Exhibit 10.2

 

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO COACH INDUSTRIES GROUP, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.

 

SECURED CONVERTIBLE TERM NOTE

 

FOR VALUE RECEIVED, COACH INDUSTRIES GROUP, INC., a Nevada corporation (the
“Borrower”), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or
its registered assigns or successors in interest, on order, the sum of Six
Million Dollars ($6,000,000), together with any accrued and unpaid interest
hereon, on September 29, 2007 (the “Maturity Date”) if not sooner paid. The
original principal amount of this Note subject to amortizing payments pursuant
to Section 1.2 hereof is hereinafter referred to as the “Amortizing Principal
Amount” and the remaining original principal amount of this Note is hereinafter
referred to as the “Non-Amortizing Principal Amount.”

 

Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in that certain Securities Purchase Agreement dated as of
the date hereof between the Borrower and the Holder (the “Purchase Agreement”).

 

The following terms shall apply to this Note:

 

ARTICLE I

INTEREST & AMORTIZATION

 

1.1 (a) Interest Rate. Subject to Sections 1.1(b), 4.12 and 5.6 hereof, interest
payable on this Note shall accrue at a rate per annum (the “Interest Rate”)
equal to the “prime rate” published in The Wall Street Journal from time to
time, plus three and one-half percent (3.5%). The prime rate shall be increased
or decreased as the case may be for each increase or decrease in the prime rate
in an amount equal to such increase or decrease in the prime rate; each change
to be effective as of the day of the change in such rate. Subject to Section
1.1(b) hereof, the Interest Rate shall not be less than eight percent (8.0%).
Interest shall be calculated on the basis of a 360 day year. Interest shall
accrue but not be payable during the period commencing on the date hereof and
ending on October 31, 2004. Interest on the Amortizing Principal Amount shall be
payable monthly, in arrears, commencing on November 1, 2004 and on the first day
of each consecutive calendar month thereafter (each, a “Repayment Date”) and on
the Maturity Date, whether by acceleration or otherwise. Accrued interest on the
Non-Amortizing Principal Amount shall be payable only on the

 

1 of 15

--------------------------------------------------------------------------------

Maturity Date or, in the event of the redemption or conversion of all or any
portion of the Non-Amortizing Principal Amount, accrued interest on the amount
so redeemed or converted shall be paid on the date of redemption or conversion,
as the case may be.

 

1.1 (b) Interest Rate Adjustment. The Interest Rate shall be subject to
adjustment on the last business day of each month hereafter until the Maturity
Date (each a “Determination Date”). If on any Determination Date (i) the
Borrower shall have registered under the Securities Act of 1933, as amended (the
“Securities Act”), the shares of Common Stock underlying each of the conversion
of this Note and the exercise of the Warrant on a registration statement
declared effective by the Securities and Exchange Commission (the “SEC”), (ii)
the Common Stock is listed on the NASDAQ SmallCap Market, NASDAQ National Market
System, or the American Stock Exchange and (iii) the market price (the “Market
Price”) of the Common Stock as reported by Bloomberg, L.P. on the Principal
Market (as defined below) for the five (5) consecutive trading days immediately
preceding such Determination Date exceeds the then applicable Fixed Conversion
Price by at least twenty five percent (25%), the Interest Rate for each day of
the succeeding calendar month shall automatically be reduced by 200 basis points
(200 b.p.) (2.0.%) for each incremental increase in the Market Price of the
Common Stock by twenty-five (25%) above the then applicable Fixed Conversion
Price. If on any Determination Date (i) the Borrower shall have registered under
the Securities Act the shares of Common Stock underlying the conversion of this
Note and the exercise of the Warrant on a registration statement declared
effective by the SEC, and (ii) the Market Price of the Common Stock as reported
by Bloomberg, L.P. on the Principal Market for the five (5) consecutive trading
days immediately preceding such Determination Date exceeds the then applicable
Fixed Conversion Price by at least twenty five percent (25%), the Interest Rate
for each day of the succeeding calendar month shall automatically be decreased
by 100 basis points (100 b.p.) (1.0.%) for each incremental increase in the
Market Price of the Common Stock by twenty-five (25%) above the then applicable
Fixed Conversion Price. Notwithstanding the foregoing (and anything to the
contrary contained in herein), in no event shall the Interest Rate be less than
zero percent (0%).

 

1.2 Minimum Monthly Principal Payments. Amortizing payments of the outstanding
principal amount of this Note not contained in the Restricted Account (as
defined in the Restricted Account Agreement) shall begin on January 1, 2004 and
shall recur on each succeeding Repayment Date thereafter until the Amortizing
Principal Amount has been repaid in full, whether by the payment of cash or by
the conversion of such principal into Common Stock pursuant to the terms hereof.
Subject to Section 2.1 and Article 3 below, on each Repayment Date, the Borrower
shall make payments to the Holder in the amount of $45,454.54 (the “Monthly
Principal Amount”), together with any accrued and unpaid interest then due on
such portion of the Amortizing Principal Amount plus any and all other amounts
which are then owing under this Note that have not been paid (the Monthly
Principal Amount, together with such accrued and unpaid interest and such other
amounts, collectively, the “Monthly Amount”) ; provided that, following a
release of an amount of funds from the Restricted Account (as defined in the
Restricted Account Agreement) for the purposes set forth in the Restricted
Account Side Letter (other than with respect to a release that occurs as a
result of a conversion of any Principal Amount) (each, a “Release Amount”) each
Monthly Principal Amount due on any Repayment Date occurring 90 days following
any such release shall be increased by an amount equal to (x) such Release
Amount divided by (y) the sum of

 

2 of 15

--------------------------------------------------------------------------------

(I) the number of Repayment Dates that exist after the date that is 90 days
following such release to and including the Maturity Date plus (II) one (1). Any
Principal Amount that remains outstanding on the Maturity Date shall be due and
payable on the Maturity Date.

 

ARTICLE II

CONVERSION REPAYMENT

 

2.1 (a) Payment of Monthly Amount in Cash or Common Stock. If the Monthly Amount
(or a portion thereof of such Monthly Amount if such portion of the Monthly
Amount would have been converted into shares of Common Stock but for Section
3.2) is required to be paid in cash pursuant to Section 2.1(b), then the
Borrower shall pay the Holder an amount equal to 102% of the Monthly Amount due
and owing to the Holder on the Repayment Date in cash. If the Monthly Amount (or
a portion of such Monthly Amount if not all of the Monthly Amount may be
converted into shares of Common Stock pursuant to Section 3.2) is required to be
paid in shares of Common Stock pursuant to Section 2.1(b), the number of such
shares to be issued by the Borrower to the Holder on such Repayment Date (in
respect of such portion of the Monthly Amount converted into in shares of Common
Stock pursuant to Section 2.1(b)), shall be the number determined by dividing
(x) the portion of the Monthly Amount converted into shares of Common Stock, by
(y) the then applicable Fixed Conversion Price. For purposes hereof, initially,
“Fixed Conversion Price” shall mean, individually, each of the following taken
separately, and, collectively, each of the following taken together: (i) with
respect to the first $2,000,000 principal amount of this Note converted pursuant
to the terms hereof (and all interest and fees related thereto), $0.97, (ii)
with respect to the next $2,000,000 principal amount of this Note converted
pursuant to the terms hereof (and all interest and fees related thereto), $1.21
and (iii) with respect to the remaining $2,000,000 principal amount of this Note
converted pursuant to the terms hereof (and all interest and fees related
thereto), $1.33.

 

(b) Monthly Amount Conversion Guidelines. Subject to Sections 2.1(a), 2.2 and
3.2 hereof, the Holder shall convert into shares of Common Stock all or a
portion of the Monthly Amount due on each Repayment according to the following
guidelines (collectively, the “Conversion Criteria”): (i) the average closing
price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market
for the five (5) consecutive trading days immediately preceding such Notice Date
shall be greater than or equal to 110% of the Fixed Conversion Price and (ii)
the amount to be paid in shares of Common Stock does not exceed twenty five
percent (25%) of the aggregate dollar trading volume of the Common Stock for the
ten (10) day trading period immediately preceding the applicable Repayment Date.
If the Conversion Criteria are not met, the Holder shall convert only such part
of the Monthly Amount that meets the Conversion Criteria. Any part of the
Monthly Amount due on a Repayment Date that the Holder has not been able to
convert into shares of Common Stock due to failure to meet the Conversion
Criteria, shall be paid by the Borrower in cash at the rate of 102% of the
Monthly Amount otherwise due on such Repayment Date, within three (3) business
days of the applicable Repayment Date.

 

(c) Application of Conversion Amounts. Any amounts paid in shares of Common
Stock pursuant to Section 2.1(b) shall be deemed to constitute payments of, or
applied against, (i) first, outstanding fees, (ii) second, accrued interest on
the Amortizing Principal Amount, and (iii) third, Amortizing Principal Amount.

 

3 of 15

--------------------------------------------------------------------------------

2.2 No Effective Registration. Notwithstanding anything to the contrary herein,
no amount payable hereunder may be converted into or otherwise paid in Common
Stock unless (a) either (i) an effective current Registration Statement (as
defined in the Registration Rights Agreement) covering the shares of Common
Stock to be issued in satisfaction of such obligations exists, or (ii) an
exemption from registration of the Common Stock is available pursuant to Rule
144 of the Securities Act, and (b) no Event of Default hereunder exists and is
continuing, unless such Event of Default is cured within any applicable cure
period or is otherwise waived in writing by the Holder in whole or in part at
the Holder’s option.

 

2.3 Optional Redemption of Amortizing Principal Amount. The Borrower will have
the option of prepaying the outstanding Amortizing Principal Amount (“Optional
Amortizing Redemption”), in whole or in part, by paying to the Holder a sum of
money equal to one hundred twenty five percent (125%) of the Amortizing
Principal Amount to be redeemed, together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder arising
under this Note, the Purchase Agreement or any Related Agreement (the
“Amortizing Redemption Amount”) on the day written notice of redemption (the
“Notice of Amortizing Redemption”) is given to the Holder. The Notice of
Amortizing Redemption shall specify the date for such Optional Amortizing
Redemption (the “Amortizing Redemption Payment Date”), which date shall be not
less than seven (7) business days after the date of the Notice of Amortizing
Redemption (the “Redemption Period”). A Notice of Amortizing Redemption shall
not be effective with respect to any portion of the Amortizing Principal Amount
for which the Holder has a pending election to convert pursuant to Section 3.1,
or for conversions initiated or made by the Holder pursuant to Section 3.1
during the Redemption Period. The Amortizing Redemption Amount shall be
determined as if such Holder’s conversion elections had been completed
immediately prior to the date of the Notice of Amortizing Redemption. On the
Amortizing Redemption Payment Date, the Amortizing Redemption Amount shall be
paid in good funds to the Holder. In the event the Borrower fails to pay the
Amortizing Redemption Amount on the Amortizing Redemption Payment Date as set
forth herein, then such Notice of Amortizing Redemption will be null and void.

 

2.4 Optional Redemption of Non-Amortizing Principal Amount. The Borrower will
have the option of repaying the outstanding Non-Amortizing Principal Amount
(“Optional Non-Amortizing Redemption”), in whole or in part, by paying the
Holder a sum of money equal to one hundred five percent (105%) of the
Non-Amortizing Principal Amount to be redeemed, together with accrued but unpaid
interest thereon (the “Non-Amortizing Redemption Amount”) on the day written
notice of redemption (the “Notice of Non-Amortizing Redemption”) is given to the
Holder. The Notice of Non-Amortizing Redemption shall specify the date for such
Optional Non-Amortizing Redemption (the “Non-Amortizing Redemption Date”), which
date shall be not less than seven (7) business days after the date of the Notice
of Non-Amortizing Redemption (the “Non-Amortizing Redemption Period”). A Notice
of Non-Amortizing Redemption shall not be effective with respect to any portion
of the Non-Amortizing Principal Amount for which the Holder has a pending
election to convert pursuant to Section 3.1, or for conversions initiated or
made by the Holder pursuant to Section 3.1 during the Non-Amortizing Redemption
Period. The Non-Amortizing

 

4 of 15

--------------------------------------------------------------------------------

Redemption Amount shall be determined as if the Holder’s conversion elections
had been completed immediately prior to the date of the Notice of Non-Amortizing
Redemption. On the Non-Amortizing Redemption Date, the Non-Amortizing Redemption
Amount shall be paid (i) in good funds to the Holder, (ii) by furnishing the
Holder written direction to notify the bank holding the Restricted Account to
release from the Restricted Account and deliver to the Holder a sum of money
equal to the Non-Amortizing Redemption Amount, or (iii) if the amount on deposit
in the Restricted Account is less than the Non-Amortizing Redemption Amount, by
furnishing the Holder written direction to notify the bank holding the
Restricted Account to release all amounts on deposit in the Restricted Account
to the Holder and delivering to the Holder good funds in an amount equal to the
balance of the Non-Amortizing Redemption Amount.

 

ARTICLE III

CONVERSION RIGHTS

 

3.1. Holder’s Conversion Rights. Subject to Section 2.2, the Holder shall have
the right, but not the obligation, to convert all or any portion of the then
aggregate outstanding Principal Amount of this Note, together with interest and
fees due hereon, into shares of Common Stock, subject to the terms and
conditions set forth in this Article III. The Holder may exercise such right by
delivery to the Borrower of a written Notice of Conversion pursuant to Section
3.3.

 

3.2 Conversion Limitation. Notwithstanding anything contained herein to the
contrary, the Holder shall not be entitled to convert pursuant to the terms of
this Note an amount that would be convertible into that number of shares of
Common Stock which would exceed the difference between 4.99% of the issued and
outstanding shares of Common Stock of the Borrower and the number of shares of
Common Stock beneficially owned by such Holder or issuable upon exercise in full
of Warrants held by such Holder. For the purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Holder may void
the Conversion Share limitation described in this Section 3.2 upon 75 days prior
notice to the Borrower or without any notice requirement upon an Event of
Default.

 

3.3 Mechanics of Holder’s Conversion. (a) In the event that the Holder elects to
convert any amounts outstanding under this Note into Common Stock, the Holder
shall give notice of such election by delivering an executed and completed
notice of conversion (a “Notice of Conversion”) to the Borrower, which Notice of
Conversion shall provide a breakdown in reasonable detail of the Principal
Amount, accrued interest and fees being converted. On each Conversion Date (as
hereinafter defined) and in accordance with its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount, accrued interest
and fees as entered in its records and shall provide written notice thereof to
the Borrower within two (2) business days after the Conversion Date. Each date
on which a Notice of Conversion is delivered or telecopied to the Borrower in
accordance with the provisions hereof shall be deemed a “Conversion Date”. A
form of Notice of Conversion to be employed by the Holder is annexed hereto as
Exhibit A.

 

(b) Pursuant to the terms of a Notice of Conversion, the Borrower will issue
instructions to the transfer agent accompanied by an opinion of counsel, if so
required by the

 

5 of 15

--------------------------------------------------------------------------------

Borrower’s transfer agent, within two (2) business days of the date of the
delivery to Borrower of the Notice of Conversion and shall cause the transfer
agent to transmit the certificates representing the Conversion Shares to the
Holder by crediting the account of the Holder’s designated broker with the
Depository Trust Corporation (“DTC”) through its Deposit Withdrawal Agent
Commission (“DWAC”) system within three (3) business days after receipt by the
Borrower of the Notice of Conversion (the “Delivery Date”). In the case of the
exercise of the conversion rights set forth herein the conversion privilege
shall be deemed to have been exercised and the Conversion Shares issuable upon
such conversion shall be deemed to have been issued upon the date of receipt by
the Borrower of the Notice of Conversion. The Holder shall be treated for all
purposes as the record holder of such shares of Common Stock, unless the Holder
provides the Borrower written instructions to the contrary.

 

3.4 Conversion Mechanics.

 

(a) The number of shares of Common Stock to be issued upon each conversion of
this Note pursuant to this Article III shall be determined by dividing that
portion of the Principal Amount and interest and fees to be converted, if any,
by the then applicable Fixed Conversion Price. In the event of any conversions
of outstanding obligations under this Note in part pursuant to this Article III,
such conversions shall be deemed to constitute conversions (i) first, of the
Monthly Amount for the current calendar month, (ii) then of outstanding
Amortizing Principal Amount, by applying the conversion amount to Monthly
Principal Amounts for the remaining Repayment Dates in chronological order.
(iii) then, of the accrued interest on the Non-Amortizing Principal Amount, and
(iv) then, of outstanding Non-Amortizing Principal Amount.

 

(b) The Fixed Conversion Price and number and kind of shares or other securities
to be issued upon conversion is subject to adjustment from time to time upon the
occurrence of certain events, as follows:

 

A. Stock Splits, Combinations and Dividends. If the shares of Common Stock are
subdivided or combined into a greater or smaller number of shares of Common
Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
or the Fixed Conversion Price, as the case may be, shall be proportionately
reduced in case of subdivision of shares or stock dividend or proportionately
increased in the case of combination of shares, in each such case by the ratio
which the total number of shares of Common Stock outstanding immediately after
such event bears to the total number of shares of Common Stock outstanding
immediately prior to such event.

 

B. During the period the conversion right exists, the Borrower will reserve from
its authorized and unissued Common Stock a sufficient number of shares to
provide for the issuance of Common Stock upon the full conversion of this Note.
The Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. The Borrower agrees that its issuance of
this Note shall constitute full authority to its officers, agents, and transfer
agents who are charged with the duty of executing and issuing stock certificates
to execute and issue the necessary certificates for shares of Common Stock upon
the conversion of this Note.

 

6 of 15

--------------------------------------------------------------------------------

C. Share Issuances. Subject to the provisions of this Section 3.4, if the
Borrower shall at any time prior to the conversion or repayment in full of the
Principal Amount issue any shares of Common Stock or securities convertible into
Common Stock to a person other than the Holder (except (i) pursuant to
Subsections A or B above; (ii) pursuant to options, warrants or other
obligations to issue shares outstanding on the date hereof as disclosed to
Holder in writing; (iii) pursuant to options that may be issued under any
employee incentive stock option and/or any qualified stock option plan adopted
by the Borrower; (iv) for issuances to officers, employees or directors of the
Borrower or any of its Subsidiaries; (v) with respect to up to 10,000 shares of
Common Stock (as calculated on the date hereof and appropriately adjusted for
any subdivision, combination or similar event) issued to consultants of the
Borrower in any fiscal month of the Borrower; or (vi) issuances made by the
Borrower as consideration for the acquisition of assets or property or the
acquisition of any business or entity, so long as such shares of Common Stock so
issued (or securities convertible into Common Stock so issued) are not
registered under a registration statement with the SEC and do not become freely
or publicly traded in any respect until so permitted under Rule 144 of the
Securities Act of 1933 (as amended)) for a consideration per share (the “Offer
Price”) less than any Fixed Conversion Price in effect at the time of such
issuance, then in the event that the Offer Price is less than or equal to $1.21
(as such amount shall be adjusted from time to time following the occurrence of
any event described in either Sections 3.4(b)A or 3.4(b)D (or any event similar
to that described in either of Sections 3.4(b)A or 3.4(b)D)) (as adjusted, the
“Closing Date Market Price”), such Fixed Conversion Price applicable to a
portion of the outstanding principal amount of this Note (and all interest,
fees, costs and expenses related thereto) equal to the fair market value of the
aggregate consideration paid for, or attributable to, such shares of Common
Stock or securities convertible into Common Stock (the “Aggregate
Consideration”) shall be immediately reset to such lower Offer Price at the time
of issuance of such securities (provided that, in the event that the outstanding
principal amount of this Note is greater than the respective Aggregate
Consideration, the Holder shall determine in its sole discretion which portion
of the outstanding principal amount of the Note shall have a “reset” Fixed
Conversion Price as a result of such issuance). For example, in the event that
(i) the Offer Price is less than or equal to the Closing Date Market Price and
(ii) the Aggregate Consideration equals $1,000,000, a Fixed Conversion Price
applicable a principal amount of this Note equal to $1,000,000 (plus all
interest, fees, costs and expenses related thereto) shall be reset to the Offer
Price if the Offer Price is less than such Fixed Conversion Price in effect at
the time of such issuance. For purposes hereof, the issuance of any security of
the Borrower convertible into or exercisable or exchangeable for Common Stock
shall result in an adjustment to the Fixed Conversion Price at the time of
issuance of such securities.

 

D. Reclassification, etc. If the Borrower at any time shall, by reclassification
or otherwise, change the Common Stock into the same or a different number of
securities of any class or classes, this Note, as to the unpaid Principal Amount
and accrued interest thereon, shall thereafter be deemed to evidence the right
to purchase an adjusted number of such securities and kind of securities as
would have been issuable as the result of such change with respect to the Common
Stock immediately prior to such reclassification or other change.

 

7 of 15

--------------------------------------------------------------------------------

3.5 Issuance of Replacement Note. Upon any partial conversion of this Note, a
replacement Note containing the same date and provisions of this Note shall, at
the written request of the Holder, be issued by the Borrower to the Holder for
the outstanding Principal Amount of this Note and accrued interest which shall
not have been converted or paid. Subject to the provisions of Article IV, the
Borrower will pay no costs, fees or any other consideration to the Holder for
the production and issuance of a replacement Note.

 

ARTICLE IV

EVENTS OF DEFAULT

 

Upon the occurrence and continuance of an Event of Default beyond any applicable
grace period, the Holder may make all sums of principal, interest and other fees
then remaining unpaid hereon and all other amounts payable hereunder immediately
due and payable. In the event of such an acceleration, the amount due and owing
to the Holder shall be 125% of the outstanding principal amount of the Note
(plus accrued and unpaid interest and fees, if any) (the “Default Payment”). The
Default Payment shall be applied first to any fees due and payable to Holder
pursuant to this Note, the Purchase Agreement or the Related Agreements, second
to accrued and unpaid interest due on the Note third, to outstanding principal
balance of the Note and forth, any balance to Borrower.

 

The occurrence of any of the following events set forth in Sections 4.1 through
4.10, inclusive, is an “Event of Default”:

 

4.1 Failure to Pay Principal, Interest or other Fees. The Borrower fails to pay
when due any installment of principal, interest or other fees hereon in
accordance herewith, or the Borrower fails to pay when due any amount due under
any other promissory note issued by Borrower, and in any such case, such failure
shall continue for a period of three (3) days following the date upon which any
such payment was due in the case of this Note, or the applicable grace period
thereunder, in the case of any other promissory note.

 

4.2 Breach of Covenant. The Borrower breaches any covenant or any other term or
condition of this Note or the Purchase Agreement in any material respect, or the
Borrower or any of its Subsidiaries breaches any covenant or any other term or
condition of any Related Agreement in any material respect and, in such case,
such breach, continues for a period of fifteen (15) days after the occurrence
thereof.

 

4.3 Breach of Representations and Warranties. Any representation or warranty
made by the Borrower in this Note or the Purchase Agreement, or by the Borrower
or any of its Subsidiaries in any Related Agreement, shall, in any such case, be
false or misleading in any material respect on the date that such representation
or warranty was made or deemed made.

 

4.4 Receiver or Trustee. The Borrower or any of its Subsidiaries shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business; or such a receiver or trustee shall otherwise be
appointed.

 

4.5 Judgments. Any money judgment, writ or similar final process shall be
entered or

 

8 of 15

--------------------------------------------------------------------------------

filed against the Borrower or any of its Subsidiaries or any of their respective
property or other assets for more than $50,000, and shall remain unpaid,
unvacated, unbonded or unstayed for a period of thirty (30) days.

 

4.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
of its Subsidiaries.

 

4.7 Stop Trade. An SEC stop trade order or Principal Market trading suspension
of the Common Stock shall be in effect for five (5) consecutive days or five (5)
days during a period of ten (10) consecutive days, excluding in all cases a
suspension of all trading on a Principal Market, provided that the Borrower
shall not have been able to cure such trading suspension within thirty (30) days
of the notice thereof or list the Common Stock, on another Principal Market
within sixty (60) days of such notice. The “Principal Market” for the Common
Stock shall include the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ
National Market System, American Stock Exchange, or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange or
market for the Common Stock, or any securities exchange or other securities
market on which the Common Stock is then being listed or traded.

 

4.8 Failure to Deliver Common Stock or Replacement Note. The Borrower shall fail
(i) to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note, and Section 9 of the Purchase Agreement, if such failure
to timely deliver Common Stock shall not be cured within two (2) business days
or (ii) to deliver a replacement Note to Holder within seven (7) business days
following the required date of such issuance pursuant to this Note, the Purchase
Agreement or any Related Agreement (to the extent required under such
agreements).

 

4.9 Default Under Related Agreements or Other Agreements. The occurrence and
continuance of any Event of Default (as defined in the Purchase Agreement or any
Related Agreement) or any event of default (or similar term) under any other
indebtedness of the Borrower or any of its Subsidiaries.

 

4.10 Change in Control. (i) Any “Person” or “group” (as such terms are defined
in Sections 13(d) and 14(d) of the Exchange Act, as in effect on the date
hereof) is or becomes the “beneficial owner” (as defined in Rules 13(d)-3 and
13(d)-5 under the Exchange Act), directly or indirectly, of 35% or more on a
fully diluted basis of the then outstanding voting equity interest of the
Borrower or (ii) the Board of Directors of the Borrower shall cease to consist
of a majority of the Board of Directors of the Borrower on the date hereof (or
directors appointed by a majority of the Board of Directors in effect
immediately prior to such appointment).

 

DEFAULT RELATED PROVISIONS

 

4.11 Default Interest Rate. Following the occurrence and during the continuance
of an Event of Default, the Borrower shall pay additional interest on this Note
in an amount equal to two percent (2%) per month, and all outstanding
obligations under this Note, including unpaid interest, shall continue to accrue
such additional interest from the date of such Event of Default until the date
such Event of Default is cured or waived.

 

9 of 15

--------------------------------------------------------------------------------

4.12 Conversion Privileges. The conversion privileges set forth in Article III
shall remain in full force and effect immediately from the date hereof and until
this Note is paid in full.

 

4.13 Cumulative Remedies. The remedies under this Note shall be cumulative.

 

ARTICLE V

MISCELLANEOUS

 

5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the
Holder hereof 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. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

5.2 Notices. Any notice herein required or permitted to be given shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
Borrower at the address provided in the Purchase Agreement executed in
connection herewith, and to the Holder at the address provided in the Purchase
Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third
Avenue, 14th Floor, New York, New York 10022, facsimile number (212) 541-4434,
or at such other address as the Borrower or the Holder may designate by ten days
advance written notice to the other parties hereto. A Notice of Conversion shall
be deemed given when made to the Borrower pursuant to the Purchase Agreement.

 

5.3 Amendment Provision. The term “Note” and all reference thereto, as used
throughout this instrument, shall mean this instrument as originally executed,
or if later amended or supplemented, then as so amended or supplemented, and any
successor instrument issued pursuant to Section 3.5 hereof, as it may be amended
or supplemented.

 

5.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Purchase Agreement. This Note shall not be assigned by the
Borrower without the consent of the Holder.

 

5.5 Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of New York, without regard to principles of
conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individual signing this Note on behalf of the
Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney’s fees and costs. In the event that any provision of this Note is

 

10 of 15

--------------------------------------------------------------------------------

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 unenforceability 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 Borrower in any
other jurisdiction to collect on the Borrower’s obligations to Holder, to
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court in favor of the Holder.

 

5.6 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 Borrower to the Holder and thus refunded to the Borrower.

 

5.7 Security Interest and Guarantee. The Holder has been granted a security
interest (i) in certain assets of the Borrower and its Subsidiaries as more
fully described in the Master Security Agreement dated as of the date hereof and
(ii) pursuant to the Stock Pledge Agreement dated as of the date hereof. The
obligations of the Borrower under this Note are guaranteed by certain
Subsidiaries of the Borrower pursuant to the Subsidiary Guaranty dated as of the
date hereof.

 

5.8 Construction. Each party acknowledges that its legal counsel participated in
the preparation of this Note and, therefore, stipulates that the rule of
construction that ambiguities are to be resolved against the drafting party
shall not be applied in the interpretation of this Note to favor any party
against the other.

 

5.9 Cost of Collection. If default is made in the payment of this Note, the
Borrower shall pay to Holder reasonable costs of collection, including
reasonable attorney’s fees.

 

[Balance of page intentionally left blank; signature page follows.]

 

11 of 15

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its name
effective as of this 29th day of September, 2004.

 

COACH INDUSTRIES GROUP, INC. By:  

 

--------------------------------------------------------------------------------

Name:

   

Title:

   

 

WITNESS:

 

--------------------------------------------------------------------------------

 

12 of 15

--------------------------------------------------------------------------------

EXHIBIT A

 

NOTICE OF CONVERSION

 

(To be executed by the Holder in order to convert all or part of the Note into
Common Stock

 

[Name and Address of Holder]

 

The Undersigned hereby converts $             of the principal due on [specify
applicable Repayment Date] under the Convertible Term Note issued by Coach
Industries Group, Inc. dated September     , 2004 by delivery of Shares of
Common Stock of Coach Industries Group, Inc. on and subject to the conditions
set forth in Article III of such Note.

 

1.    Date of Conversion  

 

--------------------------------------------------------------------------------

     2.    Shares To Be Delivered:  

 

--------------------------------------------------------------------------------

    

 

By:  

 

--------------------------------------------------------------------------------

Name:  

 

--------------------------------------------------------------------------------

Title:  

 

--------------------------------------------------------------------------------

 

13 of 15

--------------------------------------------------------------------------------

[PAGE INTENTIONALLY BLANK]

 

14 of 15

--------------------------------------------------------------------------------

[PAGE INTENTIONALLY BLANK]