Document:

Exhibit
4.4

 

NEITHER THE ISSUANCE AND SALE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO
RULE 144 OR RULE 144A UNDER SAID ACT. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. 
ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY,
THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

 

 

CONVERTIBLE NOTE

 

 

	
  Issuance Date: March 16,
  2004

  	
   

  	
  Principal:
  U.S. $7,500,000

  

 

FOR VALUE RECEIVED, VASO ACTIVE PHARMACEUTICALS, INC., a Delaware 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 or on any Installment Date with respect to the
Installment Amount due on such Installment Date (each, as defined herein) (in each case in accordance with the terms
hereof) and to pay interest (“Interest”)
on any outstanding Principal at the rate of 2.00% 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 Convertible Note (including all Convertible Notes issued in
exchange, transfer or replacement hereof, this “Note”) is one of an issue of Convertible Notes (collectively,
the “Notes” and such other
Convertible Notes, the “Other Notes”)
issued on the Issuance Date pursuant to the Securities Purchase Agreement (as
defined below).  Certain capitalized
terms are defined in Section 29.  For
the purposes of this Note, “Common Stock”
means the Company’s Class A common stock, par value $.0001.

 

 

(1)           MATURITY.  On the Maturity Date, the
Holder shall surrender this Note to the Company and the Company shall pay to
the Holder an amount in cash or, at the option of the Company (subject to the
satisfaction of the conditions set forth in this Section 1 and subject to Section
3(d)(ii)), in shares of Common Stock (“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 shall be payable in Repayment Shares only if
the Company delivers written notice of such election (“Maturity Date Payment Election Notice”) to
each holder of the Notes at least twenty (20) Trading Days prior to the
Maturity Date (a “Maturity Payment Election
Date”).  The “Original Maturity Date” shall be September
16, 2005, as may be extended in accordance with Section 8 hereof or 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 may be extended, 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 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
by the Holder in writing to the Company at least two Business Days prior to the
Maturity Date, 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 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, or (y) 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 Note on the Maturity
Payment Election Date or on the Maturity Date. 
The Company shall pay any and all taxes that may be payable with respect
to the issuance and delivery of Repayment Shares.

 

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(2)           INTEREST; INTEREST RATE. 
Interest on this Note 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 Calendar Quarter during
the period beginning on the Issuance Date and ending on, and including, the
Maturity Date (each, an “Interest Date”)
with the first Interest Date being April 1, 2004.  Interest shall be payable on each Interest Date in cash or, at
the option of the Company (subject to the satisfaction of the conditions set
forth in this Section 2 and subject to Section 3(d)(ii)), 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 Notes 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 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 by the Holder in writing to the
Company at least two Business Days prior to the applicable Interest Date, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled.  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, or (y) 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 Note on the Interest Election Date or on the
Interest Date.  Prior to the payment of
Interest on an Interest Date, Interest on this Note shall accrue at the
Interest Rate and be payable by way of inclusion of the Interest in the
Conversion Amount 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, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated at such
increased rate during the continuance of such Event of Default shall continue
to apply to the extent relating to the days after the occurrence of such Event
of Default through and including the date of cure of such Event of
Default.  The Company shall pay any and
all taxes that may be payable with respect to the issuance and delivery of
Interest Shares.

 

(3)           CONVERSION OF NOTES. 
This Note shall be convertible into shares of

 

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the Company’s 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 (A) as of any Conversion Date (as
defined below) or other date of determination (other than with respect to an
Installment Amount on an Installment Date pursuant to a Company Conversion (as
defined in Section 9(a)) during the period beginning on the Issuance Date and
ending on and including the Maturity Date, the Fixed Conversion Price, and (B)
with respect to any Installment Amount on an Installment Date pursuant to a
Company Conversion, at the option of the Holder, either the Fixed Conversion
Price or the Company Conversion Price (as defined in Section 9(d)), each
in effect as of such date and subject to adjustment as provided herein.

 

(iii)          “Fixed Conversion Price” means $9.00 subject to adjustment as
provided herein.

 

(c)           Mechanics of Conversion.

 

(i)            Optional Conversion.  To
convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A)
transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59
p.m., New York Time, on such date, a copy of an executed notice of conversion
in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required by
Section 3(c)(iii), surrender this Note to a common carrier for delivery to the
Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to

 

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this Note 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.  On or before the second 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 Note is physically surrendered for
conversion as required by Section 3(c)(iii) and the outstanding Principal of
this Note is greater than the Principal portion of the Conversion Amount being
converted, then the Company shall as soon as practicable and in no event later
than three Business Days after receipt of this Note and at its own expense,
issue and deliver to the holder a new Note (in accordance with Section 19(d))
representing the outstanding Principal not converted.  The Person or Persons entitled to receive the shares of Common
Stock issuable upon a conversion of this Note shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on the
Conversion Date.

 

(ii)           Company’s Failure to Timely Convert.  If
the Company shall fail 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 (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 on or prior to the Share Delivery Date and to which the Holder is
entitled, and (II) the Closing Sale 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 Note that has not been converted pursuant to such
Conversion Notice; provided that the voiding of a Conversion Notice shall not
affect the Company’s obligations to make any payments which have accrued prior
to the date of such notice pursuant to this Section 3(c)(ii) or otherwise.

 

(iii)          Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the Company
unless (A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting physical
surrender and reissue of this Note.  The
Holder and the Company shall maintain records showing the Principal, Interest
and Late Charges

 

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converted and the dates of
such conversions or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

 

(iv)          Pro Rata Conversion; Disputes.  In
the event that the Company receives a Conversion Notice from more than one
holder of Notes for the same Conversion Date and the Company can convert some,
but not all, of such portions of the Notes submitted for conversion, the
Company, subject to Section 3(d), shall convert from each holder of Notes
electing to have Notes converted on such date a pro rata amount of such
holder’s portion of its Notes submitted for conversion based on the principal
amount of Notes submitted for conversion on such date by such holder relative
to the aggregate principal amount of all Notes submitted for conversion on such
date.  In the event of a dispute as to
the number of shares of Common Stock issuable to the Holder in connection with
a conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 24.

 

(v)           Application of
Conversion Amounts.  Any Conversion
Amount which the Holder elects to convert in accordance with this Section 3
(other than pursuant to Company Conversions) shall be deducted from the Installment
Amounts relating to the Installment Dates as set forth in the Conversion
Notice.

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership.  The
Company shall not effect any conversion of this Note, and the Holder of this
Note shall not have the right to convert any portion of this Note pursuant to
Section 3(a), to the extent that after giving effect to such conversion, the
Holder (together with the Holder’s affiliates) would beneficially own in excess
of 9.99% of the number of shares of Common Stock outstanding immediately after
giving effect to such conversion.  For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Note with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted portion of this Note beneficially owned by the
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 3(d)(i), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.  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
as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K,

 

6

 

(y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock
outstanding.  For any reason at any
time, upon the written or oral request of the Holder, the Company shall within
one Business Day 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 Note, by the Holder or its affiliates since the
date as of which such number of outstanding shares of Common Stock was
reported.

 

(ii)           Principal Market Regulation.  The
Company (1) shall not be obligated to issue any shares of Common Stock upon
conversion of this Note and (2) shall not be permitted to issue Repayment Shares
or Interest Shares (but instead shall make payments in cash on the applicable
Maturity Date and Interest Date, as the case may be), to the extent that the
issuance of such shares of Common Stock would exceed that number of shares of
Common Stock which the Company may issue upon conversion of the Notes without
breaching the Company’s obligations under the rules or regulations 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 for issuances of Common Stock in excess of such amount or
(B) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of the Notes representing at least a majority of the principal amounts
of the Notes then outstanding.  Until
such approval or written opinion is obtained, no purchaser of the Notes
pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued, upon conversion of Notes,
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
Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on
the Issuance Date and the denominator of which is the aggregate principal
amount of all Notes issued to the Purchasers pursuant to the Securities
Purchase Agreement on the Issuance Date (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 Notes, 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 Notes shall convert all of such holder’s Notes 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 Notes on a pro rata basis in proportion to the aggregate
principal amount of the Notes then held by each such holder.

 

7

 

(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 Notes for sale of all of such holder’s
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of 10 consecutive days or for more than
an aggregate of 30 days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));

 

(ii)           the suspension from trading or failure of the Common Stock to be listed
on the Principal Market, the Nasdaq National Market or The New York Stock
Exchange, Inc. for a period of five consecutive days or for more than an
aggregate of 10 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) notice, written or oral, to any
holder of the Notes, including by way of public announcement or through any of
its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Common Stock that is tendered in
accordance with the provisions of the Notes;

 

(iv)          upon the Company’s receipt of a Conversion Notice, the Company is not
obligated to issue shares of Common Stock upon such conversion due to the
provisions of Section 3(d)(ii);

 

(v)           at any time following the tenth 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 Note (without regard to any limitations on
conversion set forth in Section 3(d) or otherwise);

 

(vi)          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 Note, the
Securities Purchase Agreement, the Registration Rights Agreement, the Warrants
or any other agreement,

 

8

 

document, 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 three Business Days;

 

(vii)         any default under, redemption of or acceleration prior to maturity of
any 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
Notes;

 

(viii)        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 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;

 

(ix)           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;

 

(x)            a final judgment or judgments for the payment
of money aggregating in excess of $250,000 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 credit
worthy party shall not be included in calculating the $250,000 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;

 

(xi)           the Company breaches any representation, warranty, covenant or other
term or condition of the Securities Purchase Agreement, the Registration Rights
Agreement, the Warrants, this Note, the Other Notes, or any other agreement,
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 a covenant which is curable, only if such
breach continues for a period of at least ten (10) consecutive Business Days;

 

9

 

(xii)          any breach or failure in any respect to comply with Section 15 of this
Note;

 

(xiii)         any Event of Default (as defined in the Other Notes) occurs with
respect to any Other Notes; or

 

(xiv)        the Company shall, directly or indirectly, repay, prepay, redeem,
defease or otherwise make any payment on any Indebtedness existing on the
Issuance Date, other than this Note or the Other Notes, in cash or cash
equivalents.

 

(b)           Redemption Right. 
Promptly after the occurrence of an Event of Default with respect to
this Note or any Other Note, the Company shall deliver written notice thereof
via facsimile and overnight courier (an “Event
of Default Notice”) to the Holder. 
At any time after the earlier of the Holder’s receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the “Event of Default
Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem.  Each portion of
this Note subject to redemption by the Company pursuant to this Section 4(b)
shall be redeemed by the Company at a price equal to the greater of (i) the
product of (x) the Conversion Amount to be redeemed and (y) the Redemption
Premium and (ii) the product of (A) the Conversion Rate with respect to such
Conversion Amount in effect at such time as the Holder delivers an Event of
Default Redemption Notice and (B) the Closing Sale Price of the Common Stock on
the date immediately preceding such Event of Default (the “Event of Default Redemption Price”).  Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 12.

 

(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

 

10

 

(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.

 

No sooner than 15 days nor later than 10 days
prior to the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of Control Notice”).

 

(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 resulting from such Change of
Control (in each case, an “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then outstanding) to deliver to each holder of Notes in exchange for such
Notes, a security of the Acquiring Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder, and
satisfactory to the holders of Notes representing at least a majority of the
principal amount of the Notes 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 Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding may elect to treat such Person as the
Acquiring 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 Note by delivering written notice thereof (“Change of Control Redemption Notice”) to
the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem.  The portion of this Note subject to redemption pursuant to this
Section 5(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 Closing Sale Price of the Common
Stock 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 12 and shall have
priority to payments to stockholders in connection with a Change of Control.

 

11

 

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

 

(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
Note, (i) in addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder would have been
entitled with respect to such shares of Common Stock had such shares of Common
Stock been held by the Holder upon the consummation of such Corporate Event 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 Note
initially been issued with conversion rights for the form of such consideration
(as opposed to shares of Common Stock) at a conversion rate for such
consideration commensurate with the Conversion Rate.  Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes 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 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 Fixed Conversion Price then in effect shall
be reduced to an amount equal to the New Securities Issuance Price.  For purposes of determining the adjusted
Fixed Conversion Price under this Section 7(a), the following shall be
applicable:

 

12

 

(i)            Issuance of Options.  If
the Company in any manner grants or sells any Options and the lowest price per
share for which one share of Common Stock is issuable upon the exercise of any
such Option or upon conversion or exchange or exercise of any Convertible
Securities issuable upon exercise of such Option is less than the Applicable
Price, then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the granting or sale of
such Option for such price per share. 
For purposes of this Section 7(a)(i), the “lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such
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 Fixed
Conversion Price shall be made upon the actual issuance of 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 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 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 Fixed
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 Fixed Conversion Price had been or are
to be made pursuant to other provisions of this Section 7(a), no further
adjustment of the Fixed 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 Fixed Conversion Price in effect at
the time of such change shall be adjusted to the Fixed Conversion Price which
would have been in effect at such time had

 

13

 

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 Fixed Conversion Price then in
effect.

 

(iv)          Calculation of Consideration Received.  In
case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of
$.01.  If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. 
If any 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 Closing Sale 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 Notes representing at
least a majority of the principal amounts of the Notes then outstanding.  If 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 within five Business Days after
the tenth day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the holders of Notes representing
at least a majority of the principal amounts of the Notes then
outstanding.  The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the Company.

 

(v)           Record Date.  If the Company takes a record
of the holders of Common 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

 

14

 

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.

 

(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 will
make an appropriate adjustment in the Conversion Price so as to protect the
rights of the Holder under this Note; provided that no such adjustment will
increase the Conversion Price as otherwise determined pursuant to this Section
7.

 

(8)           EXTENSION OF MATURITY DATE AT HOLDER’S OPTION.  The
Holder shall have the right, in its sole discretion, to require that the Original
Maturity Date as to this Note (but not any other Note) be extended for a period
not to exceed two years from the Original Maturity Date, without the action of
any other Person, by delivering written notice thereof (a “Holder Maturity Date Extension Notice”) to
the Company at any time prior to the Original Maturity Date, which Holder
Maturity Date Extension Notice shall indicate the Maturity Date, as so
extended, of this Note.  Within one
Business Day of receipt of a Holder Maturity Date Extension Notice, the Company
shall inform all other holders of Notes that such a notice has been received by
the Company.

 

(9)           COMPANY INSTALLMENT CONVERSION OR REDEMPTION.

 

(a)           General.  On each Installment Date, the
Company shall pay to the Holder of this Note the Installment Amount as of such
Installment Date by the combination of any of the following, but subject to and
in accordance with the terms of this Section 9, (i) requiring the conversion of
a portion of the applicable Installment Amount, in whole or in part, in
accordance with this Section 9 but subject to the satisfaction of the
Conditions to Company Conversion (as defined below) (a “Company Conversion”), and/or (ii)
redeeming the applicable Installment Amount, in whole or in part, in accordance
with this Section 9 (a “Company Redemption”);
provided that all of the outstanding applicable Installment Amount as of each
such Installment Date must be converted and/or redeemed by the Company on the

 

15

 

applicable
Installment Date, subject to the provisions of this Section 9.  On or prior to the date which is at least 2
Trading Days prior to each Installment Measuring Period, the Company shall
deliver written notice to the Holder (each, a “Company Installment Notice”), which Company Installment Notice
shall state (i) the portion, if any, of the applicable Installment Amount which
the Company elects to convert pursuant to a Company Conversion, which amount
when added to the Company Redemption Amount must equal the applicable
Installment Amount (the “Company Conversion
Amount”), (ii) the portion, if any, of the applicable Installment
Amount which the Company elects to redeem pursuant to a Company Redemption (the
“Company Redemption Amount”),
which amount when added to the Company Conversion Amount must equal the
applicable Installment Amount, and (iii) if the Company has elected, in whole
or in part, a Company Conversion, then the Company Installment Notice shall
certify that the Conditions to Company Conversion are satisfied as of the date
of the Company Installment Notice.  If
the Company does not deliver a Company Installment Notice in accordance with
this Section 9(a), then the “Company Redemption Amount” and the “Company Conversion
Amount” with respect to such Installment Date shall be in such amounts and
proportions as the Holder shall designate in writing to the Company in its sole
discretion and the Company shall be deemed to have delivered a Company
Installment Notice setting forth such amounts. 
Each Company Installment Notice shall be irrevocable.  Except as expressly provided in this Section
9(a), the Company shall redeem and convert the applicable Installment Amount of
this Note pursuant to this Section 9 and the corresponding Installment Amounts
of the Other Notes pursuant to the corresponding provisions of the Other Notes
in the same ratio of the Installment Amount being redeemed and converted
hereunder.  The Company Redemption
Amount (whether set forth in the Company Installment Notice or by operation of
this Section 9) shall be redeemed in accordance with Section 9(b), and the
Company Conversion Amount shall be converted in accordance with Section 9(c).

 

(b)           Mechanics of Company Redemption.  If
the Company elects, or is deemed to have elected, a Company Redemption in
accordance with Section 9(a), then the Company Redemption Amount, if any, which
is to be paid to the Holder on the applicable Installment Date shall be
redeemed by the Company on such Installment Date, and the Company shall pay to
the Holder on such Installment Date, by wire transfer of immediately available
funds, an amount in cash (the “Company
Installment Redemption Price”) equal to the sum of 100% of the
Company Redemption Amount. 
Notwithstanding anything to the contrary in this Section 9(b), but
subject to Section 3(d), until the Company Installment Redemption Price
(together with any interest thereon) is paid in full, the Company Redemption
Amount (together with any interest thereon) may be converted, in whole or in
part, by the Holder into Common Stock pursuant to Section 3.

 

(c)           Mechanics of Company Conversion. 
Subject to Section 3(d) and Section 9(e), if the Company delivers a
Company Installment Notice and elects or is deemed to have elected, in whole or
in part, a Company Conversion in accordance with Section 9(a), then the
applicable Company Conversion Amount, if any, which remains outstanding shall
be converted as of the applicable Installment Date by converting on such
Installment Date such

 

16

 

Company
Conversion Amount as if the Holder had delivered a Conversion Notice pursuant
to Section 3 with respect to such Company Conversion Amount on such Installment
Date but without the Holder being required to actually deliver such Conversion
Notice; provided that the Conditions to Company Conversion are satisfied (or
waived in writing by the Holder) on such Installment Date.  If the Conditions to Company Conversion are
not satisfied (or waived in writing by the Holder) on such Installment Date,
then at the option of the Holder designated in writing to the Company, the
Holder may require the Company to do any one or more of the following: (i) the
Company shall redeem all or any part designated by the Holder of the
unconverted Company Conversion Amount (such designated amount is referred to as
the “First Redemption Amount”) on
such Installment Date and the Company shall pay to the Holder on such
Installment Date, by wire transfer of immediately available funds, an amount in
cash equal to such First Redemption Amount, or (ii) the Company Conversion
shall be null and void with respect to all or any part designated by the Holder
of the unconverted Company Conversion Amount and the Holder shall be entitled
to all the rights of a holder of this Note with respect to such amount of the
Company Conversion Amount.  If the
Company fails to redeem any First Redemption Amount on the applicable
Installment Date by payment of such amount on the applicable Installment Date, then
the Holder shall have the rights set forth in Section 9(b) as if the Company
failed to pay the applicable Company Redemption Price and all other rights
under this Note (including, without limitation, such failure constituting an
Event of Default described in Section 4(a)(xi)).  In the event the Holder delivers a Conversion Notice to the
Company after the earlier of the date which is 10 days prior to the applicable
Installment Date and the Holder’s receipt of the Company Installment Notice in
respect of such Installment Date in which the Company elects or is deemed to
have elected a Company Redemption, the Principal amount specified in such
Conversion Notice shall be deducted (1) first, from the Principal represented
by the Company Redemption Amount and then (2) second, in accordance with Section
3(c)(v).

 

(d)           Conditions to Company Conversion.  For
purposes of this Section 9, “Conditions
to Company Conversion” means (i) during the period beginning on the Issuance Date and ending on and
including the applicable Installment Date, 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 analogous provisions under the Other
Notes, and shall have delivered shares of Common Stock upon exercise of any
Warrants on a timely basis as set forth in Section 1(a) of the Warrants; (ii)
on each day during the period beginning on the Issuance Date and ending on and
including the applicable Installment Date, the Common Stock shall be listed on
the Principal Market or the NYSE and delisting or suspension of the Common
Stock 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 for the Common Stock; (iii)
during the period beginning on the Issuance Date and ending on and including
the applicable Installment Date, there shall not have occurred either (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) during the period beginning on the date which is the Issuance Date and
ending on and including the applicable Installment Date, there shall not have
occurred an event that with the

 

17

 

passage
of time or giving of notice, and assuming it were not cured, would constitute
an Event of Default; (v) on each day of the period beginning on the date of
delivery of a Company Installment Notice with respect to an Installment Date
and ending on the applicable Installment Date either (x) the Registration
Statement or Registration Statements required pursuant to the Registration
Rights Agreement shall be effective and available for the resale of 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
Notes and the Other Notes and shares of Common Stock issuable upon exercise of
the Warrants shall be eligible for sale without restriction (other than any
restriction arising under applicable federal or state securities laws as a
result of the holder of such securities being an Affiliate of the Company) and
without the need for registration under any applicable federal or state
securities laws; (vi) on each day of the period beginning on the applicable
Installment 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 resale 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 Notes and the Other Notes and shares of Common Stock issuable upon exercise
of the Warrants shall be eligible for sale without restriction (other than any
restriction arising under applicable federal or state securities laws as a
result of the holder of such securities states as an Affiliate of the Company)
and without the need for registration under any applicable federal or state
securities laws; and (vii) 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, any of the Warrants, any of the Notes or any of the other
Transaction Documents.

 

(e)           Certain Definitions.  For
purposes of this Section 9, the following capitalized terms shall have the
following meanings:

 

(i)            “Company
Conversion Price” means, with respect to any Company Conversion,
that price which shall be computed as
90% of the arithmetic average of the Weighted Average Price of the Common Stock
on each Trading Day in the Installment Measuring Period.

 

(ii)           “Installment Amount” means,
with respect to any Installment Date, the lesser of (A) the quotient of (x) the
original Principal amount of this Note on the Issuance Date divided by (y) 6, and
(B) the Principal amount under this Note as of the Installment Date.  In the event the Holder shall sell or
otherwise transfer any portion of this Note, the transferee shall be allocated
a pro rata portion of the Installment Amount.

 

(iii)          “Installment Date” means
each of the six monthly anniversaries of the Trigger Date; provided, however,
that if the Maturity Date is extended after the Trigger Date occurs, then (x)
the Trigger Date shall be extended such that the new Trigger Date is X calendar
months prior to the Maturity Date, as so extended, and (y) the “Installment
Date” shall mean each of the X monthly anniversaries of the Trigger Date, in
each case where

 

18

 

“X”
is equal to (A) 6 less (B) the number of Installment Dates that have passed at
the time the Maturity Date is so extended.

 

(iv)          “Installment Measuring
Period” means, with respect
to an Installment Date, the 5-day Trading Day period commencing on and
including the sixth Trading Day immediately preceding such Installment Date and
ending on and including the Trading Day immediately preceding such Installment
Date.

 

(v)           “Trigger Date” means, subject to Section 9(e)(iii), the date
that is 6 calendar months prior to the Maturity Date.

 

(10)         NONCIRCUMVENTION.  The
Company hereby covenants and agrees that the Company will not, by amendment of
its Certificate 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 Note, and will at all times in good faith carry out
all of the provisions of this Note and take all action as may be required to
protect the rights of the Holder of this Note.

 

(11)         RESERVATION OF AUTHORIZED SHARES.

 

(a)           Reservation.  The Company shall initially
reserve out of its authorized and unissued Common Stock a number of shares of
Common Stock for each of the Notes equal to 130% of the Conversion Rate with
respect to the Conversion Amount of each such Note as of the Issuance
Date.  Thereafter, the Company, so long
as any of the Notes 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 Notes, 110% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
conversion of all of the Notes then outstanding; provided that at no time shall
the number of shares of Common Stock so reserved be less than the number of
shares required to be reserved by the previous sentence (without regard to any
limitations on conversions) (the “Required
Reserve Amount”).  The
initial number of shares of Common Stock reserved for conversions of the Notes
and each increase in the number of shares so reserved shall be allocated pro
rata among the holders of the Notes based on the principal amount of the Notes
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
Notes, each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation.  Any shares
of Common Stock reserved and allocated to any Person which ceases to hold any
Notes shall be allocated to the remaining holders of Notes, pro rata based on
the principal amount of the Notes then held by such holders.

 

(b)           Insufficient Authorized Shares.  If
at any time while any of the Notes remain outstanding the Company does not have
a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon 

 

19

 

conversion
of the Notes at least a number of shares of Common Stock equal to the Required
Reserve Amount (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow
the Company to reserve the Required Reserve Amount for the Notes then
outstanding.  Without limiting the
generality of the foregoing sentence, as soon as practicable after the date of
the occurrence of an Authorized Share Failure, but in no event later than 60
days after the occurrence of such Authorized Share Failure, the Company shall
hold a meeting of its stockholders for the approval of an increase in the
number of authorized shares of Common Stock. 
In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit
its stockholders’ approval of such increase in authorized shares of Common
Stock and to cause its board of directors to recommend to the stockholders that
they approve such proposal.

 

(12)         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 Note to the Company.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within five Business Days after
the Company’s receipt of the Holder’s Event of Default Redemption Notice.  If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(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 of a redemption of less than
all of the Conversion Amount of this Note, the Company shall promptly cause to
be issued and delivered to the Holder a new Note (in accordance with Section
19(d)) representing the outstanding Principal which has not been redeemed.  In the event that the Company does not pay
the Redemption Price 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
Note 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 Note, or issue a new Note (in accordance with
Section 19(d)) to the Holder representing such Conversion Amount and (z) the
Conversion Price of this Note or such new Notes shall be adjusted to the lesser
of (A) the Conversion Price as in effect on the date on which the Redemption
Notice is voided and (B) the lowest Closing Bid Price during the period
beginning on and including the date on which the Redemption Notice is delivered
to the Company and ending on and including the date on which the Redemption
Notice is voided.

 

20

 

The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such
notice with respect to the Conversion Amount subject to such notice.

 

(b)           Redemption by Other Holders. 
Upon the Company’s receipt of notice from any of the holders of the
Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b) or
Section 5(c) (each, an “Other Redemption
Notice”), the Company shall immediately forward to the Holder by
facsimile a copy of such notice.  If the
Company receives a Redemption Notice and one or more Other Redemption Notices
during the seven Business Day period beginning on and including the date which
is three Business Days prior to the Company’s receipt of the Holder’s
Redemption Notice and ending on and including the date which is three Business
Days after the Company’s receipt of the Holder’s Redemption Notice and the Company
is unable to redeem all principal, interest and other amounts designated in
such Redemption Notice and such Other Redemption Notices received during such
seven Business Day period, then the Company shall redeem a pro rata amount from
each holder of the Notes (including the Holder) based on the principal amount
of the Notes submitted for redemption pursuant to such Redemption Notice and
such Other Redemption Notices received by the Company during such seven
Business Day period.

 

(13)         RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. 
Until all of the Notes 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 without the prior express written consent of
the holders of Notes representing at least a majority of the aggregate
principal amount of the Notes then outstanding.

 

(14)         VOTING RIGHTS.  The
Holder shall have no voting rights as the holder of this Note, except as
required by law, including but not limited to the Delaware General Corporation
Law, and as expressly provided in this Note.

 

(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

(a)           Rank.      All payments due under this
Note (a) shall rank pari passu
with all Other Notes and (b) shall be senior to all other Indebtedness of the
Company and its Subsidiaries, other than Permitted Senior and Pari Passu
Indebtedness (as defined below).

 

(b)           Incurrence
of Indebtedness.  So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and the
Other Notes and (ii) Permitted Indebtedness. 
As used herein, “Permitted
Indebtedness” means (A) an aggregate amount of Indebtedness that is

 

21

 

senior or pari passu in right of payment to the
Notes (collectively, “Permitted Senior and
Pari Passu Indebtedness”) not to exceed at any one time $5,000,000;
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 Note and the Other Notes on terms
reasonably satisfactory to the holders of Notes representing not less than a majority of the aggregate
principal amount of the then outstanding Notes 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.

 

(c)           Existence
of Liens.  So long as this Note is outstanding, the Company shall not, and
the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.  As used herein, “Permitted
Liens” means Liens incurred to secure Permitted Senior and Pari
Passu Indebtedness.

 

(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 Subordinated Indebtedness or
Permitted Senior and Pari Passu Indebtedness that is not expressly made senior
in right of payment of the Notes, the Other Notes, whether by way of payment in
respect of principal of (or premium, if any) or interest on, such Indebtedness
if at the time such payment is due or is otherwise made or, after giving effect
to such payment, 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.

 

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

 

(17)         VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES.  The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of Notes representing not less than a
majority of the aggregate principal amount of the then outstanding Notes, shall
be required for any change or amendment to this Note or the Other Notes.

 

22

 

(18)         TRANSFER.  This Note may be offered,
sold, assigned or transferred by the Holder without the consent of the Company,
subject only to the provisions of Section 2(f) of the Securities Purchase
Agreement.

 

(19)         REISSUANCE OF THIS NOTE.

 

(a)           Transfer.  If this Note is to be
transferred, the Holder shall surrender this Note to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the Holder a new
Note (in accordance with Section 19(d)), registered as the Holder may request,
representing the outstanding Principal being transferred by the Holder and, if
less then the entire outstanding Principal is being transferred, a new Note (in
accordance with Section 19(d)) to the Holder representing the outstanding
Principal not being transferred.  The
Holder and any assignee, by acceptance of this Note, acknowledge and agree
that, by reason of the provisions of Section 3(c)(iii) and this Section 19(a),
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.

 

(b)           Lost, Stolen or Mutilated Note. 
Upon receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Note, and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of this Note, the Company shall execute and deliver
to the Holder a new Note (in accordance with Section 19(d)) representing the
outstanding Principal.

 

(c)           Note Exchangeable for Different Denominations. 
This Note is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Company, for a new Note or Notes (in accordance
with Section 19(d) and in principal amounts of at least $100,000) representing
in the aggregate the outstanding Principal of this Note, and each such new Note
will represent such portion of such outstanding Principal as is designated by
the Holder at the time of such surrender.

 

(d)           Issuance of New Notes. 
Whenever the Company is required to issue a new Note pursuant to the
terms of this Note, such new Note (i) shall be of like tenor with this Note,
(ii) shall represent, as indicated on the face of such new Note, the Principal
remaining outstanding (or in the case of a new Note being issued pursuant to
Section 19(a) or Section 19(c), the Principal designated by the Holder which,
when added to the principal represented by the other new Notes issued in
connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest
and Late Charges on the Principal and Interest of this Note, from the Issuance
Date.

 

23

 

(20)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this
Note shall be cumulative and in addition to all other remedies available under
this Note, the Securities Purchase Agreement, the Warrants and the Registration
Rights Agreement, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by
the Company to comply with the terms of this Note.  Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof).  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate.  The Company
therefore agrees that, in the event of any such breach or threatened breach,
the Holder shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

 

(21)         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER
COSTS.  If (a) this Note is placed in the hands of
an attorney for collection or enforcement or is collected or enforced through
any legal proceeding or the Holder otherwise takes action to collect amounts
due under this Note or to enforce the provisions of this Note or (b) there
occurs any bankruptcy, reorganization, receivership of the Company or other
proceedings affecting Company creditors’ rights and involving a claim under
this Note, then the Company shall pay the costs incurred by the Holder for such
collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited
to, attorneys’ fees and disbursements.

 

(22)         CONSTRUCTION; HEADINGS. 
This Note 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 Note are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Note.

 

(23)         FAILURE OR INDULGENCE NOT WAIVER.  No
failure or delay on the part of the Holder in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.

 

(24)         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 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

 

24

 

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 Closing Bid Price or the Closing Sale 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.

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices.  Whenever notice is required
to be given under this Note, unless otherwise provided herein, such notice
shall be given in accordance with Section 9(f) of the Securities Purchase
Agreement.  The Company shall provide
the Holder with prompt written notice of all actions taken pursuant to this
Note, including in reasonable detail a description of such action and the
reason therefore.  Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) immediately upon any adjustment of the Conversion Price, setting forth in
reasonable detail, and certifying, the calculation of such adjustment and (ii)
at least twenty days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any 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 Note.

 

(b)           Payments.  Whenever any payment of cash
is to be made by the Company to any Person pursuant to this Note, such payment
shall be made in lawful money of the United States of America by a check drawn
on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which
address, in the case of each of the 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 prior
written notice setting out such request and the Holder’s wire transfer
instructions.  Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a
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 Note is paid in full, the extension of the due date thereof shall
not be taken into account for purposes of determining the amount of Interest
due on such date.  Any amount of Principal
or

 

25

 

other
amounts due under the Transaction Documents (as defined in the Securities
Purchase Agreement) 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 18% per annum from the date such amount was due
until the same is paid in full (“Late Charge”).

 

(26)         CANCELLATION. 
After all Principal, accrued Interest and other amounts at any time owed
on this Note has been paid in full, this Note shall automatically be deemed
canceled, shall be surrendered to the Company for cancellation and shall not be
reissued.

 

(27)         WAIVER OF NOTICE.  To
the extent permitted by law, the Company hereby waives demand, notice, protest
and all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note and the Securities Purchase
Agreement.

 

(28)         GOVERNING LAW. 
This Note shall be construed and enforced in accor­dance with, and all
questions concerning the construction, validity, interpretation and performance
of this Note shall be governed by, the internal laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of New
York.

 

(29)         CERTAIN DEFINITIONS.  For
purposes of this Note, 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 or director 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)           “Calendar Quarter” means each of: the period beginning on and
including January 1 and ending on and including March 31; the period beginning
on and including April 1 and ending on and including June 30; the period
beginning on and including July 1 and ending on and including September 30; and
the period beginning on and including October 1 and ending on and including
December 31.

 

(e)           “Closing Bid Price” and “Closing
Sale Price” means, for any security as of any date, the last closing
bid price and last closing trade price, respectively, for

 

26

 

such
security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of
such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.).  If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Closing Bid Price or the Closing Sale Price, as the case may be, of such
security on such date shall be the fair market value as mutually determined by
the Company and the Holder.  If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

 

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

 

(g)           “Excluded Securities” means any shares of Common Stock issued or
issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion
of the Notes or the Warrants; (iii) in connection with the payment of any
Interest Shares or Repayment Shares on the Notes; (iv) upon conversion of any
Options or Convertible Securities which are outstanding on the day immediately
preceding the Issuance Date, provided that the terms of such Options or
Convertible Securities are not amended, modified or changed on or after the
Issuance Date; and (v) upon conversion of warrants issued to Kashner Davidson
Securities Corp. pursuant to an underwriter’s consent dated as of the Issuance
Date.

 

(h)           “Issuance Date” means March 16, 2004.

 

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

 

(j)            “Maturity Date Conversion
Price” means that price
which shall 

 

27

 

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.

 

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

 

(l)            “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.

 

(m)          “Principal
Market” means The Nasdaq SmallCap Market.

 

(n)           “Redemption Notice”
means any of an Event of Default Redemption Notice, Change of Control
Redemption Notice, or Company Installment Notice.

 

(o)           “Redemption Price”
means any of an Event of Default Redemption Price, Change of Control Redemption
Price, or Company Installment Redemption Price.

 

(p)           “Redemption Premium” means (i) in the case
of the Events of Default described in Section 4(a)(i) - (vii) and (x) - (xiv),
120% or (ii) in the case of the Events of Default described in Section
4(a)(viii) - (ix), 100%.

 

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

 

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

 

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

 

(t)            “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

 

28

 

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).

 

(u)           “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.

 

(v)           “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 24.  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]

 

29

 

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

 

	
   

  	
  VASO
  ACTIVE PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name: John J. Masiz

  
	
   

  	
   

  	
  Title:  Chief Executive Officer

  

 

 

EXHIBIT I

 

VASO ACTIVE PHARMACEUTICALS, INC.

CONVERSION NOTICE

 

Reference is made to the Convertible Note
(the “Note”) issued to the
undersigned by Vasco Active Pharmaceuticals, Inc. (the “Company”).  In accordance with and pursuant to the Note, the undersigned
hereby elects to convert the Conversion Amount (as defined in the Note) of the
Note indicated below into shares of Common Stock, par value $0.0001 per share
(the “Common Stock”), of the
Company as of the date specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount
to be converted:

 

Please confirm the following information:

 

Conversion Price:

 

Number of shares of Common
Stock to be issued:

 

The Conversion Amount shall be applied against the following
Installment Amounts, in the following manner: 

 

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

 

Issue to:

 

 

Facsimile Number:

 

Authorization:

 

	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  
	
  Dated:

  
	
   

  
	
  Account Number:

  
	
    (if electronic book entry transfer)

  
	
   

  
	
  Transaction Code Number:

  
	
    (if electronic book entry transfer)

  

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby
directs [EquiServe, Inc.] to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
March 16, 2004 from the Company and acknowledged and agreed to by [EquiServe, Inc.].

 

	
   

  	
  VASO
  ACTIVE PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:EXHIBIT 10.1

                    WEBSITE DESIGN AND PROGRAMMING AGREEMENT

This agreement is entered into by Destin Sands International, hereinafter
referred to "Service Provider", and Communications Research, Inc., hereinafter
referred to as "CRI", and sets forth the terms and conditions for services to be
rendered by Service Provider on behalf of CRI.

SERVICES OF THE SERVICE PROVIDER

Destin Sands International will design a website for CRI's subsidiary TeleWriter
Corporation, Inc. and shall assist in developing a database management
enterprise software for the ongoing management and development of the sales and
marketing of the Telewriter software.

TIMING, FEES AND EXPENSES

1. Service Provider will commence its work with CRI immediately. For the
consulting services provided during the term of the engagement, Service Provider
charges a one time up front fee of 1.5 million shares of registered stock, (the
"Stock Fee") at a $.001 cost basis collectively representing the "Consulting
Fee". The consulting services will be for a period of 1 year. If CRI desires to
terminate the services of the Service Provider prior to the expiration of this
agreement, the Consultant will be entitled to retain the entire consulting fee
and no proration of this fee will be made.

2. CRI will issue to Service Provider within 10 business days of signing the
consulting agreement the 1.5 million shares of registered stock.

3. Travel expenses. All of Service Provider's travel, lodging, meals and airfare
incurred on CRI's behalf, over $250, shall be pre-approved. Airfare shall be
pre-paid directly by CRI (rather than paid by, and subsequently reimbursed to
Service Provider).

o All remittances will be made to Service Provider.

ADDITIONAL TERMS

This Agreement will commence with your signing this Agreement, and will continue
for a period of 365 days.

1. Service Provider's relationship with CRI shall be that of an independent
contractor and not that of an employee. Service Provider will not be eligible
for any employee benefits, nor will CRI make deductions from the consulting fees
for taxes, insurance, bonds or any other subscription of any kind, which shall
be Service Provider's sole responsibility. Service Provider will use its best
efforts in performing the services under this Agreement, within the scope of
work specified in this Agreement. The Service Provider may use contractors or
other third parties of Service Provider's choice to assist in rendering such
services.

2. Confidentiality and non-disclosure. CRI, their officers, directors, employees
and/or agents, understand that Service Provider considers its investors, source
firms and compensation arrangements to be confidential and proprietary, and
agrees not to disclose any such information to any person or firm outside of CRI
without prior written consent from Service Provider, except as required by law.
CRI's obligations under this paragraph shall survive termination of this
Agreement for a period of 24 months.

3. Service Provider shall keep in confidence and shall not disclose or make
available to third parties or make any use of any information or documents
relating to the products, methods of manufacture, trade secrets, processes,
business or affairs or confidential or proprietary information of CRI (other
than information in the public domain through no fault of Service Provider),
except with the prior written consent of CRI. Upon termination of this Agreement
Service Provider will, upon request by CRI, return all documents, and other
materials related to the services provided hereunder furnished to Service
Provider by CRI. Service Provider's obligations under this paragraph shall
survive termination of this Agreement.

4. Service Provider and CRI further agree to indemnify and hold each other
harmless from and against any and all losses, claims or damages, including any
legal or other expenses reasonably incurred, in connection with defending
against any litigation, whether commenced or threatened, to which either CRI or
Service Provider may become subject under any statute, caused by, or arising out
of any service under this Agreement; provided, however, that neither party shall
be liable in any such case to the extent that any loss or damage is found to
have resulted from the other party's gross negligence, intentional
misrepresentation or violation of any statute or regulation.

<PAGE>

5. In the event that any controversy or claim arises out of this Agreement, the
parties hereto shall negotiate in good faith to resolve such controversy or
claim. If such controversy or claim cannot be settled by the parties through
negotiation, such controversy or claim shall be settled by binding arbitration.
During the arbitration, both parties shall continue to perform their obligations
under this Agreement unless the Agreement has been terminated. In addition to
any other recovery, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and costs thereby incurred.

6. If any provision of this Agreement is held to be invalid or unenforceable to
any extent in any context, it shall nevertheless be enforced to the fullest
extent allowed by law in that and other contexts, and the validity and force of
the remainder of this Agreement shall not be affected thereby. Further, a waiver
of the non-performance of any provision of this Agreement must be in writing and
shall apply only to the particular non-performance involved and shall not
constitute an amendment, change or modification of this Agreement or apply to
any other performance requirement.

7. This agreement shall inure to the benefit of and be binding on the respective
parties hereto and the respective executors, administrators, successors and
assigns.

8. If accepted by CRI and Service Provider below, this Agreement shall
constitute a binding agreement between CRI and Service Provider. This Agreement
reflects the entire agreement between CRI and Service Provider, and the terms
herein shall not be modified except by a written amendment signed by the parties
hereto. The signatories below acknowledge that they have the necessary authority
of their respective parties, including board approval, if required, to enter
into this Agreement.

9. This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New Jersey.

10. The Service Provider is not a registered broker and will not provide the
services of a broker. If it is necessary to utilize the services of a registered
broker, any fees and/or costs of such a broker shall be borne by CRI.

                                             AGREED AND ACCEPTED:

Destin Sands International                   Communications Research, Inc.

Signature:  /S/ Reinery Barba                Signature:  /S/ Carl R. Ceragno
            ------------------------                   ----------------------
Title:      President                        Title:      President & COO
            ------------------------                   ----------------------
Date:       03/11/04                         Date:       03/11/04
            ------------------------                   -----------------------

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