**EXHIBIT 4.10**

 

**THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIESLAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE MAKER) IN THE FORM, SUBSTANCE AND SCOPEREASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.**

 

**ANALYTICAL SURVEYS, INC.**

 

Senior Secured Convertible Promissory Note 

due April 2, 2005 

 

 

For value received,ANALYTICAL SURVEYS, INC., a Colorado corporation (the “Maker”), hereby promises to pay to the order of TONGA PARTNERS, L.P. (together with its successors, representatives, and permitted assigns, the “Holder”), inaccordance with the terms hereinafter provided, the principal amount of One Million Seven Hundred Thousand Dollars ($1,700,000.00), together with interest thereon. 

 

All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to theHolder at the address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by wire transfer of funds to the Holder’s account, instructions for which are attachedhereto as Exhibit A. The outstanding principal balance of this Note shall be due and payable on April 2, 2005 (the “Maturity Date”) or at such earlier time as provided herein; provided, however, if the MandatoryConversion Date is extended pursuant to Section 3.5(b)(x) hereof, the Maturity Date shall be extended to the Mandatory Conversion Date. 

 

ARTICLE I 

 

Section 1.1 Purchase Agreement. This Note has been executed and delivered pursuant to the Note and Warrant Purchase Agreement, dated as of March21, 2002 (the “Purchase Agreement”), by and between the Maker and the purchasers listed therein. Capitalized terms used and not otherwise defined herein shall have the meanings set forth for such terms in the Purchase Agreement.

Section 1.2 Interest. Beginning on the date hereof, the outstanding principal balance of this Noteshall bear interest at a rate per annum equal to five percent (5%), payable upon conversion unless earlier converted or prepaid as provided herein. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months and shallaccrue commencing on the issuance date of this Note (the “Issuance Date”). The interest shall be payable in shares of the Maker’s common stock, no par value per share (the “Common Stock”); provided, thatthe Maker shall issue to the Holder registered and freely tradable shares of Common Stock. The number of shares of Common Stock to be issued as payment of accrued and unpaid interest shall be determined by dividing (a) the total amount of accruedand unpaid interest to be converted into Common Stock by (b) the Conversion Price (as defined in Section 3.2(a) hereof). Furthermore, upon the occurrence of an Event of Default (as defined in Section 2.1 hereof), then to the extent permitted by law,the Maker will pay interest to the Holder, payable on demand, on the outstanding principal balance of the Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of fifteen percent (15%) and themaximum applicable legal rate per annum.****

 

Section 1.3Security Agreement. The obligations of the Maker hereunder shall be secured by, and the Holder shall be entitled to the rights and security granted by the Maker pursuant to, the Security Agreement dated as of April 2, 2002 by the Maker forthe benefit of the Holder (the “Security Agreement”). 

 

Section 1.4 Senior Note. This Note shall be senior to all other indebtedness of the Maker. 

 

Section 1.5 Payment on Non-Business Days. Whenever any payment to be made shall be due on a Saturday, Sunday or a public holiday under the laws ofthe State of New York, such payment may be due on the next succeeding business day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date. 

 

Section 1.6 Transfer. This Note may be transferred or sold, subject tothe provisions of Section 4.8 of this Note, or pledged, hypothecated or otherwise granted as security by the Holder. 

 

Section 1.7 Replacement. Upon receipt of a duly executed, notarized and unsecured written statement from the Holder with respect to the loss, theftor destruction of this Note (or any replacement hereof), and without requiring an indemnity bond or other security, or, in the case of a mutilation of this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of liketenor and amount, in lieu of such lost, stolen, destroyed or mutilated Note. 

 

ARTICLE II 

 

EVENTS OFDEFAULT; REMEDIES

 

Section 2.1 Events of Default.The occurrence of any of the following events shall be an “Event of Default” under this Note: 

 

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(a) the Maker shall fail to make the payment of any amount of principal outstanding on the date suchpayment is due hereunder; or 

 

(b) the Maker shall fail to makeany payment of interest in shares of Common Stock for a period of five (5) days after the date such interest is due; or 

 

(c) the failure of the Registration Statement to be declared effective by the Securities and Exchange Commission (“SEC”) on or prior to the datewhich is one hundred fifty (150) days after the Filing Date (as defined in the Registration Rights Agreement); or 

 

(d) the suspension from listing or the failure of the Common Stock to be listed on The Nasdaq SmallCap Market for a period of five (5) consecutive TradingDays; or 

 

(e) the Maker’s notice to the Holder, includingby way of public announcement, at any time, of its inability to comply (including for any of the reasons described in Section 3.8(a) hereof) or its intention not to comply with proper requests for conversion of this Note into shares of Common Stock;or 

 

(f) the Maker shall fail to (i) timely deliver the sharesof Common Stock upon conversion of this Note or any interest accrued and unpaid, (ii) timely file the Registration Statement (as defined in the Registration Rights Agreement) or (iii) make the payment of any fees and/or liquidated damages under thisNote, the Purchase Agreement or the Registration Rights Agreement, which failure in the case of items (i) and (iii) of this Section 2.1(f) is not remedied within seven (7) business days after the incurrence thereof; or 

 

(g) while the Registration Statement is required to be maintained effectivepursuant to the terms of the Registration Rights Agreement, the effectiveness of the Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to the Holder for sale of theRegistrable 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 Trading Days, providedthat the cause of such lapse or unavailability is not due to factors primarily within the control of Holder; or 

 

(h) default shall be made in the performance or observance of (i) any material covenant, condition or agreement contained in this Note (other than as setforth in Section 3.7(m) hereof and clause (f) of this Section 2.1) and such default is not fully cured within ten (10) business days after the occurrence thereof or (ii) any material covenant, condition or agreement contained in the PurchaseAgreement, the Security Agreement, or the Registration Rights Agreement which is not covered by any other provisions of this Section 2.1 and such default is not fully cured within ten (10) business days after the occurrence thereof; or 

 

(i) any material representation or warranty made by the Maker herein or inthe Purchase Agreement, the Security Agreement or the Registration Rights Agreement shall prove to have been false or incorrect or breached in a material respect on the date as of which made; or 

 

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(j) the Maker shall issue any debt securities which are not subordinate to this Note other than on suchterms as are acceptable to the Holders of a majority of the outstanding principal amount of this Note purchased under the Purchase Agreement; provided, however, that the provisions of this Section 2.1(j) shall be of no force or effect if theMaker consummates a subsequent financing with a third party in an aggregate amount of $4,000,000 or greater; or****

 

(k) the consummation of any of the following transactions: (i) the consolidation, merger or other business combination of the Maker with or into a personor entity (other than (A) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Maker or (B) a consolidation, merger or other business combination in which holders of the Maker’svoting power immediately prior to the transaction continue after the transaction to hold, 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 theirequivalent if other than a corporation) of such entity or entities), except if in the case of a consolidation, merger or other business combination of the Maker, the Maker shall have given the Holder not less than fifteen (15) business days priorwritten notice thereof (the “Transaction Notice”) and shall have furnished the Holder with such information regarding the consolidation, merger or other business combination (including, without limitation, the counterpartiesthereto) as the Holder may reasonably request in order for the Holder to determine if it will exercise its conversion rights hereunder prior to the consummation of such consolidation, merger or other business combination; (ii) the sale or transferof all or substantially all of the Maker’s assets; or (iii) the consummation of a purchase, tender or exchange offer made to the holders of more than 30% of the outstanding shares of Common Stock; or 

 

(l) the Maker shall (i) default in any payment of any amount or amounts ofprincipal of or interest on any Indebtedness (other than the Indebtedness hereunder) the aggregate principal amount of which Indebtedness is in excess of $25,000 or (ii) default in the observance or performance of any other material agreement orcondition relating to any Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, orto permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required, such Indebtedness to become due prior to its stated maturity; or 

 

(m) the Maker shall (i) apply for or consent to the appointment of, or thetaking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under theUnited States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or othersimilar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparablelaws of any jurisdiction (foreign or domestic), or (vi) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or 

 

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(n) a proceeding or case shall be commenced in respect of the Maker, without its application or consent,in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like ofit or of all or any substantial part of its assets in connection with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described inclause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of seventy-five (75) days or any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter ineffect) or under the comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to the Maker and shallcontinue undismissed, or unstayed and in effect for a period of seventy-five (75) days. 

 

Section 2.2 Remedies Upon An Event of Default. If an Event of Default shall have occurred and shall be continuing, the Holder of this Note may at any time at its option (a) declare the entire unpaid principalbalance of this Note, together with all interest accrued hereon, due and payable, and thereupon, the same shall be accelerated and so due and payable, without presentment, demand, protest, or notice, all of which are hereby expressly unconditionallyand irrevocably waived by the Maker; provided, however, that upon the occurrence of an Event of Default described in (i) Sections 2.1 (m), (n) or (o), the outstanding principal balance and accrued interest hereunder shall beautomatically due and payable and (ii) Sections 2.1 (c)-(l), demand the prepayment of this Note pursuant to Section 3.7 hereof, (b) demand that the principal amount of this Note then outstanding and all accrued and unpaid interest thereon shall beconverted into shares of Common Stock at a Conversion Price per share calculated pursuant to Section 3.1 hereof assuming that the date that the Event of Default occurs is the Conversion Date (as defined in Section 3.2(a) hereof), or (c) exercise orotherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies and interests under this Note, the Purchase Agreement, the Security Agreement, the Registration Rights Agreement or applicable law. No course of delay on thepart of the Holder shall operate as a waiver thereof or otherwise prejudice the right of the Holder. No remedy conferred hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute orotherwise. 

 

ARTICLE III 

 

CONVERSION; ANTIDILUTION; PREPAYMENT 

 

Section 3.1 Conversion Option. At any time on or after the IssuanceDate, this Note shall be convertible (in whole or in part), at the option of the Holder (the “Conversion Option”), into such number of fully paid and non-assessable shares of Common Stock (the “Conversion Rate”) asis determined by dividing (x) that portion of the outstanding principal balance under this Note as of such date that the Holder elects to convert by (y) the Conversion Price (as hereinafter defined) then in effect on the date on which the Holderfaxes a notice of conversion (the “Conversion Notice”), duly executed, to the Maker (facsimile number(210) 657-1304, Attn.: Chief Financial Officer) (the “Voluntary Conversion Date”), provided, however, thatthe Conversion Price shall be subject to adjustment as described in Section 3.6 below. 

 

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Section 3.2 Conversion Price. 

 

(a) Subject to the provisions of subsection (b) below, the term “Conversion Price” shall mean an amountequal to the lesser of (i) the Closing Price (as defined below) and (ii) ninety percent (90%) of the average of the Per Share Market Value of the Common Stock for the three (3) Trading Days having the lowest Per Share Market Value during the twenty(20) Trading Days immediately prior to the Voluntary Conversion Date or the Mandatory Conversion Date (as defined in Section 3.5 hereof), as applicable, except that if during any period (a “Black-out Period”), a Holder is unable totrade any Common Stock issued or issuable upon conversion of the Notes immediately due to the postponement of filing or delay or suspension of effectiveness of a registration statement or because the Maker has otherwise informed such Holder that anexisting prospectus cannot be used at that time in the sale or transfer of such Common Stock, such Holder shall have the option but not the obligation on any Voluntary Conversion Date or Mandatory Conversion Date, as the case may be, within ten (10)Trading Days following the expiration of the Black-out Period of using the Conversion Price applicable on such Conversion Date or any Conversion Price selected by such Holder that would have been applicable had such Conversion Date been at anyearlier time during the Black-out Period or within the ten (10) Trading Days thereafter. 

 

(b) The term “Closing Price” shall mean an amount equal to the lesser of (i) $.40 if the Reverse Stock Split is not effected prior to the Closing Date or $2.00 if the Reverse Stock Split is effectedprior to the Closing Date and (ii) ninety percent (90%) of the average Per Share Market Value of the Common Stock for the ninety (90) Trading Days immediately prior to the Closing Date. The term “Per Share Market Value” means on anyparticular date (a) the ****closing bid price of the Common Stock on such date on The Nasdaq SmallCap Market or other registered national stock exchange on which the Common Stock is then listed or if there is no such price on such date, then theclosing bid price on such exchange or quotation system on the date nearest preceding such date, or (b) if the Common Stock is not listed then on The Nasdaq SmallCap Market or any registered national stock exchange, then the lowest intra-day pricefor a share of Common Stock, as reported by Bloomberg L.P. or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the intra-day price for a share of Common Stock is notthen reported, then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share ofCommon Stock as determined by an Independent Appraiser (as defined in Section 4.13 hereof) selected in good faith by the Holders of a majority in interest of the Notes; provided, however, that the Maker, after receipt of thedetermination by such Independent Appraiser, shall have the right to select an additional Independent Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Independent Appraiser; andprovided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during such period. The determination of fair market value byan Independent Appraiser shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall befinal and binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, orto the existence or absence of, or any limitations on, voting rights. 

 

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(c) Upon the conversion of the final portion of this Note (the “Final Conversion”), ifthe total number of Conversion Shares previously issued to the Holder plus the number of Conversion Shares issued in connection with the Final Conversion is less than thirty-eight percent (38%) of the number of shares of Common Stock outstanding ona fully diluted basis as of the date of the Final Conversion, the Company shall issue additional shares of Common Stock to the Holder on a pro rata basis so that the Holder owns in the aggregate at least thirty-eight percent (38%) of the number ofshares of Common Stock outstanding on a fully diluted basis as of the date of the Final Conversion. 

 

Section 3.3 Mechanics of Conversion. 

 

(a) Not later than three (3) Trading Days after any Conversion Date, the Maker will deliver to the applicable Holder by express courier (A) a certificateor certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 5.1 of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of thisNote and (B) one or more new promissory notes representing the amount of this Note not converted. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the thirdTrading Day after the Conversion Date (the “Delivery Date”), the Holder shall be entitled by written notice to the Maker at any time on or before its receipt of such certificate or certificates thereafter, to rescind suchconversion, in which event the Maker shall immediately return this Note tendered for conversion, whereupon the Maker and the Holder shall each be restored to their respective positions immediately prior to the delivery of such notice of revocation,except that any amounts described in Sections 3.3(b) and (c) shall be payable through the date notice of rescission is given to the Maker. 

 

(b) The Maker understands that a delay in the delivery of the shares of Common Stock upon conversion of this Note and failure to deliver one or more newpromissory notes representing the unconverted principal amount of this Note beyond the Delivery Date could result in economic loss to the Holder. If the Maker fails to deliver to the Holder such certificate or certificates pursuant to this Sectionhereunder by the Delivery Date, the Maker shall pay to such Holder, in cash, an amount per Trading Day for each Trading Day until such certificates are delivered, together with interest on such amount at a rate of 10% per annum, accruing until suchamount and any accrued interest thereon is paid in full, equal to the greater of (A) (i) 1% of the aggregate principal amount of the Notes requested to be converted for the first five (5) Trading Days after the Delivery Date and (ii) 2% of theaggregate principal amount of the Notes requested to be converted for each Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as liquidated damages and not as a penalty). Nothing herein shall limit a Holder’s right topursue actual damages for the Maker’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein (including, without limitation, damages relating to any purchase of shares of CommonStock by such Holder to make delivery on a sale effected in anticipation of receiving certificates representing shares of Common Stock upon conversion, such damages to be in an amount equal to (A) the aggregate amount paid by such Holder for theshares of Common Stock so purchased minus (B) the 

 

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aggregate amount of net proceeds, if any, received by such Holder from the sale of the shares of Common Stock issued by the Maker pursuant to suchconversion), and such Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief). Notwithstanding anything to the contrarycontained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker shall only be obligated to pay the liquidated damages accrued in accordance with this Section 3.3(b) through the date the ConversionNotice is withdrawn. 

 

(c) In addition to any other rightsavailable to the Holder, if the Maker fails to deliver to the Holder such certificate or certificates pursuant to Section 3.3(a) by the Delivery Date and if after the Delivery Date the Holder purchases (in an open market transaction or otherwise)shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder anticipated receiving upon such conversion, provided that the sale occurs prior to the time of receipt of the certificate orcertificates (a “Buy-In”), then the Maker shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (A) the Holder’s total purchase price (including brokeragecommissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate principal amount of this Note for which such conversion was not timely honored, together with interest thereon at a rate of the lesser of 15% and the maximumapplicable legal rate per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Holder purchases shares of Common Stock havinga total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate principal amount of this Note, the Maker shall be required to pay the Holder $1,000, plus interest. The Holder shall provide the Makerwritten notice indicating the amounts payable to the Holder in respect of the Buy-In. 

 

Section 3.4 Intentionally Omitted. 

 

Section 3.5 Mandatory Conversion. 

 

(a) On the Mandatory Conversion Date (as defined below), this Note shall, automatically and without any action on the part of the holder hereof, convert into a number of fully paid and nonassessable shares of CommonStock equal to the quotient of (i) the principal amount of this Note outstanding on the Mandatory Conversion Date divided by (ii) the Conversion Price in effect on the Mandatory Conversion Date. 

 

(b) As used herein, the “Mandatory Conversion Date” shall be thedate which is three (3) years from the date of issuance of this Note, provided, that the Mandatory Conversion Date shall be extended for the following periods: (x) for as long as (A) the conversion of this Note would violate Section 3.4hereof but shall not be extended for more than a total of ninety (90) days, (B) a Triggering Event (as defined in Section 3.7(f) hereof) shall have occurred and be continuing or (C) any event shall have occurred and be continuing which with thepassage of time and the failure to cure would result in a Triggering Event, (y) for those number of days that the Registration Statement (as defined in the Registration Rights Agreement) was not in effect during the Effectiveness Period (as definedin the Registration Rights Agreement) and (z) one day for each day in any Blackout Period (as defined in Section 3.2(a) hereof). The Mandatory Conversion Date and the Voluntary Conversion Date collectively are referred to in this Note as the“Conversion Date.” 

 

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(c) On the Mandatory Conversion Date, the outstanding principal balance of this Note plus all accrued andunpaid interest shall be converted automatically without any further action by the holder of this Note and whether or not this Note is surrendered to the Company or its transfer agent; provided, however, that the Company shall not beobligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of this Note unless this Note is either delivered to the Company or the holder notifies the Company this Note has been lost, stolen, or destroyed, andexecutes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. Upon the occurrence of the automatic conversion of this Note pursuant to this Section 3.5, the holder of this Note shallsurrender this Note for which the Mandatory Conversion Date has occurred to the Company and the Company shall deliver the shares of Common Stock issuable upon such conversion (in the same manner set forth in Section 3.3 hereof) to the holder withinthree (3) Trading Days of the holder’s delivery of this Note. 

 

Section 3.6 Adjustment of Conversion Price. 

 

(a) The Conversion Price shall be subject to adjustment from time to time as follows: 

 

(i) Adjustments for Stock Splits and Combinations. If the Maker shall at any time or from time to time after the Issuance Date, effect a stocksplit of the outstanding Common Stock, the applicable Conversion Price in effect immediately prior to the stock split shall be proportionately decreased. If the Maker shall at any time or from time to time after the Issuance Date, combine theoutstanding shares of Common Stock, the applicable Conversion Price in effect immediately prior to the combination shall be proportionately increased. Any adjustments under this Section 3.6(a)(i) shall be effective at the close of business on thedate the stock split or combination occurs. 

 

(ii)Adjustments for Certain Dividends and Distributions. If the Maker shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive adividend or other distribution payable in shares of Common Stock, then, and in each event, the applicable Conversion Price in effect immediately prior to such event shall be decreased as of the time of such issuance or, in the event such record dateshall have been fixed, as of the close of business on such record date, by multiplying, as applicable, the applicable Conversion Price then in effect by a fraction: 

 

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior tothe time of such issuance or the close of business on such record date; and 

 

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number ofshares of Common Stock issuable in payment of such dividend or distribution. 

 

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(iii) Adjustment for Other Dividends and Distributions. If the Maker shall at any time or fromtime to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in other than shares of Common Stock, then, and in each event, anappropriate revision to the applicable Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holders of this Note shall receive upon conversions thereof, in addition to thenumber of shares of Common Stock receivable thereon, the number of securities of the Maker which they would have received had this Note been converted into Common Stock on the date of such event and had thereafter, during the period from the date ofsuch event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this Section 3.6(a)(iii) withrespect to the rights of the holders of this Note. 

 

(iv)Adjustments for Reclassification, Exchange or Substitution. If the Common Stock issuable upon conversion of this Note at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of anyclass or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 3.6(a)(i), (ii) and (iii), or a reorganization,merger, consolidation, or sale of assets provided for in Section 3.6(a)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) sothat the holder of this Note shall have the right thereafter to convert this Note into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number ofshares of Common Stock into which such Note might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein. 

 

(v) Adjustments for Reorganization, Merger, Consolidation or Salesof Assets. If at any time or from time to time after the Issuance Date there shall be a capital reorganization of the Maker (other than by way of a stock split or combination of shares or stock dividends or distributions provided for inSection 3.6(a)(i), (ii) and (iii), or a reclassification, exchange or substitution of shares provided for in Section 3.6(a)(iv)), or a merger or consolidation of the Maker with or into another corporation, or the sale of all or substantially all ofthe Maker’s properties or assets to any other person (an “Organic Change”), then as a part of such Organic Change an appropriate revision to the Conversion Price shall be made and provision shall be made (by adjustments of theConversion Price or otherwise) so that the holder of this Note shall have the right thereafter to convert such Note into the kind and amount of shares of stock and other securities or property of the Maker or any successor corporation resulting fromOrganic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3.6(a)(v) with respect to the rights of the holder of this Note after the Organic Change to the end that the provisions ofthis Section 3.6(a)(v) (including any adjustment in the applicable Conversion Price then in effect and the number of shares of stock or other securities deliverable upon conversion of this Note) shall be applied after that event in as nearly anequivalent manner as may be practicable. 

 

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(vi) Adjustments for Issuance of Additional Shares of Common Stock. 

 

(1) In the event the Maker, shall, at any time, from time to time, issue orsell any shares of Additional Shares of Common Stock (including Treasury Shares) for a consideration per share less than the Conversion Price or Closing Price then in effect for the Note immediately prior to the time of such issue or sale, then,forthwith upon such issue or sale, the Conversion Price or the Closing Price, as the case may be, then in effect for the Notes shall be reduced to a price equal to the consideration per share paid for such Common Stock and the number of shares ofCommon Stock for which this Note is convertible shall be increased by the product of the number of shares of Common Stock for which this Note is convertible immediately prior to such issuance or sale multiplied by the Dilution Percentage.“Dilution Percentage” shall mean the percentage by which the Conversion Price then in effect is reduced pursuant to this Section 3.6(a)(vi). 

 

(2) The provisions under this subsection 3.6(a)(vi) shall not apply under any of the circumstances for which an adjustment is provided in subsections(i), (ii), (iii), (iv) or (v) of this Section 3.6(a). No adjustment of the applicable Conversion Price or Closing Price shall be made under this subsection (a)(vi) upon the issuance of any Additional Shares of Common Stock which are issued pursuantto any Common Stock Equivalent (as defined below) if upon the issuance of such Common Stock Equivalent (x) any adjustment shall have been made pursuant to subsection (vii) of this Section 3.6(a) or (y) no adjustment was required pursuant tosubsection (vii) of this Section 3.6(a). No adjustment of the applicable Conversion Price shall be made under this subsection (vi) in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made atthe time and together with the next subsequent adjustment, if any, which together with any adjustments so carried forward shall amount to $.01 per share or more; provided that upon any adjustment of the applicable Conversion Price as a resultof any dividend or distribution payable in Common Stock or Convertible Securities (as defined below) or the reclassification, subdivision or combination of Common Stock into a greater or smaller number of shares, the foregoing figure of $.01 pershare (or such figure as last adjusted) shall be adjusted (to the nearest one-half cent) in proportion to the adjustment in the applicable Conversion Price. 

 

(vii) Issuance of Common Stock Equivalents. If the Maker, at any time after the Issuance Date, shall issue any securities convertible into orexchangeable for, directly or indirectly, Common Stock (“Convertible Securities”), other than this Note, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold(collectively, the “Common Stock Equivalents”) and the price per share for which Additional Shares of Common Stock may be issuable thereafter pursuant to such Common Stock Equivalent shall be less than the applicable ConversionPrice then in effect, or if, after any such issuance of Common Stock Equivalents, the price per share for which Additional Shares of Common Stock may be issuable thereafter is amended or adjusted, and such price as so amended shall be less than theapplicable Conversion Price in effect at the time of such amendment, then the applicable Conversion Price upon each such issuance or amendment shall be adjusted as provided in the first sentence of subsection (vi) of this Section 3.6(a) on the basisthat (1) the maximum number of Additional Shares of Common Stock issuable pursuant to all such Common Stock Equivalents shall be deemed to have been issued (whether or not such Common Stock Equivalents are actually then exercisable, convertible orexchangeable in whole or in part) as of the earlier of (A) the date on which the Maker shall enter into a firm contract for the issuance of such Common Stock Equivalent, or (B) the date of actual issuance of such Common Stock 

 

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Equivalent, and (2) the aggregate consideration for such maximum number of Additional Shares of Common Stock shall be deemed to be the minimum considerationreceived or receivable by the Maker for the issuance of such Additional Shares of Common Stock pursuant to such Common Stock Equivalent. No adjustment of the applicable Conversion Price shall be made under this subsection (vii) upon the issuance ofany Convertible Security which is issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any adjustment shall previously have been made to the exercise price of such warrants then in effect upon theissuance of such warrants or other rights pursuant to this subsection (vii). If no adjustment is required under this subsection (vii) upon issuance of any Common Stock Equivalent or once an adjustment is made under this subsection (vii) based uponthe Per Share Market Value in effect on the date of such adjustment, no further adjustment shall be made under this subsection (vii) based solely upon a change in the Per Share Market Value after such date. 

 

(viii) Consideration for Stock. In case any shares of Common Stock orany Common Stock Equivalents shall be issued or sold: 

 

(1) inconnection with any merger or consolidation in which the Maker is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Maker shall be changed to or exchanged for thestock or other securities of another corporation), the amount of consideration therefore shall be, deemed to be the fair value, as determined reasonably and in good faith by the Board of Directors of the Maker, of such portion of the assets andbusiness of the nonsurviving corporation as such Board may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or warrants or options, as the case may be; or 

 

(2) in the event of any consolidation or merger of the Maker in which theMaker is not the surviving corporation or in which the previously outstanding shares of Common Stock of the Maker shall be changed into or exchanged for the stock or other securities of another corporation, or in the event of any sale of all orsubstantially all of the assets of the Maker for stock or other securities of any corporation, the Maker shall be deemed to have issued a number of shares of its Common Stock for stock or securities or other property of the other corporationcomputed on the basis of the actual exchange ratio on which the transaction was predicated, and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities or other property of the othercorporation. If any such calculation results in adjustment of the applicable Conversion Price, or the number of shares of Common Stock issuable upon conversion of the Notes, the determination of the applicable Conversion Price or the number ofshares of Common Stock issuable upon conversion of the Notes immediately prior to such merger, consolidation or sale, shall be made after giving effect to such adjustment of the number of shares of Common Stock issuable upon conversion of the Notes.

 

(b) Record Date. In case the Maker shall take record ofthe holders of its Common Stock for the purpose of entitling them to subscribe for or purchase Common Stock or Convertible Securities, then the date of the issue or sale of the shares of Common Stock shall be deemed to be such record date.****

 

(c) Certain Issues Excepted. Anything herein to thecontrary notwithstanding, the Maker shall not be required to make any adjustment of the number of shares of Common 

 

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Stock issuable upon conversion of the Notes upon the grant after the Issuance Date of, or the exercise after the Issuance Date of, (i) shares of Common Stockissuable upon exercise of the Warrants; (ii) shares of Common Stock issuable upon conversion of this Note; (iii) shares of Common Stock to be issued to strategic partners and/or in connection with a strategic merger or acquisition; (iv) shares ofCommon Stock or the issuance of options to purchase shares of Common Stock to employees, officers, directors, consultants and vendors in accordance with the Issuer’s existing employee stock ownership plans; (v) the issuance of Securitiespursuant to the conversion or exercise of convertible or exercisable securities issued or outstanding prior to the date hereof; and (vi) the issuance of securities in exchange for assets. 

 

(d) No Impairment. The Maker shall not, by amendment of its Articles of Incorporation or through any reorganization,transfer of assets, consolidation, merger, 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 to be observed or performed hereunder by the Maker, but willat all times in good faith, assist in the carrying out of all the provisions of this Section 3.6 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the Holder against impairment. Inthe event a Holder shall elect to convert any Notes as provided herein, the Maker cannot refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, violationof an agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from a court, or notice, restraining and or adjoining conversion of all or of said Notes shall have issued and the Maker posts a surety bond for thebenefit of such Holder in an amount equal to 130% of the amount of the Notes the Holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall bepayable to such Holder in the event it obtains judgment. 

 

(e)Certificates as to Adjustments. Upon occurrence of each adjustment or readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion of this Note pursuant to this Section 3.6, the Maker at its expense shallpromptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment isbased. The Maker shall, upon written request of the Holder, at any time, furnish or cause to be furnished to such holder a like certificate setting forth such adjustments and readjustments, the applicable Conversion Price in effect at the time, andthe number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of this Note. Notwithstanding the foregoing, the Maker shall not be obligated to deliver acertificate unless such certificate would reflect an increase or decrease of at least one percent (1%) of such adjusted amount. 

 

(f) Issue Taxes. The Maker shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable inrespect of any issue or delivery of shares of Common Stock on conversion of this Note pursuant thereto; provided, however, that the Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by anyholder in connection with any such conversion. 

 

(g)Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares to which the Holder would 

 

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otherwise be entitled, the Maker shall pay cash equal to the product of such fraction multiplied by the average of the Per Share Market Values of the CommonStock for the five (5) consecutive Trading Days immediately preceding the Conversion Date. 

 

(h) Reservation of Common Stock. The Maker shall at all times when this Note shall be outstanding, reserve and keep available out of its authorized but unissued Common Stock, 10,000,000 shares of Common Stockto effect the conversion of this Note and all interest accrued thereon; provided that the number of shares of Common Stock so reserved shall at no time be less than 125% of the number of shares of Common Stock for which this Note and allinterest accrued thereon are at any time convertible. The Maker shall, from time to time in accordance with the Colorado General Corporation Law, as amended, increase the authorized number of shares of Common Stock if at any time the unissued numberof authorized shares shall not be sufficient to satisfy the Maker’s obligations under this Section 3.6(h). 

 

(i) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of this Note or any interest accrued thereonrequire registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion,the Maker shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be. 

 

Section 3.7 Prepayment. 

 

(a) Prepayment Upon an Event of Default. Notwithstanding anything to the contrary contained herein, upon the occurrence of an Event of Defaultdescribed in Sections 2.1(c)-(k) hereof, the Holder shall have the right, at such Holder’s option, to require the Maker to prepay all or a portion of this Note at a price equal to the Triggering Event Prepayment Price (as defined in Section3.7(c) below) applicable at the time of such request. Nothing in this Section 3.7(a) shall limit the Holder’s rights under Section 2.2 hereof. 

 

(b) Prepayment Option Upon Major Transaction. In addition to all other rights of the holder of this Note contained herein, simultaneous with theoccurrence of a Major Transaction (as defined below), the holder of this Note shall have the right, at such holder’s option, to require the Maker to prepay all or a portion of such holder’s Notes at a price equal to the greater of (i) 130%of the aggregate principal amount of the Notes and (ii) the product of (A) the Conversion Rate and (B) the Per Share Market Value of the Common Stock on the Trading Day immediately preceding such Major Transaction (“Major Transaction PrepaymentPrice”). 

 

(c) Prepayment Option Upon TriggeringEvent. In addition to all other rights of the holder of this Note contained herein, after a Triggering Event (as defined below), the holder of this Note shall have the right, at such holder’s option, to require the Maker to prepay all or aportion of such holder’s Notes at a price equal to the greater of (i) 130% of the aggregate principal amount of this Note and (ii) the product of (A) the Conversion Rate at such time and (B) the Per Share Market Value of the Common Stockcalculated as of the date immediately preceding such Triggering Event on which the exchange or market on which the Common Stock is traded is open (“Triggering Event Prepayment Price”). 

 

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(d) Intentionally Omitted. 

 

(e) “Major Transaction.” A “Major Transaction” shall be deemed to have occurred at suchtime as any of the following events: 

 

(i) the consolidation,merger or other business combination of the Maker with or into another Person (as defined in Section 4.13 hereof) (other than (A) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of theMaker or (B) a consolidation, merger or other business combination in which holders of the Maker’s voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of thesurviving 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). 

 

(ii) the sale or transfer of all or substantially all of the Maker’s assets; or 

 

(iii) consummation of a purchase, tender or exchange offer made to theholders of more than 30% of the outstanding shares of Common Stock. 

 

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

 

(i) the failure of the Registration Statement to be declared effective by the SEC on or prior to the date which is onehundred fifty (150) days after the Closing Date; 

 

(ii) whilethe Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of the Registration Statement lapses for any reason (including, without limitation, the issuance of astop order) or is unavailable to the holder of this Note for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailabilitycontinues for a period of ten (10) consecutive Trading Days, provided that the cause of such lapse or unavailability is due to factors within the control of the Maker and not due to factors solely within the control of the holder of thisNote; 

 

(iii) the suspension from trading or the failure of theCommon Stock to be traded on The Nasdaq SmallCap Market for a period of five (5) consecutive days, provided, that such suspension from listing or failure to be listed is due to factors within the control of the Maker, including, but notlimited to, failure to timely file all reports required to be filed with the SEC or to meet the net tangible assets requirements for listing, if any; 

 

(iv) the Maker’s notice to any holder of the Notes, including by way of public announcement, at any time, of its inability to comply (including forany of the reasons described in Section 3.8) or its intention not to comply with proper requests for conversion of any of the Notes into shares of Common Stock; 

 

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(v) the Maker’s failure to comply with a Conversion Notice tendered within ten (10) business daysafter the receipt by the Maker of the Conversion Notice and the original Note; or 

 

(vi) any material representation, warranty or covenant made by the Maker herein or in the Purchase Agreement, the Security Agreement or the Registration Rights Agreement shall prove to have been false or incorrect orbreached in a material respect on the date as of which made. 

 

(g) Intentionally Omitted. 

 

(h) Mechanics ofPrepayment at Option of Holder Upon Major Transaction. No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Major Transaction, but not prior to the public announcement of such Major Transaction, the Makershall deliver written notice thereof via facsimile and overnight courier (“Notice of Major Transaction”) to the holder of this Note. At any time after receipt of a Notice of Major Transaction (or, in the event a Notice of MajorTransaction is not delivered at least ten (10) days prior to a Major Transaction, at any time within ten (10) days prior to a Major Transaction), any holder of the Notes then outstanding may require the Maker to prepay, effective immediately priorto the consummation of such Major Transaction, all of the holder’s Notes then outstanding by delivering written notice thereof via facsimile and overnight courier (“Notice of Prepayment at Option of Holder Upon MajorTransaction”) to the Maker, which Notice of Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the number of Notes that such holder is electing to prepay and (ii) the applicable Major Transaction Prepayment Price, ascalculated pursuant to Section 3.7(b) above. 

 

(i) Mechanicsof Prepayment at Option of Holder Upon Triggering Event. Within one (1) day after the occurrence of a Triggering Event, the Maker shall deliver written notice thereof via facsimile and overnight courier (“Notice of TriggeringEvent”) to each holder of the Notes. At any time after the earlier of a holder’s receipt of a Notice of Triggering Event and such holder becoming aware of a Triggering Event, any holder of this Note then outstanding may require theMaker to prepay all of the Notes on a pro rata basis by delivering written notice thereof via facsimile and overnight courier (“Notice of Prepayment at Option of Holder Upon Triggering Event”) to the Maker, which Notice ofPrepayment at Option of Holder Upon Triggering Event shall indicate (i) the number of Notes that such holder is electing to prepay and (ii) the applicable Triggering Event Prepayment Price, as calculated pursuant to Section 3.7(c) above. 

 

(j) Intentionally Omitted. 

 

(k) Payment of Prepayment Price. Upon the Maker’s receipt of aNotice(s) of Prepayment at Option of Holder Upon Triggering Event or a Notice(s) of Prepayment at Option of Holder Upon Major Transaction from any holder of the Notes, the Maker shall immediately notify each holder of the Notes by facsimile of theMaker’s receipt of such Notice(s) of Prepayment at Option of Holder Upon Triggering Event or Notice(s) of Prepayment at Option of Holder Upon Major Transaction and each holder which has sent such a notice shall promptly submit to the Maker suchholder’s certificates representing the Notes which such holder has 

 

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elected to have prepaid. The Maker shall deliver the applicable Triggering Event Prepayment Price, in the case of a prepayment pursuant to Section 3.7(i), tosuch holder within five (5) business days after the Maker’s receipt of a Notice of Prepayment at Option of Holder Upon Triggering Event and, in the case of a prepayment pursuant to Section 3.7(k), the Maker shall deliver the applicable MajorTransaction Prepayment Price immediately prior to the consummation of the Major Transaction; provided that a holder’s original Note shall have been so delivered to the Maker; provided further that if the Maker is unable to prepayall of the Notes to be prepaid, the Maker shall prepay an amount from each holder of the Notes being prepaid equal to such holder’s pro-rata amount (based on the number of Notes held by such holder relative to the number of Notes outstanding)of all Notes being prepaid. If the Maker shall fail to prepay all of the Notes submitted for prepayment (other than pursuant to a dispute as to the arithmetic calculation of the Prepayment Price), in addition to any remedy such holder of the Notesmay have under this Note, the Security Agreement and the Purchase Agreement, the applicable Prepayment Price payable in respect of such Notes not prepaid shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid infull. Until the Maker pays such unpaid applicable Prepayment Price in full to a holder of the Notes submitted for prepayment, such holder shall have the option (the “Void Optional Prepayment Option”) to, in lieu of prepayment,require the Maker to promptly return to such holder(s) all of the Notes that were submitted for prepayment by such holder(s) under this Section 3.7 and for which the applicable Prepayment Price has not been paid, by sending written notice thereof tothe Maker via facsimile (the “Void Optional Prepayment Notice”). Upon the Maker’s receipt of such Void Optional Prepayment Notice(s) and prior to payment of the full applicable Prepayment Price to such holder, (i) the Notice(s)of Prepayment at Option of Holder Upon Triggering Event or the Notice(s) of Prepayment at Option of Holder Upon Major Transaction, as the case may be, shall be null and void with respect to those Notes submitted for prepayment and for which theapplicable Prepayment Price has not been paid, (ii) the Maker shall immediately return any Notes submitted to the Maker by each holder for prepayment under this Section 3.7(h) and for which the applicable Prepayment Price has not been paid and (iii)the Conversion Price of such returned Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the Void Optional Prepayment Notice(s) is delivered to the Maker and (B) the lowest Per Share Market Valueduring the period beginning on the date on which the Notice(s) of Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of Prepayment at Option of Holder Upon Triggering Event, as the case may be, is delivered to the Maker andending on the date on which the Void Optional Prepayment Notice(s) is delivered to the Maker; provided that no adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect. A holder’s deliveryof a Void Optional Prepayment Notice and exercise of its rights following such notice shall not effect the Maker’s obligations to make any payments which have accrued prior to the date of such notice. Payments provided for in this Section 3.7shall have priority to payments to other stockholders in connection with a Major Transaction. 

 

(l) Holder Prepayment Option. At the sole option of the Holder, the Holder may grant the Maker the option to prepay all or any portion of the outstanding principal amount of this Note together with all accruedand unpaid interest thereon within ten (10) days of the Holder granting the option to the Maker. If the Maker elects to exercise the prepayment option, the Maker shall upon five (5) days prior written notice to the Holder (the “Maker’sPrepayment 

 

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Notice”) prepay all or a portion of the outstanding Notes equal to 130% of the aggregate outstanding principal amount of this Note plus anyaccrued but unpaid interest (the “Maker’s Prepayment Price”); provided, however, that if a holder has delivered a Conversion Notice to the Maker or delivers a Conversion Notice after receipt of the Maker’sPrepayment Notice, the Notes designated to be converted may not be prepaid by the Maker; providedfurther that if during the period between delivery of the Maker’s Prepayment Notice and the Maker’s Prepayment Date (as definedbelow), a holder shall become entitled to deliver a Notice of Prepayment at Option of Holder Upon Major Transaction or Notice of Prepayment at Option of Holder upon Triggering Event, then the such rights of the holders shall take precedence over thepreviously delivered Maker Prepayment Notice. The Maker’s Prepayment Notice shall state the date of prepayment which date shall be the sixth (6th) day after the Maker has delivered the Maker’s Prepayment Notice (the “Maker’sPrepayment Date”), the Maker’s Prepayment Price and the amount of Notes to be prepaid by the Maker. The Maker shall deliver the Maker’s Prepayment Price to the Holder within five (5) business days after the Maker has delivered theMaker’s Prepayment Notice, provided, that if the holder(s) delivers a Conversion Notice before the Maker’s Prepayment Date, then the portion of the Maker’s Prepayment Price which would be paid to prepay the Notes covered bysuch Conversion Notice shall be returned to the Maker upon delivery of the Common Stock issuable in connection with such Conversion Notice to the holder(s). On the Maker’s Prepayment Date, the Maker shall pay the Maker’s Prepayment Price,subject to any adjustment pursuant to the immediately preceding sentence, to the holder(s) on a pro rata basis, provided, however, that upon receipt by Maker of the certificates representing the Notes to be prepaid pursuant to this Section3.7(l), the Maker shall, on the next business day following the date of receipt by the Maker of the original Note, pay the Maker’s Prepayment Price to the holder(s) on a pro rata basis. If the Maker fails to pay the Maker’s PrepaymentPrice by the sixth (6th) business day after the Maker has delivered the Maker’s Prepayment Notice, the prepayment will be declared null and void and the Maker shall lose its right to serve a Maker ‘s Prepayment Notice pursuant to thisSection 3.7(l) in the future.****

 

Section 3.8 Inabilityto Fully Convert. 

 

(a) Holder’s Option if MakerCannot Fully Convert. If, upon the Maker’s receipt of a Conversion Notice or on the Mandatory Conversion Date, the Maker cannot issue shares of Common Stock registered for resale under the Registration Statement for any reason, including,without limitation, because the Maker (w) does not have a sufficient number of shares of Common Stock authorized and available, (x) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotationsystem or other self-regulatory organization with jurisdiction over the Maker or any of its securities from issuing all of the Common Stock which is to be issued to the Holder pursuant to a Conversion Notice or (y) fails to have a sufficient numberof shares of Common Stock registered for resale under the Registration Statement, then the Maker shall issue as many shares of Common Stock as it is able to issue in accordance with the Holder’s Conversion Notice and, with respect to theunconverted portion of this Note, the Holder, solely at Holder’s option, can elect to: 

 

(i) require the Maker to prepay that portion of this Note for which the Maker is unable to issue Common Stock in accordance with the Holder’s Conversion Notice (the “Mandatory Prepayment”) at aprice per share equal to the Prepayment Price as of such Conversion Date (the “Mandatory Prepayment Price”); 

 

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(ii) if the Maker’s inability to fully convert is pursuant to Section 3.8(a)(y) above, require theMaker to issue restricted shares of Common Stock equal to one hundred twenty percent (120%) of the number of shares of Common Stock the Maker is unable to deliver in accordance with such holder’s Conversion Notice; 

 

(iii) void its Conversion Notice and retain or have returned, as the casemay be, this Note that was to be converted pursuant to the Conversion Notice (provided that the Holder’s voiding its Conversion Notice shall not effect the Maker’s obligations to make any payments which have accrued prior to the date ofsuch notice). 

 

(b) Mechanics of Fulfilling Holder’sElection. The Maker shall immediately send via facsimile to the Holder, upon receipt of a facsimile copy of a Conversion Notice from the Holder which cannot be fully satisfied as described in Section 3.8(a) above, a notice of the Maker’sinability to fully satisfy the Conversion Notice (the “Inability to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is unable to fully satisfy such holder’s ConversionNotice, (ii) the amount of this Note which cannot be converted and (iii) the applicable Mandatory Prepayment Price. The Holder shall notify the Maker of its election pursuant to Section 3.8(a) above by delivering written notice via facsimile to theMaker (“Notice in Response to Inability to Convert”). 

 

(c) Payment of Prepayment Price. If the Holder shall elect to have its shares prepaid pursuant to Section 3.8(a)(i) above, the Maker shall pay the Mandatory Prepayment Price in cash to the Holder within five (5) days of theMaker’s receipt of the Holder’s Notice in Response to Inability to Convert, provided that prior to the Maker’s receipt of the Holder’s Notice in Response to Inability to Convert the Maker has not delivered a notice to theHolder stating, to the satisfaction of the Holder, that the event or condition resulting in the Mandatory Prepayment has been cured and all Conversion Shares issuable to the Holder can and will be delivered to the Holder in accordance with the termsof this Note. If the Maker shall fail to pay the applicable Mandatory Prepayment Price to the Holder on a timely basis as described in this Section 3.8(c) (other than pursuant to a dispute as to the determination of the arithmetic calculation of thePrepayment Price), in addition to any remedy the Holder may have under this Note and the Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid in full. Until the fullMandatory Prepayment Price is paid in full to the Holder, the Holder may (i) void the Mandatory Prepayment with respect to that portion of the Note for which the full Mandatory Prepayment Price has not been paid, (ii) receive back such Note, and(iii) require that the Conversion Price of such returned Note be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the Holder voided the Mandatory Prepayment and (B) the lowest Per Share Market Value during theperiod beginning on the Conversion Date and ending on the date the Holder voided the Mandatory Prepayment. 

 

Section 3.9 No Rights as Shareholder. Nothing contained in this Note shall be construed as conferring upon the Holder, prior to the conversion ofthis Note, the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as ashareholder of the Maker. 

 

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ARTICLE IV 

 

MISCELLANEOUS

 

Section 4.1 Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing andshall be effective (a) upon hand delivery by telex (with correct answer back received), telecopy or facsimile at the address or number designated in the Purchase Agreement (if delivered on a business day during normal business hours where suchnotice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailingby express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The Maker will give written notice to the Holder at least ten (10) days prior to the date on which the Makercloses its books or takes a record (x) with respect to any dividend or distribution upon the Common Stock, (y) with respect to any pro rata subscription offer to holders of Common Stock or (z) for determining rights to vote with respect to anyOrganic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public. The Maker will also give written notice to the Holder at least ten (10)days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to the Holder prior to such information being made known to the public. 

 

Section 4.2 Governing Law. This Note shall be governed by andconstrued in accordance with the internal laws of the State of New York, without giving effect to the choice of law provisions. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.

 

Section 4.3 Headings. Article and section headings inthis Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose. 

 

Section 4.4 Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulativeand in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliancewith the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of this Note. Amounts set forth or provided for herein with respect topayments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Maker (or the performancethereof). The Maker acknowledges that a breach by it of its obligations hereunder will cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker agrees that, in the eventof any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining anysuch breach or threatened breach, without the necessity of showing economic loss and without any bond or other security being required. 

 

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Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and expenses of enforcement ofthis Note, including, without limitation, reasonable attorneys’ fees and expenses. 

 

Section 4.6 Binding Effect. The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and assigns of each such party, whether or not such successors or assigns arepermitted by the terms hereof. 

 

Section 4.7 Amendments.This Note may not be modified or amended in any manner except in writing executed by the Maker and the Holder. 

 

Section 4.8 Compliance with Securities Laws. The Holder of this Note acknowledges that this Note is being acquired solely for the Holder’s ownaccount and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or otherwise dispose of this Note. This Note and any Note issued in substitution or replacement therefore shall be stamped or imprintedwith a legend in substantially the following form: 

 

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINIONOF COUNSEL (WHICH COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE MAKER) IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROMREGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.” 

 

Section 4.9 Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of theState of New York located in New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is notpersonally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the Holder consents to process beingserved in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under the Purchase Agreement and agrees that such service shall constitute good and sufficient service of process andnotice thereof. Nothing in this Section 4.9 shall affect or limit any right to serve process in any other manner permitted by law. 

 

Section 4.10 Parties in Interest. This Note shall be binding upon, inure to the benefit of and be enforceable by the Maker, the Holder and theirrespective successors and permitted assigns. 

 

Section 4.11Failure 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 orprivilege preclude other or further exercise thereof or of any other right, power or privilege. 

 

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Section 4.12 Maker Waivers. Except as otherwise specifically provided herein, the Maker and allothers that may become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest and all other demands’ and notices in connection with the delivery, acceptance,performance and enforcement of this Note, and do hereby consent to any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made without notice to any such persons and without affectingtheir liability herein and do further consent to the release of any person liable hereon, all without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY. 

 

(a) No delay or omission on the part of the Holder in exercising its rightsunder this Note, or course of conduct relating hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on any one occasion be deemed a waiver of the same rightor rights on any future occasion. 

 

Section 4.13Definitions. For the purposes hereof, the following terms shall have the following meanings: 

 

“Independent Appraiser” means a nationally recognized or major regional investment banking firm or firm of independent certified publicaccountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as goingconcerns, and which is not affiliated with either the Issuer or the Holder of any Warrant. 

 

“Person” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agencyor political subdivision thereof) or other entity of any kind. 

 

“Trading Day” “ means (a) a day on which the Common Stock is traded on The Nasdaq SmallCap Market or other registered national stock exchange on which the Common Stock has been listed, or (b) if the Common Stock is notlisted on The Nasdaq SmallCap Market or any registered national stock exchange, a day or which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTCBulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided,however, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which bankinginstitutions in the State of New York are authorized or required by law or other government action to close. 

 

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ANALYTICAL SURVEYS, INC.
By:
     
Name:
  
Title:

 

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EXHIBIT A 

 

WIRE INSTRUCTIONS. 

 

Payee:

Bank:

Address:

 

Bank No.:

Account No.:

Account Name:

 

 

 

 

 

 

 

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FORM OF 

 

NOTICE OF CONVERSION 

 

(To be Executed by the Registered Holder in order to Convert the Note) 

 

The undersigned hereby irrevocably elects to convert $                             of the principal amount of the above Note No.    into shares of Common Stock of ANALYTICAL SURVEYS, INC. (the “Maker”) according to the conditions hereof, as of the date written below. 

 

Date of Conversion                                                                                                                                    

 

Applicable Conversion Price                                                                                                                    

 

Signature                                                                                                                                                    

 

[Name] 

 

Address:
  
 
   
 

 

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