exv4w1



 



Exhibit 4.1



NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY ONLY BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (B) AN OPINION OF
COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (C) RULE 144(K) UNDER SAID ACT AND, IN EACH
CASE, IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
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 DEBENTURE SHOULD CAREFULLY REVIEW THE
TERMS OF THIS DEBENTURE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE
PRINCIPAL AMOUNT REPRESENTED BY THIS DEBENTURE 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 DEBENTURE.


SUBORDINATED CONVERTIBLE DEBENTURE




	 	 	 
	Issuance Date: January 13, 2004	 	
Principal: U.S. $15,000,000



     FOR VALUE RECEIVED, TeleCommunication Systems, Inc., a Maryland
corporation (the “Company”), hereby promises to pay to the order of THE
RIVERVIEW GROUP LLC 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 (as defined below), acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest (“Interest”)
in the manner set forth herein on any outstanding Principal at the rate of
3.00% per annum, subject to periodic adjustment pursuant to Section 2 (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), the Maturity Date, acceleration, conversion,
redemption or otherwise (in each case in accordance with the terms hereof).
This Subordinated Convertible Debenture (including all Subordinated Convertible
Debentures issued in exchange, transfer or replacement hereof, this
“Debenture”) is one of an issue of Subordinated Convertible Debentures
(collectively, the “Debentures” and such other Subordinated Convertible
Debentures, the “Other Debentures”) issued on the Issuance Date pursuant to the
Securities Purchase Agreement (as defined below). Certain capitalized terms
are defined in Section 28.


          (1) MATURITY. On the Maturity Date, the Holder shall surrender this




 






 





Debenture to the Company and the Company shall pay to the Holder an amount in
cash or, at the option of the Company (subject to the satisfaction of the
conditions set forth in this Section 1), in shares of Common Stock (“Repayment
Shares”), or a combination of cash and Repayment
Shares, representing all outstanding Principal, accrued and unpaid Interest and
accrued and unpaid Late Charges, if any; provided that the Principal, accrued
and unpaid Interest and accrued and unpaid Late Charges, if any payable on the
Maturity Date may be payable in Repayment Shares (subject to the proviso set
forth below) only if the Company delivers written notice of such election
(“Maturity Date Payment Election Notice”) to each holder of the Debentures at
least 15 Trading Days prior to the Maturity Date (a “Maturity Payment Election
Date”). The “Original Maturity Date” shall
be January 13, 2009, as extended
at the option of the Holder (i) in the event that, and for so long as, an Event
of Default (as defined in Section 4(a)) 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 days after the consummation of a Change of Control
(as defined in Section 5(a)) in the event that a Change of Control is publicly
announced or a Change of Control Notice (as defined in Section 5(a)) is
delivered prior to the Maturity Date (as such Original Maturity Date may be
extended pursuant to clause (i) or (ii) above, the “Maturity Date”). Payments
to be made on the Maturity Date in Repayment Shares shall be paid in a number
of fully paid and nonassessable shares (rounded to the nearest whole share in
accordance with Section 3(a)) of Common Stock equal to the quotient of (a) the
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if
any, payable and (b) the Maturity Date Conversion Price on the Maturity Date.
If any Repayment Shares are to be paid on the Maturity Date, then the Company
shall (X) provided that the Company’s transfer agent (the “Transfer Agent”) is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer Program, credit such aggregate number of Repayment 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 on the Maturity Date, to such address as
specified at least two Business Days prior to the Maturity Date by the Holder
in writing to the Company, a certificate, registered in the name of the Holder
or its designee, for the number of Repayment Shares to which the Holder shall
be entitled. Notwithstanding the foregoing, the Company shall not be entitled
to make any payment due on the Maturity Date in Repayment Shares and shall be
required to make all of such payment in cash on the Maturity Date if, unless
consented to in writing by the Holder, (x) any event constituting an Event of
Default or an event that with the passage of time and assuming it were not
cured would constitute an Event of Default has occurred and is continuing on
the applicable Maturity Payment Election Date or the Maturity Date, (y) (i) the
Registration Statement (as defined in the Registration Rights Agreement)
covering the Repayment Shares is not effective and available for the resale of
all of the Registrable Securities (as defined in the Registration Rights
Agreement) relating to this Debenture on the Maturity Payment Election Date or
on the Maturity Date and (ii)



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the Holder is not able to sell all of the
Registrable Securities held by them pursuant to Rule 144(k) or (z) the Company
has not obtained the Stockholder Approval (as defined in the Securities
Purchase Agreement). The Company shall pay any and all taxes (other than
income taxes which shall be payable by the Holder) that may be payable with respect to
the issuance and delivery of Repayment Shares. If the Company elects to pay
the amounts due on the Maturity Date by a combination of cash and Repayment
Shares, then any conversions made by the holder prior to the Maturity Date
shall be applied first to the amount of Repayment Shares which the Company has
elected to pay and then against the amount to be paid by cash under the
Maturity Date Payment Election Notice.


          (2) INTEREST; INTEREST RATE. Interest on this Debenture shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable in arrears on the first day
of each Semi-Annual Period 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 July 1, 2004. Interest shall be payable on each
Interest Date, at the option of the Company, (i) in cash, (ii) by way of
inclusion in the Conversion Amount in accordance with Section 3(b)(i), or (iii)
subject to the satisfaction of the conditions set forth in this Section 2, in
shares of Common Stock (“Interest Shares”); provided, that the Interest which
accrued during any period shall be payable in Interest Shares only if the
Company delivers written notice of such election (“Interest Election Notice”)
to each holder of the Debentures at least ten (10) Trading Days prior to the
Interest Date (an “Interest Election Date”). Interest to be paid on an
Interest Date in Interest Shares shall be paid in a number of fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 3(a)) of Common Stock equal to the quotient of (a) the Interest payable
on such debt and (b) the Interest Conversion Price on the applicable Interest
Date. If any Interest Shares are to be paid on an Interest Date, then the
Company shall (X) provided that the Transfer Agent is participating in the DTC
Fast Automated Securities Transfer Program, credit such aggregate number of
Interest Shares to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver on the applicable
Interest Date, to such address as specified at least two Business Days prior to
the applicable Interest Date by the Holder in writing to the Company, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled.
Notwithstanding the foregoing, the Company shall not be entitled to pay
Interest in Interest Shares and shall be required to pay such Interest in cash
on the applicable Interest Date if, unless consented to in writing by the
Holder, (x) any event constituting an Event of Default or an event that with
the passage of time and assuming it were not cured would constitute an Event of
Default has occurred and is continuing on the applicable Interest Election Date
or the Interest Date, (y) (i) the Registration Statement (as defined in the
Registration Rights Agreement) covering the Interest Shares is not effective
and available for the resale of all of the Registrable Securities (as defined
in the Registration Rights Agreement) relating to this Debenture on the
Interest Election Date or on the Interest Date and (ii) the Holder




3






 





is not able
to sell all of the Registrable Securities held by them pursuant to Rule 144(k)
or (z) the Company has not obtained the Stockholder Approval. Prior to the
payment of Interest on an Interest Date, Interest on this Debenture shall
accrue at the Interest Rate and be payable by way
of inclusion of the Interest in the Conversion Amount in accordance with
Section 3(b)(i). From and after the occurrence of an Event of Default, the
Interest Rate shall be increased to 12%. In the event that such Event of
Default is subsequently cured or waived, the adjustment referred to in the
preceding sentence shall cease to be effective as of the date of such cure or
waiver; 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 and waiver of such Event of Default. The Company
shall pay any and all taxes (other than income taxes which shall be payable by
the Holder) that may be payable with respect to the issuance and delivery of
Interest Shares.


          (3) CONVERSION OF DEBENTURES. This Debenture shall be convertible into
shares of the Company’s Class A common stock, par value $0.01 per share (the
“Common Stock”), on the terms and conditions set forth in this Section 3.



               (a) Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below). The Company
shall not issue any fraction of a share of Common Stock upon any conversion.
If the issuance would result in the issuance of a fraction of a share of Common
Stock, the Company shall round such fraction of a share of Common Stock up to
the nearest whole share. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Stock upon
conversion of any Conversion Amount.



               (b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be
determined by dividing (x) such Conversion Amount by (y) the Conversion Price
(as defined below) (the “Conversion Rate”).




	 	 	(i) “Conversion Amount” means the sum of (A) the portion of the Principal
to be converted, redeemed or otherwise with respect to which this
determination is being made, (B) accrued and unpaid Interest with respect
to such Principal and (C) accrued and unpaid Late Charges with respect to
such Principal and Interest.
	 
	 	 	(ii) “Conversion Price” means, as of any Conversion Date (as defined
below) or other date of determination, and subject to adjustment as
provided herein, $5.3753



               (c) Mechanics of Conversion.





4






 






	 	 	(i) Optional Conversion. To convert any Conversion Amount into shares of
Common Stock on any date (a “Conversion Date”), the Holder shall (A)
transmit by
facsimile (or otherwise deliver), for receipt on or prior to 9:30 a.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
Debenture 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 Debenture in the case of its loss, theft or
destruction). On or before the first Business 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
Transfer Agent (a “Confirmation Receipt”). On or before the third
Business Day following the date of receipt of a Conversion Notice (the
“Share Delivery Date”), the Company shall (X) credit such aggregate
number of shares of Common Stock to which the Holder shall be entitled to
the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent
is not participating in 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 shares of Common Stock to which the Holder shall be
entitled. If this Debenture is physically surrendered for conversion as
required by Section 3(c)(iii) and the outstanding Principal of this
Debenture at the time of such conversion is greater than the Principal
portion of the Conversion Amount being converted, then the Company shall
as soon as practicable and in no event later than three Business Days
after receipt of this Debenture and at its own expense, issue and deliver
to the holder a new Debenture (in accordance with Section 18(d))
representing the outstanding Principal not converted. The Person or
Persons entitled to receive the shares of Common Stock issuable upon a
conversion of this Debenture shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the Conversion
Date. All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this
Debenture required to be converted on the Mandatory Conversion Date.
	 
	 	 	(ii) Company’s Failure to Timely Convert. Subject to Section 3(d), 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 shares of Common
Stock to which the Holder is entitled upon conversion of any Conversion
Amount on or prior to the date which is five Business Days after the
Conversion Date, provided, that if the Company shall not have timely
delivered a Confirmation Receipt, the Holder shall have retransmitted by
facsimile its Conversion Notice on or prior to the date which is three
Business Days after the Conversion Date (a “Conversion Failure”), then
(A) the Company shall pay damages to the Holder for each date of such
Conversion Failure in an amount equal to 1.0% of the product of (I) the
sum of the number of shares of Common Stock not issued to the Holder



5






 







	 	 	on or prior to the Share Delivery Date and to which the Holder is entitled,
and (II) the Weighted Average Price of the Common Stock on the Share
Delivery Date 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 Debenture 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.
	 
	 	 	(iii) Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon conversion, redemption or repayment of any portion of this
Debenture in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Debenture to the Company unless (A)
the full Conversion Amount represented by this Debenture 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
physical surrender and reissue of this Debenture. The Holder and the
Company shall maintain records showing the Principal, Interest and Late
Charges 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 Debenture upon conversion.
	 
	 	 	(iv) Pro Rata Conversion; Disputes. In the event that the Company
receives a Conversion Notice from more than one holder of Debentures for
the same Conversion Date and the Company can convert some, but not all,
of such portions of the Debentures submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Debentures
electing to have Debentures converted on such date a pro rata amount of
such holder’s portion of its Debentures submitted for conversion based on
the principal amount of Debentures submitted for conversion on such date
by such holder relative to the aggregate principal amount of all
Debentures submitted for conversion on such date. In the event of a
dispute as to the number of shares of Common Stock issuable to the Holder
in connection with a conversion of this Debenture, the Company shall
issue to the Holder the number of shares of Common Stock not in dispute
and resolve such dispute in accordance with Section 23, and failure to
convert the amount in dispute shall not constitute a default during
pendency of dispute.



               (d) Limitations on Conversions.




	 	 	(i) Beneficial Ownership. Notwithstanding anything to the contrary set
forth in this Debenture, the Company shall not effect any conversion of
this Debenture, and the Holder of this Debenture shall neither solicit
the conversion nor have the right to convert any portion of this
Debenture pursuant to Section 3, to the extent that after giving effect
to such conversion, the Holder (together with the Holder’s affiliates)
would beneficially own in excess of 9.99% of the number of shares of
Common Stock outstanding



6






 







	 	 	immediately after giving effect to such
conversion. For purposes of the foregoing sentence, such Holder
(together with such Holder’s affiliates) shall be deemed to beneficially
own of the shares of Common Stock issuable upon conversion of this
Debenture with respect to which the determination of such sentence is
being made, but shall not be deemed to beneficially own shares of Common
Stock which would be issuable upon (A) conversion of the remaining,
nonconverted portion of this Debenture and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the
Company (including, without limitation, any Other Debentures 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. For purposes of this Section 3(d)(i), in
determining the number of outstanding shares of Common Stock, the Holder
may rely on the number of outstanding shares of Common Stock, on any
determination date, as reflected in (x) the Company’s Form 10-Q or Form
10-K most recently filed, (y) a more recent public announcement by the
Company or (z) any other notice by the Company setting forth the number
of shares of Common Stock outstanding provided pursuant to the next
sentence. For any reason at any time, upon the written request of the
Holder, the Company shall within two Business Days confirm orally and in
writing to the Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Debenture, by the
Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. Any Conversion Notice
requesting a conversion that, after giving effect to such conversion,
would result in a violation of this Section 3(d)(i) shall be null and
void as to the portion of such Conversion Notice that would be in
violation of this Section 3(d)(i) as if never delivered to the Company.
	 
	 	 	(ii) Principal Market Regulation. Notwithstanding anything to the
contrary set forth in this Debenture, the Company shall not be obligated
to issue any shares of Common Stock upon conversion of this Debenture if
the issuance of such shares of Common Stock (individually or together
with all other shares of Common Stock issued or issuable now or in the
future pursuant to (i) this Debentures, (ii) the other Debentures issued
by the Company pursuant to the Securities Purchase Agreement, (iii) the
Warrants issued pursuant to the Securities Purchase Agreement, or (iv)
the Securities Purchase Agreement) would exceed that number of shares of
Common Stock which the Company may issue upon conversion of this
Debenture without triggering the stockholder approval requirements of
Rule 4350(i) under the rules of the Principal Market (the “Exchange
Cap”), except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by the
applicable rules of the Principal Market and in accordance with
applicable law for issuances of Common Stock



7






 







	 	 	in excess the threshold
amount in such rule or (B) obtains a written opinion from outside counsel
to the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the holders of the Debentures representing at
least a majority of
the principal amounts of the Debentures then outstanding. Until such
approval or written opinion is obtained, no purchaser of the Debentures,
Warrants or shares of Common Stock pursuant to the Securities Purchase
Agreement (the “Purchasers”) shall be issued, upon conversion of
Debentures or exercise of the Warrants, shares of Common Stock in an
amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the principal amount of Debentures
initially issued to such Purchaser pursuant to the Securities Purchase
Agreement and the denominator of which is the aggregate principal amount
of all Debentures initially issued to the Purchasers pursuant to the
Securities Purchase Agreement (with respect to each Purchaser, the
“Exchange Cap Allocation”). In the event that any Purchaser shall sell
or otherwise transfer any of such Purchaser’s Debentures, the transferee
shall be allocated a pro rata portion of such Purchaser’s Exchange Cap
Allocation, and the restrictions of the prior sentence shall apply to
such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee. In the event that any holder of
Debentures shall convert all of such holder’s Debentures into a number of
shares of Common Stock which, in the aggregate, is less than such
holder’s Exchange Cap Allocation, then the difference between such
holder’s Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective
Exchange Cap Allocations of the remaining holders of Debentures on a pro
rata basis in proportion to the aggregate principal amount of the
Debentures then held by each such holder. Any Conversion Notice
requesting a conversion that, after giving effect to such conversion,
would result in a violation of this Section 3(d) shall be null and void
as to the portion of such Conversion Notice that would be in violation of
this Section 3(d) as if never delivered to the Company.



              (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 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
Debentures for sale of all of such holder’s Registrable Securities (as
defined



8






 







	 	 	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 more than an aggregate of 20
Trading 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 Stock to be
listed on the Principal Market, The Nasdaq SmallCap Market or The New
York Stock Exchange, Inc. for a period of 10 consecutive Trading Days or
for more than an aggregate of 20 Trading Days in any 365-day period;
	 
	 	 	(iii) the Company’s (A) failure to cure a Conversion Failure by delivery
of the required number of shares of Common Stock within ten (10) Business
Days after the applicable Conversion Date or (B) written notice to any
holder of the Debentures, including by way of public announcement or
through any of its agents, at any time, of its express intention not to
comply with a request for conversion of any Debentures into shares of
Common Stock that is tendered in accordance with the provisions of the
Debentures;
	 
	 	 	(iv) at any time following
the 20th consecutive Business Day that the
Holder’s Authorized Share Allocation is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a
conversion of the full Conversion Amount of this Debenture (without
regard to any limitations on conversion set forth in Section 3(d)(i) or
otherwise);
	 
	 	 	(v) the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this
Debenture or any other Transaction Document (as defined in the Securities
Purchase Agreement), certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which
the Holder is a party, 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 seven Business Days after the Company
has received notice of such failure to pay from the Holder;
	 
	 	 	(vi) any redemption of or acceleration prior to maturity of any material
Indebtedness (as defined in Section 3(s) of the Securities Purchase
Agreement) 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 Debentures;
	 
	 	 	(vii) the Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal 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



9






 







	 	 	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 non-appealable judgment or judgments for the payment of
money aggregating in excess of $1,500,000 are rendered against the
Company or any of its Subsidiaries and which judgments are not, within 60
days after the entry thereof, bonded, discharged or stayed pending
appeal, or are not discharged within 60 days after the expiration of such
stay; provided, however, that any judgment which is covered by insurance
or an indemnity from a creditworthy party shall not be included in
calculating the $1,500,000 amount set forth above so long as the Company
provides the Holder a written statement from such insurer or indemnity
provider (which written statement shall be reasonably satisfactory to the
Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within 30 days of the issuance of such judgment;
	 
	 	 	(x) the Company breaches, in any material respect, any representation,
warranty, covenant or other term or condition of this Debenture or any
other Transaction Document, certificate or other instrument delivered in
connection with the transactions contemplated thereby and hereby to which
the Holder is a party, except, in the case of a breach of covenant which
is curable, only if such breach continues for a period of at least ten
(10) consecutive Business Days of the Company’s receipt of notice of
same; or
	 
	 	 	(xi) any breach or failure in any respect to comply with Section 14 of
this Debenture.



               (b) Redemption Right. Promptly after the Company becomes aware of the
occurrence of an Event of Default with respect to this Debenture or any Other
Debenture, 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 Debenture by delivering written
notice thereof (the “Event of Default Redemption Notice”) to the Company, which
Event of Default Redemption Notice shall indicate the facts constituting the
Event of Default and the portion of this Debenture the Holder is electing to
redeem. Each portion of this Debenture subject to redemption by the Company
pursuant to this Section 4(b) shall be redeemed by the Company at a price equal
to the product of (x) the Conversion Amount to be redeemed and (y) the
Redemption Premium (the “Event of Default Redemption
Price”). Redemptions
required by this Section 4(b) shall be made in accordance with the provisions
of Section 11.




10






 





              (5) RIGHTS UPON CHANGE OF CONTROL.



                   (a) Change of Control. Each of the following events shall constitute a
“Change of Control”:




	 	 	(i) the consolidation, merger or other business combination (including,
without limitation, a reorganization or recapitalization) of the Company
with or into another Person (other than (A) a consolidation, merger or
other business combination (including, without limitation, reorganization
or recapitalization) in which holders of the Company’s voting 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 their equivalent if other than a corporation) of such
entity or entities, or (B) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the
Company);
	 
	 	 	(ii) the sale or transfer of all or substantially all of the Company’s
assets; or
	 
	 	 	(iii) a purchase, tender or exchange offer made to and accepted by the
holders of more than the 50% of the outstanding shares of Common Stock
(exclusive of Repayment Shares and Interest Shares).
	 
	 	 	No sooner than 15 days nor later than 10 days prior to the consummation of a
Change of Control, but in any event 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”).



               (b) Assumption. Prior to the consummation of any Change of Control, the
Company will secure from any Person purchasing the Company’s assets or Common
Stock or any successor (other than the Company) resulting from such Change of
Control (in each case, an “Acquiring Entity”) a written agreement (in form and
substance reasonably satisfactory to the holders of Debentures representing at
least a majority of the aggregate principal amount of the Debentures then
outstanding) to deliver to each holder of Debentures in exchange for such
Debentures, a security of the Acquiring Entity evidenced by a written
instrument substantially similar in form and substance to the Debentures,
including, without limitation, having a principal amount and interest rate
equal to the principal amounts and the interest rates of the Debentures then
held by such holder, and reasonably satisfactory to the holders of Debentures
representing at least a majority of the principal amount of the Debentures then
outstanding. In the event that an Acquiring Entity is directly or indirectly
controlled by a company or entity whose common stock or similar equity interest
is listed, designated or quoted on a securities exchange or trading market, the
holders of Debentures representing at least a majority of the aggregate
principal amount of the Debentures then outstanding may elect to treat such
Person as the Acquiring




11






 





Entity for purposes of this Section 5(b).


               (c) Redemption Right. At any time during the period beginning after the
Holder’s receipt of a Change of Control Notice and ending on the date of the
consummation of such Change of Control (or, in the event a Change of Control
Notice is not delivered at least 10 days prior to a Change of Control, at any
time on or after the date which is 10 days prior to a Change of Control and
ending 10 days after the consummation of such Change of Control), the Holder
may require the Company to redeem all or any portion of this Debenture 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
Debenture subject to redemption pursuant to this Section 5(c) shall be redeemed
by the Company at a price equal to the greater of (i) the product of (x) the
Conversion Amount being redeemed and (y) the quotient determined by dividing
(A) the Weighted Average Price of the Common Stock for the full Trading Day
immediately following the public announcement of such proposed Change of
Control by (B) the Conversion Price and (ii) 125% of the Conversion Amount
being redeemed (the “Change of Control Redemption Price”). Redemptions required
by this Section 5(c) shall be made in accordance with the provisions of Section
11 and shall have priority to payments to stockholders in connection with a
Change of Control.



          (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 stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Debenture (without taking into account any limitations or restrictions on the
convertibility of this Debenture) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no
such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.



               (b) Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for Common Stock (a “Corporate Event”), the Company shall
make appropriate provision to insure that the Holder will thereafter have the
right to receive upon a conversion of this Debenture, (i) in addition to the
shares of Common Stock receivable upon such conversion, such securities or
other assets to which the Holder would have been entitled with respect to such
shares of Common Stock had




12






 





such shares of Common Stock been held by the Holder
upon the consummation of such
Corporate Event or (ii) in lieu of the shares of Common Stock otherwise
receivable upon such conversion, such securities or other assets received by
the holders of Common Stock in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to
receive had this Debenture initially been issued with conversion rights for the
form of such consideration (as opposed to shares of Common Stock) at a
conversion rate for such consideration commensurate with the Conversion Rate.
Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the holders of Debentures representing at least a
majority of the aggregate principal amount of the Debentures then outstanding.


              (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.



               (a) Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Issuance Date, the Company issues or sells, or in
accordance with this Section 7(a) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company, but excluding shares of Common
Stock issued or deemed to have been issued or sold by the Company in connection
with any Excluded Security) for a consideration per share (the “New Securities
Issuance Price”) less than a price (the “Applicable Price”) equal to the
Conversion Price in effect immediately prior to such issue 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 greater of (x) the New Securities Issuance Price and (y) $2.50
(subject to adjustment for any stock split, stock dividend, stock combination
or other similar transaction after the Issuance Date) (the “Price Floor”). 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, other than Excluded Securities, and the lowest price per
share for which one share of Common Stock is issuable upon the exercise
of any such Option or upon conversion or exchange or exercise of any
Convertible Securities issuable upon exercise of such Option is less than
the Applicable Price, then, solely for purposes of this Section 7, such
share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the granting or sale of
such Option for such price per share. For purposes of this Section
7(a)(i), the “lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such 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 share of Common Stock 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



13






 







	 	 	such Common Stock or of such Convertible Securities upon the
exercise of such Options
or upon the actual issuance of such Common Stock 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, other than Excluded
Securities, and the lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange or exercise thereof is
less than the Applicable Price, then, solely for purposes of this Section
7, such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the issuance of
sale of such Convertible Securities for such price per share. For the
purposes of this Section 7(a)(ii), the “price per share for which one
share of Common Stock 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 share of Common Stock 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 Stock 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 Stock
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
Issuance Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the
Common Stock 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 to a Conversion Price
greater than the Conversion Price in effect on the Issuance Date (subject
to appropriate adjustments for stock splits, stock dividends, stock
combinations and other similar transactions after the Issuance Date).
	 
	 	 	(iv) Calculation of Consideration Received. In case any Option is issued
in



14






 







	 	 	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
Stock, Options or Convertible Securities are issued or sold or deemed to
have been issued or sold for cash, the consideration received therefor
will be deemed to be the gross amount received by the Company therefor.
If any Common Stock, 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 Weighted Average Price of such securities on the date of receipt. If
any Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity, the amount of consideration therefor
will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common
Stock, 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 holders of Debentures
representing at least a majority of the principal amounts of the
Debentures, unless the Board of Directors of the Company shall have
obtained a fairness opinion from an independent financial advisor in
which case the fair value shall be as stated in such fairness opinion.
If, in the absence of a fairness opinion, such parties are unable to
reach agreement within ten days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined in accordance with Section 23 hereof.
	 
	 	 	(v) Record Date. If the Company takes a record of the holders of Common
Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.



               (b) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision will be proportionately reduced.
If the Company at any time combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.





15






 






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



          (8) COMPANY’S RIGHT OF MANDATORY CONVERSION AND PREPAYMENT; HOLDER’S RIGHT
TO REQUIRE REPAYMENT.



               (a)     (i)
Mandatory Conversion. If at any time from and after January 13, 2006, the arithmetic average of the Weighted Average Price of the Common
Stock exceeds 200% of the Conversion Price as of the Issuance Date (subject to
adjustments pursuant to the terms and conditions of this Debenture) for each of
any 30 consecutive Trading Days (the “Mandatory Conversion Measuring Period”)
and the Conditions to Mandatory Conversion (as set forth in Section 8(c)) are
satisfied or waived in writing by the Holder, the Company shall have the right
to require the Holder to convert all or any such portion of the Conversion
Amount of this Debenture designated in the Mandatory Conversion Notice into
fully paid, validly issued and nonassessable shares of Common Stock 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 8(a) by delivering
within not more than fifteen (15) 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 Debentures
and the Transfer Agent (the “Mandatory Conversion Notice” and the date all of
the holders received such notice is referred to as the “Mandatory Conversion
Notice Date”). The Mandatory Conversion Notice shall be irrevocable.



                         (ii) Prepayment. Notwithstanding anything to the contrary contained in
this Agreement, at any time after the Company has completed a Qualified Public
Offering and as long as the Conditions to Optional Prepayment (as defined in
Section 8(a)(iii) below) are satisfied or waived in writing by the Holder, the
Company shall have the right to prepay all or any such portion of the
outstanding Principal (the “Prepayment Portion”) for an amount in cash equal to
120% of the sum of the Prepayment Portion plus all accrued and unpaid Interest
and accrued and unpaid Late Charges thereon, if any (such amount, the
“Prepayment Premium Amount”). The Company may exercise its rights to prepay
the Debenture as set forth hereunder by delivering written notice to the Holder
at least twenty (20) Trading Days and no more than sixty (60) Trading Days
prior to the effectiveness of such election indicating the date



16






 


of
effectiveness of delivery of a written notice election (the “Prepayment
Notice”), the
Prepayment Portion, and the Prepayment Premium Amount (the date of
effectiveness being referred to as the “Prepayment Effectiveness Date”). The
Company shall deliver payment of the Prepayment Premium Amount on the
applicable Prepayment Effectiveness Date by wire transfer of immediately
available funds or by delivery of a certified check. A prepayment election
hereunder shall be irrevocable unless waived by the Holder.


                    (iii) Conditions to Optional Prepayment. For purposes of this Section 8,
“Conditions to Optional Prepayment” means the following conditions: (i) during
the period commencing on the date of delivery of a Prepayment Notice under
Section 8(a)(ii) above and the date of actual payment of the applicable
Prepayment Premium Amount (such period, the “Optional Prepayment Period”), the
Company shall have delivered shares of Common Stock upon any conversion of
Conversion Amounts on a timely basis as set forth in Section 3(c)(i) and
delivered shares of Common Stock upon exercise of any Warrants or on a timely
basis as set forth in Section 1(a) of the Warrants; (ii) on each day during the
Optional Prepayment Period, the Common Stock shall be listed on the Principal
Market, The Nasdaq SmallCap Market or The New York Stock Exchange, Inc. and
delisting or suspension by such market or exchange shall not have been
threatened either (A) in writing by such market or exchange or (B) by falling
below the minimum listing maintenance requirements of such market or exchange;
(iii) during the Optional Prepayment Period, there shall not have occurred (x)
the public announcement of a pending, proposed or intended Change of Control
which has not been abandoned, terminated or consummated, or (y) an Event of
Default; (iv) on each day of the Optional Prepayment Period either (x) the
Registration Statement or Registration Statements required pursuant to the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Debentures and shares of Common Stock issuable upon 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 (v) the Company otherwise shall have been in material compliance with and
shall not have breached, in any material respect, any provision, covenant,
representation or warranty of the Securities Purchase Agreement, the
Registration Rights Agreement, the Warrants, any of the Debentures or any other
Transaction Document (as defined in the Securities Purchase Agreement).



               (b) Pro Rata Conversion/Prepayment Requirement. If the Company elects to
cause a conversion of all or any portion of the Conversion Amount of this
Debenture pursuant to Section 8(a)(i) or to prepay this Debenture in accordance
with Section 8(a)(ii), then it must simultaneously take the same action with
respect to the Other Debentures. If the Company elects to cause the conversion
of this Debenture pursuant to Section 8(a) (or similar provisions under the
Other Debentures), with respect to less than all of the Conversion Amounts of
the Debentures then outstanding (or similar provisions under the Other
Debentures) or elects to prepay less than all of the Conversion Amounts of the
Debentures then outstanding in accordance with Section 8(a)(ii), then the
Company shall require conversion of or prepay a




17






 





Conversion Amount from each of
the holders of the Debentures equal to the product of (I) the
aggregate Conversion Amount of Debentures which the Company has elected to
cause to be converted pursuant to Section 8(a)(i) or to prepay pursuant to
Section 8(a)(ii), multiplied by (II) the fraction, the numerator of which is
the sum of the aggregate principal amount of the Debentures purchased by such
holder pursuant to the Securities Purchase Agreement and the denominator of
which is the sum of the aggregate principal amount of the Debentures then
outstanding and purchased by all holders pursuant to the Securities Purchase
Agreement (such fraction with respect to each holder is referred to as its
“Allocation Percentage,” and such amount with respect to each holder is
referred to as its “Pro Rata Amount”). In the event that the initial holder of
any Debentures shall sell or otherwise transfer any of such holder’s
Debentures, the transferee shall be allocated a pro rata portion of such
holder’s Allocation Percentage. The Mandatory Conversion Notice shall state
(i) the Trading Day selected for the Mandatory Conversion in accordance with
Section 8(a), which Trading Day shall be at least 10 Business Days but not more
than 60 Business Days following the Mandatory Conversion Notice Date (the
“Mandatory Conversion Date”), (ii) the aggregate Conversion Amount of the
Debentures which the Company has elected to be subject to mandatory conversion
from all of the holders of the Debentures pursuant to this Section 8 (and
analogous provisions under the Other Debentures), (iii) each holder’s Pro Rata
Amount of the Conversion Amount of the Debentures the Company has elected to
cause to be converted pursuant to this Section 8 (and analogous provisions
under the Other Debentures) and (iv) the number of shares of Common Stock to be
issued to such Holder as of the Mandatory Conversion Date. All Conversion
Amounts converted by the Holder after the Mandatory Conversion Notice Date
shall reduce the Conversion Amount of this Debenture required to be converted
on the Mandatory Conversion Date or permitted to be prepaid on the Prepayment
Effectiveness Date. 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.


               (c) Conditions to Mandatory Conversion. For purposes of this Section 8,
“Conditions to Mandatory Conversion” means the following conditions: (i) during
the Mandatory Conversion Measuring Period, the Company shall have delivered
shares of Common Stock upon any conversion of Conversion Amounts on a timely
basis as set forth in Section 3(c)(i) and delivered shares of Common Stock upon
exercise of any Warrants or on a timely basis as set forth in Section 1(a) of
the Warrants; (ii) on each day during the period beginning on the first Trading
Day of the Mandatory Conversion Measuring Period and ending on and including
the Mandatory Conversion Date, the Common Stock shall be listed on the
Principal Market, The Nasdaq SmallCap Market or The New York Stock Exchange,
Inc. and delisting or suspension by such market or exchange shall not have been
threatened either (A) in writing by such market or exchange or (B) by falling
below the minimum listing maintenance requirements of such market or exchange;
(iii) during the Mandatory Conversion Measuring Period, there shall not have
occurred (x) the public announcement of a pending, proposed or intended Change
of




18






 





Control which has not been abandoned, terminated or consummated, or (y) an
Event of Default;
(iv) on each day of the period beginning on the date of delivery of the
Mandatory Conversion Notice and ending on the Mandatory Conversion Date either
(x) the Registration Statement or Registration Statements required pursuant to
the Registration Rights Agreement shall be effective and available for the sale
for all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Debentures and shares of Common Stock issuable upon 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;
(v) on each day of the period beginning on the Mandatory Conversion Date and
ending thirty Trading Days thereafter either (x) the Registration Statements
required pursuant to the Registration Rights Agreement shall be expected to be
effective and available for the sale of at least all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Debentures and
shares of Common Stock issuable upon 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 (vi) the Company otherwise
shall have been in material compliance with and shall not have breached, in any
material respect, any provision, covenant, representation or warranty of any
Transaction Document.


               (d) Holder’s Right to Require Redemption. If the Weighted Average Price
of the Common Stock is less than the Conversion Price on either the ten
consecutive Trading Days immediately preceding the second anniversary or third
anniversary of the Issuance Date, the Holder shall have the right, in its sole
discretion, to require that the Company redeem all or any portion of the
Conversion Amount of this Debenture (a “Holder Optional Redemption”) by
delivering written notice thereof (a “Holder Optional Redemption Notice”) to
the Company within thirty days after the second anniversary or third
anniversary of the Issuance Date, as applicable, which Holder Redemption Notice
shall indicate the Conversion Amount the Holder is electing to redeem. The
portion of this Debenture subject to redemption pursuant to this Section 8(d)
shall be redeemed by the Company in cash at a price equal to the Conversion
Amount being redeemed (the “Holder Optional Redemption Price”). Redemptions
required by this Section 8(d) shall be made in accordance with the provisions
of Section 11.



          (9) NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will 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 of this Debenture, and will
at all times in good faith carry out all of the provisions of this Debenture
and take all action as may be required to reasonably protect the rights of the
Holder of this Debenture.



          (10) RESERVATION OF AUTHORIZED SHARES.





19






 





               (a) Reservation. The Company shall initially reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for
each of the Debentures equal to 150% of the Conversion Rate with respect to the
Conversion Amount of each such Debenture as of the Issuance Date. Thereafter,
the Company, so long as any of the Debentures are outstanding, shall take all
action necessary to reserve and keep available out of its authorized and
unissued Common Stock, solely for the purpose of effecting the conversion of
the Debentures, 130% of the number of shares of Common Stock as shall from time
to time be necessary to effect the conversion of all of the Debentures then
outstanding; provided that at no time shall the number of shares of Common
Stock so reserved be less than the number of shares required to be reserved by
the previous sentence (the “Required Reserve Amount”). The initial number of
shares of Common Stock reserved for conversions of the Debentures and each
increase in the number of shares so reserved shall be allocated pro rata among
the holders of the Debentures based on the principal amount of the Debentures
held by each holder at the time of Issuance Date or increase in the number of
reserved shares, as the case may be (the “Authorized Share Allocation”). In
the event that a holder shall sell or otherwise transfer any of such holder’s
Debentures, each transferee shall be allocated a pro rata portion of such
holder’s Authorized Share Allocation. Any shares of Common Stock reserved and
allocated to any Person which ceases to hold any Debentures shall be allocated
to the remaining holders of Debentures, pro rata based on the principal amount
of the Debentures then held by such holders.



               (b) Insufficient Authorized Shares. If at any time while any of the
Debentures remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Debentures at least a number of
shares of Common Stock equal to the Required Reserve Amount (an “Authorized
Share Failure”), then the Company shall immediately take all action necessary
to increase the Company’s authorized shares of Common Stock to an amount
sufficient to allow the Company to reserve the Required Reserve Amount for the
Debentures then outstanding. Without limiting the generality of the foregoing
sentence, as soon as reasonably practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than 90 days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting
of its stockholders for the approval of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Company shall
provide each stockholder with a proxy statement and shall use its best efforts
to solicit its stockholders’ approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.



          (11) HOLDER’S REDEMPTIONS.



               (a) Mechanics. In the event that the Holder has sent a Redemption Notice
to the Company pursuant to Section 4(b) or Section 5(c), the Holder shall
promptly submit this Debenture to the Company. The Company shall deliver the
applicable Event of Default Redemption Price to the Holder within 10 Business
Days after the Company’s receipt of




20






 





the Holder’s Event of Default Redemption
Notice. If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(c), 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
Business Days after the Company’s receipt of such notice otherwise. In the
event that the Holder has sent a Holder Optional Redemption Notice pursuant to
Section 8(d), the Company shall deliver the Holder Optional Redemption Price
within 45 days after the Company’s receipt of the Holder Optional Redemption
Notice and upon receipt of such payment, the Holder shall promptly deliver this
Debenture to the Company. In the event of a redemption of less than all of the
Conversion Amount of this Debenture, the Company shall promptly cause to be
issued and delivered to the Holder a new Debenture (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 Redemption Price or Holder Optional
Redemption to the Holder (or deliver any Common Stock to be issued pursuant to
a Company Redemption Share Notice) within the time period required, at any time
thereafter and until the Company pays such unpaid Redemption Price (and issues
any Common Stock required pursuant to a Company Redemption Share Notice) 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 Debenture
representing the Conversion Amount that was submitted for redemption and for
which the applicable Redemption Price (or any Common Stock required to be
issued pursuant to a Company Redemption Share Notice) (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 Debenture, or
issue a new Debenture (in accordance with Section 18(d)) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this
Debenture or such new Debentures 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 greater of (I) the Price Floor and (II) the Weighted Average
Price, on 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 Debentures for redemption or repayment as
a result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) (each, an “Other Redemption Notice”), the
Company shall immediately forward to the Holder by facsimile a copy of such
notice. The Holder shall have five Business Days from receipt of such
facsimile copy of such Other Redemption Notice to deliver a Redemption Notice.
If the Company receives a Redemption Notice and one or more Other Redemption
Notices during such five Business Day period and the Company is unable to
redeem all principal, interest and other amounts designated in such Redemption
Notice and such Other Redemption Notices,




21






 





then the Company shall redeem a pro
rata amount from each holder of the Debentures (including
the Holder) based on the principal amount of the Debentures submitted for
redemption pursuant to such Redemption Notice and such Other Redemption Notices
received by the Company during such five Business Day period.


          (12) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the
Debentures have been converted, redeemed or otherwise satisfied in accordance
with their terms, the Company shall not, directly or indirectly, redeem,
repurchase or declare or pay any cash dividend or distribution on its capital
stock, other than the repurchase of restricted stock from terminated employees
or the redemption of any shares of preferred stock or payment of dividends or
redemptions required to be paid pursuant to the terms of any securities
existing on the date hereof, without the prior express written consent of the
holders of Debentures representing at least a majority of the aggregate
principal amount of the Debentures then outstanding.



          (13) VOTING RIGHTS. The Holder shall have no voting rights as the holder
of this Debenture, except as required by law and as expressly provided in this
Debenture.



          (14) RANK; ADDITIONAL INDEBTEDNESS; LIENS.



               (a) Rank. All payments due under this Debenture (a) shall rank pari passu
with all Other Debentures and (b) shall be senior to all other Indebtedness of
the Company and its Subsidiaries, other than Permitted Senior and Pari Passu
Indebtedness (as defined below), except as otherwise provided in the last
sentence of the definition of “Senior Debt” set forth in Section 28(b).



               (b) Incurrence of Indebtedness. So long as this Debenture is outstanding,
the Company shall not, and the Company 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 Debenture and
the Other Debentures and (ii) Permitted Indebtedness. As used herein,
“Permitted Indebtedness” means (A) an aggregate amount of Indebtedness that is
senior or pari passu in right of payment to the Debentures (collectively,
“Permitted Senior and Pari Passu Indebtedness”) not to exceed at any one time
$25,000,000 and (B) Permitted Subordinated Indebtedness. “Permitted
Subordinated Indebtedness” means Indebtedness that (x) is made expressly
subordinate in right of payment to the Indebtedness evidenced by this Debenture
and the Other Debentures on terms reasonably satisfactory to the holders of
Debentures representing not less than a majority of the aggregate principal
amount of the then outstanding Debentures and (y) does not provide at any time
for the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until at least 91 days
after the Maturity Date.




22






 





               (c) Existence of Liens. So long as this Debenture 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. As used
herein, “Permitted Liens” means (i) Liens incurred to secure Permitted Senior
and Pari Passu Indebtedness, (ii) statutory Liens for current taxes not yet
due, (iii) purchase money Liens on equipment or other property acquired or held
by the Company or any of its Subsidiaries in the ordinary course of its
business to secure the purchase price of such equipment or Indebtedness
incurred solely for the purpose of financing the acquisition of such equipment
or Liens existing on such equipment at the time of its acquisition;
provided, however, that no such Lien shall extend to or cover any other property of the
Company or any of its Subsidiaries; and (iv) other Liens imposed by law (such a
materialmen’s, mechanics’, carriers’, worker’s and repairman’s Liens).



               (d) Restricted Payments. 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 that is not, to the extent expressly permitted by this
Debenture, expressly made senior in right of payment of the Debentures, the
Other Debentures, 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.



          (15) PARTICIPATION. The Holder, as the holder of this Debenture, shall be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Debenture into
Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such shares of Common Stock on the record date for such
dividends and distributions. Payments under the preceding sentence shall be
made concurrently with the dividend or distribution to the holders of Common
Stock.



          (16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, DEBENTURES. The affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of Debentures representing not less than a majority of
the aggregate principal amount of the then outstanding Debentures, shall be
required for any change or amendment to this Debenture or the Other Debentures.
Any election by the holders of Debentures representing at least a majority of
the aggregate principal amount of the Debentures then outstanding shall bind
the holders of all Debentures then outstanding.




23






 





          (17) TRANSFER. This Debenture 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 DEBENTURE.



               (a) Transfer. If this Debenture is to be transferred, the Holder shall
surrender this Debenture to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Debenture (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 Debenture (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 Debenture, acknowledge and agree that, by reason of the provisions of
Section 3(c)(iii) and this Section 18(a), following conversion or redemption of
any portion of this Debenture, the outstanding Principal represented by this
Debenture may be less than the Principal stated on the face of this Debenture.



               (b) Lost, Stolen or Mutilated Debenture. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Debenture, 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 Debenture, the Company shall execute and deliver to the Holder a new
Debenture (in accordance with Section 18(d)) representing the outstanding
Principal.



               (c) Debenture Exchangeable for Different Denominations. This Debenture is
exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Debenture or Debentures (in accordance with Section
18(d) and in principal amounts of at least $100,000) representing in the
aggregate the outstanding Principal of this Debenture, and each such new
Debenture will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.



               (d) Issuance of New Debentures. Whenever the Company is required to issue
a new Debenture pursuant to the terms of this Debenture, such new Debenture (i)
shall be of like tenor with this Debenture, (ii) shall represent, as indicated
on the face of such new Debenture, the Principal remaining outstanding (or in
the case of a new Debenture 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 Debentures issued in connection with
such issuance, does not exceed the Principal remaining outstanding under this
Debenture immediately prior to such issuance of new Debentures), (iii) shall
have an issuance date, as indicated on the face of such new Debenture, which is
the same as the Issuance Date of this Debenture, (iv) shall




24






 





have the same rights and conditions as this Debenture, and (v) shall represent
accrued but unpaid Interest and Late Charges on the Principal and Interest of
this Debenture, from the Issuance Date.


          (19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Debenture shall be cumulative
and in addition to all other remedies available under this Debenture or any
other Transaction Document, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
parties’ right to pursue actual and consequential damages for any failure by
the other party hereto to comply with the terms of this Debenture; provided,
however, that in no event shall any party recover more than once for the same
losses or damages. 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 to seek, in addition to all other available remedies, 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
Debenture 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 Debenture or to
enforce the provisions of this Debenture or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Debenture, 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 Debenture shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed
against any person as the drafter hereof. The headings of this Debenture are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Debenture.



          (22) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Company or 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 Redemption Price or the arithmetic calculation of the Conversion Rate or
the Redemption




25






 





Price, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within one Business Day of 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 Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one Business Day submit via facsimile (a) the disputed
determination of the Weighted Average Price to an independent, reputable
investment bank selected by the Company and approved by the Holder or (b) the
disputed arithmetic calculation of the Conversion Rate or the 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 Business Days from the
time it receives the disputed determinations or calculations. Such investment
bank’s or accountant’s determination or calculation, as the case may be, shall
be binding upon all parties absent demonstrable error.


          (24) NOTICES; PAYMENTS.



               (a) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit
with an overnight courier service, in each case properly addressed to the party
to receive the same. The addresses and facsimile numbers for such
communications shall be:



If to the Company:



	 	 	 	 	 
	 	 	TeleCommunication Systems, Inc.
	 	 	275 West Street, Suite 400
	 	 	Annapolis, Maryland 21401
	 	 	
Telephone:
	 	(410) 263-7616
	 	 	
Facsimile:
	 	(410) 263-7617
	 	 	
Attention:
	 	Thomas M. Brandt, Jr.
	 	 	 	 	 
	 	 	with a copy (which shall not constitute notice) to:
	 	 	 	 	 
	 	 	Piper Rudnick LLP
	 	 	6225 Smith Avenue
	 	 	Baltimore, Maryland 21209-3600
	 	 	
Telephone:
	 	(410) 580-3000
	 	 	
Facsimile:
	 	(410) 580-3001
	 	 	
Attention:
	 	Wilbert H. Sirota, Esq.



26






 



     If to the Holder:



	 	 	 	 	 
	 	 	The Riverview Group LLC
	 	 	666
Fifth Avenue, 8th Floor
	 	 	New York, New York 10103
	 	 	
Facsimile:
	 	(212) 977-1667
	 	 	
Telephone:
	 	(212) 841-4100
	 	 	
Attention:
	 	Daniel Cardella
	 	 	 	 	 
	 	 	with a copy (which shall not constitute notice) to:
	 	 	 	 	 
	 	 	Schulte Roth & Zabel LLP
	 	 	919 Third Avenue
	 	 	New York, New York 10022
	 	 	Facsimile: (212) 593-5955
	 	 	Telephone: (212) 756-2000
	 	 	Attention: Eleazer Klein, Esq.



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


               The Company shall provide the Holder with prompt written notice of all
actions taken pursuant to this Debenture, 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) within three Business Days upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least the same number of days prior to the date on which
the Company provides notice to any other Person who has the right to receive
notice of such an event (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to
holders of Common Stock or (C) for determining rights to vote with respect to
any Change of Control, 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. Notwithstanding the foregoing,
Section 4(i) of the Securities Purchase Agreement shall apply to all notices
given pursuant to this Debenture.



               (b) Payments. Whenever any payment of cash is to be made by the




27






 





Company to any Person pursuant to this Debenture, 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 Purchasers, 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 written notice at least two
Business Days prior to the due date of such payment setting out such request
and the Holder’s wire transfer instructions. Whenever any amount expressed to
be due by the terms of this Debenture is due on any day which is not a Business
Day, the same shall instead be due on the next succeeding day which is a
Business Day and, in the case of any Interest Date which is not the date on
which this Debenture 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 required
to be paid under the Transaction Documents (as defined in the Securities
Purchase Agreement) 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 12% per annum from the date such
amount was due until the same is paid in full (“Late Charge”).


          (25) CANCELLATION. After all Principal, accrued Interest and other
amounts at any time owed on this Debenture has been paid in full, this
Debenture 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
Debenture.



          (27) GOVERNING LAW. This Debenture shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Debenture 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.



          (28) SUBORDINATION. To the extent there is any conflict between the
provisions of this Section 28 and the other provisions of this Debenture, the
provisions of this Section 28 shall control. By its acceptance of this
Debenture, Holder and any subsequent holder hereof agrees to the terms and
conditions of this Section 28.



               (a) Holder subordinates any security interest or lien that Holder may
have in or in the future obtain in any property of the Company as security for
the indebtedness evidenced by this Debenture (the “Subordinated Debt”) to any
security interest or lien that any




28






 





Senior Debt Holder (as hereinafter defined) may have in or in the future
obtain in any property of the Company as security for any Senior Debt (as
hereinafter defined). Notwithstanding the respective dates of attachment or
perfection of any security interest of Holder and the security interest of any
Senior Debt Holder, the security interest of each Senior Debt Holder in the
property of the Company securing the Senior Debt shall at all times be prior to
the security interest of Holder in the property of the Company securing the
Subordinated Debt. Nothing in this Section 28 shall be construed as any Senior
Debt Holder’s consent for Holder to take a security interest or lien in any
property of the Company.


               (b) All of the Subordinated Debt is subordinated in right of payment to
all of the Senior Debt, whether now existing or hereafter arising, including,
without limitation, all interest accruing after the commencement by or against
the Company of any bankruptcy, reorganization or similar proceeding. As used
herein, the following terms shall have the respective meanings set forth below:



               “Debt Incurrence Notice” means a written notice delivered by the Company
to the Holder promptly following the incurrence by the Company of any Senior
Debt after the date hereof, which notice shall (i) set forth the name of the
holder or holders of such Senior Debt, the principal amount of such Senior
Debt, the maturity date of such Senior Debt and any collateral securing such
Senior Debt, and (ii) shall include a certification by the Company that as of
the date of such notice, after giving effect to the incurrence of the Senior
Debt described therein, the aggregate principal amount of all indebtedness
ranking senior to or pari passu with the Subordinated Debt does not exceed
$25,000,000.



               “Senior Debt” means (i) all “Obligations” as defined in the SVB Loan
Agreement, (ii) the indebtedness set forth in Schedule 28(b) hereto and (iii)
any indebtedness incurred after the date hereof which has been identified to
the Holder in a Debt Incurrence Notice as constituting Senior Debt, provided
that, the aggregate principal amount of the obligations and other indebtedness
described in clauses (i), (ii) and (iii), together with the aggregate principal
amount of all other indebtedness ranking senior to or pari passu with the
Subordinated Debt, shall not exceed $25,000,000. Any indebtedness or other
obligation excluded from the definition of Senior Debt pursuant to the proviso
to the preceding sentence shall rank pari passu with the Subordinated Debt,
provided that nothing herein shall be deemed to (A) waive any rights the Holder
may have against the Company or any other party as a result of a breach of
Section 14(b) hereof or the failure of a certification in any Debt Incurrence
Notice to be true and correct, or (B) limit the effectiveness of any agreement
pursuant to which any indebtedness or other obligation excluded from the
definition of Senior Debt is made subordinate to the Subordinated Debt.



               “Senior Debt Holder” means (i) Silicon Valley Bank and its successor and
assigns, (ii) the holders of the indebtedness described in Schedule 28(b)
hereto and their respective successors and assigns, and (iii) any person
identified to the Holder in a Debt Incurrence Notice as the holder of Senior
Debt, together with their respective successors and




29






 





assigns, so long as each such person described in clauses (i), (ii) and
(iii) continues to be a holder of Senior Debt.


               “Senior Event of Default” means an event of default under any Senior Debt,
including an “Event of Default” as defined in the SVB Loan Agreement.



               “SVB Loan Agreement” means that certain Amended and Restated Loan and
Security Agreement dated July      , 2003, by and between Silicon Valley Bank and
the Company, as amended, modified, restated, substituted, extended and renewed
at any time and from time to time.



               (c) Holder will not demand or receive from the Company (and the Company
will not pay to Holder) all or any part of the Subordinated Debt, by way of
payment, prepayment, setoff, lawsuit or otherwise, nor will Holder exercise any
remedy with respect to any of the Senior Debt Holders’ collateral, nor will
Holder commence, or cause to commence, prosecute or participate in any
administrative, legal or equitable action against the Company with respect to
the Subordinated Debt (provided that, subject to the priorities set forth in
this Section 28, the Holder may join and participate in, but not initiate, any
bankruptcy proceeding with respect to the Company so long as the Holder does
not interfere with any action taken by any Senior Debt Holder in such
proceeding consistent with the terms set forth in this Section 28) for so long
as any portion of the Senior Debt remains outstanding, provided, however, that
(i) the Holder may receive, and the Company may pay (A) the outstanding
principal under this Debenture on the Maturity Date or on such earlier date on
which the Senior Debt has been accelerated (provided such acceleration has not
been rescinded) or is required to be redeemed pursuant to this Debenture, and
(B) interest hereunder in the stated amounts and on the stated dates of payment
hereof (without regard to any amendment to such stated amounts or stated dates
effected after the date hereof), and (ii) the Holder may exercise any rights or
remedies it may have against the Company during the continuance of an Event of
Default hereunder, unless at the time of the making such payment or exercise of
rights and remedies, a Senior Debt Holder shall have sent the Holder a written
notice (in accordance with the Section 24 hereof) certifying that any Senior
Event of Default shall have occurred and is continuing with respect to the
Senior Debt owing to such Senior Debt Holder and (x) fewer than 180 days shall
have elapsed since the date of such notice (the “Standstill Period”), or (y)
such Senior Debt has matured and has not been paid or such Senior Debt Holder
shall have accelerated the maturity of such Senior Debt by reason of the
occurrence of such Senior Event of Default and, in either such case, such
Senior Debt Holder is diligently and in good faith seeking to exercise its
remedies against the Company and its collateral. The Holder agrees that any
Event of Default arising hereunder solely as the result of a Senior Event of
Default under, or the acceleration or mandatory redemption of, any Senior Debt,
shall be deemed cured in the event that such Senior Event of Default under such
Senior Debt is cured or waived in writing or such acceleration or mandatory
redemption of such Senior Debt is rescinded in writing. Any blockage of
payments and exercise of remedies pursuant to this paragraph (c) (a “Blockage
Event”) shall immediately end on the earliest to




30






 





occur of (1) the date that the Senior Event of Default giving rise to such
Blockage Event shall have been cured or waived in writing, (2) the Senior Debt
owing to such Senior Debt Holder shall have been paid in full and (3) except as
set forth in clause (y) above, the applicable Standstill Period shall have
expired, it being understood that no exercise of remedies shall be commenced
with respect to an Event of Default deemed cured in accordance with the
preceding sentence. There shall be at least 90 consecutive days during which
no Standstill Period is in effect during any period of 360 consecutive days.
If at any time following a Blockage Event, the Holder is no longer prohibited
from receiving any payments with respect to the Subordinated Debt, the Holder
shall be entitled to receive all payments with respect to the Subordinated Debt
that have been blocked, and any late payment charges, together with any default
interest to the extent provided for by this Debenture. Nothing in this Section
28 shall prohibit Holder from converting all or any part of the Subordinated
Debt into equity securities of the Company or from receiving and retaining any
notes or securities distributed by the Company to its creditors in connection
with a bankruptcy proceeding.


               (d) Holder shall promptly deliver to the Senior Debt Holders in the form
received (except for endorsement or assignment by Holder where required by the
Senior Debt Holders) for application to the Senior Debt any payment,
distribution, security or proceeds received by Holder with respect to the
Subordinated Debt other than in accordance with this Section 28,
provided that the Holder shall be entitled to deposit any such payment with any court in the
event that the Holder shall not have received written instructions from all
Senior Debt Holders as to the disposition of any such amount.



               (e) In the event of the Company’s insolvency, reorganization or any case
or proceeding under any bankruptcy or insolvency law or laws relating to the
relief of debtors, the provisions of this Section 28 shall remain in full force
and effect, and the Senior Debt Holders’ claim against the Company and the
estate of the Company shall be paid in full to the extent provided herein
before any payment is made to Holder.



               (f) For so long as any of the Senior Debt remains unpaid, Holder
authorizes any Senior Debt Holder in any bankruptcy, insolvency or similar
proceeding involving the Company to file the appropriate claim or claims in
respect of the Subordinated Debt on behalf of Holder if Holder does not do so
prior to 30 days before the expiration of the time to file claims in such
proceeding.



               (g) This Section 28 shall remain effective for so long as the Company
owes any portion of the Senior Debt to any Senior Debt Holder. If, at any time
after payment in full of the Senior Debt any payments of the Senior Debt must
be disgorged by a Senior Debt Holder for any reason (including, without
limitation, the bankruptcy of the Company) this Section 28 and the relative
rights and priorities set forth herein shall be reinstated as to all such
disgorged payments as though such payments had not been made and Holder shall
immediately pay over to such Senior Debt Holder (subject to the proviso to
paragraph (d) above) all payments received with




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respect to the Subordinated Debt to the extent that such payments would
have been prohibited hereunder. At any time and from time to time, without
notice to Holder, any Senior Debt Holder may take such actions with respect to
the Senior Debt owing to it as such Senior Debt Holder, in its sole discretion,
may deem appropriate (subject to any consent rights of the Company), including,
without limitation, terminating advances to the Company, increasing the
principal amount (but without any corresponding change in the definition of
“Senior Debt” as set forth herein), extending the time of payment, increasing
applicable interest rates, renewing, compromising or otherwise amending the
terms of any documents affecting such Senior Debt and any collateral securing
such Senior Debt, and enforcing or failing to enforce any rights against the
Company or any other person. No such action or inaction shall impair or
otherwise affect such Senior Debt Holder’s rights hereunder.


               (h) The provisions of this Section 28 shall be binding on, and inure to
the benefit of, the Holder, the Senior Debt Holders and their respective
successors and assigns, and, if the Company refinances a portion of the Senior
Debt with any person, such person shall be deemed a successor of such Senior
Debt Holder for purposes of this Section 28.



               (i) The provisions of this Section 28 may be amended only by written
instrument signed by Holder, each Senior Debt Holder and the Company.



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



                    (a) “Approved Stock 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, director or other
service provider to the Company for services provided to the Company.



                    (b) “Bloomberg” means Bloomberg Financial Markets.



                    (c) “Business Day” means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.



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



                    (e) “Excluded Securities” shall have the meaning given to it in the
Securities Purchase Agreement.



                    (f) “Interest Conversion Price” means, with respect to any Interest




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Date, that price which shall be computed as 90% of the arithmetic average of
the Weighted Average Price of the Common Stock on each of the five consecutive
Trading Days immediately preceding such Interest Date. All such determinations
to be appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction during such period.


                    (g) “Maturity Date Conversion Price” means that price which shall be
computed as 90% of the arithmetic average of the Weighted Average Price of the
Common Stock on each of the five consecutive Trading Days immediately preceding
the Maturity Date. All such determinations to be appropriately adjusted for
any stock split, stock dividend, stock combination or other similar transaction
during such period.



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



                    (i) “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.



                    (j) “Principal Market” means the Nasdaq National Market.



                    (k) “Qualified Public Offering” means a firm commitment underwritten
offering of Common Stock by the Company after the Issuance Date pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, that yields net proceeds to the Company of not less than $50,000,000.



                    (l) “Redemption Premium” means 120% in the case of the Events of Default
described in Section 4(a).



                    (m) “Registration Rights Agreement” means that certain registration rights
agreement between the Company and the initial holders of the Debentures
relating to the registration of the resale of the shares of Common Stock
issuable upon conversion of the Debentures.



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



                    (o) “Securities Purchase Agreement” means that certain securities purchase
agreement between the Company and the initial holders of the Debentures
pursuant to which the Company issued the Debentures.



                    (p) “Semi-Annual Period” means each of: the period beginning on and
including January 1 and ending on and including June 30; and the period
beginning on and




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including July 1 and ending on and including December 31.


                    (q) “Trading Day” means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).



                    (r) “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.



                    (s) “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 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, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the 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 stock dividend, stock split, stock combination
or other similar transaction during the applicable calculation period.



[Signature Page Follows]



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



	 	 	 	 	 
	 	 	TELECOMMUNICATION SYSTEMS, INC.
	 	 	 	 	 
	 	 	
By:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer



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EXHIBIT I


TELECOMMUNICATION SYSTEMS, INC.

CONVERSION NOTICE



Reference is made to the Convertible Debenture (the “Debenture”) issued to the
undersigned by TeleCommunication Systems, Inc. (the “Company”). In accordance
with and pursuant to the Debenture, the undersigned hereby elects to convert
the Conversion Amount (as defined in the Debenture) of the Debenture indicated
below into shares of Class A Common Stock, par value $0.01 per share (the
“Common Stock”), of the Company as of the date specified below.


After giving effect to the conversion of the Aggregate Conversion Amount of
Debentures requested to be converted pursuant hereto, the undersigned will not
be the beneficial owner of 10% or more of the outstanding Common Stock
(determined as set forth in Section 3(d)(i) of the Debenture).



	 	 	 
	Date of Conversion:	 	 
	 	 	






	 	 	 
	Aggregate Conversion Amount to be converted:	 	 
	 	 	





Please confirm the following information:



	 	 	 
	Conversion Price:	 	 
	 	 	






	 	 	 
	Number of shares of Common Stock to be issued:	 	 
	 	 	





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



	 	 	 
	Issue to:	 	 
	 	 	


	 	 	


	 	 	






	 	 	 
	Facsimile Number:	 	 
	 	 	






	 	 	 
	Authorization:	 	 
	 	 	






	 	 	 
	By:	 	 
	 	 	






	 	 	 
	 	Title:	 
	 	 	






	 	 	 
	Dated:	 	 
	 	 	






	 	 	 
	Account Number:	 	 
	 	 	

	     (if electronic book entry transfer)




	 	 	 
	Transaction Code Number:	 	 
	 	 	

	     (if electronic book entry transfer)	 	 



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ACKNOWLEDGMENT



     The Company hereby acknowledges this Conversion Notice and hereby directs
American Stock Transfer & Trust Company to issue the above indicated number of
shares of Class A Common Stock in accordance with the Transfer Agent
Instructions dated, 2004 from the Company and acknowledged and
agreed to by American Stock Transfer & Trust Company.



	 	 	 	 	 
	 	 	TELECOMMUNICATION SYSTEMS, INC.
	 	 	 	 	 
	 	 	
By:	 	 
	 	 	
 
	 	





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