Document:

EXHIBIT 4.2

SUPERGEN,
INC.

2003 STOCK PLAN

STOCK
OPTION AGREEMENT

Unless otherwise defined
herein, the terms defined in the 2003 Stock Plan shall have the same defined
meanings in this Stock Option Agreement.

 

I.              NOTICE
OF STOCK OPTION GRANT

 

[Optionee’s Name and Address]

 

You have been granted an option to purchase
Common Stock of the Company, subject to the terms and conditions of the Plan
and this Option Agreement, as follows:

	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Grant Number

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Date of Grant

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Vesting Commencement Date

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Exercise Price per Share

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Total Number of Shares
  Granted

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Total Exercise Price

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Type of Option:

  	
  ___ Incentive Stock Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ___ Nonstatutory Stock
  Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Term/Expiration Date:

  	
   

  	
   

  

Vesting
Schedule:

This
Option shall be exercisable, in whole or in part, in accordance with the
following schedule:

[25% of the
Shares subject to the Option shall vest twelve months after the Vesting
Commencement Date, and 1/48 of the Shares subject to the Option shall vest on
each one month anniversary thereafter, subject to the Optionee continuing to be
a Service Provider on such dates].

Termination
Period:

This
Option may be exercised for three months after Optionee ceases to be a Service
Provider.  Upon the death or Disability of
the Optionee, this Option may be exercised for twelve months after Optionee
ceases

 

 

to be a Service Provider.  In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.

II.            AGREEMENT

                A.            Grant
of Option.

The
Plan Administrator of the Company hereby grants to the Optionee named in the
Notice of Grant attached as Part I of this Agreement (the “Optionee”) an option
(the “Option”) to purchase the number of Shares, as set forth in the Notice of
Grant, at the exercise price per share set forth in the Notice of Grant (the
“Exercise Price”), subject to the terms and conditions of the Plan, which is
incorporated herein by reference. 
Subject to Section 15(c) of the Plan, in the event of a conflict
between the terms and conditions of the Plan and the terms and conditions of
this Option Agreement, the terms and conditions of the Plan shall prevail.

If
designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this
Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code.  However,
if this Option is intended to be an Incentive Stock Option, to the extent that
it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as
a Nonstatutory Stock Option (“NSO”).

                B.            Exercise
of Option.

(a)           Right to Exercise.  This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.

(b)           Method of Exercise.  This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the “Exercise
Notice”), which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised (the “Exercised Shares”),
and such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. 
The Exercise Notice shall be completed by the Optionee and delivered to
the Controller/Assistant Controller of the Company.  The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares.  This Option shall be deemed to be exercised upon receipt by the
Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.

No
Shares shall be issued pursuant to the exercise of this Option unless such
issuance and exercise complies with Applicable Laws.  Assuming such compliance, for income tax purposes the Exercised
Shares shall be considered transferred to the Optionee on the date the Option
is exercised with respect to such Exercised Shares.

                C.            Method
of Payment.

Payment
of the aggregate Exercise Price shall be by any of the following, or a
combination thereof, at the election of the Optionee:

1.             cash; or

2.             check; or

2

 

3.             consideration received by the
Company under a formal cashless exercise program implemented by the Company in
connection with the Plan; or

4.             surrender of other Shares which
(i) in the case of Shares acquired either directly or indirectly from the
Company, have been owned by the Optionee for more than six (6) months on the
date of surrender, and (ii) have a Fair Market Value on the date of
surrender equal to the aggregate Exercise Price of the Exercised Shares.

                D.            Non-Transferability
of Option.

This
Option may not be transferred in any manner otherwise than by will or by the
laws of descent or distribution and may be exercised during the lifetime of
Optionee only by the Optionee.  The
terms of the Plan and this Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.

                E.             Term
of Option.

This
Option may be exercised only within the term set out in the Notice of Grant,
and may be exercised during such term only in accordance with the Plan and the
terms of this Option Agreement.

                F.             Tax
Obligations.

(a)           Withholding Taxes.  Optionee agrees to make appropriate
arrangements with the Company (or the Parent or Subsidiary employing or
retaining Optionee) for the satisfaction of all Federal, state, local and
foreign income and employment tax withholding requirements applicable to the
Option exercise.  Optionee acknowledges
and agrees that the Company may refuse to honor the exercise and refuse to deliver
Shares if such withholding amounts are not delivered at the time of exercise.

(b)           Notice of Disqualifying
Disposition of ISO Shares.  If the
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. 
Optionee agrees that Optionee may be subject to income tax withholding
by the Company on the compensation income recognized by the Optionee.

                G.            Entire
Agreement; Governing Law.

The
Plan is incorporated herein by reference. 
The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee’s interest except by means of a writing signed by the Company and
Optionee.  This agreement is governed by
the internal substantive laws, but not the choice of law rules, of Delaware.

                H.            NO
GUARANTEE OF CONTINUED SERVICE.

OPTIONEE
ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING
SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A

3

 

SERVICE PROVIDER AT THE WILL OF THE COMPANY
(AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING
SHARES HEREUNDER).  OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS
OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE
VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH
OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS
A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

By
your signature and the signature of the Company’s representative below, you and
the Company agree that this Option is granted under and governed by the terms
and conditions of the Plan and this Option Agreement.  Optionee has reviewed the Plan and this Option Agreement in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option Agreement and fully understands all provisions of the
Plan and Option Agreement.  Optionee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement.  Optionee further
agrees to notify the Company upon any change in the residence address indicated
below.

	
   

  	
   

  	
   

  
	
  OPTIONEE:

  	
   

  	
  SUPERGEN, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature

  	
   

  	
  By

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Print Name

  	
   

  	
  Title

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Residence Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

4

EXHIBIT
A

SUPERGEN, INC.

2003 STOCK PLAN

EXERCISE
NOTICE

SuperGen, Inc.

4140 Dublin Boulevard

Suite 200

Dublin, CA 
94568

 

Attention: 
[Controller/Assistant Controller]

 

1.             Exercise of Option.  Effective as of today, ________________,
_____, the undersigned (“Purchaser”) hereby elects to purchase ______________
shares (the “Shares”) of the Common Stock of SuperGen, Inc. (the “Company”)
under and pursuant to the 2003 Stock Plan (the “Plan”) and the Stock Option
Agreement dated, _____ (the “Option Agreement”).  Subject to adjustment in accordance with Section 13 of the
Plan, the purchase price for the Shares shall be $_____, as required by the
Option Agreement.

2.             Delivery of Payment.  Purchaser herewith delivers to the Company
the full purchase price for the Shares.

3.             Representations of Purchaser.  Purchaser acknowledges that Purchaser has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

4.             Rights as Shareholder.  Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option.  The Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. 
No adjustment will be made for a dividend or other right for which the
record date is prior to the date of issuance, except as provided in
Section 13 of the Plan.

5.             Tax Consultation.  Purchaser understands that Purchaser may
suffer adverse tax consequences as a result of Purchaser’s purchase or
disposition of the Shares.  Purchaser
represents that Purchaser has consulted with any tax consultants Purchaser
deems advisable in connection with the purchase or disposition of the Shares
and that Purchaser is not relying on the Company for any tax advice.

6.             Entire Agreement; Governing Law.  The Plan and Option Agreement are
incorporated herein by reference.  This
Agreement, the Plan and the Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Purchaser
with respect to the subject matter hereof, and may not be modified

 

 

adversely to the Purchaser’s interest except
by means of a writing signed by the Company and Purchaser.  This agreement is governed by the internal
substantive laws, but not the choice of law rules, of Delaware.

	
   

  	
   

  	
   

  
	
  Submitted by:

  	
   

  	
  Accepted by:

  
	
   

  	
   

  	
   

  
	
  PURCHASER:

  	
   

  	
  SUPERGEN, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature

  	
   

  	
  By

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Print Name

  	
   

  	
  Its

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
  Address:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4140 Dublin Boulevard, Suite 200

  
	
   

  	
   

  	
  Dublin, CA  94568

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date Received

  

 

 

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Exhibit 4.1    
    

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

 
 

SECURED CONVERTIBLE NOTE    
    

        FOR VALUE RECEIVED, DIGITAL ANGEL CORPORATION, a Delaware corporation (hereinafter called the "Borrower"), hereby promises to pay to LAURUS MASTER
FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
345-949-9877 (the "Holder") or its registered assigns, on order, without demand, the sum of Two Million Dollars ($2,000,000) (the "Principal Amount"), together with any accrued
and unpaid interest, on July 31, 2005 (the "Maturity Date"). 

        The
following terms shall apply to this Note: 

 
 

ARTICLE I
  INTEREST    
    

        1.1    Interest Rate.    Interest payable on this Note shall accrue at the annual rate of Prime Rate plus 1.75%,
provided, however, that in no event shall the interest rate be less than 6% (the "Interest Rate") and be payable in arrears commencing one month from
the date hereof and on the first business day of each consecutive calendar month thereafter, and on the Maturity Date, accelerated or otherwise, due and payable as described below. Interest shall be
computed on the basis of actual days elapsed in a year of 360 days. "Prime Rate" means the "base rate" or "prime rate" published in the Wall Street Journal from time to time. The Prime Rate
shall be increased or decreased as the case may be for each increase or decrease in the Prime Rate in an amount equal to such increase or decrease in the Prime Rate, each such change to be effective
as of the day of the change in such rate. 

        1.2    Default Rate.    The Borrower shall have a three (3) business day grace period to pay any monetary
amounts due under this Note, after which grace period a default interest rate of 5% per annum above the Interest Rate shall apply to the amounts owed hereunder. This is the same period set forth in
Section 4.1. 

 
 

ARTICLE II
  PAYMENTS OF PRINCIPAL AND INTEREST    
    

        2.1    Monthly Payments.    Subject to the terms of this Article II, the Borrower shall repay one twenty-first
(1/21st) of the Principal Amount (to the extent such amount has not been converted pursuant to Article III below), together with interest accrued to date on such portion of the Principal Amount
plus any and all other amounts owing under this Note but not previously paid (collectively the "Monthly Amount"), in accordance with Section 2.2
below, on the first business day of each consecutive calendar month (each, a "Repayment Date"), beginning on the first such day which occurs ninety days
following the date hereof. 

 

        2.2    Cash or Common Stock.    Subject to the terms of this Article II, the Borrower has the sole option to
determine whether to satisfy payment of the Monthly Amount in full on each Repayment Date either in cash or in shares of the Borrower's common stock, as currently constituted (the
"Common Stock"), or any combination of both. The Borrower shall deliver to the Holder a written irrevocable notice in the form of Exhibit B
attached hereto electing to pay such Monthly Amount in full on such Repayment Date in either cash or Common Stock, or any combination of both ("Repayment Election
Notice"). Such Repayment Election Notice shall be delivered at least twenty (20) days prior to the applicable Repayment Date (the date of such notice being hereinafter
referred to as the "Notice Date"). The Holder shall have the right to defer for any period of time the payment of the Monthly Amount in shares of Common
Stock in its sole discretion. If such Repayment Election Notice is not delivered within twenty (20) days prior to the applicable Repayment Date, then the repayment shall be made in either cash
or shares of Common Stock on the same terms hereunder at the Holder's sole option. If the Borrower elects or is required to repay all or a portion of the Monthly Amount in cash on a Repayment Date,
then on such Repayment Date the Borrower shall pay to the Holder 105% of the Monthly Amount in satisfaction of such obligation. If the Borrower elects or is required to repay any portion of the
Monthly Amount in shares of Common Stock, the number of such shares to be issued for such Repayment Date shall be the number determined by dividing (x) the portion of the Monthly Amount to be
paid in shares of Common Stock, by (y) the applicable Conversion Price as of such Repayment Date. Any shares of Common Stock comprising the Monthly Amount are referred to herein as
"Repayment Shares." 

        2.3    No Effective Registration.    Notwithstanding anything to the contrary herein, the Borrower shall be prohibited
from exercising its right to repay the Monthly Amount in Repayment Shares (and must deliver cash in respect thereof) if at any time from the Notice Date until the day on which the Holder receive such
Repayment Shares (i) there fails to exist an effective registration statement covering the resale of such Repayment Shares or (ii) an Event of Default (as defined in Article V)
exists or occurs which is not waived in writing by the Holder in whole or in part at the Holder's option. 

        2.4    Share Price/Issuance Limitations.    Notwithstanding anything to the contrary herein (a) the Borrower
shall have no right to satisfy payment of the Monthly Amount by delivery of Repayment Shares unless the closing price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for any
of the eleven (11) trading days preceding a Repayment Date is greater than 113% of the Fixed Conversion Price (as defined in Section 3.1 below) and (b) the Borrower shall not be
entitled to issue any Repayment Shares if such issuance would exceed the difference between the number of shares of Common Stock beneficially owned by the Holder or issuable upon exercise of warrants
held by the Holder and 4.99% of the outstanding shares of Common Stock of the Borrower. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Holder may void the Repayment Share limitation described in this Section 2.4 upon
75 days' prior notice to the Borrower or without any notice requirement upon an Event of Default. 

        2.4    Deemed Conversions.    Any repayment of the Monthly Amount in Repayment Shares pursuant to the terms hereof
shall constitute and be deemed a conversion of such portion of the applicable Principal Amount and accrued interest for all purposes under this Note (except as otherwise provided herein). 

2

 

        2.5    Prepayments.    In the event Borrower wishes to prepay all or a portion of the Principal Amount, Borrower shall
deliver to the Holder a written irrevocable notice indicating the amount intended to be so prepaid (the "Prepayment Amount") and the date on which such prepayment shall be made (the "Prepayment
Date"). Such notice shall be delivered to the Holder at least five (5) business days' prior to the Prepayment Date. On the Prepayment Date, Borrower shall pay to the Holder (a) in the
event the Prepayment Date occurs during the first six month period following the date hereof, 110% of the Prepayment Amount in satisfaction of the Prepayment Amount, (b) in the event the
Prepayment Date occurs during the second six month period following the date hereof, 115% of the Prepayment Amount in satisfaction of the Prepayment Amount and (c) in the event the Prepayment
Date occurs at any time after the second six month period following the date hereof, 125% of the Prepayment Amount in satisfaction of the Prepayment Amount. 

 
 

ARTICLE III
  CONVERSION RIGHTS    
    

        3.1    Optional Conversion.    Subject to the terms of this Article III, the Holder shall have the right, but
not the obligation, at any time until the Maturity Date or thereafter during an Event of Default (as defined in Article V), to convert all or any portion of the outstanding Principal Amount
and/or accrued interest and fees due and payable into fully paid and nonassessable shares of Common Stock at the conversion price set forth in Section 3.2 (the
"Conversion Price"). The shares of Common Stock to be issued upon such conversion are herein referred to as the "Conversion
Shares." 

        3.2    Conversion Price.    Subject to adjustment as provided in Section 3.7 hereof, the Conversion Price per
share shall be $2.33 (the "Fixed Conversion Price"). If an Event of Default has occurred and shall be continuing hereunder, then the Conversion Price
shall be equal to the lower of (i) the Fixed Conversion Price; or (ii) eighty percent (80%) of the average of the three lowest closing prices for the Common Stock on the principal
trading exchange or market for the Common Stock, (the "Principal Market"), or on any securities exchange or other securities market on which the Common
Stock is then being listed or traded, for the thirty (30) trading days prior to but not including the Conversion Date. 

        3.3    Conversion Limitation.    Notwithstanding anything contained herein to the contrary, the Holder shall not be
entitled to convert pursuant to the terms of this Note an amount that would be convertible into that number of Conversion Shares which would exceed the difference between the number of shares of
Common Stock beneficially owned by such holder or issuable upon exercise of warrants held by such holder and 4.99% of the outstanding shares of Common Stock of the Borrower. For the purposes of the
immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Holder may
void the Conversion Share limitation described in this Section 3.3 upon 75 days' prior notice to the Borrower or without any notice requirement upon an Event of Default. 

3

 

        3.4    Mechanics of Conversion.    In the event that the Holder elects to convert this Note into Common Stock, the
Holder shall give notice of such election by delivering an executed and completed notice of conversion ("Notice of Conversion") to the Borrower and such
Notice of Conversion shall provide a breakdown in reasonable detail of the amount of Principal Amount, accrued interest and fees that are being converted. On each Conversion Date (as hereinafter
defined) and in accordance with its Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount, accrued interest and fees as entered in its records and shall provide
written notice thereof to the Borrower within two (2) business days after the Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to the Borrower in accordance
with the provisions hereof shall be deemed a Conversion Date (the "Conversion Date"). A form of Notice of Conversion that may be employed by the Holder
is annexed hereto as Exhibit A. The Borrower will cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Holder's
designated broker with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three
(3) business days after receipt by the Borrower of the Notice of Conversion (the "Delivery Date"). 

        In
the case of the exercise of the conversion rights set forth herein, the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such
conversion shall be deemed to have been issued upon the date of receipt by the Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of such Common
Stock, unless the Holder provides the Borrower written instructions to the contrary. 

        3.5    Partial Conversions.    In the event of any partial conversions of outstanding Principal Amount pursuant to
this Article III, such conversions shall be deemed to constitute conversions of outstanding Principal Amount applying to Monthly Amounts for the Repayment Dates in chronological order. For
example, if the Holder elects to convert $200,000 of the Principal Amount prior to the first Repayment Date, then (i) the Principal Amount of the Monthly Amount due on each of the first and
second Repayment Dates would equal $0, (ii) the Principal Amount of the Monthly Amount due on the third Repayment Date would equal $85,714 and (iii) the Principal Amount of the Monthly
Amount due on each of the remaining Repayment Dates would be $95,238. 

        3.6    Late Payments.    The Borrower understands that a delay in the delivery of the shares of Common Stock in the
form required pursuant to this Article beyond the Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss, the Borrower agrees to pay late payments to
the Holder for late issuance of the such shares in the form required pursuant to this Article III upon conversion of the Note, in the amount equal to the greater of (i) $500 per business
day after the Delivery Date and (ii) the Borrower's actual damages from such delayed delivery. The Borrower shall pay any payments incurred under this Section in immediately available funds
upon demand and, in the case of actual damages, accompanied by reasonable documentation of the amount of such damages. 

        3.7    Adjustment Provisions.    The Fixed Conversion Price and number and kind of shares or other securities to be
issued upon conversion determined pursuant to Sections 3.1 and 3.2 shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains
outstanding, as follows: 

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

4

 

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

        C.    Share Issuances.    Subject to the provisions of this Section 3.7, if the Borrower shall at any time
prior to the conversion or repayment in full of the Principal Amount issue any shares of Common Stock to a person other than the Holder (otherwise than (i) pursuant to Subsections A or B above;
(ii) pursuant to options, warrants, or other obligations to issue shares outstanding on the date hereof as set forth in the Schedules to the Purchase Agreement dated as of the date hereof
between the Borrower and the Holder, which agreement is incorporated herein by this reference (the "Purchase Agreement"); or (iii) pursuant to options that may be issued under any employee
incentive stock option and/or any qualified stock option plan adopted by the Borrower), for a consideration per share (the "Offer Price") less than the Fixed Conversion Price in effect at the time of
such issuance, then the Fixed Conversion Price shall be immediately reset to such lower Offer Price. For purposes hereof, the issuance of any security of the Borrower convertible into or exercisable
or exchangeable for Common Stock shall result in an adjustment to the Conversion Price only upon the conversion, exercise or exchange of such securities. 

        D.    Computation of Consideration.    For purposes of any computation respecting consideration received pursuant to
Subsection C above, the following shall apply: 

        (a)   in
the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made
for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; 

        (b)   in
the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be
the fair market value thereof as determined in good faith by the Board of Directors of the Company (irrespective of the accounting treatment thereof); and 

        (c)   in
the case of the issuance of securities convertible into or exchangeable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to
be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion or exchange
thereof (the consideration in each case to be determined in the same manner as provided in clauses (a) and (b) of this Subsection (D)). 

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

        3.9    Registration Rights.    The Holder has been granted registration rights with respect to the shares of Common
Stock issuable upon conversion of this Note as more fully set forth in a Registration Rights Agreement dated the date hereof. 

5

 

 
 

ARTICLE IV
  EVENT OF DEFAULT    
    

        The occurrence of any of the following events is an Event of Default ("Event of Default"): 

        4.1    Failure to Pay Principal, Interest or other Fees.    Subject to the grace period set forth in
Section 1.2 hereof, the Borrower fails to pay any installment of principal, interest or other fees hereon or in respect of any other promissory note issued pursuant to the Purchase Agreement
when due. 

        4.2    Breach of Covenant.    The Borrower breaches any covenant or other term or condition of this Note or the
Purchase Agreement (as hereafter defined) in any material respect and such breach, if subject to cure, continues for a period of five (5) days after the occurrence thereof. 

        4.3    Breach of Representations and Warranties.    Any material representation or warranty of the Borrower made
herein, in the Purchase Agreement, or in any agreement, statement or certificate given in writing pursuant hereto or in connection therewith shall be false or misleading. 

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

        4.5    Judgments.    Any money judgment, writ or similar final process shall be entered or filed against the Borrower
or any of its property or other assets for more than $250,000, and shall remain unvacated, unbonded or unstayed for a period of ninety (90) days. 

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

        4.7    Stop Trade.    An SEC stop trade order or Principal Market trading suspension of the Common Stock for 5
consecutive trading days or 5 trading days during a period of 10 consecutive trading days, excluding in all cases a suspension of all trading on a Principal Market. 

        4.8    Cross Default.    A default shall have occurred under any document, instrument or agreement by and between the
Company and Wells Fargo Business Credit, Inc., which has not been cured within any applicable cure or grace period, other than those financial covenant defaults specified on
Schedule 2.6(b) to the Purchase Agreement. 

        4.9    Default Under Related Agreement.    An Event of Default occurs under and as defined in the Security Agreement. 

 
 

ARTICLE V
  DEFAULT PAYMENT    
    

        5.1    Default Payment.    If an Event of Default occurs, the Holder, at its option, may elect to require the Borrower
to make a Default Payment ("Default Payment"). The Default Payment shall be 130% of the outstanding principal amount of the Note, plus accrued but
unpaid interest, all other fees then remaining unpaid, and all other amounts payable hereunder. Additionally, at the direction of Laurus, the Borrower shall enter into an additional convertible debt
transaction with Laurus, the proceeds of which shall be used by the Borrower to payoff in full all obligations and liabilities then owing by the Borrower to Wells Fargo Business Credit, Inc. In
connection therewith, the Borrower shall deliver to Laurus an additional secured convertible note, registration rights agreement, securities purchase agreement and common stock purchase warrant on
terms identical to those set forth in such documents, instruments and agreements entered into by the Borrower in connection with the transactions contemplated hereby. 

6

 

        5.2    Default Payment Date and Default Notice Period.    The Default Payment shall be due and payable on the fifth
business day after the date written notice is sent from the Holder to the Borrower of an Event of Default as defined in Article IV ("Default Payment
Date"). The period between the date of the written notice from the Holder to the Borrower of an Event of Default and the Default Payment Date shall be the
"Default Notice Period." If during the Default Notice Period, the Borrower cures the Event of Default, the Event of Default will no longer exist and any
rights the Holder had pertaining to the Event of Default will no longer exist. If the Event of Default is not cured during the Default Notice Period, all amounts payable hereunder shall be due and
payable on the Default Payment Date, all without further demand, presentment or notice, or grace period, all of which hereby are expressly waived. 

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

 
 

ARTICLE VI
  MISCELLANEOUS    
    

        6.1    Failure or Indulgence Not Waiver.    No failure or delay on the part of the Holder hereof in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 

        6.2    Notices.    Any notice herein required or permitted to be given shall be in writing and shall be deemed
effectively given: (a) upon personal delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient but, if not, then
on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Borrower at the address as set forth on the signature page to
the Purchase Agreement executed in connection herewith and to the Holder at the address set forth on the signature page to the Purchase Agreement for such Holder, with a copy to John Tucker, Esq., 152
West 57th Street, 4th Floor, New York, New York 10019, facsimile number (212) 541-4434, or at such other address as the Borrower or the Holder may designate by ten days' advance
written notice to the other parties hereto. A Notice of Conversion shall be deemed given when made to the Borrower pursuant to the Purchase Agreement. 

        6.3    Amendment Provision.    The term "Note" and all references thereto, as used throughout this instrument, shall
mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 

        6.4    Assignability.    This Note shall be binding upon the Borrower and its successors and assigns, and shall inure
to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder. 

        6.5    Costs of Collection.    If default is made in the payment of this Note, the Borrower shall pay the Holder
hereof reasonable costs of collection, including reasonable attorneys' fees. 

7

 

        6.6    Governing Law.    This Note shall be governed by and construed in accordance with the laws of the State of New
York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the
state courts of New York or in the federal courts located in the state of New York. Both parties and the individual signing this Note on behalf of the Borrower agree to submit to the jurisdiction of
such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorneys' fees and costs. In the event that any provision of this Note is invalid or unenforceable
under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. 

        6.7    Maximum Payments.    Nothing contained herein shall be deemed to establish or require the payment of a rate of
interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 

        6.8    Security Interest.    The Holder of this Note has been granted a security interest in certain assets of the
Borrower as more fully described in the Security Agreement dated as of the date hereof between the Borrower and the Holder, as the same may be amended, modified and supplemented from time to time (the
"Security Agreement"). 

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

        6.10    Management Fee.    Simultaneously with the execution of this Note, the Borrower shall pay to Laurus Capital
Management, LLC a management fee in an amount equal to four percent (4%) of the Principal Amount, which such amount at the Holder's option may be deducted from funds made available by the Holder to
the Borrower hereunder. 

        6.11    Subordination Agreement.    This Note is subject to the Subordination Agreement dated as of the date hereof
among the Borrower, the Holder and Wells Fargo Business Credit, Inc. under which this Note and the Borrower's obligations hereunder are subordinated in the manner set forth therein. 

8

 

        IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its name effective as of this 31st day of July, 2003.

 

	

 	
 	

DIGITAL ANGEL CORPORATION
	

 	
 	

By:	
 	

/s/  JAMES P. SANTELLI      

	 	 	Name:	 	 
	 	 	Title:	 	 
	WITNESS:	 	 	 	 
	

/s/  REBECCA S. THOMPSON      
	
 	

 	
 	

 

9

 
 
 

NOTICE OF CONVERSION    
    

(To
be executed by the Holder in order to convert the Note) 

        The
undersigned hereby elects to convert
$                                         
 of the principal and
$                                         
 of the interest due on the Note issued by DIGITAL ANGEL
CORPORATION (the "Company") on                        , 2003 into Shares of Common Stock of the Company according to the
conditions set forth in such Note, as of the date written below. 

	Date of Conversion:	 	

	

Conversion Price:	
 	

	

Shares To Be Delivered:	
 	

	

Signature:	
 	

	

Print Name:	
 	

	

Address:	
 	

10

 
 
 

EXHIBIT B
  
    FORM OF REPAYMENT ELECTION NOTICE    
    

To:        [HOLDER
AT HOLDER'S ADDRESS] 

        Pursuant
to Section 2.2 the Note of Digital Angel Corporation (the "Company") issued on            , 2003 we hereby notify you that we are irrevocably electing to repay the
outstanding Monthly Amount (as defined in the Note) due on the Repayment Date (as defined in the Note) which occurs on            , 20    (CHECK ONE): 

        o
In full in cash on such Repayment Date. 

        o
In full in shares of the Company's Common Stock within three (3) trading days following such Repayment Date. 

	

 	
 	

Digital Angel Corporation
	

 	
 	

By:	
 	

	

 	
 	

Name:	
 	

	

 	
 	

Title:	
 	

11

QuickLinks

Exhibit 4.1

SECURED CONVERTIBLE NOTE

ARTICLE I INTEREST

ARTICLE II PAYMENTS OF PRINCIPAL AND INTEREST

ARTICLE III CONVERSION RIGHTS

ARTICLE IV EVENT OF DEFAULT

ARTICLE V DEFAULT PAYMENT

ARTICLE VI MISCELLANEOUS

NOTICE OF CONVERSION

EXHIBIT B FORM OF REPAYMENT ELECTION NOTICE

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