exv10w2



 







Exhibit 10.2




[FORM OF SENIOR 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. NEITHER THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE MAY BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) THE PROVISION OF REASONABLE
ASSURANCES THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE
144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING
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.




Touchstone Resources USA, Inc.




Senior Convertible Note




	 	 	 
	Issuance Date: April 4, 2006

	 	Principal: U.S. $                    






          FOR VALUE RECEIVED, Touchstone Resources USA, Inc., a Delaware corporation, (the “Company”),
hereby promises to pay to [KINGS ROAD HOLDINGS II LLC] [CAPITAL VENTURES INTERNATIONAL] [SF CAPITAL
PARTNERS LTD.] [RHP MASTER FUND, LTD] or registered assigns (“Holder”) the amount set out above as
the Principal (as reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date, on any Installment Date with
respect to the Installment Amount due on such Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any outstanding Principal at the rate of 7.5% per annum (the “Interest
Rate”), from the date set out above as the Issuance Date (the “Issuance Date”) until the same
becomes due and payable, whether upon an Interest Date (as defined below), any Installment Date,
the Maturity Date, acceleration, conversion, redemption or otherwise (in each case, in accordance
with the terms hereof). This Senior Convertible Note (including all Senior 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 (collectively, the “Notes” and such other Senior
Convertible Notes, the “Other Notes”). Certain capitalized terms used herein are defined in
Section 28.




          (1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the
Company and 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, if any.




          (2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 360-day year comprised of twelve 30-day
months and shall be payable in arrears on the last day of each Calendar Quarter during the period
beginning on the Issuance Date and ending on, and including, the Maturity Date (each, an “Interest
Date”) with the first Interest Date being June 30, 2006. Interest shall be payable on each
Interest Date in cash. Prior to the payment of Interest on an Interest Date, Interest on this Note
shall accrue at the Interest Rate. Upon the occurrence and during the continuance of an Event of
Default, the Interest Rate shall be increased to twelve percent (12%) per annum (the “Default
Rate”). 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 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 cure of such Event of Default. Interest on overdue
interest shall accrue at the same rate compounded quarterly.




          (3) CONVERSION OF NOTES. This Note shall be convertible into shares of common stock
of the Company, par value $0.001 per share (the “Common Shares”), 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
Common Shares in accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a Common Share upon any conversion. If the issuance would
result in the issuance of a fraction of a Common Share, the Company shall round such fraction of a
Common Share up to the nearest whole share. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Shares upon conversion of any
Conversion Amount.



               (b) Conversion Rate. The number of Common Shares 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 (such number of shares, 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.



     (ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other date of
determination a price equal to $1.06, subject to adjustment as provided herein.



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               (c) Mechanics of Conversion.



                    (i) Optional Conversion. To convert any Conversion Amount into Common Shares on any
date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), 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 common carrier for
delivery to the Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or destruction). On or before
the first (1st) Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a 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) (x) provided that the Transfer Agent is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate
number of Common Shares to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system or (y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue
and deliver to the address as specified in the Conversion Notice, a certificate, registered in the
name of the Holder or its designee, for the number of Common Shares to which the Holder shall be
entitled and (2) pay to the Holder in cash an amount equal to the accrued and unpaid Interest on
the Conversion Amount plus any accrued and unpaid Late Charges on the Conversion Amount,
each up to and including the Conversion Date. 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 five (5) Trading Days after receipt of this Note and at
its own expense, issue and deliver to the holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal not converted. The Person or Persons entitled to receive
the Common Shares issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such Common Shares on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the principal amount converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the Conversion Notice.



                    (ii) Failure to Timely Convert. If the Company shall fail to issue a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of Common Shares to which
the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is
three (3) Trading Days after the Conversion Date (a “Conversion Failure”), then (A) the Company
shall pay damages to the Holder for each day of such Conversion Failure in an amount equal to 1.5%
of the product of (I) the sum of the number of Common Shares not issued to the Holder on or prior
to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of
the Common Shares on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have returned, as the case
may be, any portion of this Note that has not been converted pursuant to such Conversion Notice;
provided that the voiding of a Conversion Notice shall not affect the Company’s obligations
to make any payments which have accrued prior to the date of such notice pursuant to this Section
3(c)(ii) or otherwise. In addition



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to the foregoing, if within three (3) Trading Days after the Company’s receipt of the
facsimile copy of a Conversion Notice, the Company shall fail to issue and deliver a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of Common Shares to which
the Holder is entitled upon such holder’s conversion of any Conversion Amount, and if on or after
such Trading Day the Holder purchases (in an open market transaction or otherwise) Common Shares to
deliver in satisfaction of a sale by the Holder of Common Shares issuable upon such conversion that
the Holder anticipated receiving from the Company (a “Buy-In”), then 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 Common Shares so purchased (the
“Buy-In Price"), at which point the Company’s obligation to deliver such certificate (and to issue
such Common Shares) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder
a certificate or certificates representing such Common Shares 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
Common Shares times (B) the Closing Bid Price on the Conversion Date.



                    (iii) Book-Entry. 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. The Holder and the Company shall maintain records showing the
Principal converted and the dates of such conversions 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 cause the Company to 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 Common Shares issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the Holder the number of
Common Shares not in dispute and resolve such dispute in accordance with Section 23.



               (d) Limitations on Conversions. The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any portion of this Note
pursuant to Section 3(a), to the extent that after giving effect to such conversion, the Holder
(together with the Holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum
Percentage”) of the number of Common Shares outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of Common Shares beneficially owned
by the Holder and its affiliates shall include the number of Common Shares issuable upon conversion
of this Note with respect to which the



4









 







determination of such sentence is being made, but shall exclude the number of Common Shares
which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company (including, without
limitation, any Other Notes or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). For purposes of this Section 3(d)(i), in
determining the number of outstanding Common Shares, the Holder may rely on the number of
outstanding Common Shares as reflected in (x) the Company’s most recent Form 10-K, Form 10-Q or
Form 8-K, as the case may be (y) a more recent public announcement by the Company or (z) any other
notice by the Company or the Transfer Agent setting forth the number of Common Shares outstanding.
For any reason at any time, upon the written or oral request of the Holder, the Company shall
within one (1) Trading Day confirm orally and in writing to the Holder the number of Common Shares
then outstanding. In any case, the number of outstanding Common Shares shall be determined after
giving effect to the conversion or exercise of securities of the Company, including this Note, by
the Holder or its affiliates since the date as of which such number of outstanding Common Shares
was reported. By written notice to the Company, the 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 sixty-first (61st) day after such
notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the
Holder and not to any other holder of Notes.



          (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 required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is
sixty (60) days after the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, 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 is unavailable to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10)
consecutive days or for more than an aggregate of thirty (30) days in any 365-day period (other
than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));



                    (ii) the suspension from trading or failure of the Common Shares to be listed on an Eligible
Market for a period of seven (7) consecutive Trading Days or for more than an aggregate of twelve
(12) Trading Days in any 365-day period;



5









 





                    (iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of Common Shares within ten (10) Trading Days after the applicable Conversion Date or (B)
notice, written or oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into Common Shares that is tendered in accordance with the provisions of
the Notes;



                    (iv) (A) at any time prior to the Stockholder Approval (as defined in the Securities Purchase
Agreement) (1) following the tenth (10th) consecutive Trading Day that all of the
Company’s authorized and unissued Common Shares are not reserved in respect of the Notes or (2)
that the Company has issued, or authorized or reserved for issuance, any of its Common Shares,
whether or not pursuant to Options, warrants or any other derivative security, to a Person other
than the Holder or the holders of the Other Notes in accordance with the Transaction Documents or
(B) at any time on or after the Stockholder Approval following the tenth (10th)
consecutive Trading Day that the number of Common Shares that are available for issuance to the
Holder is less than the number of Common Shares 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);



                    (v) the Company’s failure to pay to the Holder any amount of Principal (including, without
limitation, the Company’s failure to pay any redemption payments), Interest, Late Charges or other
amounts when and as due under this Note or any other Transaction Document (as defined in the
Securities Purchase Agreement), except, in the case of a failure to pay Interest and Late Charges
when and as due, in which case only if such failure continues for a period of at least three (3)
Trading Days;



                    (vi) the occurrence of any default under, redemption of or acceleration prior to maturity of
Indebtedness of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) other than with respect to any Other Notes;



                    (vii) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11,
U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively,
“Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general assignment for the
benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as
they become due;



                    (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law
that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B)
appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;



                    (ix) a final judgment or judgments are rendered against the Company or any of its Subsidiaries
pursuant to which the Company or its Subsidiary, as the case may be, is responsible for the payment
of money aggregating in excess of $100,000 and which



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judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or
stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such
stay; provided, however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $100,000 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 clearly covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such judgment;



                    (x) other than as set forth in item (xi) below, the Company breaches any representation,
warranty, covenant or other term or condition of any Transaction Document, except, in the case of a
breach of a covenant which is curable, only if such breach continues for a period of at least
fifteen (15) consecutive Trading Days;



                    (xi) any breach or failure in any respect to comply with either of Sections 8 or 14 of this
Note; or



                    (xii) any Event of Default (as defined in the Other Notes) occurs with respect to any Other
Notes.



               (b) Redemption Right. Promptly after the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall deliver written notice thereof via
facsimile and overnight courier (an “Event of Default Notice”) to the Holder. 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 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 (x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii) the
product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time as
the Holder delivers an Event of Default Redemption Notice and (B) the Closing Sale Price of the
Common Shares on the date immediately preceding such Event of Default (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 12(b). In the event of a partial redemption of this Note pursuant hereto,
the Principal amount redeemed shall be deducted from the Installment Amounts relating to the
applicable Installment Dates as set forth in the Event of Default Redemption Notice.



          (5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.




               (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



7









 







reasonably satisfactory to the Required Holders and approved by the Required Holders prior to
such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange
for such Notes a security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the Principal amounts and the Interest Rates of the Notes held by
such holder, having similar conversion rights as the Notes, having similar ranking to the Notes,
and satisfactory to the Required Holders and (ii) the Successor Entity (including its Parent
Entity) is a publicly traded corporation whose common shares are 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 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 with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of the Fundamental Transaction, the Successor
Entity (if other than the Company) 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 the
Fundamental Transaction, in lieu of the Company’s Common Shares (or other securities, cash, assets
or other property) purchasable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such publicly traded common shares (or their equivalent) of the Successor
Entity (including its Parent Entity), as adjusted in accordance with the provisions of this Note.
The provisions of this Section shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations on the conversion or redemption
of this Note.



               (b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10) 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 during the period (the “Change
of Control Period”) beginning after the Holder’s receipt of a Change of Control Notice and ending
on the date that is twenty (20) Trading Days after the consummation of such Change of Control, 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 125% of the greater of (x) the sum of (1) the Conversion Amount
being redeemed and (2) the amount of any accrued but unpaid Interest thereon through the date of
such redemption payment and (y) the sum of (1) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient determined by dividing (I) the aggregate cash consideration
and the aggregate cash value of any non-cash consideration per Common Share to be paid to the
holders of the Common Shares upon consummation of the Change of Control (any such non-cash
consideration consisting of marketable securities to be valued at the higher of the Closing Sale
Price of such securities as of the Trading Day immediately prior to or the Trading Day following
the public announcement of such proposed Change of Control) by (II) the Conversion Price plus (2)
the amount of any accrued but unpaid Interest on such Conversion Amount being redeemed through the
date of such redemption payment (the “Change of Control Redemption Price”). Redemptions required
by this Section 5 shall be made in accordance with the provisions of



8









 







Section 12(b) and shall have priority to payments to shareholders in connection with a Change
of Control. Notwithstanding anything to the contrary in this Section 5, until the Change of
Control Redemption Price (together with any interest thereon) is paid in full, the Conversion
Amount submitted for redemption under this Section 5(b) may be converted, in whole or in part, by
the Holder into Common Shares, or in the event the Conversion Date is after the consummation of the
Change of Control, shares or equity interests of the Successor Entity substantially equivalent to
the Company’s Common Shares pursuant to Section 3.



          (6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.




               (a) Purchase Rights. If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase shares, warrants, securities or other property pro
rata to all record holders of any class of Common Shares (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 Common
Shares 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 Shares are to be determined for
the grant, issue or sale of such Purchase Rights.



               (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 Common Shares are entitled to receive securities or other assets with respect to or in
exchange for Common Shares (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, at
the Holder’s option, (i) in addition to the Common Shares receivable upon such conversion, such
securities or other assets to which the Holder would have been entitled with respect to such Common
Shares had such Common Shares 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 Common Shares otherwise receivable upon such conversion, such securities or
other assets received by the holders of Common Shares 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
Common Shares) 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 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.



          (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.




               (a) Adjustment of Conversion Price upon Issuance of Common Shares. 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 Common Shares



9









 




(including the issuance or sale of Common Shares owned or held by or for the account of the
Company, but excluding Common Shares deemed to have been issued or sold by the Company in
connection with any Excluded Security) for a consideration per share (the “New Issuance Price”)
less than a price (the “Applicable Price”) equal to the Conversion Price in effect immediately
prior to such issue or sale or deemed issuance or sale (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 Common Share is issuable upon the exercise of any such
Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such Common Share 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 Common Share is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon exercise of 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 Common Share upon granting or sale of the Option,
upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Shares or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such Common Shares upon conversion or exchange or
exercise 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 Common Share is issuable
upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such
Common Share 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 Common Share is
issuable upon such conversion or exchange or exercise” 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
Common Share upon the issuance or sale of the Convertible Security and upon the conversion or
exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such Common Shares upon conversion or exchange or
exercise 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 had
been or are to be made pursuant to other provisions of this Section 7(a), no further adjustment of
the Conversion Price shall be made by reason of such issue or sale.



                    (iii) Change in Option Price or Rate of Conversion. If the purchase price provided
for in any Options, the additional consideration, if any, payable upon the issue, conversion,
exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable or exercisable for Common Shares



10









 







changes at any time, the Conversion Price in effect at the time of such change 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 changed purchase price, additional consideration or
changed 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 changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common Shares deemed issuable
upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of
such change. No adjustment 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 in which no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued for a consideration of $.01. If
any Common Shares, 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 Common Shares, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of receipt. If any Common
Shares, 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 Common Shares, Options or
Convertible Securities, as the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the Required Holders. 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 the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders. The determination of
such appraiser shall be deemed binding upon all parties absent manifest error and the fees and
expenses of such appraiser shall be borne by the Company.



                    (v) Record Date. If the Company takes a record of the holders of Common Shares for
the purpose of entitling them (A) to receive a dividend or other distribution payable in Common
Shares, Options or in Convertible Securities or (B) to subscribe for or purchase Common Shares,
Options or Convertible Securities, then such record date will be deemed to be the date of the issue
or sale of the Common Shares 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 Shares.
If the Company at any time on or after the Subscription Date subdivides (by any share split, share
dividend, recapitalization or otherwise) one or more classes of its



11









 







outstanding Common Shares 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 share split or otherwise) one
or more classes of its outstanding Common Shares into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination will be proportionately increased.



               (c) Other Events. 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 share appreciation rights, phantom share rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 7.



          (8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.




               (a) General. Subject to and in accordance with the terms of this Section 8, on each
applicable Installment Date, the Company shall pay to the Holder of this Note the Installment
Amount as of such Installment Date by the combination of any of the following, (i) provided that
there has been no Equity Conditions Failure, requiring the conversion of a portion of the
applicable Installment Amount, in whole or in part, in accordance with this Section 8 (a “Company
Conversion”), and/or (ii) redeeming for cash the applicable Installment Amount, in whole or in
part, in accordance with this Section 8 (a “Company Redemption”); provided that all of the
outstanding applicable Installment Amount as of each such Installment Date must be converted and/or
redeemed by the Company on the applicable Installment Date, subject to the provisions of this
Section 8. Unless the Company Installment Notice (as defined below) indicates otherwise or if
there is an Equity Conditions Failure, the entire Installment Amount to be paid on such Installment
Date shall be paid through a Company Conversion. On or prior to the date which is the tenth
(10th) Trading Day prior to each Installment Date (each, an “Installment Notice Due
Date”), the Company shall deliver written notice (each, a “Company Installment Notice”) to the
Holder which Company Installment Notice shall state (i) the portion, if any, of the applicable
Installment Amount to be converted pursuant to a Company Conversion, which amount when added to the
Company Redemption Amount must equal the applicable Installment Amount; provided that the Company
shall not convert an Installment Amount under this section in excess of the Holder’s Pro Rata
Amount of 15% of the aggregate dollar trading volume (as reported on Bloomberg) of the Common
Shares over the twenty (20) consecutive Trading Day period ending on the Trading Day immediately
preceding the applicable Installment Date (the “Company Conversion Amount”), (ii) the portion, if
any, of the applicable Installment Amount which the Company elects to redeem pursuant to a Company
Redemption (the “Company Redemption Amount”), which amount when added to the Company Conversion
Amount must equal the applicable Installment Amount and (iii) unless the Company has elected to pay
the applicable Installment Amount entirely through a Company Redemption, the Company Installment
Notice shall certify that the Equity Conditions have been satisfied as of the date of the Company
Installment Notice. Each Company Installment Notice whether actually given or deemed given shall
be irrevocable. Except as expressly provided in this Section 8(a), the Company shall redeem and
convert the applicable Installment Amount of this Note pursuant



12









 







to this Section 8 and the corresponding Installment Amounts of the Other Notes pursuant to the
corresponding provisions of the Other Notes in the same ratio of the Installment Amount being
redeemed and converted hereunder. The Company Redemption Amount (whether set forth in the Company
Installment Notice or by operation of this Section 8) shall be redeemed in accordance with Section
8(b) and the Company Conversion Amount shall be converted in accordance with Section 8(c).



               (b) Mechanics of Company Redemption. If the Company elects, or is deemed to have
elected, a Company Redemption in accordance with Section 8(a), then the Company Redemption Amount,
if any, which is to be paid to the Holder on the applicable Installment Date shall be redeemed by
the Company on such Installment Date, and the Company shall pay to the Holder on such Installment
Date, by wire transfer of immediately available funds, an amount in cash (the “Company Installment
Redemption Price”) equal to 100% of the Company Redemption Amount. If the Company fails to redeem
the Company Redemption Amount on the applicable Installment Date by payment of the Company
Installment Redemption Price on such date, then at the option of the Holder designated in writing
to the Company (any such designation, a “Conversion Notice” for purposes of this Note), the Holder
may require the Company to convert all or any part of the Company Redemption Amount at the Company
Conversion Price. Conversions required by this Section 8(b) shall be made in accordance with the
provisions of Section 3(c). Notwithstanding anything to the contrary in this Section 8(b), but
subject to Section 3(d), until the Company Installment Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Shares pursuant to Section 3. In the
event the Holder elects to convert all or any portion of the Company Redemption Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence, the Company
Redemption Amount so converted shall be deducted from the Installment Amounts relating to the
Installment Dates as set forth in the applicable Conversion Notice.



               (c) Mechanics of Company Conversion.



                    (i) Subject to Section 3(d), if the Company pays any part of an Installment Amount pursuant to
a Company Conversion in accordance with Section 8(a), then on the Trading Day prior to the
Installment Date the Company shall (i) cause the Transfer Agent to deliver to the Holder’s account
with DTC a number of Common Shares equal to the quotient of (x) such Company Conversion Amount
divided by (y) the Initial Company Conversion Price (the “Pre-Installment Conversion Shares”) and
(ii) pay to the Holder, in cash by wire transfer of immediately available funds, the amount of any
accrued and unpaid interest on such Company Conversion Amount and any accrued and unpaid Late
Charges on such Conversion Amount and Interest. On the Trading Day immediately after the end of
the Company Conversion Measuring Period (the “Installment Settlement Date”), the Company shall, or
shall direct the Transfer Agent to, deliver to the Holder’s account with DTC a number of additional
Conversion Shares, if any, equal to the Installment Balance Conversion Shares. If an Event of
Default occurs during any applicable Company Conversion Measuring Period and the Holder elects an
Event of Default Redemption in accordance with Section 4(b), then, at the Holder’s option, either
(A) the Holder, upon receipt of the Event of Default Redemption Price (which Redemption Price
includes redemption of any portion of a Company Conversion Amount represented by Pre-



13









 







Installment Conversion Shares that the Holder shall return to the Company), shall return any
Pre-Installment Conversion Shares delivered in connection with the applicable Installment Date,
which the Holder has not otherwise sold, transferred or disposed of, to the Company or (B) the
Conversion Amount used to calculate the Event of Default Redemption Price shall be reduced by the
product of (I) the Company Conversion Amount applicable to such Installment Date multiplied by (II)
the Conversion Share Ratio.



                    (ii) If there is an Equity Conditions Failure, then at the option of the Holder designated in
writing to the Company, the Holder may require the Company to do any one or both of the following:
(x) the Company shall redeem all or any part designated by the Holder of the unconverted Company
Conversion Amount (such designated amount is referred to as the “First Redemption Amount”) on such
Installment Date or Installment Settlement Date, as applicable, and the Company shall pay to the
Holder on such Installment Date or Installment Settlement Date, as applicable, by wire transfer of
immediately available funds, an amount in cash equal the First Redemption Amount, or (y) the
Company Conversion shall be null and void with respect to all or any part designated by the Holder
of the unconverted Company Conversion Amount and the Holder shall be entitled to all the rights of
a holder of this Note with respect to such amount of the Company Conversion Amount; provided,
however, that the Conversion Price for such unconverted Company Conversion Amount shall thereafter
be adjusted to equal the lesser of (1) the Company Conversion Price as in effect on the date on
which the Holder voided the Company Conversion and (2) the Company Conversion Price as in effect on
the date on which the Holder delivers a Conversion Notice relating thereto. In the event of an
Equity Conditions Failure, at the Holder’s option, either (A) the Holder shall, upon receipt of a
First Redemption Amount (which amount includes redemption of any portion of a Company Conversion
Amount represented by Pre-Installment Conversion Shares that the Holder shall return to the
Company), return any Pre-Installment Conversion Shares delivered in connection with the applicable
Installment Date, which the Holder has not otherwise sold, transferred or disposed of, to the
Company or (B) any related First Redemption Amount shall be reduced by the product of (I) the
Company Conversion Amount applicable to such Installment Date multiplied by (II) the Conversion
Share Ratio. If the Company fails to redeem any First Redemption Amount on or before the
applicable Installment Date or Installment Settlement Date, as applicable, by payment of such
amount on the applicable Installment Date or Installment Settlement Date, as applicable, then the
Holder shall have the rights set forth in Section 12(b) as if the Company failed to pay the
applicable Company Redemption Price and all other rights under this Note (including, without
limitation, such failure constituting an Event of Default described in Section 4(a)(xi)).
Notwithstanding anything to the contrary in this Section 8(c), but subject to 3(d), until the
Company delivers Common Shares representing the Company Conversion Amount to the Holder, the
Company Conversion Amount may be converted by the Holder into Common Shares pursuant to Section 3.
In the event the Holder elects to convert the Company Conversion Amount prior to the applicable
Installment Date as set forth in the immediately preceding sentence, the Company Conversion Amount
so converted shall be deducted from the Installment Amounts relating to the Installment Dates as
set forth in the applicable Conversion Notice.



               (d) Deferred Installment Amount. Notwithstanding any provision of this Section 8 to
the contrary, the Holder may, at its option and in its sole discretion, deliver a notice to the
Company at least five (5) Trading Days prior to the applicable Installment Date



14









 







electing to have all or any portion of the Installment Amount payable on such Installment Date
(such amount, the “Deferral Amount”) deferred until one or more later Installment Dates (each, a
“Deferral Date”). Any notice delivered by either the Holder pursuant to this Section 8(d) shall
set forth (A) the Deferral Amount and (B) the Deferral Date(s).



          (9) COMPANY’S RIGHT OF MANDATORY CONVERSION.




               (a) Mandatory Conversion. If at any time from and after the one-year anniversary of
the Effective Date (the “Mandatory Conversion Eligibility Date”) (i) the Closing Sale Price of the
Common Shares equals or exceeds 125% of the Conversion Price on the Issuance Date (subject to
appropriate adjustments for share splits, share dividends, share combinations and other similar
transactions after the Subscription Date) for each of any twenty (20) consecutive Trading Days
following the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring Period”)
and (ii) the Equity Conditions shall have been satisfied during the period commencing on the
Mandatory Conversion Notice Date through the applicable Mandatory Conversion Date (each, as defined
below), then the Company shall have the right to require the Holder to convert all or any
designated portion of the Conversion Amount then remaining under this Note as designated in the
Mandatory Conversion Notice (as defined below) into fully paid, validly issued and nonassessable
Common Shares in accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory
Conversion Date (as defined below) (a “Mandatory Conversion”). The Company may exercise its right
to require conversion under this Section 9(a) by delivering within not more than two (2) Trading
Days following the end of such Mandatory Conversion Measuring Period a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders of Notes and the
Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”). The Mandatory
Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section 9(a), which Trading
Day shall be at least ten (10) Trading Days but not more than sixty (60) Business Days following
the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the aggregate
Conversion Amount of the Notes subject to such Mandatory Conversion from the Holder and all of the
holders of the Notes pursuant to this Section 9 (and analogous provisions under the Other Notes),
and (iii) the number of Common Shares to be issued to such Holder on the Mandatory Conversion Date;
provided, however, that the Company shall not convert a Conversion Amount under this Section in
excess of the Holder’s Pro Rata Amount of 25% of the aggregate dollar trading volume (as reported
on Bloomberg) of the Common Shares over the twenty (20) consecutive Trading Day period ending on
the Trading Day immediately preceding the Mandatory Conversion Notice Date; provided further that
nothing in this Section 9(a) shall, in any way or at any time (including, for the benefit of doubt,
at any time following the time that the Company provides a Mandatory Conversion Notice), limit the
ability of the Holder to exercise its right to convert Common Shares pursuant to Section 3. All
Conversion Amounts converted by the Holder after the Mandatory Conversion Notice Date shall reduce
the Conversion Amount of this Note required to be converted on the Mandatory Conversion Date. The
Company may not effect more than one (1) Mandatory Conversion during any consecutive thirty (30)
Trading Day period. The Company may not exercise its right to a Mandatory Conversion if it has not
reserved and made available out of its authorized and unissued shares of Common Stock the number of
shares of Common Stock as is necessary to allow the exercise of



15









 







any Series B Warrants (as defined in the Securities Purchase Agreement) that are exercisable
after such Mandatory Conversion.



               (b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 9(a), then it must simultaneously take the
same action in the same proportion with respect to the Other Notes. If the Company has elected a
Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shall apply, to the
extent applicable, as if the Company and the Transfer Agent had received from the Holder on the
Mandatory Conversion Date a Conversion Notice with respect to the Conversion Amount being converted
pursuant to the Mandatory Conversion.



          (10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Articles of Incorporation, Bylaws 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.




          (11) RESERVATION OF AUTHORIZED SHARES.




               (a) Reservation. Commencing on the Issuance Date and until the Capital Increase has
been obtained, the Company shall reserve in respect of the Notes all of its authorized and unissued
Common Shares, which amount shall be sufficient to convert no less than 100% of the Notes at the
initial Conversion Price. Immediately upon the Company’s obtaining the Stockholder Approval, the
Company shall reserve out of its authorized and unissued Common Shares a number of Common Shares
for each of the Notes equal to 130% of the Conversion Rate with respect to the Conversion Amount of
each such Note as of the Issuance Date and, for so long thereafter 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 Shares, solely for the purpose of effecting the conversion of the
Notes, 130% of the number of Common Shares 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
Common Shares 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 Common Shares 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 principal amount of the Notes held by each holder at the Closing (as defined in the Securities
Purchase Agreement) 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 Common Shares 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 at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved



16









 







Common Shares to satisfy its obligation to reserve for issuance upon conversion of the Notes
at least a number of Common Shares 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 Common Shares 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 ninety (90) days after the occurrence of such Authorized Share Failure,
the Company shall hold a meeting of its shareholders for the approval of an increase in the number
of authorized Common Shares. In connection with such meeting, the Company shall provide each
shareholder with a proxy statement and shall use its commercially reasonable best efforts to
solicit its shareholders’ approval of such increase in authorized Common Shares and to cause its
board of directors to recommend to the shareholders that they approve such proposal.



          (12) HOLDER’S REDEMPTIONS.




               (a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Trading 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), then the Company shall deliver the applicable Change of Control
Redemption Price to the Holder 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) Trading
Days after the Company’s receipt of such notice otherwise (the “Change of Control 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 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
representing such Conversion Amount and (z) the Conversion Price of this Note or such new Notes
shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the
Redemption Notice is voided and (B) the lowest Closing Bid Price of the Common Shares during the
period beginning on and including the date on which the Redemption Notice is delivered to the
Company and ending on and including the date on which the Redemption Notice is voided. 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



17









 







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) Trading 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) Trading Day period beginning on and including the date which is three (3)
Trading Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and
including the date which is three (3) Trading Days after the Company’s receipt of the Holder’s
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) Trading 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) Trading Day period.



          (13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as provided by law, the Delaware General Corporation Law and as expressly provided in
this Note.




          (14) COVENANTS.




               (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 now in
existence or hereinafter created.



               (b) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, 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. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, 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; Restricted Distribution. The Company shall not, and the
Company shall not permit any of its Subsidiaries to, 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 Permitted Indebtedness, 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, an event constituting,
or that with the passage of time and without being cured would constitute, an Event of Default, has
occurred and is continuing. In addition, the Company shall not make any Distribution (as defined
below) without the written consent of the Required Holders.



18









 





          (15) RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common
Shares, by way of return of capital or otherwise (including, without limitation, any distribution
of cash, shares or other securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a
“Distribution”), at any time after the issuance of this Note, then, in each such case any
Conversion Price in effect immediately prior to the close of business on the record date fixed for
the determination of holders of Common Shares entitled to receive the Distribution shall be
reduced, effective as of the close of business on such record date, to a price determined by
multiplying such Conversion Price by a fraction of which (i) the numerator shall be the Closing Bid
Price of the Common Shares on the trading day immediately preceding such record date minus the
value of the Distribution (as determined in good faith by the Company’s Board of Directors)
applicable to one Common Share, and (ii) the denominator shall be the Closing Bid Price of the
Common Shares on the trading day immediately preceding such record date.




          (16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote, at a meeting
duly called for such purpose or the written consent without a meeting, of the Required Holders
shall be required for any change or amendment to this Note or the Other Notes. Any change or
amendment so approved shall be binding upon all existing and future holders of this Note and any
Other Notes. No consideration shall be offered or paid to any Holder of the Notes to amend or
consent to a waiver or modification of any provision of any of the Notes unless the same
consideration is also offered to all of the Holders of the Notes.




          (17) TRANSFER. This Note and any Common Shares 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(f) of the Securities Purchase Agreement.




          (18) REISSUANCE OF THIS NOTE.




               (a) Transfer. If this Note is to be transferred, then 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 then 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.



               (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,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary 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.



19









 





               (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 $100,000) 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 on the Principal of this Note and any accrued and unpaid Late Charges on the Principal and
Interest of this Note, in each case 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. 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.




          (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, but not limited to, attorneys’ fees and disbursements.




          (21) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly

20









 








drafted by the Company and all the Holders 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.




          (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.




          (23) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Trading Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within one (1) Trading Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one (1)
Trading Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the
Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank
reasonably selected by the Company and approved by the Holder, or if the Company and the Holder
cannot agree on such bank, the Company shall select two independent reputable investment banks and
the Holder shall select one to serve on a panel, (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company’s independent, outside accountant. The
Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Trading Days from the time it receives the disputed determinations
or calculations. Such investment bank’s or accountant’s determination or calculation, as the case
may be, shall be binding upon all parties absent demonstrable error.




          (24) NOTICES; 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 twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Shares, (B) with respect to any
pro rata subscription offer to holders of Common Shares 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.



21









 





               (b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Holders, shall initially be as set forth on the Schedule of Buyers attached to the
Securities Purchase Agreement); provided that the Holder may elect to receive a payment of 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. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Trading Day, the
same shall instead be due on the next succeeding day which is a Trading Day and, in the case of any
Interest Date which is not the date on which this Note is paid in full, the extension of the due
date thereof shall not be taken into account for purposes of determining the amount of Interest due
on such date. Any amount of Principal or other amounts due under the Transaction Documents, other
than Interest, 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 fifteen percent (15%)
per annum from the date such amount was due until the same is paid in full (“Late Charge”).




22










 







          (25) CANCELLATION. After all Principal, accrued Interest, any 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 waives
demand, notice, protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note and the 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. 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 and waive trial by jury. Both parties 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 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.




          (28) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have
the following meanings:




               (a) “AMEX” means the American Stock Exchange.



               (b) “Approved Share Plan” means any employee benefit plan which has been approved by the Board
of Directors of the Company, pursuant to which the Company’s securities may be issued to any
employee, officer or director for services provided to the Company.



               (c) “Bloomberg” means Bloomberg Financial Markets.



               (d) “Calendar 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.



23









 





               (e) “Change of Control” means any Fundamental Transaction other than (i) 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, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.



               (f) “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 pursuant to Section 23. All such determinations to be appropriately adjusted for any
share dividend, share split, share combination or other similar transaction during the applicable
calculation period.



               (g) “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.



               (h) “Company Conversion Price” means, as of any date of determination, that price which shall
be the lower of (i) the applicable Conversion Price and (ii) the price computed as 85% of the
arithmetic average of the Weighted Average Price of the Common Shares on the Principal Market
during each of the twelve (12) consecutive Trading Days commencing on the Trading Day immediately
after the applicable Installment Date (such period, the “Company Conversion Measuring Period”).



               (i) “Contingent Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person



24









 




incurring such liability, or the primary effect thereof, is to provide assurance to the
obligee of such liability that such liability will be paid or discharged, or that any agreements
relating thereto will be complied with, or that the holders of such liability will be protected (in
whole or in part) against loss with respect thereto.




               (j) “Conversion Share Ratio” means, as to any applicable date of determination, the quotient
of (i) the number of Pre-Installment Conversion Shares delivered in connection with such
Installment Date divided by (ii) the number of Post-Installment Conversion Shares relating
to such Installment Date.



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



               (l) “Effective Date” means the date on which the Registration Statement filed pursuant to the
Registration Rights Agreement is declared effective by the SEC.



               (m) “Eligible Market” means the Principal Market, AMEX, The New York Stock Exchange, Inc,
NASDAQ or The Nasdaq Capital Market.



               (n) “Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning six (6) months prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), either (x) the Registration Statement filed pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all remaining Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall not have been any
Grace Periods (as defined in the Registration Rights Agreement) or (y) all Common Shares issuable
upon conversion or redemption of the Notes, payment of Installment Amounts and exercise of the
Warrants shall be eligible for sale without restriction and without the need for registration under
any applicable federal or state securities laws and such shares shall be freely tradable on an
Eligible Market; (ii) on each day during the Equity Conditions Measuring Period, the Common Shares
are designated for quotation on the Principal Market and shall not have been suspended from trading
on such exchange or 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 such exchange or market been threatened or pending either (A) in
writing by such exchange or market or (B) by falling below the minimum listing maintenance
requirements of such exchange or market; (iii) during the one (1) year period ending on and
including the date immediately preceding the applicable date of determination, the Company shall
have delivered Conversion Shares upon conversion of the Notes and Common Shares upon exercise of
the Warrants to the holders on a timely basis as set forth in Section 3(c)(ii) hereof (and
analogous provisions under the Other Notes) and Section 2(a) of the Warrants; (iv) any applicable
Common Shares to be issued in connection with the event requiring determination may be issued in
full without violating Section 3(d) hereof and the rules and regulations of the Principal Market;
(v) during the Equity Conditions Measuring Period, the Company shall not have failed to timely make
any payments within five (5) Trading Days of when such payment is due pursuant to any Transaction
Document; (vi) during the Equity Conditions Measuring Period, there shall not have



25









 




occurred either (A) the public announcement of a pending, proposed or intended Fundamental
Transaction which has not been abandoned, terminated or consummated or (B) an Event of Default or
an event that with the passage of time or giving of notice would constitute an Event of Default;
(vii) the Company shall have no knowledge of any fact that would cause (x) the Registration
Statements required pursuant to the Registration Rights Agreement not to be effective and available
for the resale of all remaining Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) any Common Shares issuable upon conversion or redemption of
the Notes, payment of Installment Amounts and Common Shares issuable upon exercise of the Warrants
not to be eligible for sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; (viii) the Company otherwise shall have been in material compliance with and shall
not have materially breached any provision, covenant, representation or warranty of any Transaction
Document; (ix) the Common Shares have not traded below $0.50 per share in the immediately preceding
twenty (20) consecutive Trading Days; and (x) the Company has obtained Stockholder Approval.




               (o) “Equity Conditions Failure” means that during any period commencing with the delivery of
the Company Installment Notice through the applicable Installment Date or Installment Settlement
Date, as applicable, the Equity Conditions have not been satisfied (or waived in writing by the
Holder).



               (p) “Excluded Securities” means any Common Shares issued or issuable: (i) in connection with
any Approved Share Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
pursuant to a bona fide firm commitment underwritten public offering at a price per Common Shares
not less than the Conversion Price in effect at the time of such offering with a nationally
recognized underwriter which generates gross proceeds to the Company of at least $50,000,000 (other
than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity
lines”); (iv) in connection with any strategic acquisition or strategic transaction, whether
through an acquisition of shares or a merger of any business, assets or technologies, the primary
purpose of which is not to raise equity capital in an amount not to exceed, in the aggregate twenty
percent (20%) of the outstanding Common Shares in any twelve (12) month period; and (v) upon
conversion of any Options or Convertible Securities which are outstanding on the day immediately
preceding the Subscription Date, provided that the terms of such Options or Convertible Securities
are not amended, modified or changed on or after the Subscription Date.



               (q) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the properties or assets of the Company to another Person, or (iii)
be subject to an offer from another Person or group of related Persons (as defined in Sections
13(d) and 14(d) of the Exchange Act) other than the Holder to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding Voting Shares (not
including any Voting Shares 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 (iv)
consummate a share purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group
of related Persons (as defined in



26









 




Sections 13(d) and 14(d) of the Exchange Act) whereby such other Person or group acquires more
than the 50% of the outstanding Voting Shares (not including any Voting Shares 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 share purchase agreement or other business combination), (v) reorganize,
recapitalize or reclassify the Common Shares or (vi) any “person” or “group” (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
50% of the aggregate Voting Stock of the Company.




               (r) “GAAP” means United States generally accepted accounting principles, consistently applied.



               (s) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Principal
amount of this Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the Securities Purchase
Agreement on the Closing Date.



               (t) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with generally
accepted accounting principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness, and (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to
in clauses (i) through (vii) above.



               (u) “Initial Company Conversion Price” means, as of any date of determination, that price
which shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as 85%
of the arithmetic average of the Weighted Average Price of the Common Shares on the Principal
Market during each of the five (5) consecutive Trading Days ending on the Trading Day immediately
prior to the Installment Date (such period, the “Initial Company Measuring Period”).



27









 





               (v) “Installment Amount” means, for each Installment Date, an amount equal to the lesser of
(i) (A) the quotient of (x) the aggregate outstanding Principal of this Note as of the first
(1st) Installment Date hereunder divided by (y) the number of whole months from
such Installment Date through the Maturity Date and (ii) the Principal amount outstanding under
this Note, in each case, plus any accrued and unpaid interest on such amount, as any such
Installment Amount may be reduced pursuant to the terms of this Note, whether upon conversion,
redemption or otherwise.



               (w) “Installment Balance Conversion Shares” means, for any Installment Date, a number of
Common Shares equal to (i) the Post-Installment Conversion Shares for such date minus (ii)
the amount of any Pre-Installment Conversion Shares delivered on such date; provided that in the
event that the amount of Pre-Installment Conversion Shares exceeds the Post-Installment Conversion
Shares for such date (such excess, the “Installment Conversion Shares Excess”), the outstanding
Principal under this Note shall be reduced by the product of (x) the Installment Conversion Share
Excess and (y) the Company Conversion Price and the Installment Balance Conversion Shares shall
equal zero (0).



               (x) “Installment Date” means April 1, 2007, and the first (1st) day of each month
thereafter prior to the Maturity Date.



               (y) “Maturity Date” means April 4, 2009; provided however, that 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 which with
the passage of time and the failure to cure would result in an Event of Default and (ii) through
the date that is ten (10) Trading Days after the consummation of a Change of Control in the event
that a Change of Control is publicly announced or a Change of Control Notice is delivered prior to
the Maturity Date.



               (z) “NASDAQ” means the Nasdaq National Market.



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



               (bb) “OTCBB” means the Over-The-Counter Bulletin Board.



               (cc) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common shares or equivalent equity security are 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.



               (dd) “Permitted Indebtedness” means (i) Indebtedness incurred by the Company, or their
Subsidiaries 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 Required Holders and approved
by the Required Holders in writing, and which Indebtedness does not provide at any time for the
payment, prepayment, repayment, redemption, repurchase or defeasance, directly or indirectly, of
any principal or premium, if any, thereon until 91 days after



28









 




the Maturity Date or later, (ii) Indebtedness secured by Permitted Liens and (iii)
Indebtedness to trade creditors incurred in the ordinary course of business.




               (ee) “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)
any Lien on the Company’s proven hydrocarbon reserves approved by the Required Holders in writing
and (v) 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.



               (ff) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a government
or any department or agency thereof.



               (gg) “Post-Installment Conversion Shares” means, for any Installment Date, that number of
Common Shares equal to the applicable Company Conversion Amount for such Installment Date
divided by the Company Conversion Price (without taking into account the delivery of any
Pre-Installment Conversion Shares).



               (hh) “Principal Market” means the OTCBB.



               (ii) “Redemption Notices” means, collectively, the Event of Default Redemption Notices, Change
of Control Redemption Notices, and any Company Installment Notices (in the event a Company
Redemption is elected in any such notices) and, each of the foregoing, individually, a “Redemption
Notice”.



               (jj) “Redemption Premium” means (i) in the case of the Events of Default described in Section
4(a)(i) — (vi) and (ix) — (xii), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vii) — (viii), 100%.



               (kk) “Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price, and any Company Installment Redemption Price (in the event a Company
Redemption is elected with respect to any Installment Date) and, each of the foregoing,
individually, a “Redemption Price”.



               (ll) “Registration Rights Agreement” means that certain registration rights agreement dated as
of the Subscription 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 Shares issuable upon conversion of
the Notes and exercise of the Warrants.



29









 





               (mm) “Required Holders” means the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.



               (nn) “SEC” means the United States Securities and Exchange Commission.



               (oo) “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.



               (pp) “Subscription Date” means April 4, 2006.



               (qq) “Successor Entity” means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
shares or equivalent equity security are quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.



               (rr) “Trading Day” means any day on which the Common Shares are quoted on the Principal
Market, or, if the Principal Market is not the principal trading market for the Common Shares, then
on the principal securities exchange or securities market on which the Common Shares are then
traded or quoted, as the case may be; provided that “Trading Day” shall not include any day on
which the Common Shares is scheduled to trade on any such exchange or market for less than 4.5
hours or any day that the Common Shares are suspended from trading during the final hour of trading
on any 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).



               (ss) “Voting Shares” of a Person means capital shares 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 shares of any other class or classes shall have
or might have voting power by reason of the happening of any contingency).



               (tt) “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.



               (uu) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of



30









 




trading), and ending at 4:00:00 p.m., New York Time (or such other time as such market
publicly announces is the official close of trading) as reported by Bloomberg, 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 Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and the 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 pursuant to Section 23. All such determinations to be appropriately
adjusted for any share dividend, share split, share combination or other similar transaction during
the applicable calculation period.




          (29) 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, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within two (2) Trading Days after any such receipt or
delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, nonpublic
information, relating to the Company or its Subsidiaries, the Company shall indicate to the 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, nonpublic information relating to the Company or its Subsidiaries.




[Signature Page Follows]




31









 








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




	 	 	 	 	 
	 	Touchstone Resources USA, Inc. 

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 



32









 






	 	 	 	 	 



EXHIBIT I




TOUCHSTONE RESOURCES USA, INC.




CONVERSION NOTICE



Reference is made to the Senior Convertible Note (the “Note”) issued to the undersigned by
Touchstone Resources USA, Inc. (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, par value $0.001 per share (the “Common Shares”), as
of the date specified below.




	 	 	 	 	 	 	 
	 

	 	Date of Conversion:	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Aggregate Conversion Amount to be converted:	 	 
	 

	 	 	 	 	 	 




Please confirm the following information:




	 	 	 	 	 	 	 
	 

	 	Conversion Price:	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Number of Common Shares to be issued:	 	 
	 

	 	 	 	 	 	 




Please apply the Aggregate Conversion Amount to reduce the Installment
Amount(s) to be paid on the following Installment Date(s) as indicated below:




	 	 	 	 	 	 	 
	 

	 	Installment Date(s):	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Reduction in Installment Amount(s):	 	 
	 

	 	 	 	 	 	 




Please issue the Common Shares 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)






34









 






ACKNOWLEDGMENT




          The Company hereby acknowledges this Conversion Notice and hereby directs StockTrans, Inc to
issue the above indicated number of Common Shares in accordance with the Transfer Agent
Instructions dated April 4, 2006 from the Company and acknowledged and agreed to by StockTrans,
Inc.




	 	 	 	 	 
	 	Touchstone Resources USA, Inc. 

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title: