accordance with Section 11.
 
 
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(c)           Pro Rata Redemption Requirement.  If the Company elects to cause a
Company Optional Redemption or a Company Call Redemption of this Note pursuant
to Section 9(a) or 9(b), then it must simultaneously take the same action with
respect to all of the Other Notes.
 
9.           NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation (as defined
in the Securities Purchase Agreement), Bylaws (as defined in the Securities
Purchase Agreement) or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Note, and will at all times in good
faith carry out all of the provisions of this Note and take all action as may be
required to protect the rights of the Holder of this Note. Without limiting the
generality of the foregoing, the Company (i) shall not increase the par value of
any shares of Common Stock receivable upon conversion of this Note above the
Conversion Price then in effect, (ii) shall take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the conversion of this
Note, and (iii) shall, so long as any of the Notes are outstanding, take all
action necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Notes, the maximum number of shares of Common Stock as shall
from time to time be necessary to effect the conversion of the Notes then
outstanding (without regard to any limitations on conversion).
 
 
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10.           RESERVATION OF AUTHORIZED SHARES.
 
(a)           Reservation. The Company shall initially reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for each
of the Notes equal to 130% of the entire Conversion Rate with respect to the
entire Conversion Amount of each such Note as of the Issuance Date.  So long as
any of the Notes are outstanding, the Company shall 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, 130% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding, provided that at no
time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve Amount”).  The
initial number of shares of Common Stock reserved for conversions of the Notes
and each increase in the number of shares so reserved shall be allocated pro
rata among the holders of the Notes based on the original principal amount of
the Notes held by each holder on the Closing Date or increase in the number of
reserved shares (as the case may be) (the “Authorized Share Allocation”). In the
event that a holder shall sell or otherwise transfer any of such holder’s Notes,
each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.
 
(b)           Insufficient Authorized Shares. If, notwithstanding Section 10(a),
and not in limitation thereof, at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but
in no event later than sixty (60) days after the occurrence of such Authorized
Share Failure, the Company shall hold a meeting of its stockholders for the
approval of an increase in the number of authorized shares of Common Stock.  In
connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal.
 
 
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11.           REDEMPTIONS.
 
(a)           Mechanics. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder in cash within five (5) Business Days
after the Company’s receipt of the Holder’s Event of Default Redemption Notice.
If the Holder has submitted a Change of Control Redemption Notice in accordance
with Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder in cash concurrently with the consummation of
such Change of Control if such notice is received prior to the consummation of
such Change of Control and within five (5) Business Days after the Company’s
receipt of such notice otherwise.  The Company shall deliver the applicable
Company Optional Redemption Price on the Company Optional Redemption Date.  The
Company shall deliver the applicable Company Call Redemption Price on the
Company Call Redemption Date.  In the event of a redemption of less than all of
the Conversion Amount of this Note, the Company shall promptly cause to be
issued and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company’s receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 18(d)), to the Holder, and
in each case the principal amount of this Note or such new Note (as the case may
be) shall be increased by an amount equal to the difference between (1) the
applicable Event of Default Redemption Price, Change of Control Redemption
Price, Company Optional Redemption Price or Company Call Redemption Price (as
the case may be) minus (2) the Conversion Amount submitted for redemption and
(z) the Conversion Price of this Note or such new Notes (as the case may be)
shall be adjusted to the lowest of (A) the Conversion Price as in effect on the
date on which the applicable Redemption Notice is voided, (B) 90% of the lowest
Closing Bid Price of the Common Stock during the period beginning on and
including the date on which the applicable Redemption Notice is delivered to the
Company and ending on and including the date on which the applicable Redemption
Notice is voided and (C) 90% of the VWAP for the five (5) Trading Day period
immediately preceding the Conversion Date of the applicable conversion. The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.
 
(b)           Redemption by Other Holders. Upon the Company’s receipt of notice
from any of the holders of the Other Notes for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) or Section 5(b) (each, an “Other
Redemption Notice”), the Company shall immediately, but no later than one (1)
Business Day of its receipt thereof, forward to the Holder by facsimile a copy
of such notice. If the Company receives a Redemption Notice and one or more
Other Redemption Notices, during the seven (7) Business Day period beginning on
and including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s applicable Redemption Notice and ending on and including
the date which is three (3) Business Days after the Company’s receipt of the
Holder’s applicable Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven (7) Business Day
period.
 
 
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12.           VOTING RIGHTS. The Holder shall have no voting rights as the
holder of this Note, except as required by law, including but not limited to the
Delaware General Corporation Law, and as expressly provided in this Note.
 
13.           COVENANTS. Until all of the Notes have been converted, redeemed or
otherwise satisfied in accordance with their terms:
 
(a)           Rank. All payments due under this Note (a) shall rank pari passu
with all Other Notes and (b) shall be senior to all other Indebtedness of the
Company and its Subsidiaries other than Permitted Senior Indebtedness .
 
(b)           Incurrence of Indebtedness. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, incur or
guarantee, assume or suffer to exist any Indebtedness (other than (i) the
Indebtedness evidenced by this Note and the Other Notes and (ii) Permitted
Indebtedness).
 
(c)           Existence of Liens. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, allow or suffer
to exist any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”)
other than Permitted Liens.
 
(d)           Restricted Payments. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness (other than Permitted Senior Indebtedness or the Notes), whether by
way of payment in respect of principal of (or premium, if any) or interest on,
such Indebtedness if at the time such payment is due or is otherwise made or,
after giving effect to such payment, (i) an event constituting an Event of
Default has occurred and is continuing or (ii) an event that with the passage of
time and without being cured would constitute an Event of Default has occurred
and is continuing.
 
(e)           Restriction on Redemption and Cash Dividends. The Company shall
not, and the Company shall cause each of its Subsidiaries to not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on any of its capital stock without the prior express written
consent of the Holder.
 
(f)           Restriction on Transfer of Assets. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
sell, lease, license, assign, transfer, convey or otherwise dispose of any
assets or rights of the Company or any Subsidiary owned or hereafter acquired
whether in a single transaction or a series of related transactions, other than
(i) sales, leases, licenses, assignments, transfers, conveyances and other
dispositions of such assets or rights by the Company and its Subsidiaries that,
in the aggregate, do not have a fair market value in excess of $100,000 in any
twelve (12) month period and (ii) sales of inventory in the ordinary course of
business.
 
 
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(g)           Maturity of Indebtedness. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, permit any
Indebtedness of the Company or any of the Subsidiaries to mature or accelerate
prior to the Maturity Date, other than Permitted Senior Indebtedness.
 
(h)           New Subsidiaries. Simultaneously with the acquisition or formation
of each New Subsidiary, the Company shall cause such New Subsidiary to execute,
and deliver to each holder of Notes, Guaranties that the Current Subsidiaries
are required to execute in connection with the transactions contemplated by the
Securities Purchase Agreement.
 
(i)           Change in Nature of Business. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
engage in any material line of business substantially different from those lines
of business conducted by the Company and each of its Subsidiaries on the
Issuance Date or any business substantially related or incidental thereto.  The
Company shall not, and the Company shall cause each of its Subsidiaries to not,
directly or indirectly, modify its or their corporate structure or purpose.
 
(j)           Preservation of Existence, Etc.  The Company shall maintain and
preserve, and cause each of its Subsidiaries to maintain and preserve, its
existence, rights and privileges, and become or remain, and cause each of its
Subsidiaries to become or remain, duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
in which the transaction of its business makes such qualification necessary.
 
(k)           Maintenance of Properties, Etc.  The Company shall maintain and
preserve, and cause each of its Subsidiaries to maintain and preserve, all of
its properties which are necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted,
and comply, and cause each of its Subsidiaries to comply, at all times with the
provisions of all leases to which it is a party as lessee or under which it
occupies property, so as to prevent any loss or forfeiture thereof or
thereunder.
 
(l)           Maintenance of Insurance.  The Company shall maintain, and cause
each of its Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations with respect to its properties (including
all real properties leased or owned by it) and business, in such amounts and
covering such risks as is required by any governmental authority having
jurisdiction with respect thereto or as is carried generally in accordance with
sound business practice by companies in similar businesses similarly situated.
 
14.           SECURITY. This Note and the Other Notes are secured to the extent
and in the manner set forth in the Transaction Documents (including, without
limitation, the Pledge Agreement).
 
 
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15.         PARTICIPATION. In addition to any adjustments pursuant to Section 7,
the Holder, as the holder of this Note, shall be entitled to receive such
dividends paid and distributions made to the holders of Common Stock to the same
extent as if the Holder had converted this Note into Common Stock (without
regard to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and distributions.
Payments under the preceding sentence shall be made concurrently with the
dividend or distribution to the holders of Common Stock (provided, however, to
the extent that the Holder’s right to participate in any such dividend or
distribution would result in the Holder exceeding the Maximum Percentage, then
the Holder shall not be entitled to participate in such dividend or distribution
to such extent (or the beneficial ownership of any such shares of Common Stock
as a result of such dividend or distribution to such extent) and such dividend
or distribution to such extent shall be held in abeyance for the benefit of the
Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Maximum Percentage).
 
16.         AMENDING THE TERMS OF THIS NOTE. The prior written consent of the
Company and the Required Holders shall be required for any change or amendment
to the Notes; provided, that the prior consent of the Holder shall be required
to (i) change the Maturity Date or Interest Date of this Note, (ii) reduce the
Principal, Interest Rate, or any amount payable upon redemption of this Note or
amend or modify in any manner adverse to the Holder the Company's obligation to
make such payments, whether through an amendment or waiver of provisions in the
covenants, definitions or otherwise, (iii) change the currency of payment of
Principal, Interest or any other amounts outstanding under this Note, (iv)
impair the right of the Holder to institute suit for the enforcement of any
payment on or with respect to this Note, (vi) modify any of the provisions of
this Section 16, except to provide that certain other provisions of this Note
cannot be modified or waived without the consent of the Holder, or (vi) modify
the right of the Holder to cause the Company to redeem this Note upon a Change
of Control or Event of Default.  No consideration shall be offered or paid to
the Holder to amend or consent to a waiver or modification of any provision of
this Note unless the same consideration is also offered to all of the holders of
the Other Notes. The Holder shall be entitled, at its option, to the benefit of
any amendment to any of the Other Notes.
 
17.         TRANSFER. This Note and any shares of Common Stock issued upon
conversion of this Note may be offered, sold, assigned or transferred by the
Holder without the consent of the Company, subject only to the provisions of
Section 2(g) of the Securities Purchase Agreement.
 
18.         REISSUANCE OF THIS NOTE.
 
(a)           Transfer. If this Note is to be transferred, the Holder shall
surrender this Note to the Company, whereupon the Company will forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with Section
18(d)), registered as the Holder may request, representing the outstanding
Principal being transferred by the Holder and, if less than the entire
outstanding Principal is being transferred, a new Note (in accordance with
Section 18(d)) to the Holder representing the outstanding Principal not being
transferred. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.

 
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(b)           Lost, Stolen or Mutilated Note. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Note (as to which a written certification and the
indemnification contemplated below shall suffice as such evidence), and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary and reasonable form and, in the case of
mutilation, upon surrender and cancellation of this Note, the Company shall
execute and deliver to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal.
 
(c)           Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section 18(d) and in
principal amounts of at least $10,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
 
(d)           Issuance of New Notes. Whenever the Company is required to issue a
new Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 18(a) or Section 18(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.
 
19.         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 and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential 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 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. The Company shall provide all
information and documentation to the Holder that is requested by the Holder to
enable the Holder to confirm the Company’s compliance with the terms and
conditions of this Note (including, without limitation, compliance with Section
7).

 
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20.         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 the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs 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 or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including,
without limitation, attorneys’ fees and disbursements. The Company expressly
acknowledges and agrees that no amounts due under this Note shall be affected,
or limited, by the fact that the Purchase Price paid for this Note was less than
the original Principal amount hereof.
 
21.         CONSTRUCTION; HEADINGS.  This Note shall be deemed to be jointly
drafted by the Company and the Holder and shall not be construed against any
Person as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note. Terms used in this Note but defined in the other Transaction Documents
shall have the meanings ascribed to such terms on the Closing Date in such other
Transaction Documents unless otherwise consented to in writing by the Holder.
 
22.         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. No waiver shall be effective unless it is
in writing and signed by an authorized representative of the waiving party.
 
23.         DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the Conversion Price, the Closing Bid Price, the Closing Sale Price or fair
market value (as the case may be) or the arithmetic calculation of the
Conversion Rate or the applicable Redemption Price (as the case may be), the
Company or the Holder (as the case may be) shall submit the disputed
determinations or arithmetic calculations (as the case may be) via facsimile (i)
within two (2) Business Days after receipt of the applicable notice giving rise
to such dispute to the Company or the Holder (as the case may be) or (ii) if no
notice gave rise to such dispute, at any time after the Holder learned of the
circumstances giving rise to such dispute (including, without limitation, as to
whether any issuance or sale or deemed issuance or sale was an issuance or sale
or deemed issuance or sale of Excluded Securities). If the Holder and the
Company are unable to agree upon such determination or calculation within two
(2) Business Days of such disputed determination or arithmetic calculation (as
the case may be) being submitted to the Company or the Holder (as the case may
be), then the Company shall, within two (2) Business Days, submit via facsimile
(a) the disputed determination of the Conversion Price, the Closing Bid Price,
the Closing Sale Price or fair market value (as the case may be) to an
independent, reputable investment bank selected by the Company and approved by
the Holder or (b) the disputed arithmetic calculation of the Conversion Rate or
any Redemption Price (as the case may be) to the Company’s independent, outside
accountant. The Company shall cause at its expense the investment bank or the
accountant (as the case may be) to perform the determinations or calculations
(as the case may be) and notify the Company and the Holder of the results no
later than ten (10) Business Days from the time it receives such disputed
determinations or calculations (as the case may be). Such investment bank’s or
accountant’s determination or calculation (as the case may be) shall be binding
upon all parties absent demonstrable error.

 
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24.         NOTICES; CURRENCY; PAYMENTS.
 
(a)           Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least fifteen (15) days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any
grant, issuances, or sales of any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property to holders of shares of
Common Stock or (C) for determining rights to vote with respect to any
Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.
 
(b)           Currency.  All principal, interest and other amounts owing under
this Note or any Transaction Document that, in accordance with their terms, are
paid in cash shall be paid in US dollars.   All amounts denominated in other
currencies shall be converted to the US dollar equivalent amount in accordance
with the Exchange Rate on the date of calculation. “Exchange Rate” means, in
relation to any amount of currency to be converted into US dollars pursuant to
this Note, the US dollar exchange rate as published in the Wall Street Journal
on the relevant date of calculation (it being understood and agreed that where
an amount is calculated with reference to, or over, a period of time, the date
of calculation shall be the final date of such period of time).
 
(c)           Payments. Whenever any payment of cash is to be made by the
Company to any Person pursuant to this Note, unless otherwise expressly set
forth herein, such payment shall be made in lawful money of the United States of
America in cash via wire transfer of immediately available funds by providing
the Company with prior written notice setting out such request and the Holder’s
wire transfer instructions, which the Holder shall deliver to the Company as
soon as commercially practicable following any written request of the Company
therefor. Whenever any amount expressed to be due by the terms of this Note is
due on any day which is not a Business Day, the same shall instead be due on the
next succeeding day which is a Business Day. Any amount of Principal or other
amounts due under the Transaction Documents which is not paid when due shall
result in a late charge being incurred and payable by the Company in an amount
equal to interest on such amount at the rate of eighteen percent (18%) per annum
from the date such amount was due until the same is paid in full (“Late
Charge”).

 
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25.         CANCELLATION. After all Principal, accrued Interest, Late Charges
and other amounts at any time owed on this Note have been paid in full, this
Note shall automatically be deemed canceled, shall be surrendered to the Company
for cancellation and shall not be reissued.
 
26.         WAIVER OF NOTICE.  To the extent permitted by law, the Company
hereby irrevocably waives demand, notice, presentment, protest and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this Note and the Securities Purchase Agreement.
 
27.         GOVERNING LAW.  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, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. The Company 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.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  In the event that any
provision of this Note is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law.  Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of this Note. Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder.  The Company hereby appoints CT Corporation System, with offices at
111 Eighth Avenue, New York, New York 10011 as its agent for service of process
in the United States.  If service of process is effected pursuant to the above
sentence, such service will be deemed sufficient under New York law and the
Company shall not assert otherwise. Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.  THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.
 
28.         JUDGMENT CURRENCY.
 
(a)           If for the purpose of obtaining or enforcing judgment against the
Company in any court in any jurisdiction it becomes necessary to convert into
any other currency (such other currency being hereinafter in this Section 28
referred to as the “Judgment Currency”) an amount due in U.S. dollars under this
Note, the conversion shall be made at the Exchange Rate prevailing on the
Trading Day immediately preceding:

 
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(i)           the date actual payment of the amount due, in the case of any
proceeding in the courts of New York or in the courts of any other jurisdiction
that will give effect to such conversion being made on such date: or
 
(ii)          the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 28(a)(ii) being hereinafter referred
to as the “Judgment Conversion Date”).
 
(b)           If in the case of any proceeding in the court of any jurisdiction
referred to in Section 28(a)(ii) above, there is a change in the Exchange Rate
prevailing between the Judgment Conversion Date and the date of actual payment
of the amount due, the applicable party shall pay such adjusted amount as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Exchange Rate prevailing on the date of payment, will produce
the amount of US dollars which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial order at the Exchange
Rate prevailing on the Judgment Conversion Date.
 
(c)           Any amount due from the Company under this provision shall be due
as a separate debt and shall not be affected by judgment being obtained for any
other amounts due under or in respect of this Note.
 
29.         MAXIMUM PAYMENTS.  Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law.  In the event that the rate
of interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Holder and thus refunded to the
Company.
 
30.         CERTAIN DEFINITIONS.  For purposes of this Note, the following terms
shall have the following meanings:
 
(a)           “Additional Share Amount” means, as to any Conversion Amount being
converted in connection with a Change of Control, an amount equal to the present
value of the difference between (i) Interest that, but for the applicable
conversion, would have been paid to the Holder on such Conversion Amount from
the Issuance Date through the Maturity Date and (ii) the amount of Interest
already paid to the Holder through the applicable Conversion Date.
 
(b)           “Approved Stock Plan” means any employee benefit plan which has
been approved by the board of directors of the Company prior to or subsequent to
the date hereof pursuant to which shares of Common Stock and standard options to
purchase Common Stock may be issued to any employee, officer, consultant or
director for services provided to the Company in their capacity as such.

 
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(c)           “Black Scholes Consideration Value” means the value of the
applicable Options based on the Black and Scholes Option Pricing Model obtained
from the “OV” function on Bloomberg determined as of the close of business on
the Trading Day immediately preceding the public announcement of the execution
of definitive documents with respect to the sale of such Options and reflecting
(i) a risk-free interest rate corresponding to the U.S. Treasury rate for a
period equal to the remaining term of such Options as of the date of issuance of
the such Options and (ii) an expected volatility equal to the greater of 100%
and the 30 day volatility obtained from the HVT function on Bloomberg as of the
Trading Day immediately following the date of issuance of the such Options.
 
(d)           “Bloomberg” means Bloomberg, L.P.
 
(e)           “Business Day” means any day other than Saturday, Sunday or other
day on which commercial banks in The City of New York are authorized or required
by law to remain closed.
 
(f)           “Change of Control” means any Fundamental Transaction other than
(i) any merger of the Company or any of its, direct or indirect, wholly-owned
Subsidiaries with or into any of the foregoing Persons, (ii) any reorganization,
recapitalization or reclassification of the Common Shares in which holders of
the Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, are, in all material respects, the holders of the voting
power of the surviving entity (or entities with the authority or voting power to
elect the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities) after such reorganization,
recapitalization or reclassification, or (iii) pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Company or any of its Subsidiaries.
 
(g)           “Change of Control Redemption Premium” means 135%.
 
(h)           “Closing Bid Price” and “Closing Sale Price” means, for any
security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price
(as the case may be) then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid
Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price (as the case may be) of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder. If
the Company and the Holder are unable to agree upon the fair market value of
such security, then such dispute shall be resolved in accordance with the
procedures in Section 23. All such determinations shall be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar
transaction during such period.

 
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(i)            “Closing Date” shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.
 
(j)            “Common Stock” means (i) the Company’s shares of common stock,
$0.001 par value per share, and (ii) any capital stock into which such common
stock shall have been changed or any share capital resulting from a
reclassification of such common stock.
 
(k)           “Convertible Securities” means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for shares of Common Stock.
 
(l)            “Current Subsidiaries” means any Person in which the Company on
the Subscription Date, directly or indirectly, (i) owns any of the outstanding
capital stock or holds any equity or similar interest of such Person or (ii)
controls or operates all or any part of the business, operations or
administration of such Person, and each of the foregoing, individually, a
“Current Subsidiary.”
 
(m)           “Dollar Failure” means, that (i) on any day during the period
commencing ten (10) Trading Days prior to the applicable Interest Date through
the applicable Interest Date, (ii) on any day during the period commencing
fifteen (15) Trading Days prior to the applicable Company Optional Redemption
Notice Date through the applicable Company Optional Redemption Date, or (iii) on
any day during the period commencing fifteen (15) Trading Days prior to the
applicable Company Call Redemption Notice Date through the applicable Company
Call Redemption Date, that the aggregate dollar trading volume (as reported on
Bloomberg) of the Common Stock on the Eligible Market on which the Common Stock
is listed or designated for quotation as of such date of determination over the
fifteen (15) consecutive Trading Day period ending on the Trading Day
immediately preceding such date of determination is less than $1,000,000.
 
(n)           “Effective Date” means such date either (x) the applicable
Registration Statement filed pursuant to the Registration Rights Agreement shall
be effective and the prospectus contained therein shall be available for the
resale by the Holder of all of the Registrable Securities (which, solely for
clarification purposes, includes all shares of Common Stock issuable upon
conversion of the Notes or otherwise pursuant to the terms of the Notes and upon
exercise of the Warrants (without regard for any limitations on conversion,
issuance or exercise set forth therein) in accordance with the terms of the
Registration Rights Agreement) or (y) all Registrable Securities shall be
eligible for sale without restriction under Rule 144 (as defined in the
Securities Purchase Agreement) (including, without limitation, volume
restrictions) and without the need for current public information required by
Rule 144(c)(1) (or Rule 144(i)(2), if applicable) and without the need for
registration under any applicable federal or state securities laws (in each
case, disregarding any limitation on conversion of the Notes, other issuance of
securities  with respect to the Notes and exercise of the Warrants).

 
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(o)           “Eligible Market” means The New York Stock Exchange, the Nasdaq
Global Select Market, the Nasdaq Global Market, the NYSE Amex or the Principal
Market.
 
(p)           “Equity Conditions” means: (i) on each day during the period
beginning one month prior to the applicable date of determination and ending on
and including the applicable date of determination either (x) the applicable
Registration Statement filed pursuant to the Registration Rights Agreement shall
be effective and the prospectus contained therein shall be available for the
resale by the Holder of all of the Registrable Securities (which, solely for
clarification purposes, includes all shares of Common Stock issuable upon
conversion of this Note or otherwise pursuant to the terms of this Note) in
accordance with the terms of the Registration Rights Agreement and there shall
not have been during such period any Grace Periods (as defined in the
Registration Rights Agreement) or (y) all Registrable Securities shall be
eligible for sale without restriction under Rule 144 (as defined in the
Securities Purchase Agreement) (including, without limitation, volume
restrictions) and without the need for current public information required by
Rule 144(c)(1) (or Rule 144(i)(2), if applicable) and without the need for
registration under any applicable federal or state securities laws (in each
case, disregarding any limitation on conversion of the Notes, other issuance of
securities  with respect to the Notes and exercise of the Warrants); (ii) on
each day during the period beginning six months prior to the applicable date of
determination and ending on and including the applicable date of determination
(the “Equity Conditions Measuring Period”), the Common Stock (including all
Registrable Securities) is listed or designated for quotation (as applicable) on
an Eligible Market and shall not have been suspended from trading on an Eligible
Market (other than suspensions of not more than two (2) days and occurring prior
to the applicable date of determination due to business announcements by the
Company) nor shall delisting or suspension by an Eligible Market have been
threatened (with a reasonable prospect of delisting occurring) or pending either
(A) in writing by such Eligible Market or (B) by falling below the minimum
listing maintenance requirements of the Eligible Market on which the Common
Stock is then listed or designated for quotation (as applicable); (iii) on each
day during the Equity Conditions Measuring Period, the Company shall have
delivered all shares of Common Stock issuable upon conversion of this Note on a
timely basis as set forth in Section 3 hereof and all other shares of capital
stock required to be delivered by the Company on a timely basis as set forth in
the other Transaction Documents; (iv) any shares of Common Stock to be issued in
connection with the event requiring determination may be issued in full without
violating Section 3(d) hereof; (v) any shares of Common Stock to be issued in
connection with the event requiring determination may be issued in full without
violating the rules or regulations of the Eligible Market on which the Common
Stock is then listed or designated for quotation (as applicable); (vi) on each
day during the Equity Conditions Measuring Period, no public announcement of a
pending, proposed or intended Fundamental Transaction shall have occurred which
has not been abandoned, terminated or consummated; (vii) the Company shall have
no knowledge of any fact that would reasonably be expected to cause (1) the
applicable Registration Statement required to be filed pursuant to the
Registration Rights Agreement to not be effective or the prospectus contained
therein to not be available for the resale of all of the Registrable Securities
in accordance with the terms of the Registration Rights Agreement or (2) any
Registrable Securities to not be eligible for sale without restriction pursuant
to Rule 144 (including, without limitation, volume restrictions) and without the
need for current public information required by Rule 144(c)(1) (or Rule
144(i)(2), if applicable) or any applicable state securities laws (in each case,
disregarding any limitation on conversion of the Notes, other issuance of
securities  with respect to the Notes and exercise of the Warrants); (viii) the
Holder shall not be in (and no other Buyer shall be in) possession of any
material, non-public information provided to any of them by the Company, any of
its affiliates or any of their respective employees, officers, representatives,
agents or the like; (ix) on each day during the Equity Conditions Measuring
Period, the Company otherwise shall have been in compliance with and shall not
have breached any provision, covenant, representation or warranty of any
Transaction Document; and (x) on each day during the Equity Conditions Measuring
Period, there shall not have occurred an Event of Default or an event that with
the passage of time or giving of notice would constitute an Event of Default.

 
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(q)           “Equity Conditions Failure” means that (i) on any day during the
period commencing ten (10) Trading Days prior to the applicable Interest Date
through the applicable Interest Date, (ii) on any day during the period
commencing fifteen (15) Trading Days prior to the applicable Company Optional
Redemption Notice Date through the applicable Company Optional Redemption Date,
or (iii) on any day during the period commencing fifteen (15) Trading Days prior
to the applicable Company Call Redemption Notice Date through the applicable
Company Call Redemption Date, the Equity Conditions have not been satisfied (or
waived in writing by the Holder).
 
(r)            “Equity Value Redemption Premium” means 135%.
 
(s)           “Excluded Securities” means any Common Stock issued or issuable:
(i) to directors, officers, consultants or employees of the Company in their
capacity as such pursuant to an Approved Stock Plan, provided that (A) all such
issuances (taking into account the shares of Common Stock issuable upon exercise
of Options) after the date hereof pursuant to this clause (i) do not, in the
aggregate, exceed more than 15% of the Common Stock issued and outstanding
immediately prior to the date hereof, and (B) such Options are not amended to
increase the number of shares issuable thereunder or to lower the exercise price
thereof or to otherwise materially change the terms or conditions thereof in any
manner that adversely affects any of the Buyers; (ii) upon the conversion or
exercise of Options or Convertible Securities issued prior to the date hereof,
provided that such Options or Convertible Securities have not been amended since
the date of this Agreement to increase the number of shares issuable thereunder
or to lower the exercise or conversion price thereof or otherwise materially
change the terms or conditions thereof in any manner that adversely affects any
of the Buyer, (iii) upon conversion of the Notes or the exercise of the Warrants
and (iv) in connection with strategic alliances, acquisitions, mergers, and
strategic partnerships, provided, that (A) the primary purpose of such issuance
is not to raise capital as determined in good faith by the Required Holders, (B)
the purchaser or acquirer of the securities in such issuance solely consists of
either (x) the actual participants in such strategic alliance or strategic
partnership, (y) the actual owners of such assets or securities acquired in such
acquisition or merger or (z) the stockholders, partners or members of the
foregoing Persons and (C) the number or amount of securities issued to such
Person by the Company shall not be disproportionate to such Person’s actual
participation in such strategic alliance or strategic partnership or ownership
of such assets or securities to be acquired by the Company, as applicable.

 
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(t)            “Fundamental Transaction” means that (i) the Company or any of
its Subsidiaries shall, directly or indirectly, in one or more related
transactions, (1) consolidate or merge with or into (whether or not the Company
or any of its Subsidiaries is the surviving corporation) another Person, or (2)
sell, lease, license, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company or any of its
Subsidiaries to another Person, or (3) allow another Person to make a purchase,
tender or exchange offer that is accepted by the holders of more than 50% of the
outstanding shares of Voting Stock of the Company (not including any shares of
Voting Stock of the Company held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such purchase,
tender or exchange offer), or (4) consummate a stock or share purchase agreement
or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than 50% of the outstanding shares of Voting
Stock of the Company (not including any shares of Voting Stock of the Company
held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock or share
purchase agreement or other business combination), or (5) reorganize,
recapitalize or reclassify its Common Stock, or (ii) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act
and the rules and regulations promulgated thereunder) is or shall become the
“beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or
indirectly, of 50% of the aggregate ordinary voting power represented by issued
and outstanding Voting Stock of the Company.
 
(u)           “GAAP” means United States generally accepted accounting
principles, consistently applied.
 
(v)           “Holder Pro Rata Amount” means a fraction (i) the numerator of
which is the original Principal amount of this Note on the Closing Date and (ii)
the denominator of which is the aggregate original principal amount of all Notes
issued to the initial purchasers pursuant to the Securities Purchase Agreement
on the Closing Date.
 
(w)          “Interest Conditions Failure” means the occurrence of any Equity
Conditions Failure, Volume Failure, Dollar Failure or Price Failure.

 
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(x)           “Interest Conversion Price” means, with respect to any Interest
Date that price which shall be the lower of (i) the applicable Conversion Price
and (ii) the price computed as 90% of the quotient of (I) the sum of the VWAP of
the Common Stock on each of the five (5) consecutive Trading Days ending on the
Trading Day immediately preceding the applicable Interest Date, divided by (II)
five (5) (such period, the “Interest Measuring Period”).  All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction that proportionately
decreases or increases the Common Stock during such Interest Measuring Period.
 
(y)           "Interest Notice Due Date" means the twenty-fifth (25th) Trading
Day prior to the applicable Interest Date.
 
(z)           “Interest Rate” means six percent (6%) per annum, subject to
adjustment as set forth in Section 2.
 
(aa)         “Market Price” means, for any given date, the greater of (x) $2.75
(as adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction occurring during the period commencing
on the Subscription Date and ending on the Adjustment Date) and (y) 90% of the
quotient of (I) the sum of the VWAP of the Common Stock on each of the ten (10)
consecutive Trading Days ending and including the Adjustment Date, divided by
(II) ten (10) (such period, the “Market Price Measuring Period”).  All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction during such Market
Price Measuring Period.
 
(bb)         “Maturity Date” shall mean January __, 2012; provided, however, the
Maturity Date may be extended at the option of the Holder (i) in the event that,
and for so long as, an Event of Default shall have occurred and be continuing or
any event shall have occurred and be continuing that with the passage of time
and the failure to cure would result in an Event of Default or (ii) through the
date that is twenty (20) Business Days after the consummation of a Fundamental
Transaction in the event that a Fundamental Transaction is publicly announced or
a Change of Control Notice is delivered prior to the Maturity Date, provided
further that if a Holder elects to convert some or all of this Note pursuant to
Section 3 hereof, and the Conversion Amount would be limited pursuant to Section
3(d) hereunder, the Maturity Date shall automatically be extended until such
time as such provision shall not limit the conversion of this Note.
 
(cc)         “New Subsidiaries” means, as of any date of determination, any
Person in which the Company after the Subscription Date, directly or indirectly,
(i) owns or acquires any of the outstanding capital stock or holds any equity or
similar interest of such Person or (ii) controls or operates all or any part of
the business, operations or administration of such Person, and each of the
foregoing, individually, a “New Subsidiary.”
 
(dd)         “Options” means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.

 
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(ee)         “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
 
(ff)           Permitted Indebtedness" means (i) Indebtedness evidenced by this
Note and the Other Notes, (ii) unsecured Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the
Holder and approved by the Holder in writing, and which Indebtedness does not
provide at any time for (A) the payment, prepayment, repayment, repurchase or
defeasance, directly or indirectly, of any principal or premium, if any, thereon
until ninety-one (91) days after the Maturity Date or later and (B) total
interest and fees at a rate in excess of 6.00% per annum, (iii) Indebtedness
secured by Permitted Liens described in clauses (iv) and (v) of the definition
of Permitted Liens and (iv) Permitted Senior Indebtedness.
 
(gg)         "Permitted Liens" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen's liens, mechanics' liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the
purchase price of such equipment or indebtedness incurred solely for the purpose
of financing the acquisition or lease of such equipment, or (B) existing on such
equipment at the time of its acquisition, provided that the Lien is confined
solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, (v) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in clause
(iv) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the Indebtedness being extended, renewed or refinanced does not increase,
(vi) leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company's business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(vii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods, (viii) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(xii) and
(ix) Liens securing Permitted Senior Indebtedness.

 
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(hh)         “Permitted Senior Indebtedness” means the principal of (and
premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable out-of-pocket costs, enforcement expenses
(including reasonable out-of-pocket legal fees and disbursements), collateral
protection expenses and other reimbursement or indemnity obligations relating
thereto) payable by Company and/or its Subsidiaries under or in connection with
any credit facility entered into or to be entered into by the Company and/or its
Subsidiaries with one or more financial institutions (and on terms and
conditions), under commercially reasonably terms; provided, however, that the
aggregate outstanding amount of such Indebtedness permitted hereunder (taking
into account the maximum amounts which may be advanced under the loan documents
evidencing such Permitted Senior Indebtedness) does not at any time exceed RMB
220,000,000.
 
(ii)           “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity or a government or any department or agency
thereof.
 
(jj)           “Price Failure” means, with respect to a particular date of
determination, that the Interest Conversion Price (determined under clause (ii)
of the definition thereof and not clause (i) of the definition thereof)  is less
than $1.00 (as adjusted for stock splits, stock dividends, stock combinations or
other similar transactions).
 
(kk)         “Principal Market” means the Nasdaq Capital Market.
 
(ll)           “Quarter” means each of: (i) the period beginning on and
including January 1 and ending on and including March 31; (ii) the period
beginning on and including April 1 and ending on and including June 30; (iii)
the period beginning on and including July 1 and ending on and including
September 30; and (iv) the period beginning on and including October 1 and
ending on and including December 31.
 
(mm)       “Redemption Conditions Failure” means the occurrence of any Equity
Conditions Failure, Volume Failure or Dollar Failure.
 
(nn)        “Redemption Notices” means, collectively, the Event of Default
Redemption Notice and the Change of Control Redemption Notice, the Company
Optional Redemption Notice, the Company Call Redemption Notice and each of the
foregoing, individually, a “Redemption Notice.”
 
(oo)        “Redemption Premium” means (i) in the case of the Events of Default
described in Section 4(a) (other than Sections 4(a)(ix) through 4(a)(xi)), 135%
or (ii) in the case of the Events of Default described in Sections 4(a)(ix)
through 4(a)(xi), 100%.
 
(pp)        “Redemption Prices” means, collectively, the Event of Default
Redemption Price, the Change of Control Redemption Price, the Company Optional
Redemption Price and the Company Call Redemption Price, and each of the
foregoing, individually, a “Redemption Price.”
 
(qq)        “Registration Rights Agreement” means that certain registration
rights agreement, dated as of the Closing Date, by and among the Company and the
initial holders of the Notes relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the Notes or
otherwise pursuant to the terms of the Notes and exercise of the Warrants, as
may be amended from time to time.

 
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(rr)           “Required Holders” means the holders of Notes representing at
least a majority of the aggregate principal amount of the Notes then outstanding
(excluding any Noted held by the Company or any of its Subsidiaries).
 
(ss)         “SEC” means the United States Securities and Exchange Commission or
the successor thereto.
 
(tt)           “Securities Purchase Agreement” means that certain securities
purchase agreement, dated as of the Subscription Date, by and among the Company
and the initial holders of the Notes pursuant to which the Company issued the
Notes and Warrants, as may be amended from time to time.
 
(uu)         “Subscription Date” means January __, 2010.
 
(vv)         “Subsidiaries” means, as of any date of determination,
collectively, all Current Subsidiaries and all New Subsidiaries, and each of the
foregoing, individually, a “Subsidiary.”
 
(ww)       “Successor Entity” means the Person (or, if so elected by the Holder,
the Parent Entity) formed by, resulting from or surviving any Fundamental
Transaction or the Person (or, if so elected by the Holder, the Parent Entity)
with which such Fundamental Transaction shall have been entered into.
 
(xx)          “Trading Day” means any day on which the Common Stock is traded on
the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded, provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time) unless such day is otherwise designated
as a Trading Day in writing by the Holder.
 
(yy)        “VWAP” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market (or, if
the Principal Market is not the principal trading market for such security, then
on the principal securities exchange or securities market on which such security
is then traded) during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its
“Volume at Price” function 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
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, 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 Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If the VWAP cannot be calculated
for such security on such date on any of the foregoing bases, the VWAP of such
security on such date shall be the fair market value as mutually determined by
the Company and the Holder. If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be resolved
in accordance with the procedures in Section 23. All such determinations shall
be appropriately adjusted for any stock dividend, stock split, stock combination
or other similar transaction during such period.

 
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(zz)          “Volume Failure” means, that (i) on any day during the period
commencing ten (10) Trading Days prior to the applicable Interest Date through
the applicable Interest Date, (ii) on any day during the period commencing
fifteen (15) Trading Days prior to the applicable Company Optional Redemption
Notice Date through the applicable Company Optional Redemption Date, or (iii) on
any day during the period commencing fifteen (15) Trading Days prior to the
applicable Company Call Redemption Notice Date through the applicable Company
Call Redemption Date, the average daily volume (as reported on Bloomberg) of the
Common Stock on the Eligible Market on which the Common Stock is listed or
designated for quotation as of such date of determination over the fifteen (15)
consecutive Trading Day period ending on the Trading Day immediately preceding
such date of determination is less than 75,000 shares per day (adjusted for any
stock dividend, stock split, stock combination or other similar transaction
during such period).
 
(aaa)       “Voting Stock” of a Person means capital stock of such Person of the
class or classes pursuant to which the holders thereof have the general voting
power to elect, or the general power to appoint, at least a majority of the
board of directors, managers or trustees of such Person (irrespective of whether
or not at the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).
 
(bbb)      “Warrants” has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.
 
31.         DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
non-public information relating to the Company or any of its Subsidiaries, the
Company shall within one (1) Business Day after any such receipt or delivery
publicly disclose such material, non-public information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice
contains material, non-public information relating to the Company or any of its
Subsidiaries, the Company so shall indicate to such Holder contemporaneously
with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do
not constitute material, non-public information relating to the Company or its
Subsidiaries. Nothing contained in this Section 31 shall limit any obligations
of the Company, or any rights of the Holder, under Section 4(i) of the
Securities Purchase Agreement.

 
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[signature page follows]

 
42

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

Kandi Technologies, Corp.
   
By:
  
 
  Name:
 
  Title:

 

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EXHIBIT I

 
KANDI TECHNOLOGIES, CORP.
CONVERSION NOTICE
 
Reference is made to the Senior Secured Convertible Note (the “Note”) issued to
the undersigned by Kandi Technologies, Corp., a Delaware corporation (the
“Company”).  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, $0.001 par value per share (the
“Common Stock”), of the Company, as of the date specified below.
 
Date of Conversion:
 
 
Aggregate Conversion Amount to be converted:
 
 
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:
 
 
 
 
 
   
 
 
Facsimile Number:
 
 
Authorization:
 
 
By:
 
 
Title:
 
 
Dated:
 
 
Account Number:
 
  (if electronic book entry transfer)
 
 
Transaction Code Number:
 
  (if electronic book entry transfer)
 

 
 

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ACKNOWLEDGMENT
 
The Company hereby acknowledges this Conversion Notice and hereby directs
Corporate Stock Transfer to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated January __, 2010
from the Company and acknowledged and agreed to by Corporate Stock Transfer.

Kandi Technologies, Corp.
   
By:
  
 
  Name:
 
  Title:

 
 

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