Document:

Exhibit
10.1

 

EXECUTIVE
EMPLOYMENT AGREEMENT

 

 

THIS EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”)
is made and entered into effective as of July 1, 2003 by and between USA Broadband, Inc., a Delaware corporation
(the “Company”) and Grant Miller (“EXECUTIVE”).  The Company and EXECUTIVE are hereinafter
collectively referred to as the “Parties,” and individually referred to as each
or any “Party.”

 

RECITALS:

 

A.                                   WHEREAS,
the Company desires assurance of the continued association and services of
EXECUTIVE in order to retain EXECUTIVE’s experience, skills, abilities,
background and knowledge, and is willing to confirm the continued engagement of
EXECUTIVE’s services on the terms and conditions set forth in this Agreement;
and

 

B.                                     WHEREAS,
EXECUTIVE desires to continue in the employment of the Company, and is willing
to continue such employment on the terms and conditions set forth in this
Agreement.

 

AGREEMENT:

 

In consideration of the foregoing premises and the
mutual covenants herein contained, and for other good and valuable
consideration, the Parties, intending to be legally bound, agree as follows:

 

1.                                       Employment.

 

1.1                                 The
Company hereby employs EXECUTIVE, and EXECUTIVE hereby accepts employment by
the Company, upon the terms and conditions set forth in this Agreement for the
period beginning on the date hereof and ending as provided in Paragraph 3
hereof (the “Employment Period”).

 

1.2                                 During
the Employment Period, EXECUTIVE shall serve as Chief Financial Officer of the
Company, and shall have the normal duties, responsibilities and authority of
such office, unless otherwise determined from time to time by the Company’s
Board of Directors.  EXECUTIVE shall do
and perform all services, acts or responsibilities necessary or advisable to
carry out the job duties of Chief Financial Officer as assigned by the Company,
provided, however, that at all times during his employment EXECUTIVE shall be
subject to the direction and policies from time to time established by the
Board of Directors of the Company.

 

2.                                       Loyal
and Conscientious Performance.

 

2.1                                 During
his employment by the Company, EXECUTIVE shall devote sufficient energy,
abilities and productive time to the proper and efficient performance of this
Agreement necessary to properly carry out the duties of Chief Financial
Officer.

 

 

3.                                       Term
of Employment.

 

3.1                                 EXECUTIVE
shall be employed pursuant to the terms of this Agreement for a three (3) year
term beginning on July 1, 2003 and expiring at midnight on July 1, 2006,
provided that this Agreement shall be automatically extended for successive
additional one-year terms unless one party gives the other party written
notice, at least ninety (90) days prior to the end of such one year term, of
its/his intent not to renew this Agreement. The initial term of employment and
any extensions thereof shall be referred to as the “Employment Period”.

 

4.                                       Compensation.

 

4.1                                 Beginning
with the Effective Date of this Agreement, Company shall pay EXECUTIVE a salary
(the “Base Salary”) of Two Hundred and Forty Thousand Dollars ($240,000.00) per
year, payable twice monthly in accordance with the Company’s normal payroll
practices for Executives.

 

4.2                                 EXECUTIVE’s
compensation may be changed only by mutual agreement of EXECUTIVE and the Board
of Directors of the Company.  Any such
agreement shall be evidenced by a written amendment of this Agreement, which,
among other things, shall specify with particularity any change in EXECUTIVE’s
compensation and the date or dates when each such change shall become
effective.

 

4.3                                 Upon
the effective date of this Agreement, EXECUTIVE shall also receive from the
Company an additional stock option granting EXECUTIVE the right to purchase
500,000 shares of the Company’s common stock at the price of $1.10 per share
during the option period. The terms and conditions of this grant of stock
option shall be set forth in a separate stock option agreement. The Parties
acknowledge and confirm that this stock option is in addition to the stock
option rights EXECUTIVE currently holds under a previously issued grant of
500,000 shares of the Company’s common stock at a price of $1.33 per share.

 

4.4                                 In
addition to the Base Salary payable to EXECUTIVE hereunder, the EXECUTIVE shall
be entitled to the following benefits during the Employment Period:

 

4.4.1                        All
benefits to which other Executive officers of the Company are entitled, as
determined by the Company’s Board of Directors, on terms comparable thereto,
including but not limited to, participation in any and all pension and profit
sharing plans, bonus and incentive payment programs, group life insurance
policies and plans, medical, health, dental and disability insurance policies
and plans, and the like, which may be maintained by the Company for the benefit
of its Executive officers.

 

4.4.2                        Four
(4) weeks vacation per year, which shall accrue annually beginning with the
effective date of this Agreement.  If
the EXECUTIVE does not utilize the entire four weeks of annual vacation in a
given year, he may carry over not more than four weeks into the following
calendar year.

 

4.4.3                        EXECUTIVE
shall receive a performance bonus (“Performance Bonus”) of up to 100% Base
Salary based upon EXECUTIVE’s achievement of certain milestones by EXECUTIVE as
set forth by the Board of Directors.

 

2

 

4.5                                 The
Company shall reimburse EXECUTIVE for all reasonable out-of-pocket expenses
incurred by him in the course of performing his duties under this Agreement,
which are consistent with the Company’s policies in effect from time to time with
respect to travel, entertainment and other business expenses, subject to the
Company’s requirements with respect to reporting and documentation of such
expenses pursuant to Company policy.

 

4.6                                 The
Company shall provide EXECUTIVE with an automobile for use in Company business,
and EXECUTIVE shall maintain and provide to the Company records of the use of
that automobile for other than Company purposes, as well as all other records
relating to such automobile.

 

4.7                                 All
of EXECUTIVE’s compensation shall be subject to customary federal and state
withholding taxes and any other employment taxes as are commonly required to be
collected or withheld by the Company.

 

4.8                                 Change
of Control.  Should there be a
Change of Control of the Company or any other transaction in which the Company
is not the surviving entity during the Employment Period, then as part of that
transaction, the Company will require the surviving entity to modify this
Agreement in an equitable manner to provide EXECUTIVE with the same Base Salary
and benefits.  Any unvested options granted to the EXECUTIVE hereunder shall
fully vest upon a Change of Control or upon a termination of the EXECUTIVE’s
employment under this Agreement by the Company Without Cause.

 

5.                                       Termination.

 

5.1                                 Termination
for Cause.  The Company may
terminate this Agreement for Cause (as defined herein) by delivery of written
notice to EXECUTIVE specifying the cause or causes relied upon for such
termination.  If EXECUTIVE’s employment
under this Agreement is terminated by the Company for Cause before the last day
of any calendar month, EXECUTIVE shall be entitled to receive as compensation
for such calendar month, only the Base Salary set forth in Section 4.1 prorated
to the date of termination on the basis of a 30-day calendar month.  Grounds for the Company to terminate this
Agreement for “Cause” shall include only the occurrence of any of the following
events:

 

5.1.1                        EXECUTIVE’s
willful misconduct or gross negligence in the performance of his duties
hereunder;

 

5.1.2                        EXECUTIVE’s
willful failure or refusal to perform in the usual manner at the usual time
those duties which he regularly and routinely performs in connection with the
business of the Company or such other duties reasonably related to the capacity
in which he is employed hereunder which may be assigned to him by the Board of
Directors of the Company, if such failure or refusal has not been substantially
cured to the satisfaction of the Board of Directors within thirty (30) days
after written notice of such failure or refusal has been given by the Company
to EXECUTIVE.

 

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5.1.3                        EXECUTIVE’s
performance of any action when specifically and reasonably instructed not to do
so by the Board of Directors of the Company;

 

5.1.4                        EXECUTIVE’s
engaging or in any manner participating in any activity which is directly
competitive with or intentionally injurious to the Company;

 

5.1.5                        EXECUTIVE’s
commission of any fraud against the Company or use or appropriation for his
personal use or benefit of any funds or properties of the Company not
authorized by the Board of Directors to be so used or appropriated; or

 

5.1.6                        EXECUTIVE’s
conviction of any crime involving moral turpitude.

 

For purposes of this definition, no act or failure to act by the
EXECUTIVE shall be considered “willful” or “grossly negligent” if the EXECUTIVE
acted (or failed to act) in good faith with the reasonable belief that his
actions or omission was in the Company’s best interest.

 

Any notice of termination given pursuant to this
Section 5.1 shall effect termination as of the date specified in such notice
or, in the event no such date is specified, on the last day of the month in
which such notice is delivered.

 

5.2                                 Termination
Without Cause.  The Company may
voluntarily terminate this Agreement without Cause by giving not less than
thirty (30) days written notice to EXECUTIVE. 
Any such notice shall specify the exact date of termination (the
“Termination Date”).  If EXECUTIVE’s
employment under this Agreement is terminated by the Company without Cause (as
defined herein), EXECUTIVE shall be entitled to receive a) his Base Salary and
health insurance coverage, both at the rate existing at the date of
termination, for an additional twelve (12) months after the Termination Date.  All Base Salary payments shall be paid over
time in accordance with the Company’s general payroll practices, as and when
such Base Salary would have been paid had EXECUTIVE’s employment not
terminated; b)
any business expenses which are properly owing to EXECUTIVE through the date of
termination; and c) any options granted to EXECUTIVE to purchase shares of the
Company’s common stock that are unvested at the time of such termination
without Cause shall vest immediately and be immediately exercisable for the
term of such options pursuant to the applicable stock option agreement. The
Executive shall not be under any obligation to mitigate the Company’s
obligation by securing other employment or otherwise.

 

5.2.1                        EXECUTIVE
may voluntarily terminate this Agreement upon no less than thirty (30) days
written notice of such termination submitted to the Board of Directors, and in
such event EXECUTIVE shall be entitled to receive all amounts due to him
through the date of termination.

 

5.3                                 This
Employment Agreement is a personal services contract whereby the Company is
engaging the services of EXECUTIVE.  By
entering into this Agreement, the Company is relying on EXECUTIVE’s performing
his services for the Company throughout the entire term of this Agreement.

 

4

 

6.                                       Death
or Disability During Term of Employment.

 

6.1                                 This
Agreement shall terminate without notice upon the date of EXECUTIVE’s death or
the date when EXECUTIVE becomes “completely disabled” as that term is defined
in Section 6.4.

 

6.2                                 In
the event of EXECUTIVE’s death, all rights of EXECUTIVE to compensation
hereunder shall automatically terminate immediately upon his death, except that
EXECUTIVE’s heirs, personal representatives or estate shall be entitled to any
unpaid portion of his salary and accrued benefits earned up to the date of his
death.

 

6.3                                 In
the event EXECUTIVE is disabled, EXECUTIVE shall be entitled to receive such
disability benefits as would apply to other senior Executives in the Company,
subject to the terms and conditions of any such Company disability program.

 

6.4                                 The
term “completely disabled” as used in this Agreement shall mean the inability
of EXECUTIVE to perform his duties under this Agreement because he has become
permanently disabled within the meaning of any policy of disability income
insurance covering Executives of the Company then in force.  In the event the Company has no policy of
disability income insurance covering Executives of the Company in force when
EXECUTIVE becomes disabled, the term “completely disabled” shall mean the
inability of EXECUTIVE to perform his normal and customary duties under this
Agreement for a total of four (4) consecutive months by reason of any
incapacity, physical or mental, which the Board of Directors of the Company,
based upon medical advice or an opinion provided by a licensed physician
acceptable to the Board of Directors of the Company, determines to have
incapacitated EXECUTIVE from satisfactorily performing all of his usual
services for the Company during the foreseeable future.  The action of the Board of Directors of the
Company shall be final and binding and the date such action is taken shall be
the date of such complete disability for purposes of this Agreement, and upon
such date this Agreement shall become null and void and of no further force and
effect.

 

7.                                       Proprietary
and Confidential Information.

 

7.1                                 EXECUTIVE,
during the term of this Agreement, will have access to and become acquainted
with various information of substantial value to the Company, including trade
secrets, which is generally not known in the industry, and which gives the
Company an advantage over its competitors who do not know or use it, including,
but not limited to, trade secrets, research and development, sales and customer
information, customer and prospect lists, and business and financial
information relating to the business, products, practices, and techniques of
the Company or its business partners or vendors (collectively, the
“Confidential Information”).  EXECUTIVE
agrees to regard and preserve as confidential such Confidential Information
obtained by EXECUTIVE from whatever source and will not, either during
EXECUTIVE’s employment or thereafter, publish or disclose any part of such
Confidential Information in any manner at any time, or use such Confidential
Information except on behalf of the Company, without the prior written consent
of the Company.  All files, records,
documents, drawings, specifications, equipment, computer disks and software,
and other electronic media or similar items relating to the business of the
Company, whether prepared by the EXECUTIVE or

 

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otherwise coming into EXECUTIVE’s possession, shall remain the
exclusive property of the Company.

 

7.2                                 Preservation
of Property.  EXECUTIVE will
exercise reasonable care, consistent with good business judgment, to preserve
in good working order, subject to reasonable wear and tear from authorized
usage, and to prevent loss of, any equipment, instruments or accessories of the
Company in his custody for the purpose of conducting the business of the
Company.  Upon request, EXECUTIVE will
promptly surrender the same to the Company at the conclusion of his employment,
or if not surrendered, EXECUTIVE will account to the Company to its reasonable
satisfaction as to the present location of all such instruments or accessories
and the business purpose for their placement at such location.  At the conclusion of EXECUTIVE’s employment
with the Company, he agrees to return such instruments or accessories to the
Company or to account for same to the Company’s reasonable satisfaction.

 

7.3                                 No
Inconsistent Agreements.  EXECUTIVE
affirms that he has no agreement with any other party that would preclude his
compliance with any obligations under this Agreement.

 

8.                                       Assignment
and Binding Effect.

 

8.1                                 This
Agreement shall be binding upon and inure to the benefit of EXECUTIVE and
EXECUTIVE’s heirs, executors, administrators, estate, beneficiaries, and legal
representatives.  Neither this Agreement
nor any rights or obligations under this Agreement shall be assignable by
either party without the prior express written consent of the other party.  This Agreement shall be binding upon and
inure to the benefit of the Company and its successors, assigns and legal
representatives.

 

9.                                       Notices.

 

9.1                                 All
notices or demands of any kind required or permitted to be given by the Company
or EXECUTIVE under this Agreement shall be given in writing and shall be
personally delivered (and receipted for) or sent by facsimile (with
confirmation receipt), or sent by recognized commercial overnight courier, or
mailed by certified mail, return receipt requested, postage prepaid, addressed
as follows:

 

	
   

  	
  If to the Company:

  	
  Ric Landry

  Maroon Bells

  269 Market Square

  Lake Forest, IL 60045

  Telephone:  (847) 295-8000

  Facsimile:  (847) 295-8035

  
	
   

  	
   

  	
   

  
	
   

  	
  If to EXECUTIVE:

  	
  Grant Miller

  4 Tobago Way

  Coronado, CA 92118

  Telephone: (619) 424-3544

  Facsimile: (619) 424-8040

  

 

6

 

Any such written notice shall be deemed received when personally
delivered or upon receipt in the event of facsimile or overnight courier, or
three (3) days after its deposit in the United States mail by certified mail as
specified above.  Either Party may
change its address for notices by giving notice to the other Party in the
manner specified in this section.

 

10.                                 Choice
of Law.

 

10.1                           This
Agreement is made in San Diego, California. 
This Agreement shall be construed and interpreted in accordance with the
internal laws of the State of California. 
Each of the parties hereto agree to the exclusive jurisdiction of the
state and federal courts located in the State of California for any and all
actions between the parties.  Any
controversy or claim arising out of or relating to this Agreement or the breach
thereof, whether involving remedies at law or in equity, shall be adjudicated
in San Diego County, California.

 

11.                                 Integration.

 

11.1                           This
Agreement contains the entire agreement of the parties relating to the subject
matter of this Agreement, and supersedes all prior oral and written employment
agreements or arrangements between the Parties.  This Agreement cannot be amended or modified except by a written
agreement signed by EXECUTIVE and the Company.

 

12.                                 Waiver.

 

12.1                           No
term, covenant or condition of this Agreement or any breach thereof shall be
deemed waived, except with the written consent of the Party against whom the
waiver is claimed, and any waiver of any such term, covenant, condition or
breach shall not be deemed to be a waiver of any preceding or succeeding breach
of the same or any other term, covenant, condition or breach.  No failure or exercise, delay in exercising,
or single or partial exercise of any right, power or remedy by either party
hereto shall constitute a waiver thereof or shall preclude any other or further
exercise of the same or any other right, power or remedy.

 

13.                                 Severability.

 

13.1                           The
unenforceability, invalidity or illegality of any provision of this Agreement
shall not render any other provision of this Agreement unenforceable, invalid
or illegal.

 

14.                                 Interpretation;
Construction.

 

14.1                           The
headings set forth in this Agreement are for convenience only and shall not be
used in interpreting this Agreement. The Parties acknowledge that each Party
and its counsel has reviewed and revised, or had an opportunity to review and
revise, this Agreement, and the normal rule of construction to the effect that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.

 

7

 

15.                                 Attorneys’
Fees.

 

15.1                           In
any controversy or claim arising out of or relating to this Agreement or the
breach thereof, which results in legal action, proceeding or arbitration, the
prevailing party in such action, as determined by the court or arbitrator,
shall be entitled to recover reasonable attorneys’ fees and costs incurred in
such action.

 

16.                                 Counterparts.

 

16.1                           This
Agreement may be executed in any number of counterparts, each of which when so
executed and delivered shall together constitute an original hereof.

 

17.                                 Representations
and Warranties.

 

17.1                           EXECUTIVE
represents and warrants that he is not restricted or prohibited, contractually
or otherwise, from entering into and performing each of the terms and covenants
contained in this Agreement, and that his execution and performance of this
Agreement will not violate or breach any other agreement between EXECUTIVE and
any other person or entity.

 

18.                                 Arbitration.

 

Any controversy or claim arising out or relating to this Agreement, or
the breach hereof, or arising out of or relating to the rights, duties or
obligations of the Company or of EXECUTIVE shall be settled by binding arbitration
conducted in San Diego County, California in accordance with, and by an
arbitrator appointed pursuant to, the rules of the American Arbitration
Association in effect at the time, and the judgment upon the award rendered
pursuant thereto shall be in writing and may be entered in any court having
jurisdiction, and all rights or remedies of the Company and of the Executive to
the contrary are hereby expressly waived. 
The Company shall pay the arbitration fees and the costs for such
arbitrator.

 

IN WITNESS WHEREOF, the Parties have executed this
Agreement as of the date first above written.

 

	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  a Delaware Corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RIC LANDRY

  
	
   

  	
   

  	
  Ric Landry, 
  Director

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ GRANT MILLER

  
	
   

  	
  Grant Miller

  

 

8Exhixbit 4.3

 

NEITHER THESE SECURITIES NOR
THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
BORROWER.  THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

No.
2         $1,000,000

 

Date:  November 3, 2003

 

AEROGEN, INC.

SECURED CONVERTIBLE DEBENTURE DUE MARCH 1, 2004

 

THIS DEBENTURE
is one of a series of duly authorized and issued debentures of Aerogen, Inc., a
Delaware corporation (the “Borrower”),
designated as its Secured Convertible Debentures due March 1, 2004, in the
aggregate principal amount of up to One Million Dollars ($1,000,000) (the “Debentures”).

 

FOR VALUE
RECEIVED, the Borrower promises to pay to the order of SF Capital Partners,
Ltd. or its registered assigns (the “Holder”), the principal sum of One Million
Dollars ($1,000,000), on March 1, 2004 (the “Maturity Date”), or such
earlier date as this Debenture is required or permitted to be repaid as
provided hereunder, and to pay interest to the Holder on the aggregate then
outstanding principal amount of this Debenture in accordance with the
provisions hereof. All holders of Debentures are referred to collectively, as
the “Holders.”  This Debenture is subject to the following
additional provisions:

 

1.                                       Definitions.                                  In
addition to the terms defined elsewhere in this Debenture: (a) capitalized
terms that are not otherwise defined herein have the meanings given to such
terms in the Loan and Securities Purchase Agreement, dated as of September 9,
2003, among the Borrower and the lenders identified therein (the “Loan Agreement”), and (b) the following
terms have the meanings indicated below:

 

 

“Closing Price”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on an Eligible
Market, the closing sale price per share of the Common Stock for such date (or
the nearest preceding date) on the primary Eligible Market or exchange on which
the Common Stock is then listed or quoted; (b) if prices for the Common Stock
are then quoted on the OTC Bulletin Board, the closing sale price per share of
the Common Stock for such date (or the nearest preceding date) so quoted; (c)
if prices for the Common Stock are then reported in the “Pink Sheets” published
by the National Quotation Bureau Incorporated (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent sale
price per share of the Common Stock so reported; or (d) in all other cases, the
fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by a majority in interest of the Lenders.

 

“Common Stock Equivalents” means any securities of the Borrower or a subsidiary
thereof which entitle the holder thereof to acquire Common Stock at any time,
including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.

 

“Borrower  Prepayment Price” for any Debentures which
shall be subject to prepayment pursuant to Section 11, shall equal the sum of:
(i) 110% of the principal amount of Debentures to be prepaid, and (ii) all
accrued and unpaid interest on the principal amount of the Debentures to be
prepaid.

 

“Change of Control”
means the occurrence of any of the following in one or a series of related
transactions: (i) an acquisition after the date hereof by an individual or
legal entity or “group” (as described in Rule 13d-5(b)(1) under the Exchange
Act) of more than one-half of the voting rights or equity interests in the
Borrower; (ii) a replacement of more than one-half of the members of the
Borrower’s board of directors in a single election of directors that is not
approved by those individuals who are members of the board of directors on the
date hereof (or other directors previously approved by such individuals); (iii)
a merger or consolidation of the Borrower or any Subsidiary or a sale of all or
substantially all of the assets of the Borrower (other than any sale, transfer,
license or lease of assets relating to Borrower’s insulin inhaler product and
related technology or the MIA Assets pursuant to the MIA Term Sheet indicated
in Section 6.3(f) of the Purchase Agreement) in one or a series of related
transactions, unless following such transaction or series of transactions, the
holders of the Borrower’s securities prior to the first such transaction continue
to hold at least one-half of the voting rights and equity interests in the
surviving entity or acquirer of such assets; (iv) a recapitalization,
reorganization or other transaction involving the Borrower or any Subsidiary
that constitutes or results in a transfer of more than one-half of the voting
rights or equity interests in the Borrower, unless following such transaction
or series of transactions, the holders of the Borrower’s securities prior to
the first such transaction continue to hold at least one-half of the voting
rights and equity interests in the surviving entity or acquirer of such assets;
(v) consummation of a “Rule 13e-3 transaction” as defined in Rule 13e-3 under
the Exchange Act with respect to the Borrower, or (vi) the execution by the Borrower
or its controlling shareholders of an agreement providing for or reasonably
likely to result in any of the foregoing events.

 

2

 

“Conversion
Date” means the date
a Conversion Notice together with the Conversion Schedule is delivered to the
Borrower in accordance with Section 5(a).

 

“Conversion
Notice” means a
written notice in the form attached hereto as Exhibit A.

 

“Conversion
Price” means three
dollars and twenty eight cents ($3.28), subject to adjustment from time to time
pursuant to Section 12.

 

“Eligible
Market” means any of
the New York Stock Exchange, the American Stock Exchange, the Nasdaq National
Market or the Nasdaq Small Cap Market.

 

“Event of
Default” means any
one of the following events  (whatever
the reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court, or
any order, rule or regulation of any administrative or governmental body):

 

(i)                 any default in
the payment (free of any claim of subordination) of principal, interest or
liquidated damages in respect of any Debentures, within five (5) Trading Days
of the date when due and payable (whether on a Conversion Date, the Maturity
Date or by acceleration or prepayment or otherwise).

 

(ii)              the Borrower or any
Subsidiary defaults in any of its obligations under any other debenture or any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there has been issued, or by which
there has been secured or evidenced, any indebtedness for borrowed money or
money due under any long term leasing or factoring arrangement of the Borrower
or any Subsidiary in an amount exceeding $150,000, whether such indebtedness
now exists or is hereafter created, and such default results in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable.

 

(iii)           the occurrence of a
Change of Control transaction.

 

(iv)          the incurrence by the
Borrower of any debt obligation that is senior in right of payment to the
Debentures other than Permitted Indebtedness (as defined in the Security
Agreement), or otherwise secured by any of the assets, income or properties of
the Borrower, other than Permitted Liens.

 

(v)             the payment by the
Borrower of any dividends or distributions of assets, properties or cash to any
Person that is outside of the ordinary course of the Borrower’s business and
not consistent in amount and type with prior practice as disclosed in SEC
Reports.

 

(vi)          the occurrence and
continuance of any event of default (whether or not declared) under any
Debentures.

 

(vii)            the Borrower defaults
in the timely performance of any 
obligation under the Transaction Documents and such default continues
uncured for a period of

 

3

 

ten Trading Days after the date on which written notice of such default
is first given to the Borrower by the Holder (it being understood that no prior
notice need be given in the case of a default that cannot reasonably be cured
within ten Trading Days).

 

(viii)              any of the
Borrower’s representations and warranties set forth in the Loan Agreement shall
be incorrect as of the Original Issue Date and result in a Material Adverse
Effect.

 

(ix)                      the
occurrence of a Bankruptcy Event (as defined in the Purchase Agreement).

 

(x)                         the
Common Stock: (i) is not listed or quoted, or is suspended from trading, on an
Eligible Market for a period of three Trading Days (which need not be
consecutive Trading Days), and (ii) is not traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).

 

(xi)                      the Borrower
fails to deliver a stock certificate evidencing Underlying Shares to a Holder
within ten Trading Days after a Conversion Date or the conversion rights of the
Holders pursuant to the terms hereof are otherwise suspended for any reason.

 

(xii)                   the Borrower
fails to deliver a stock certificate evidencing Warrant Shares to a Holder
within ten Trading Days after an Exercise Date (as defined in the Warrants) or
the exercise rights of the Holders pursuant to the terms thereof are otherwise
suspended for any reason.

 

(xiii)                the Borrower fails
to have available a sufficient number of authorized but unissued and otherwise
unreserved shares of Common Stock available to issue Underlying Shares upon any
conversion of Debentures hereunder or to issue Warrant Shares upon an exercise
of the Warrants.

 

(xiv)               the Borrower fails
to make any cash payment required under the Transaction Documents (including,
without limitations, as prepayment hereunder) and such failure is not cured
within five Trading Days after notice of such default is first given to the
Borrower by a Lender.

 

(xv)                  the initial
Registration Statement to be filed pursuant to the Registration Rights
Agreement shall not be declared effective by the Commission by the 60th
day following the applicable Effectiveness Date (as defined in the Registration
Rights Agreement).

 

“Original
Issue Date” means the
date of the first issuance of any Debentures, regardless of the number of
transfers of any particular Debenture.

 

“Registration Statement”
shall have the meaning set forth in the Loan Agreement.

 

4

 

“Security Agreements”
shall have the meaning set forth in the Loan Agreement.

 

“Trading Day” means: (a) a day on
which the shares of Common Stock are traded on an Eligible Market, or
(b) if the shares of Common Stock are not listed on an Eligible Market, a
day on which the shares of Common Stock are traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (c) if the shares of
Common Stock are not quoted on the OTC Bulletin Board, a day on which the
shares of Common Stock are quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions of reporting prices); provided, that in
the event that the shares of Common Stock are not listed or quoted as set forth
in (a), (b) and (c) hereof, then Trading Day shall mean a business day.

 

“Underlying
Shares” means the
shares of Common Stock issuable upon conversion of the Debentures and payment
of interest thereunder.

 

2.                                       Interest.  The Borrower shall pay interest to the
Holder in cash on the aggregate unconverted and then outstanding principal
amount of this Debenture (including any interest added to such principal in
accordance with this Section 2) at the rate of 10% per annum, payable on the
Maturity Date or such earlier date as this Debenture is required or permitted
to be repaid as provided hereunder. 
Interest shall be calculated on the basis of a 360-day year and shall
accrue daily commencing on the Original Issue Date.

 

3.                                       Registration
of Debentures.  The Borrower shall
register the Debentures upon records to be maintained by the Borrower for that
purpose (the “Debenture Register”) in the name of each record Holder thereof
from time to time. The Borrower may deem and treat the registered Holder of
this Debenture as the absolute owner hereof for the purpose of any conversion
hereof or any payment of interest hereon, and for all other purposes, absent
actual notice to the contrary.

 

4.                                       Registration
of Transfers and Exchanges.  The
Borrower shall register the transfer of any portion of this Debenture in the
Debenture Register upon surrender of this Debenture to the Borrower at its
address for notice set forth herein. Upon any such registration or transfer, a
new Debenture, in substantially the form of this Debenture (any such new
debenture, a “New Debenture”),
evidencing the portion of this Debenture so transferred shall be issued to the
transferee and a New Debenture evidencing the remaining portion of this
Debenture not so transferred, if any, shall be issued to the transferring
Holder. The acceptance of the New Debenture by the transferee thereof shall be
deemed the acceptance by such transferee of all of the rights and obligations
of a holder of a Debenture. The Borrower agrees that its prior consent is not
required for the transfer of any portion of this Debenture.  This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge or other
fee will be imposed in connection with any such registration of transfer or
exchange.

 

5.                                       Conversion.

 

(a)                                  At the Option of
the Holder.  All or any portion of
the principal amount of this Debenture then outstanding together with any
accrued and unpaid interest

 

5

 

thereunder shall be convertible into shares of Common Stock at the
Conversion Price (subject to limitations set forth in Section 5(b)), at the
option of the Holder, at any time and from time to time from and after the
Original Issue Date. The Holder may effect conversions under this Section 5(a),
by delivering to the Borrower a Conversion Notice together with a schedule in
the form of Schedule 1 attached hereto (the “Conversion Schedule”). If the Holder is converting less than
all of the principal amount represented by this Debenture, or if a conversion
hereunder may not be effected in full due to the application of Section 5(b),
the Borrower shall honor such conversion to the extent permissible hereunder
and shall promptly deliver to the Holder a Conversion Schedule indicating the
principal amount which has not been converted.

 

(b)                                 Certain Conversion
Restrictions.

 

(i)                Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired by a Holder upon any conversion of Debentures (or
otherwise in respect hereof) shall be limited to the extent necessary to insure
that, following such conversion (or other issuance), the total number of shares
of Common Stock then beneficially owned by such Holder and its Affiliates and
any other Persons whose beneficial ownership of Common Stock would be
aggregated with such Holder’s for purposes of Section 13(d) of the Exchange
Act, does not exceed 9.999% of the total number of issued and outstanding
shares of Common Stock (including for such purpose the shares of Common Stock
issuable upon such conversion).  For
such purposes, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. This provision shall not restrict the number of shares of Common
Stock which a Holder may receive or beneficially own in order to determine the
amount of securities or other consideration that such Holder may receive in the
event of a merger, sale or other business combination or reclassification
involving the Borrower as contemplated herein. 
This restriction may not be waived.

 

(ii)             Notwithstanding
anything to the contrary in this Debenture, including without limitation any
adjustments to the Conversion Price pursuant to Secion 12(c) below, if the
Borrower has not previously obtained Shareholder Approval (as defined below),
then the Borrower may not issue shares of Common Stock in excess of the
Issuable Maximum at a Conversion Price below the Closing Price on the Trading
Day immediately preceding the Original Issue Date, upon conversions of this
Debenture. The “Issuable Maximum”
means a number of shares of Common Stock equal to 821,128, less any shares of
Common Stock previously issued upon exercise of any Warrants issued to the
Holder at an exercise price below the Closing Price on the Trading Day
immediately preceding the Original Issue Date. 
If on any Conversion Date: (A) the aggregate number of shares of Common
Stock that would then be issuable upon conversion in full of all then
outstanding principal amount of 
Debentures would exceed the Issuable Maximum on such date, and (B) the
Borrower shall not have previously obtained the vote of shareholders, as may be
required by the applicable rules and regulations of the Nasdaq (or any
successor entity or any other Eligible Market on which the Company’s securities
then trade), applicable to approve the issuance of shares of Common Stock  in excess of the Issuable Maximum pursuant to
the terms hereof (the “Shareholder Approval”),
then, the Borrower shall issue to the Holder a number of shares of Common Stock
equal to the Issuable Maximum and, with respect to the remainder of the
principal amount of Debentures then held by the Holder for which a conversion
would result in an issuance of shares of Common Stock in

 

6

 

excess of the Issuable Maximum (the “Excess
Principal Amount”), the Holder shall have the right to require the
Borrower to either: (1) seek Shareholder Approval as soon as possible, but
in any event not later than the 90th day after such request, or (2) pay cash to
the Holder, in an amount equal to the then outstanding principal under this
Debenture (and accrued and unpaid interest thereon).  If a Holder shall have elected the first option pursuant to the
immediately preceding sentence and the Borrower shall have failed to obtain the
Shareholder Approval on or prior to the 90th day after such request, then
within three (3) days of such 90th day, the Borrower shall pay cash to such
Holder an amount equal to outstanding principal under this Debenture (and
accrued and unpaid interest thereon). 
The Borrower and the Holder understand and agree that shares of Common
Stock issued to and then held by the Holder as a result of conversions of
Debentures shall not be entitled to cast votes on any resolution to obtain
Shareholder Approval pursuant hereto.

 

(c)                                  Unconverted
Portion of Debentures. If on any prepayment date or in connection with
repayment of outstanding principal amount of this Debenture on the Maturity
Date, the Holder elects to convert the outstanding principal amount of this
Debenture (including any accrued and unpaid interest) to shares of Common Stock
under Section 5(a), and any portion that the Holder is unable to convert due to
Section 5(b) (the “Debenture Balance”)
shall be, at the option of the Holder, repaid
in cash at the applicable amount or exchanged for a non-secured and
non-interest bearing note in a principal amount equal to the Debenture Balance
and which shall be convertible into shares of Common Stock (the “Balance Debenture”). 
The Balance Debenture shall have a two (2) year term and a per share
conversion price equal to the Conversion Price.  The Balance Debenture shall not contain any anti-dilution or
other exercise price adjustments (other than for stock splits, dividends,
recombinations and the like) and shall otherwise be in the same form as this
Debenture.  The Balance Debenture shall
be included within the definition of “Debentures” under the Loan Agreement and
the shares of Common Stock issuable upon conversion of the Balance Debenture
shall be included within the definition of Registrable Securities (as defined
in the Registration Rights Agreement) under the Registration Rights Agreement.

 

6.                                       Mechanics
of Conversion.

 

(a)                                  The number of
Underlying Shares issuable upon any conversion hereunder shall equal the
outstanding principal amount of this Debenture to be converted, divided by the
Conversion Price on the Conversion Date, plus (if indicated in the applicable
Conversion Notice) the amount of any accrued but unpaid interest on this
Debenture through the Conversion Date, divided by the Conversion Price on the
Conversion Date.

 

(b)                                 The Borrower shall
promptly following a Conversion Date (but in no event later than five Trading
Days after such Conversion Date) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate a certificate for the Underlying Shares issuable
upon such conversion, free of restrictive legends. The Holder, or any Person so
designated by the Holder to receive Underlying Shares, shall be deemed to have
become holder of record of such Underlying Shares as of the Conversion Date.
The Borrower shall, upon request of the Holder, use its best efforts to deliver
Underlying Shares hereunder electronically (via a DWAC) through the Depository
Trust Corporation or another established clearing corporation performing
similar functions.

 

7

 

(c)                                  The Holder shall not
be required to deliver the original Debenture in order to effect a partial
conversion hereunder. Execution and delivery of the Conversion Notice shall
have the same effect as cancellation of the Debenture and issuance of a New
Debenture representing the remaining outstanding principal amount. Upon
surrender of this Debenture following one or more partial conversions, the
Borrower shall promptly deliver to the Holder a New Debenture representing the
remaining outstanding principal amount.

 

(d)                                 The Borrower’s
obligations to issue and deliver Underlying Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Borrower or
any violation or alleged violation of law by the Holder or any other Person,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with the issuance of
such Underlying Shares.

 

(e)                                  If by the fifth
Trading Day after a Conversion Date the Borrower fails to deliver to the Holder
such Underlying Shares in such amounts and in the manner required pursuant to
Section 5, then the Holder will have the right to rescind the Conversion Notice
pertaining thereto by giving written notice to the Borrower prior to such
Holder’s receipt of such Underlying Shares.

 

(f)                                    If
by the fifth Trading Day after a Conversion Date the Borrower fails to deliver
to the Holder the required number of Underlying Shares in the manner required
pursuant to Section 5, and if after such fifth Trading Day and prior to the
receipt of such Underlying Shares, the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of the Underlying Shares which the Holder anticipated
receiving upon such conversion (a “Buy-In”),
then the Borrower shall: (1) pay in cash to the Holder (in addition to any
other remedies available to or elected by the Holder) the amount by which (x)
the Holder’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of Underlying Shares that the Borrower was required
to deliver to the Holder in connection with the exercise at issue by (B) the
Closing Price at the time of the obligation giving rise to such purchase
obligation and (2) at the option of the Holder, either void the conversion at
issue and reinstate the principal amount of Debentures (plus accrued interest
therein) for which such conversion was not timely honored or deliver to the
Holder the number of shares of Common Stock that would have been issued had the
Borrower timely complied with its exercise and delivery obligations
hereunder.  The Holder shall provide the
Borrower reasonably detailed evidence or written notice indicating the amounts
payable to the Holder in respect of the Buy-In.

 

7.                                       Events
of Default.

 

(a)                                  At any time or times
following the occurrence of an Event of Default, the Holder may elect, by
notice to the Borrower (an “Event Notice”),
to require the Borrower to repurchase all or any portion of the outstanding
principal amount of this Debenture

 

8

 

and the Warrant held by such Holder, as indicated in the Event Notice,
at a repurchase price  equal to 110% of
such outstanding principal amount, plus all accrued but unpaid interest thereon
through the date of payment.

 

(b)                                 Upon the occurrence
and during the continuance of any Bankruptcy Event, all outstanding unconverted
principal and accrued but unpaid interest on this Debenture shall immediately
become due and payable in full in cash (free of any claim of subordination),
without any further action by the Holder, and the Borrower shall immediately be
obligated to repurchase this Debenture pursuant to the preceding paragraph as
if the Holder had delivered an Event Notice immediately prior to the occurrence
of such Bankruptcy Event.

 

(c)                                  In connection with
any Event of Default, the Holder need not provide and the Borrower hereby
waives any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available
to it under applicable law. Any such declaration may be rescinded and annulled
by the Holder at any time prior to payment hereunder. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereto.

 

8.                                       Ranking.  This Debenture ranks pari passu with all
other Debentures (as defined in the Loan Agreement) now or hereafter issued
pursuant to the Transaction Documents and is senior to all existing and
hereafter created Indebtedness of the Borrower. Other than Permitted
Indebtedness, no Indebtedness of the Borrower is senior to this Debenture in
right of payment, whether with respect of interest, damages or upon liquidation
or dissolution or otherwise. The Borrower will not, and will not permit any
Subsidiary to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom, that is senior in any respect to the
Borrower’s obligations under the Debentures, other than Permitted Indebtedness.

 

9.                                       Charges,
Taxes and Expenses.  Issuance of
certificates for Underlying Shares upon conversion of (or otherwise in respect
of) this Debenture shall be made without charge to the Holder for any issue or
transfer tax, withholding tax, transfer agent fee or other incidental tax or
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Borrower; provided, however, that the Borrower
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the registration of any certificates for Underlying Shares
or Debentures in a name other than that of the Holder. The Holder shall be
responsible for all other tax liability that may arise as a result of holding
or transferring this Debenture or receiving Underlying Shares in respect
hereof.

 

10.                                 Reservation
of Underlying Shares.  The Borrower
covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and otherwise unreserved Common Stock,
solely for the purpose of enabling it to issue Underlying Shares as required
hereunder, the number of Underlying Shares which are then issuable and
deliverable upon the conversion of (and otherwise in respect of) this entire
Debenture (taking into account the adjustments of Section 12), free from
preemptive rights or any other contingent purchase rights of persons other than
the Holder. The Borrower covenants that all Underlying

 

9

 

Shares so issuable and deliverable shall,
upon issuance in accordance with the terms hereof, be duly and validly
authorized, issued and fully paid and nonassessable.

 

11.                                 Prepayment
at the Option of the Borrower.

 

(a)                                  At any time following
the Original Issue Date and prior to the Maturity Date, upon delivery of a
written notice to the Holder (a “Borrower
Prepayment Notice” and the date such notice is delivered by the
Borrower, the “Borrower Notice Date”),
the Borrower shall be entitled to prepay all or a portion of the principal
amount of this Debenture (including accrued and unpaid interest thereunder),
for an amount in cash equal to the Borrower Prepayment Price which shall be due
on the 10th Trading Day immediately following the Borrower Notice
Date.  The Holder may convert any
portion of the outstanding principal amount of the Debentures subject to a
Borrower Prepayment Notice prior to the date that the Borrower Prepayment Price
is due and paid in full.  Once
delivered, the Borrower shall not be entitled to rescind a Borrower Prepayment
Notice.  Any payment made hereunder by
the Borrower shall be applied first: to any liquidated damages owed pursuant to
any Transaction Document, second: to accrued and unpaid interest and third: to
the principal amount of Debenture subject to prepayment hereunder.

 

(b)                                 The Borrower
Prepayment Price shall be free of any claim of subordination. If any portion of
the Borrower Prepayment Price shall not be timely paid by the Borrower,
interest shall accrue thereon at the rate of 12% per annum (or the maximum rate
permitted by applicable law, whichever is less) until the Borrower Prepayment
Price plus all such interest is paid in full, which payment shall constitute
liquidated damages and not a penalty. 
In addition, if any portion of the Borrower Prepayment Price remains
unpaid after such date, the Holder subject to such prepayment may elect by
written notice to the Borrower to invalidate ab
initio such Borrower Prepayment Notice with respect to the unpaid
amount, notwithstanding anything herein contained to the contrary.  If the Holder makes such an election, this
Debenture shall be reinstated with respect to such unpaid amount and the
Borrower shall no longer have any prepayment rights under this Section 10.

 

(c)                                  Any election by the
Borrower pursuant to Section 13 of the Security Agreements to sell a portion of
the Collateral (as defined in the Security Agreements) at a price (the “Purchase Price”) which shall be equal to or
greater than the fair market value of such Collateral (as determined in good
faith by the Borrower and the Holder), shall be preceded by the delivery to the
Holder of a Borrower Prepayment Notice indicating that a portion of the amount
owning in respect of Debentures (including accrued and unpaid interest thereon
and unpaid liquidated damages) shall be subject to prepayment pursuant to the
terms and conditions of this Section at the Borrower Prepayment Price and the
Borrower shall direct that the purchaser of such Collateral deliver the
Purchaser Price to the Holder in satisfaction of the Borrower’s obligation to
deliver the Borrower Prepayment Price. 
Notwithstanding anything herein to the contrary, if, as a potential
result of a sale of Collateral pursuant to the immediately preceding sentence,
there shall remain an amount owning in respect of Debentures (including accrued
and unpaid interest thereon and unpaid liquidated damages), then the Borrower
shall deliver a Borrower Prepayment Notice pursuant to which it shall pay a
Borrower Prepayment Price equal to no less than 50% of the Purchase Price.

 

10

 

12.                                 Certain
Adjustments.  The Conversion Price
is subject to adjustment from time to time as set forth in this Section 12.

 

(a)                                  Stock Dividends
and Splits.  If the Borrower, at any
time while this Debenture is outstanding: (i) pays a stock dividend on its
Common Stock or otherwise makes a distribution on any class of capital stock
that is payable in shares of Common Stock, (ii) subdivides outstanding shares
of Common Stock into a larger number of shares, or (iii) combines outstanding
shares of Common Stock into a smaller number of shares, then in each such case
the Conversion Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding immediately before
such event and of which the denominator shall be the number of shares of Common
Stock outstanding immediately after such event.  Any adjustment made pursuant to clause (i) of this paragraph
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution, and any
adjustment pursuant to clause (ii) or (iii) of this paragraph shall become
effective immediately after the effective date of such subdivision or
combination.

 

(b)                                 Fundamental
Transactions.  Subject to the
provisions of this paragraph, if, at any time while this Debenture is
outstanding, (i) the Borrower effects any merger or consolidation of the
Borrower with or into another Person, (ii) the Borrower effects any sale of all
or substantially all of its assets in one or a series of related transactions,
(iii) any tender offer or exchange offer (whether by the Borrower or another
Person) is completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property, or (iv)
the Borrower effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which all of the Common Stock is effectively converted
into or exchanged for other securities, cash or property (other than as a
result of a subdivision or combination of shares of Common Stock covered by
Section 12(a) above) (in any such case, a “Fundamental
Transaction”), then upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Underlying
Share that would have been issuable upon such conversion absent such
Fundamental Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the Borrower
shall apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Debenture following such
Fundamental Transaction. To the extent necessary to effectuate the foregoing
provisions, any successor to the Borrower or surviving entity in such
Fundamental Transaction (or, if different, the ultimate parent of such
successor or entity or the entity issuing the Alternate Consideration) shall issue
to the Holder a new debenture consistent with the foregoing provisions and
evidencing the Holder’s right to convert such debenture into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this paragraph (c) and
insuring that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.

 

11

 

(c)                                  Subsequent Equity
Sales.

 

(i)              If the Borrower or
any subsidiary thereof, as applicable, at any time while this Debenture is
outstanding, shall issue shares of Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at a price per share
(the “Effective Price”) less than
the Conversion Price (if the holder of the Common Stock or Common Stock
Equivalent so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights issued in connection with
such issuance, be entitled to receive shares of Common Stock at a price less
than the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price), then, at the option of the Holder for such
conversions as it shall indicate, the Conversion Price shall be adjusted to
mirror the conversion, exchange or purchase price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at
issue.  Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued.  The Borrower shall notify the Holder in
writing, no later than the Trading Day following the issuance of any Common
Stock or Common Stock Equivalent subject to this section, indicating therein
the applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms. 
No further adjustments shall be made to the Conversion Price upon the
actual issuance of Common Stock upon conversion or exercise of the applicable
Common Stock Equivalent.

 

(ii)           If, at any time while
this Debenture is outstanding, the Borrower or any Subsidiary issues Common
Stock Equivalents with an Effective Price or a number of underlying shares that
floats or resets or otherwise varies or is subject to adjustment based
(directly or indirectly) on market prices of the Common Stock (a “Floating Price Security”), then for purposes of applying the
preceding paragraph in connection with any subsequent conversion, the Effective
Price will be determined separately on each Conversion Date and will be deemed
to equal the lowest Effective Price at which any holder of such Floating Price
Security is entitled to acquire Common Stock, whether prior, on or after such
Conversion Date (regardless of whether any such holder actually acquires any
shares on such date).

 

(iii)             Notwithstanding the
foregoing, no adjustment will be made under this paragraph (d) in respect of:
(A) the issuance of securities upon the exercise or conversion of any Common
Stock Equivalents issued by the Borrower prior to the date of this Agreement
(but will apply to any amendments, modifications and reissuances thereof), (B)
the grant of options or warrants, or the issuance of additional securities,
under any duly authorized Borrower stock option, restricted stock plan or stock
purchase plan, including any amendments or other modifications thereto, (C) the
issuance of Common Stock in connection with a restructuring of the Borrower’s
lease for its principal business office in Mountain View, CA,  (D) the issuance of Common Stock or Common
Stock Equivalents pursuant to a Strategic Transaction, or (E) the issuance of
any Common Stock or Common Stock Equivalents in the Additional Closing or any
other such issuance to Holder or Holder’s Affiliates.

 

(d)                                 Reclassifications;
Share Exchanges.  In case of any
reclassification of the Common Stock, or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities, cash or property
(other than compulsory share exchanges which constitute Change of Control
transactions), the Holders of the Debentures then

 

12

 

outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and property receivable
upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders shall be entitled upon such
event to receive such amount of securities, cash or property as a holder of the
number of shares of Common Stock of the Borrower into which such shares of
Debentures could have been converted immediately prior to such reclassification
or share exchange would have been entitled. This provision shall similarly
apply to successive reclassifications or share exchanges.

 

(e)                                  Calculations.   All calculations under this Section 12
shall be made to the nearest cent or the nearest share, as applicable. The
number of shares of Common Stock outstanding at any given time shall not
include shares owned or held by or for the account of the Borrower, and the
disposition of any such shares shall be considered an issue or sale of Common
Stock.

 

(f)                                    Notice of
Adjustments.   Upon the occurrence
of each adjustment pursuant to this Section 12, the Borrower at its expense
will promptly compute such adjustment in accordance with the terms hereof and
prepare a certificate describing in reasonable detail such adjustment and the
transactions giving rise thereto, including all facts upon which such
adjustment is based. Upon written request, the Borrower will promptly deliver a
copy of each such certificate to the Holder.

 

(g)                                 Notice of Corporate
Events.  If the Borrower (i)
declares a dividend or any other distribution of cash, securities or other
property in respect of its Common Stock, including without limitation any
granting of rights or warrants to subscribe for or purchase any capital stock
of the Borrower or any Subsidiary, (ii) authorizes or approves, enters into any
agreement contemplating or solicits stockholder approval for any Fundamental
Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Borrower,
then the Borrower shall deliver to the Holder a notice describing the material
terms and conditions of such transaction, at least 20 calendar days for
transactions described in subsections (i) and (iii) above, and at least 10
calendar days for transactions described in subsection (ii) above, prior to the
applicable record or effective date on which a Person would need to hold Common
Stock in order to participate in or vote with respect to such transaction, and
the Borrower will take all steps reasonably necessary in order to insure that
the Holder is given the practical opportunity to convert this Debenture prior
to such time so as to participate in or vote with respect to such transaction;
provided, however, that the failure to deliver such notice or any defect
therein shall not affect the validity of the corporate action required to be
described in such notice.

 

13.                                 Fractional
Shares.  The Borrower shall not be
required to issue or cause to be issued fractional Underlying Shares on
conversion of this Debenture. If any fraction of an Underlying Share would,
except for the provisions of this Section, be issuable upon conversion of this
Debenture, the number of Underlying Shares to be issued will be rounded to the
nearest whole share.

 

14.                                 Notices.  Any and all notices or other communications
or deliveries hereunder (including without limitation any Conversion Notice)
shall be in writing and shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section prior to 6:30 p.m.
(New York City time) on a Trading Day, (ii) the next Trading Day after the date
of transmission, if such notice or

 

13

 

communication is delivered via facsimile at
the facsimile number specified in this Section on a day that is not a Trading
Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the
Trading Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The addresses for such communications shall
be: (i) if to the Borrower, to 2071 Stierlin Court, Mountain View, CA 94043,
facsimile: (650) 864-7433, attention Chief Financial Officer, or (ii) if to the
Holder, to the address or facsimile number appearing on the Borrower’s
stockholder records or such other address or facsimile number as the Holder may
provide to the Borrower in accordance with this Section.

 

15.                                 Miscellaneous.

 

(a)                                  This Debenture shall
be binding on and inure to the benefit of the parties hereto and their
respective successors and assigns. This Debenture
may be amended only in writing signed by the Borrower and the Holder and their
successors and assigns.

 

(b)                                 Subject to Section
15(a), above, nothing in this Debenture shall be construed to give to any
person or corporation other than the Borrower
and the Holder any legal or equitable right, remedy or cause under this
Debenture. This Debenture shall inure to the sole and exclusive benefit of the
Borrower and the Holder.

 

(c)                                  All questions
concerning the construction, validity, enforcement and interpretation of this
Debenture shall be governed by and construed and enforced in accordance with
the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof.  Each party
agrees that all proceedings shall be commenced exclusively in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for any proceeding, and
hereby irrevocably waives, and agrees not to assert in any proceeding, any
claim that it is not personally subject to the jurisdiction of any New York
Court or that a New York Court is an inconvenient forum for such proceeding.  Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in effect
for notices to it under this Debenture and agrees that such service shall
constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law.  Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding.  The prevailing party in a proceeding shall be reimbursed by the
other party for its attorney’s fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such proceeding.

 

(d)                                 The headings herein
are for convenience only, do not constitute a part of this Debenture and shall
not be deemed to limit or affect any of the provisions hereof.

 

14

 

(e)                                  In case any one or
more of the provisions of this Debenture shall be invalid or unenforceable in
any respect, the validity and enforceability of the remaining terms and
provisions of this Debenture shall not in any way be affected or impaired
thereby and the parties will attempt in good faith to agree upon a valid and
enforceable provision which shall be a commercially reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Debenture.

 

(f)                                    No provision of
this Debenture may be waived or amended except in a written instrument signed,
in the case of an amendment, by the Borrower and the Holder or, or, in the case
of a waiver, by the Holder. No waiver of any default with respect to any
provision, condition or requirement of this Debenture shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.

 

(g)                                 Notwithstanding any
provision to the contrary contained in the Debentures, it is expressly agreed
and provided that the total liability of the Borrower under the Debentures for
payments in the nature of interest shall not exceed the maximum lawful rate
authorized under applicable law (the “Maximum
Rate”), and, without limiting the foregoing, in no event shall any
rate of interest or default interest, or both of them, when aggregated with any
other sums in the nature of interest that the Borrower may be obligated to pay
under the Debentures exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Debentures is
increased or decreased by statute or any official governmental action
subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate of interest applicable to the
Debentures from the effective date forward, unless such application is
precluded by applicable law. If under any circumstances whatsoever, interest in
excess of the Maximum Rate is paid by the Borrower to any Holder with respect
to indebtedness evidenced by the Debentures, such excess shall be applied by
such Holder to the unpaid principal balance of any such indebtedness or be
refunded to the Borrower, the manner of handling such excess to be at such
Holder’s election.

 

(h)                                 Except pursuant to
Sections 7 and 11 hereunder, the outstanding principal amount and interest
under this Debenture may not be prepaid by the Borrower without the prior
written consent of the Holder.

 

(i)                                     The obligations
under this Debenture are secured pursuant to the Security Agreements.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS]

 

15

 

IN WITNESS
WHEREOF, the Borrower has caused this Debenture to be duly executed by a duly authorized
officer as of the date first above indicated.

 

	
  AEROGEN, INC.

  
	
   

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Jane E.
  Shaw

  	
   

  
	
   

  	
  Jane E.
  Shaw, PhD.

  
	
   

  	
  Chief
  Executive Officer

  

 

16

 

EXHIBIT A

 

CONVERSION NOTICE

 

(To be Executed by the Registered
Holder

in order to convert Debentures)

 

The
undersigned hereby elects to convert the principal amount of Debenture
indicated below, into shares of Common Stock of Aerogen, Inc., as of the date
written below. If shares are to be issued in the name of a Person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Borrower in accordance therewith. No fee will be charged to
the Holder for any conversion, except for such transfer taxes, if any. All
terms used in this notice shall have the meanings set forth in the Debenture.

 

	
  Conversion
  calculations:

  	
   

  
	
   

  	
  Date to
  Effect Conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal
  amount of Debenture owned prior to conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal
  amount of Debenture to be Converted

  (including
                  of
  interest added)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal
  amount of Debenture remaining after Conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of
  shares of Common Stock to be Issued

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Applicable
  Conversion Price

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name of
  Holder

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

o
By the delivery of this Conversion Notice the Holder represents and warrants to
the Borrower that its ownership of the Common Stock does not exceed the
restrictions set forth in Section 5(b)(i) of the Debenture.

 

17

 

Schedule 1

 

CONVERSION SCHEDULE

 

This
Conversion Schedule reflects conversions made under the above referenced
Debentures.

 

Dated:

 

	
  Date of Conversion

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  	
   

  	
  Applicable
  Conversion

  Price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

18

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