Document:

Merit Capital Convertible Note, dated 031507

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      Document)

     

    CONVERTIBLE
      NOTE

    

    

    THIS
      NOTE
      AND THE SECURITIES INTO WHICH THIS NOTE MAY BE CONVERTED HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
      TRANSFERRED UNLESS THEY ARE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED, OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.

    

    MERIT
      CAPITAL ADVANCE, LLC

    

    15%
      SUBORDINATED CONVERTIBLE PIK NOTE

    

    $1,500,000.00                                                                March
      15,
      2007

    

    FOR
      VALUE
      RECEIVED, Merit Capital Advance, LLC, a Delaware limited liability company
      (the
      "Company"),
      hereby unconditionally promises to pay to DBAH Capital LLC (including its
      successors and assigns, "Holder")
      on the
      date 18 months from the date hereof (the "Maturity
      Date")
      the
      principal sum of one million five hundred thousand United States dollars
      ($1,500,000.00) (the "Original
      Principal Amount"),
      with
      interest as provided in Section 1.02 hereof. Capitalized terms used but not
      otherwise defined herein have the respective meanings given to such terms in
      the
      Limited Liability Company Agreement of the Company dated as of the date hereof
      (the "LLC
      Agreement")
      or in
      Article VII hereof.

    

    ARTICLE
      I

    

    PRINCIPAL
      AND INTEREST

    

    SECTION
      1.01. Principal.
      The
      entire unpaid principal amount of this Note shall be paid on the Maturity
      Date.

    

    SECTION
      1.02. Interest.
      For
      each day during the period from and including the date hereof to but excluding
      the date this Note shall be paid in full, interest
      shall accrue at a rate of fifteen percent (15%) per annum (the "Interest
      Rate")
      on the
      outstanding principal amount of this Note from time to time, and shall be
      payable on the last day of each calendar quarter and (if not the last day of
      a
      calendar quarter) on the date this Note shall be paid in full (each such date,
      an "Interest
      Payment Date").
      Such
      interest shall be payable by capitalizing the amount of such interest that
      would
      have been due on each such Interest Payment Date (the "Capitalized
      Amount")
      so
      that the principal amount

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    of
      this
      Note is increased on each Interest Payment Date by the Capitalized Amount.
      The
      Capitalized Amount shall be deemed as part of the principal amount of this
      Note
      and shall be subject to the same terms and entitled to the same benefits as
      the
      previously outstanding principal amount of this Note. Interest
      on this Note shall be computed on the basis of a year of 360 days consisting
      of
      twelve 30-day months.

    

    SECTION
      1.03. Default
      Interest.
      Without
      duplication of any interest payable under Section 1.02 hereof, the Company
      hereby unconditionally promises to pay to the Holder interest on any principal
      or interest payable by the Company under this Note that shall not be paid in
      full when due (whether at stated maturity, by acceleration or otherwise), for
      the period from and including the due date of such payment to but excluding
      the
      date the same is paid in full, at a rate per annum equal to the Interest Rate
      plus
      2%,
      which interest shall be payable from time to time on demand of the
      Holder.

    

    SECTION
      1.04. Optional
      Prepayment.
      The
      Company shall not be entitled to prepay this Note at any time in whole or in
      part.

     

    ARTICLE
      II

    

    PAYMENTS

    

    All
      payments of principal and interest to be made by the Company in respect of
      this
      Note are to be made in lawful money of the United States of America at the
      principal office of Deutsche Bank AG in New York, New York (or at such other
      place as the Holder shall have des-ig-nated by written notice to Company),
      not
      later than 12:00 p.m. New York City time on the date on which such payment
      shall become due (each such payment made after such time on such due date to
      be
      deemed to have been made on the next succeeding Business Day). If the due date
      of any payment in respect of this Note would otherwise fall on a day that is
      not
      a Business Day, such due date shall be extended to the next succeeding Business
      Day, and interest shall be payable on any principal so extended for the period
      of such extension. All amounts payable under this Note shall be paid free and
      clear of, and without reduction by reason of, any deduction, set-off or
      counterclaim. 

    

    ARTICLE
      III

    

    CONVERSION

    

    SECTION
      3.01. Conversion.
      The
      outstanding principal amount of this Note may, at any time (at the option of
      the
      Holder) on or after the date six months from the date hereof (or on or after
      such date later than the date six months from the date hereof as the Holder
      shall elect by providing written notice of such election to the Company) (the
      date six months from the date hereof, or such later elected date, the
      "Convertibility
      Date"),
      be
      converted (a "Conversion"),
      in
      whole (but not in part), into a number of Class A Units of the Company equal
      to
      the number of Class B Units of the

    
      
        
        

      

      
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    Company
      outstanding on the date of Conversion. If, on the date of Conversion, there
      shall be outstanding any options or warrants to purchase Class B Units or other
      securities convertible into or exchangeable for Class B Units, all Class B
      Units
      issuable upon exercise, conversion or exchange of such options, warrants or
      securities shall be deemed to be outstanding on the date of Conversion, for
      purposes of determining the number of Class A Units into which this Note shall
      be convertible.

     

    SECTION
      3.02. Manner
      of Conversion.
      The
      Holder may exercise the right to convert this Note into Class A Units by
      delivering for such purpose to the Company, at its principal office, a written
      notice stating that Holder elects to convert this Note in accordance with the
      provisions of this Section 3. The Holder will pay any and all issue and other
      taxes (other than taxes based on income) that may be payable in respect of
      the
      issue and delivery of Class A Units on Conversion of this Note. Upon the
      delivery of such notice, the Company shall deliver or cause to be delivered
      to
      the Holder a Certificate of Interest representing the number of validly issued,
      fully paid and nonassessable Class A Units to which the Holder shall be
      entitled. Such Conversion shall be deemed to have been made at the close of
      business on the date of giving of such notice, and Holder shall be deemed to
      have become the holder of the Class A Units represented by such Certificate
      of
      Interest on such date.

    

    SECTION
      3.03. Reservation
      of Class A Units, Etc.
      The
      Company shall at all times reserve and keep available out of its authorized
      and
      unissued Class A Units, solely for the purpose of effecting the Conversion
      of
      this Note, such number of Class A Units as shall from time to time be sufficient
      to effect the Conversion of this Note. The Company shall from time to time,
      subject to and in accordance with the LLC Act, increase the authorized amount
      of
      Class A Units if at any time the number of authorized Class A Units remaining
      unissued shall not be sufficient to permit the Conversion of this
      Note.

    

    SECTION
      3.04. Cancellation
      of Note Upon Conversion.
      Upon
      Conversion of this Note, (i) this Note shall no longer be deemed to be
      outstanding, (ii) the Company shall not be required to make any payments in
      respect of principal or interest on this Note, (iii) interest shall cease to
      accrue on this Note and (iv) the Holder shall upon written request of the
      Company return this Note to the Company for cancellation.

    

    ARTICLE
      IV

    

    TERMS
      OF SUBORDINATION

    

    SECTION
      4.01. General.
      Anything in this Note to the contrary notwithstanding, the indebtedness
      evidenced by this Note shall be subordinate and junior in right of payment,
      to
      the extent and in the manner hereinafter set forth, to all indebtedness or
      other
      liabilities of the Company outstanding from time to time under the Credit
      Agreement dated as of the date hereof between the Company and Deutsche Bank
      AG
      Cayman Islands Branch, as lender (as the same may from time to time be amended,
      extended, renewed, increased, modified, restated or refinanced, the
      "Credit
      Agreement"),

    
      
        
        

      

      
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    including,
      without limitation, any interest accruing after the commencement of any
      proceedings referred to in clause (ii) below, whether or not such interest
      is an
      allowed claim in such proceeding (all such indebtedness or other liabilities
      and
      interest being herein called "Senior
      Obligations"):

    

    (i)
      The
      holders of Senior Obligations shall be entitled to receive payment in full
      in
      cash of all amounts constituting Senior Obligations before the Holder is
      entitled to receive any payment on account of this Note.

    

    (ii)
      In
      the event of any insolvency or bankruptcy proceedings, and any receivership,
      liquidation, reorganization or other similar proceedings in connection
      therewith, relative to the Company or to its creditors, as such, or to its
      property, and in the event of any proceedings for voluntary liquidation,
      dissolution or other winding up of the Company, whether or not involving
      insolvency or bankruptcy, then (a) the holders of Senior Obligations shall
      be
      entitled to receive payment in full of all amounts constituting Senior
      Obligations before the Holder is entitled to receive, or make any demand for,
      any payment on account of this Note, and to that end the holders of Senior
      Obligations shall be entitled to receive for application in payment thereof
      any
      payment or distribution of any kind or character, whether in cash or property
      or
      securities and (b) any payment or distribution of assets of the Company of
      any
      kind or character, whether in cash, property or securities, by set-off or
      otherwise, to which the Holder would be entitled but for the provisions of
      this
      Section 4.01, including any such payment or distribution that may be payable
      or
      deliverable by reason of the payment of any other indebtedness of the Company
      being subordinated to the payment of this Note, shall be paid by the liquidating
      trustee or agent or other person making such payment or distribution, whether
      a
      trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly
      to the holders of Senior Obligations (or their representatives), ratably
      according to the respective aggregate amounts remaining unpaid thereon, to
      the
      extent necessary to pay all Senior Obligations in full.

    

    No
      present or future holder of Senior Obligations shall be prejudiced in its right
      to enforce subordination of this Note by any act or failure to act on the part
      of the Company or by any act or failure to act or delay in acting, in good
      faith
      on the part of such holder or any trustee or agent for such holder, nor shall
      any single or partial exercise of any right, remedy or power hereunder preclude
      any other or future exercise by a holder of Senior Obligations of any other
      right, remedy or power. Each and every right, remedy and power granted to the
      holders of Senior Obligations, or allowed the holders of Senior Obligations
      by
      law or other agreement shall be cumulative and not exclusive, and may be
      exercised by the holders of Senior Obligations, from time to time. The foregoing
      provisions are solely for the purpose of defining the relative rights of the
      holders of Senior Obligations on the one hand, and the Company and the Holder
      on
      the other hand, and nothing herein shall impair, as between the Company and
      the
      Holder, the obligation of the Company, which is unconditional and absolute,
      to
      pay to the Holder the principal hereof and interest hereon in accordance with
      the terms hereof, nor shall anything herein

    
      
        
        

      

      
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    prevent
      the Holder from exercising all remedies otherwise permitted by applicable law
      in
      respect hereof, subject to the rights, if any, under this Note of holders of
      Senior Obligations to receive cash, property or securities otherwise payable
      or
      deliverable to the Holder.

    

    SECTION
      4.02. Modification
      of Senior Obligations.
      Without
      in any way limiting the generality of the foregoing provisions of this Section
      4, at any time, without the consent of or notice to the Holder, without
      incurring responsibility or liability to the Holder and without impairing or
      releasing the subordination provided herein or the obligations hereunder of
      the
      Holder, the holders of Senior Obligations may do any one or more of the
      following: (i) change the manner, place or terms of payment of or extended
      the
      time of payment of, or renew or alter, the Senior Obligations or any collateral
      security or guaranty therefor, or otherwise amend or supplement in any manner
      the Senior Obligations or any instruments evidencing the same or any agreement
      under which Senior Obligations is outstanding; (ii) sell, exchange, release
      or
      otherwise deal with any property pledged, mortgaged or otherwise securing Senior
      Obligations; (iii) release any Person liable in any manner for the Senior
      Obligations; and (iv) exercise or refrain from exercising any rights against
      the
      Company and any other Person. The Holder unconditionally waives notice of the
      incurring of Senior Obligations or any part thereof.

    

    SECTION
      4.03. Defaults.
      After
      payment in full in cash of the Senior Obligations (but not otherwise), if any
      payment is not made when due hereunder, the Holder may declare all amounts
      owing
      under this Note due and payable, provided that if after repayment in full of
      the
      Senior Obligations, any payments of Senior Obligations shall at any time be
      rescinded or otherwise must be returned by the holder of any Senior Obligations,
      such demand, if made, shall be automatically rescinded.

     

    ARTICLE
      V

    

    REPRESENTATIONS
      AND WARRANTIES

    

    The
      Company represents and warrants to the Holder that:

    

    SECTION
      5.01. Organization.
      The
      Company is duly organized, validly existing and in good standing under the
      laws
      of Delaware. 

    

    SECTION
      5.02. Authorization;
      Enforceability.
      The
      execution, delivery and performance of this Note by the Company are within
      the
      Company's corporate powers and have been duly authorized by all necessary
      corporate action. This Note has been duly executed and delivered by the Company
      and constitutes a legal, valid and binding obligation of the Company,
      enforceable in accordance with its terms, except as such enforceability may
      be
      limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar
      laws of general applicability affecting the enforcement of creditors' rights
      and
      (b) the application of general principles of equity

    
      
        
        

      

      
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    (regardless
      of whether such enforceability is considered in a proceeding in equity or at
      law).

    

    SECTION
      5.03. Government
      Approvals; No Conflicts.
      The
      execution, delivery and performance of this Note by the Company (a) do not
      require any consent or approval of, registration or filing with, or any other
      action by, any governmental authority, (b) will not violate any applicable
      law
      or regulation or the certificate of formation or limited liability company
      agreement of the Company and (c) will not violate or result in a default under
      any loan agreement, indenture, or other agreement or instrument binding upon
      the
      Company or any of its Subsidiaries.

     

    SECTION
      5.04. Litigation.
      There
      are no actions, suits or proceedings by or before any arbitrator or governmental
      authority now pending against or, to the knowledge of the Company, threatened
      against or affecting the Company or any of its Subsidiaries (i) that, if
      adversely determined, could reasonably be expected, individually or in the
      aggregate, to result in a Material Adverse Effect or (ii) that involve this
      Note
      or the transactions contemplated thereby.

    

    SECTION
      5.05. Compliance
      with Laws and Agreements.
      The
      Company and each of its Subsidiaries is in compliance with all applicable laws
      (including without limitation Environmental Laws, tax laws and ERISA),
      regulations and orders of any governmental authority applicable to it or its
      property and all indentures, agreements and other instruments binding upon
      it or
      its property, except where the failure to do so, individually or in the
      aggregate, could not reasonably be expected to result in a Material Adverse
      Effect. 

    

    SECTION
      5.06. Investment
      and Holding Company Status.
      The
      Company is not an "investment company" as defined in, or subject to regulation
      under, the Investment Company Act of 1940, as amended.

    

    SECTION
      5.07. Margin
      Regulations.
      The
      Company is not engaged principally, or as one of its important activities,
      in
      the business of extending credit for the purpose, whether immediate, incidental
      or ultimate, of buying or carrying Margin Stock (within the meaning of
      Regulation U or X of the Board of Governors of the Federal Reserve System),
      and
      no part of the proceeds of this Note will be used to buy or carry any Margin
      Stock.

    

    SECTION
      5.08. Solvency.
      The
      Company is, after giving effect to the use of the proceeds of this Note will
      be,
      Solvent.

    ARTICLE
      VI

    

    COVENANTS

    

    So
      long
      as any principal of or interest or any other amount payable under this Note
      remains outstanding, the Company agrees that:

      
        
          
          

        

        
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    SECTION
      6.01. Certain
      Covenants.
      (a) The
      Company will, and cause each of its Subsidiaries to, preserve and maintain
      its
      corporate existence and comply with all applicable laws, statutes, rules,
      regulations and orders, including without limitation, those relating to federal
      or State non-banking activities, licensing, usury, truth in lending, privacy,
      credit reporting, equal opportunity, predatory lending, money-laundering and
      terrorism financing, and all applicable Environmental Laws, tax laws and ERISA,
      except to the extent such non-compliance could not reasonably be expected to
      have a Material Adverse Effect or otherwise adversely affect the Holder. The
      Company will, and will cause each of its Subsidiaries to, comply with
      instructions provided from time to time by the Holder in connection with the
      Holder's efforts to ensure the business of the Company and its Subsidiaries
      is
      at all times in compliance with all such applicable statutes, rules, regulations
      and orders, except to the extent non-compliance with such statutes, rules or
      regulations could not reasonably be expected to have a Material Adverse Effect
      or otherwise adversely affect the Holder.

    

    (b)
      The
      Company will, and cause each of its Subsidiaries to, promptly from time to
      time
      obtain and maintain in full force and effect all licenses, consents,
      authorizations and approvals of, and make all filings and registrations with,
      any Governmental Authority necessary in connection with the business of the
      Company and its Subsidiaries, except to the extent the failure to obtain or
      maintain any of the foregoing could not reasonably be expected to have a
      Material Adverse Effect or otherwise adversely affect the Holder.

    

    (c)
      The
      Company will, and cause each of its Subsidiaries to, timely file all required
      tax returns, and pay and discharge all taxes, assessments and other governmental
      charges imposed upon it and its property or any part thereof, or upon the income
      or profits therefrom, as well as all claims for labor, materials or supplies
      which if unpaid might by law become a lien or charge upon any property of the
      Company or such Subsidiary, except (i) such items as are being contested in
      good
      faith by appropriate proceedings and as to which appropriate reserves are being
      maintained and (ii) items the non-payment of which could not (either
      individually or in the aggregate) reasonably be expected to have a Material
      Adverse Effect.

    

    (d)
      The
      Company will, and cause each of its Subsidiaries to, keep adequate records
      and
      books of account, in which complete entries will be made in accordance with
      GAAP, and permit representatives of the Holder, during normal business hours,
      to
      examine, copy and make extracts from its books and records, to inspect any
      of
      its property, and to discuss its business and affairs with its
      officers.

     

    (e)
      The
      Company will furnish to the Holder:

    

    (i)
      by
      the dates the Managing Member is required to make delivery thereof to the
      Members under the LLC Agreement (or, if delivered earlier, simultaneously with
      the Managing Member's delivery thereof to such Members), copies of all financial
      statements, monthly reports, notices and other informational materials required
      to be delivered to such Members under the LLC Agreement;

    
      
        
        

      

      
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    (ii)
      as
      soon as possible and in any event within five Business Days after the occurrence
      of any Default, a statement of the Company setting forth details of such Default
      and the action which the Company has taken and proposes to take with respect
      thereto;

    

    (iii)
      within three Business Days of its receipt thereof, a copy of each invoice for
      Service Fees received by the Company under (and as defined in) the LEAF Services
      Agreement, together with all information Holder may reasonably request to
      substantiate the amount of such Service Fees;

    

    (iv)
      promptly upon the Company becoming aware thereof, written notice of the filing
      or commencement of any action, suit or proceeding by or before any arbitrator
      or
      Governmental Authority against or affecting the Company or any Affiliate thereof
      or any Member; and

    

    (v)
      such
      other information respecting the condition or operations, financial or
      otherwise, of the Company and its Subsidiaries as the Holder may from time
      to
      time request.

    

    (f)
      The
      Company will not, and will not permit any of its Subsidiaries to, merge with
      or
      consolidate into any other Person or convey, transfer or lease all or
      substantially all of its assets in a single transaction or series of
      transactions to any Person.

    

    (g)
      The
      Company will not create, and
      will
      not permit any of its Subsidiaries to, assume
      or
      suffer to exist any Lien on any of its property now owned or hereafter acquired
      by it, except Permitted Liens.

    

    (h)
      The
      Company will not at any time incur or permit to remain outstanding any
      Indebtedness, other than (x) Indebtedness under this Note and (y) Indebtedness
      under the Credit Agreement.

    

    (i)
      The
      Company will not permit its Subsidiaries to incur or have outstanding any
      Indebtedness.

    

    (j)
      The
      Company
      will
      not, and will not permit any of its Subsidiaries to, directly or indirectly
      enter into any transaction with an Affiliate (other than the LEAF Services
      Agreement) except in the ordinary course of and pursuant to the reasonable
      requirements of its business and upon commercially reasonable terms that are
      no
      lessfavorable
      to it than those which might be obtained in a comparable arm's-length
      transaction at the time from a Person which is not such an
      Affiliate.

    

    (k)
      The
      Company will at all times comply with the restrictions on its activities set
      forth in the LLC Agreement.

    
      
        
        

      

      
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    (l)
      The
      Company will cooperate actively and in good faith with the Holder, prior to
      the
      Convertibility Date, to implement such anti-money laundering policies and
      procedures and such other compliance procedures in each case as the Holder
      shall
      require in connection with this Note being convertible into Class A Units of
      the
      Company as provided in Section 3.

    

    (m)
      The
      Company will, in the event that "Cause" under (and as defined in) the LEAF
      Services Agreement shall exist, take such steps as the Holder shall reasonably
      direct, including the exercise of the Company's right to terminate the LEAF
      Services Agreement. 

    

    SECTION
      6.02. Certain
      Protections of This Note's Contingent Equity Interest.

    

    In
      addition to any applicable requirements of the LLC Agreement, the Managing
      Member agrees that it will not, without the prior written consent of the
      Holder:

    

    (a) reorganize
      the Company into a corporation;

    

    (b) permit
      the Company or any Subsidiary to take any action in contravention of the LLC
      Agreement or any other Transaction Document;

    

    (c) (i)
      permit the Company to issue any limited liability company interests (including,
      without limitation, any preferred or non-voting limited liability company
      interests) in the Company, or permit the Company to issue any rights to acquire
      any such limited liability company interests (other than the Class A Units
      issuable upon Conversion of this Note), or (ii) permit the Company to reclassify
      or combine any limited liability company interests in the Company;

    

    (d) make
      or
      permit to be made any Distribution in respect of or redemption of Interests
      (other than reasonable Tax Distributions made in accordance with Section 5.2
      of
      the LLC Agreement); 

    

    (e) permit
      the Company or any Subsidiary to acquire any assets other than Permitted
      Assets;

    

    (f) permit
      the Company or any Subsidiary to (i) amend, modify or waive any provision of
      the
      LEAF Services Agreement, any Credit Card Processor Services Agreement or any
      Relevant Provision of a Merchant Advance Contract, or (ii) enter into any
      Merchant Advance Contract whose equivalent provisionsdiffer
      from the Relevant Provisions set forth in the form of Merchant Advance Contract
      attached as Exhibit D to the LLC Agreement;

    

    (g) permit
      the Company or any Subsidiary to (i) terminate the LEAF Services Agreement,
      or
      (ii) enter into after the date hereof, terminate, or change 

    
      
        
        

      

      
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(or
        consent or fail to object to any change in) the settlement of funds procedures
        under, any Credit Card Processor Services

           agreement;

    

    

    (h) permit
      the Company or any Subsidiary to enter into any material business combination,
      partnership or joint venture with any Person, or to terminate any such
      arrangement entered into;

    

    (i)
       (i)
      permit the Company to engage in any business activities other than those
      conducted and proposed to be conducted on the date hereof, (ii) permit the
      Servicer Subsidiary to engage in any business activities other than the
      provision to the Company of services of the type contemplated in the LEAF
      Services Agreement, (iii) permit the Company or any Subsidiary to enter into
      Merchant Advance Contracts with counterparties in California (other than
      Merchant Advance Contracts entered into by the Company with such counterparties
      while the Company maintains a valid and effective California finance lender
      license) or (iv) permit the Company or any Subsidiary to do business in any
      State of the United States of America other than New York, California, New
      Jersey, Pennsylvania, Florida, Texas and Nevada, or in any country other than
      the United States of America or any political subdivision of such other
      country;

    

    (j)
       permit
      the Company or any Subsidiary to voluntarily liquidate or dissolve itself or
      appoint a Liquidator;

    

    (k) permit
      the Company or any Subsidiary to change its Fiscal Year;

    

    (l) cause
      the
      Company or any Subsidiary to be treated as a corporation or other association
      taxable as a corporation or as a publicly traded partnership for federal income
      tax purposes or to take a position inconsistent with the Company or any
      Subsidiary not being treated as a corporation or other association taxable
      as a
      corporation except as required by Applicable Law;

    

    (m)
       permit
      the Company or any Subsidiary to confess a judgment against the Company or
      any
      Subsidiary or settling actions in proceedings in law or in equity in relation
      to
      the Company or any Subsidiary before any court or other Governmental
      Authority;

    

    (n)
       permit
      the Company or any Subsidiary (other than the Servicer Subsidiary) to have
      any
      employees;

    (o) permit
      the Company to reduce the "Commitments" under the Credit Agreement;

    

    (p) (x)
      permit the Company or any Subsidiary to incur any voluntary expense (other
      than
      for Service Fees as defined in the LEAF Services Agreement), or to enter into
      any agreement other than the Transaction Documents 

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (and
      any
      agreement required to be entered into pursuant to any Transaction Document),
      if
      the aggregate of all such expenses, or of all obligations of the Company and
      its
      Subsidiaries pursuant to the relevant agreement(s), as the case may be, (i)
      individually is in excess of $35,000 or (ii) in the aggregate during any annual
      fiscal period of the Company is in excess of $200,000, unless, in the case
      of
      any such voluntary expense, the incurrence thereof is necessary to comply with
      Applicable Law, and it being understood that the Managing Member shall provide
      the Holder with at least three Business Days prior written notice of the
      incurrence by the Company or any Subsidiary of any such expense, or any such
      entry into by the Company or any Subsidiary of any such agreement, that exceeds
      or is reasonably likely to exceed the foregoing limits; or (y) permit the
      Company or any Subsidiary to pay Service Fees (as defined in the LEAF Services
      Agreement) in an aggregate amount in excess of $350,000 per calendar month,
      $875,000 per fiscal quarter of the Company or $3,500,000 per fiscal year of
      the
      Company;

    

    (q) permit
      the Company or any Subsidiary to approve any new channel partner for marketing
      the merchant advance business of the Company and its Subsidiaries (it being
      understood that a Person which is a counterparty to a Merchant Advance Contract
      with the Company shall not, as the sole consequence thereof, be deemed to be
      channel partner of the Company for purposes of this Section
      6.02(q));

    

    (r) permit
      the Company to exercise its right under the LEAF Services Agreement to acquire
      the Servicer Subsidiary, or permit the Company or any Subsidiary to acquire
      more
      than five percent of any class of voting securities of, or 25 percent of the
      equity of, any other Person; 

    

    (s) permit
      or
      consent to any amendment to or modification or waiver of any provision of the
      LLC Agreement or the Unitholders Agreement;

    

    (t) permit
      or
      consent to the transfer of any Class B Unit to any Person (other than an
      Affiliate of the Initial Class B Member in a transfer that complies with Section
      10.1(c) of the LLC Agreement); or

    

    (u) permit
      the Company or any Subsidiary to hire any regulatory counsel, provided
      that
      DBAH Capital LLC and its Affiliates shall have the right to require that any
      advice provided by any regulatory counsel to the Company or any Subsidiary
      be in
      form and substance satisfactory to DBAH Capital LLC and its Affiliates and
      in a
      form expressly permitting DBAH Capital LLC and its Affiliates to rely
      thereon.

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    ARTICLE
      VII

    

    EVENTS
      OF DEFAULT

    

    SECTION
      7.01. Events
      of Default.
      If any
      of the following events ("Events
      of Default")
      shall
      occur and be continuing:

    

    (a)
      The
      Company shall default in the payment when due of any principal of or interest
      on
      this Note when the same becomes due and payable; or

    

    (b)
      Any
      representation or warranty made by the Company herein or in any certificate
      or
      other document delivered in connection with this Note shall prove to have been
      incorrect when made or deemed made in any material respect; or

    

    (c)
      (i)
      The Company shall fail to perform or observe any term, covenant or agreement
      contained in Section 6.01(a), 6.01(b), 6.01(e), 6.01(f), 6.01(g), 6.01(h),
      6.01(i), 6.01(j), 6.01(k), 6.01(l), 6.01(m) or 6.02; or (ii) the Company shall
      fail to perform or observe any other term or covenant in this Agreement on
      its
      part to be performed or observed and such failure remains unremedied for thirty
      days after the earlier of (x) the date on which the Company has knowledge
      thereof or (y) the date on which written notice thereof shall have been given
      to
      the Company by the Holder; or 

    

    (d)
      The
      Company or any of its Subsidiaries shall fail to pay any principal of or premium
      or interest on any other Indebtedness of the Company or any of its Subsidiaries
      having an aggregate outstanding principal amount of $50,000 or more
      ("Material
      Debt")
      when
      the same becomes due and payable, and such failure shall continue after the
      applicable grace period, if any, specified in the agreement or instrument
      relating to such Material Debt; or any other event shall occur or condition
      shall exist under any agreement or instrument relating to any such Material
      Debt
      and shall continue after the applicable grace period, if any, specified in
      such
      agreement or instrument, if the effect of such event or condition is to
      accelerate, or to permit the acceleration of, the maturity of such Material
      Debt; or any such Material Debt shall be declared to be due and payable, or
      required to be prepaid (other than by a regularly scheduled required
      prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem,
      purchase or defease such Material Debt shall be required to be made, in each
      case prior to the stated maturity thereof; or

    

    (e)
      The
      Company or any of its Subsidiaries shall generally not pay its debts as such
      debts become due, or shall admit in writing its inability to pay its debts
      generally, or shall make a general assignment for the benefit of creditors;
      or
      any proceeding shall be instituted by or against the Company or any of its
      Subsidiaries seeking to adjudicate it as bankrupt or insolvent, or seeking
      liquidation, winding up, reorganization, arrangement, adjustment, protection,
      

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    relief,
      or composition of it or its debts under any law relating to bankruptcy,
      insolvency, moratorium or reorganization or relief of debtors, or liquidation
      or
      winding up, or seeking the entry of an order for relief or the appointment
      of a
      receiver, trustee, custodian or other similar official for it or for any
      substantial part of its property and such proceeding shall remain undismissed
      or
      unstayed for a period of 60 days; or the Company or any of its Subsidiaries
      shall take any corporate action to authorize any of the actions set forth above
      in this subsection (e); or

    

    (f)
      Any
      judgment or order for the payment of money in excess of $50,000 shall be
      rendered against the Company or any of its Subsidiaries, and either
      (i) enforcement proceedings shall have been commenced by any creditor upon
      such judgment or order and such proceedings shall not have been stayed or
      (ii) there shall be any period of 30 consecutive days during which a stay
      of enforcement of such judgment or order, by reason of a pending appeal or
      otherwise, shall not be in effect; or

    

    (g)
      A
      Change in Control shall occur; or

    

    (h)
      The
      Company or any of its Subsidiaries shall incur liability to a Plan, a
      Multiemployer Plan or the PBGC (or any combination of the foregoing) that either
      individually or in the aggregate, could reasonably be expected to have a
      Material Adverse Effect; or

    

    (i)
      Any
      action, suit or proceeding by or before any arbitrator or governmental authority
      against or affecting the Company or any of its Subsidiaries that, if adversely
      determined, could reasonably be expected, individually or in the aggregate,
      to
      result in a Material Adverse Effect, shall be commenced or threatened;
      or

    (j)
      Any
      Person shall initiate foreclosure proceedings with respect to any Lien on the
      Equity Interests in the Company, LEAF Ventures or the Servicer; 

    

    then,
      and
      in any such event, the Holder may, by notice to the Company, declare the
      outstanding principal amount of this Note (including capitalized interest as
      provided in Section 1.02 hereof) and all other amounts payable under this
      Agreement to be forthwith due and payable, whereupon such principal amount,
      all
      such interest and all such amounts shall become and be forthwith due and
      payable, without presentment, demand, protest or further notice of any kind,
      all
      of which are hereby expressly waived by the Company; provided,
      however,
      that in
      the event of an entry of an order for relief with respect to the Company under
      the Federal Bankruptcy Code, the outstanding principal amount of this Note,
      all
      such interest and all such amounts shall automatically become and be due and
      payable, without presentment, demand, protest or any notice of any kind, all
      of
      which are hereby expressly waived by the Company.

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    ARTICLE
      VIII

    

    DEFINITIONS

    

    The
      following terms shall have the meanings set forth below:

    

    "Change
      in Control"
      means
      (a) the acquisition of ownership, directly or indirectly, beneficially or
      of record, by any Person or group (within the meaning of the Securities Exchange
      Act of 1934 and the rules of the Securities and Exchange Commission thereunder
      as in effect on the date hereof) other than LEAF Financial Corporation and
      its
      Subsidiaries, of Equity Interests representing more than 50% of the aggregate
      ordinary voting power represented by the issued and outstanding Equity Interests
      of the Company, LEAF Ventures or the Servicer (other than, in the case of the
      Servicer, in connection with the exercise by the Company of its right under
      the
      LEAF Services Agreement to purchase the Servicer, so long as the Holder shall
      have provided its prior written consent thereto), (b) Crit DeMent ceasing to
      be
      the Chairman or Chief Executive Officer of LEAF Financial Corporation and not
      being replaced in such position by a similarly-qualified individual within
      90
      days thereof, or (c) the acquisition of direct or indirect Control of the
      Company, LEAF Ventures or the Servicer by any Person or group other than LEAF
      Financial Corporation and its Subsidiaries (other than, in the case of the
      Servicer, in connection with the exercise by the Company of its right under
      the
      LEAF Services Agreement to purchase the Servicer, so long as Holder shall have
      provided its prior written consent thereto); provided
      that
      Conversion of this Note shall not be deemed to cause a "Change in
      Control".

    

    "Control"
      means
      the possession, directly or indirectly, of the power to direct or cause the
      direction of the management or policies of a Person, whether through the ability
      to exercise voting power, by contract or otherwise. "Controlling"
      and
      "Controlled"
      have
      meanings correlative thereto.

    

    "Default"
      means
      an Event of Default or an event that, with notice or lapse of time or both,
      would become an Event of Default.

    

    "Environmental
      Laws"
      means
      any and all present and future Federal, state, local and foreign laws, rules
      or
      regulations, and any orders or decrees, in each case as now or hereafter in
      effect, relating to the regulation or protection of human health, safety or
      the
      environment or to emissions, discharges, releases or threatened releases of
      Hazardous Materials into the indoor or outdoor environment, including, without
      limitation, ambient air, soil, surface water, ground water, wetlands, land
      or
      subsurface strata, or otherwise relating to the manufacture, processing,
      distribution, use, treatment, storage, disposal, transport or handling of
      Hazardous Materials.

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

           
      "Equity
      Interests"
      means
      shares of capital stock, partnership interests, membership interests in a
      limited liability company, beneficial interests in a trust or other equity
      ownership interests in a Person, and any warrants, options or other rights
      entitling the holder thereof to purchase or acquire any such equity
      interest.

    

    "ERISA"
      means
      the Employee Retirement Income Security Act of 1974, as amended from time to
      time, and the regulations promulgated and rulings issued
      thereunder.

    

    "ERISA
      Affiliate"
      means
      any trade or business (whether or not incorporated) that, together with the
      Company, is treated as a single employer under Section 414(b) or (c) of the
      Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the
      Code, is treated as a single employer under Section 414(m) of the
      Code.

    

    "Hazardous
      Materials"
      means
      all explosive or radioactive substances or wastes and all hazardous or toxic
      substances, wastes or other pollutants, including petroleum or petroleum
      distillates, asbestos or asbestos containing materials, polychlorinated
      biphenyls, radon gas, infectious or medical wastes and all other substances
      or
      wastes of any nature regulated pursuant to any Environmental Law.

    

    "LEAF
      Ventures"
      means
      LEAF Ventures, LLC.

    

    "Material
      Adverse Effect"
      means a
      material adverse effect on (i) the business or condition (financial or
      otherwise), operations or prospects of the Company and its Subsidiaries taken
      as
      a whole, (ii) the legality, validity or enforceability of this Note or (iii)
      the
      ability of the Company to perform its obligations under this Note.

    

    "PBGC"
      means
      the Pension Benefit Guaranty Corporation or any entity succeeding to any or
      all
      of its functions under ERISA.

    

    "Permitted
      Assets"
      means:

    

    (a) in
      relation to the Company: (i) Financial Investments; (ii) Merchant Advance
      Contracts, including future receivables thereunder; (iii) intellectual property
      rights; (iv) furniture, fixtures and equipment; (v) equity interests in
      Subsidiaries and other Persons (to the extent permitted in the LLC Agreement);
      and (vi) other assets approved in writing by the Holder; and

    

    (b) in
      relation to the Servicer Subsidiary: (i) furniture, fixtures and equipment;
      and
      (ii) other assets approved in writing by the Holder.

    

    "Permitted
      Liens"
      shall
      mean, with respect to any Person:

     

    (i) Liens
      imposed by law which were incurred in the ordinary course of business, including
      (but not limited to) carriers', warehousemen's and

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    mechanics'
      liens and other similar liens arising in the ordinary course of business and
      which (x) do not in the aggregate materially impair the use thereof in the
      operations of the business of the Company or (y) are being contested in good
      faith by appropriate proceedings, which proceedings have the effect of
      preventing the forfeiture or sale of the property subject to such liens and
      for
      which adequate reserves have been made if required in accordance with
      GAAP;

     

    (ii) pledges
      or deposits made in the ordinary course of business in connection with workers'
      compensation, unemployment insurance or other similar social security
      legislation;

     

    (iii) Liens
      securing taxes, assessments and other governmental charges, the payment of
      which
      is not yet due or is being contested in good faith by appropriate proceedings
      promptly initiated and diligently conducted and for which such reserve or other
      appropriate provisions, if any, as shall be required by GAAP shall have been
      made;

     

    (iv) Liens
      securing the Senior Obligations; and

     

    (v) Liens
      which
      arise pursuant to a final judgment or judgments that do not constitute an Event
      of Default under Section 7.01(f).

     

    "Servicer"
      means
      Merit Capital Manager, LLC.

    

    "Solvent"
      means,
      with respect to any Person on a particular date, that (i) the fair value of
      the
      property of such Person is greater than the total amount of the liabilities,
      including, without limitation, contingent liabilities, of such Person, (ii)
      the
      present fair saleable value of the assets of such Person is not less than the
      amount that will be required to pay the probable liability of such Person on
      its
      debts as they become absolute and matured, (iii) such Person does not intend
      to,
      and does not believe that it will, incur debts or liabilities beyond such
      Person's ability to pay such debts and liabilities as they mature, and (iv)
      such
      Person is not engaged in business, and is not about to engage in business,
      for
      which such Person's property would constitute unreasonably small
      capital.

    

    ARTICLE
      IX

    

    MISCELLANEOUS

    

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

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    

    SECTION
      9.02. Governing
      Law; Submission to Jurisdiction.

    

    (a)
      This
      Note shall be governed by, and construed in accordance with, the laws of the
      State of New York, without regard to the conflicts of laws provisions thereof.
      The Company hereby submits to the nonexclusive jurisdiction of the United States
      District Court for the Southern District of New York and of any New York state
      court sitting in New York County for the purposes of all legal proceedings
      arising out of or relating to this Note or the transactions contemplated
      hereby.

    

    (b)
      The
      Company irrevocably waives, to the fullest extent permitted by applicable law,
      any objection that it may now or hereafter have to the laying of the venue
      of
      any such proceeding brought in such a court and any claim that any such
      proceeding brought in such a court has been brought in an inconvenient
      forum.

    

    SECTION
      9.03. Successors.
      All
      agreements of the Company in this Note shall bind its successors and permitted
      assigns. This Note shall inure to the benefit of the Holder and its successors
      and assigns.

    

    SECTION
      9.04. Amendment,
      Modification or Waiver.
      No
      provision of this Note may be amended, modified or waived except by an
      instrument in writing signed by the Company and the Holder.

    

    SECTION
      9.05. Assignment.
      The
      Company shall not assign or delegate any of its obligations hereunder without
      the prior written consent of Holder.

    

    SECTION
      9.06. Waivers.
      The
      Company waives demand, presentment for payment, notice of dishonor, protest,
      notice of protest and notice of non-payment of this Note.

    

    SECTION
      9.07. Notices.
      All
      notices and other communications in respect of this Note (including, without
      limitation, any modifications of, or requests, waivers or consents under, this
      Note) shall be given or made in writing (including, without limitation, by
      telecopy) (a) in the case of the Company, at the address for notices specified
      in the LLC Agreement and (b) in the case of the Holder, at the address for
      such
      purpose as shall have been most recently specified to the Company by the Holder;
      or, as to either the Company or the Holder, at such other address as shall
      be
      designated by such party in a notice to the other party. Except as otherwise
      provided in this Note, all such communications shall be deemed to have been
      duly
      given when transmitted by telecopier or personally delivered or, in the case
      of
      a mailed notice, upon receipt, in each case given or addressed as
      aforesaid.

    

    SECTION
      9.08. Right
      of Set-off.
      The
      Company agrees that, in addition to (and without limitation of) any right of
      set-off the Holder may otherwise have, the Holder shall be entitled, at its
      option, to offset amounts owing by the Holder to the Company, in Dollars or
      in
      any other currency (regardless of whether such amounts are

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    then
      due
      to the Company), against any amount payable by the Company to the Holder under
      this Note that is not paid when due; provided that nothing contained herein
      shall require the Holder to exercise any such right.

    

    SECTION
      9.09. Costs,
      Expenses and Indemnification.

     

    (a)
      The
      Company agrees to pay and reimburse on demand all reasonable costs and expenses
      incurred by the Holder in connection with the administration, modification,
      amendment or enforcement of this Note and the other documents to be delivered
      hereunder, including, without limitation, the reasonable fees and out-of-pocket
      expenses of counsel for the Holder with respect thereto and with respect to
      advising the Holder as to its rights and responsibilities under or in connection
      with this Note. 

    

    (b)
      The
      Company hereby agrees to indemnify the Holder and each of its Affiliates and
      their respective officers, directors, employees, agents, advisors and
      representatives (each, an "Indemnified
      Party")
      from
      and against any and all claims, damages, losses, liabilities and expenses
      (including, without limitation, fees and disbursements of counsel), joint or
      several, that may be incurred by or asserted or awarded against any Indemnified
      Party (the "Indemnities"),
      in
      each case arising out of or in connection with or relating to any investigation,
      litigation or proceeding or the preparation of any defense with respect thereto
      arising out of or in connection with or relating to this Note or the
      transactions contemplated hereby or thereby or any use made or proposed to
      be
      made with the proceeds of this Note, whether or not such investigation,
      litigation or proceeding is brought by the Company, any of its shareholders
      or
      creditors, an Indemnified Party or any other Person, or an Indemnified Party
      is
      otherwise a party thereto, and whether or not the other transactions
      contemplated by this Note are consummated, except to the extent such claim,
      damage, loss, liability or expense is found in a final, non-appealable judgment
      by a court of competent jurisdiction to have resulted from such Indemnified
      Party's gross negligence or willful misconduct; provided,
      however,
      the
      Company's obligation to indemnify any Indemnified Party, other than the Holder,
      under this Section 9.09(b) shall be subject to its receipt of written demand
      for
      the Indemnities of such Indemnified Party, such demand to set forth evidence
      of
      such Indemnified Party's payment or liability for such Indemnities. The Holder
      shall have no liability for any special, indirect, consequential or punitive
      damages in connection with any matter relating hereto.

    

    SECTION
      9.10. Right
      of First Refusal.
      Prior
      to the Conversion of this Note, the Holder (and/or any of its Affiliates
      designated thereby) shall have a right of first refusal to provide (i) any
      debt
      or equity financing required by the Company, as approved by the Board, at
      then-market terms and (ii) any advisory, structuring, underwriting or other
      services required in connection with the Company's capital raising activities
      as
      approved by the Board (including any third party debt financing, equity
      investment or initial public offering) in exchange for market-rate
      compensation.

     

    SECTION
      9.11. Waiver
      of Jury Trial.
      THE
      COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY

    
      
        
        

      

      
        18

        
          

        

      

      
        
        
APPLICABLE
        LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT
        OF
        OR RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED
        HEREBY.

    

    

    SECTION
      9.12. Confidentiality.The
      Holder agrees to maintain the confidentiality of the Information (as defined
      below) of the Company, except that Information may be disclosed (a) to the
      Holder's and its Affiliates’ directors, officers, employees and agents,
      including accountants, legal counsel and other advisors (it being understood
      that the Persons to whom such disclosure is made will be informed of the
      confidential nature of such Information and instructed to keep such Information
      confidential), (b) to the extent requested by any regulatory authority,
      (c) to the extent required by applicable laws or regulations or by any
      subpoena or similar legal process, (d) to the Company, (e) in
      connection with the exercise of any remedies hereunder or any suit, action
      or
      proceeding relating to this Agreement or the enforcement of rights hereunder,
      (f) subject to an agreement containing provisions substantially the same as
      those of this Section 9.12, to any assignee of or participant in, or any
      prospective assignee of or participant in, any of the Holder's rights or
      obligations under this Agreement, (g) with the consent of the Company or
      (h) to the extent such Information (i) becomes publicly available
      other than as a result of a breach of this Section 9.12 or (ii) becomes
      available to the Holder from a source other than the Company. For the purposes
      of this Section, “Information”
in
      relation to the Company means all information received from the Company relating
      to the Company or its business, other than any such information that is
      available to the Holder on a nonconfidential basis prior to disclosure by the
      Company; provided
      that, in
      the case of information received from the Company after the date hereof, such
      information is clearly identified at the time of delivery as confidential.
      Any
      Person required to maintain the confidentiality of Information as provided
      in
      this Section 9.12 shall be considered to have complied with its obligation
      to do
      so if such Person has exercised the same degree of care to maintain the
      confidentiality of such Information as such Person would accord to its own
      confidential information.

    

    SECTION
      9.13. Holder
      Representation.By
      its
      acceptance of this Note, the Holder represents and warrants to the Company
      that
      the Holder is an "accredited investor" within the meaning of Rule 501(a)(1),
      (2), (3) or (7) under the Securities Act of 1933, as amended (the "Securities
      Act"),
      and
      is not acquiring this Note with a view to any distribution thereof in a
      transaction that would violate the Securities Act or the securities laws of
      any
      State of the United States. 

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the Company has caused this Note to be duly executed by an
      authorized officer thereof as of the date and year first above
      written.

    

    MERIT
      CAPITAL ADVANCE, LLC

    By: LEAF
      Ventures, LLC

    Its
      Managing Member

    

    By: LEAF
      Financial Corporation

    Its
      Managing Member

    

    By:_____________________________________
      

    Name:

    Title:

    

    

    

    Accepted
      as of the date first written above:

    

    DBAH
      CAPITAL LLC

    as
      Holder

    

    By:
      __________________________

    Name: 

    Title:

    

    By:
      __________________________

    Name: 

    Title:

     

    
      
        
        

      

      
        20SEQUA CORPORATION

Exhibit 10.2

SEQUA CORPORATION

2003 DIRECTORS' STOCK AWARD PLAN

(As Amended January 25, 2007)

I.

PURPOSE

The purpose of the 2003 Directors’ Stock Award Plan (the “Plan”) is to encourage and enable members of the Board of Directors of Sequa Corporation (the “Company”) who are not employed by the Company or any of its subsidiaries or affiliates (“Eligible Directors”) to acquire a proprietary interest, or increase an existing interest, in the Company through ownership of common stock of the Company.  Such ownership will provide such Eligible Directors with a more direct stake in the future welfare of the Company and encourage them to remain with the Company.

II.

ADMINISTRATION OF THE PLAN

(a)

The Plan shall be administered by the Board of Directors of the Company (the “Board”).

(b)

Subject to the provisions of the Plan, the Board shall have full and final authority in its discretion (i) to determine the Eligible Directors to be granted options and/or restricted stock, (ii) to determine the time or times when each option and each restricted stock award will be granted, (iii) to determine the number of shares subject to each option and the number of shares covered by each restricted stock award, (iv) to determine the option price of the shares subject to each option, which shall not be less than the minimum specified in subparagraph 5(a) hereof, (v) to determine the time or times when each option will become exercisable and the duration of the exercise period, (vi) to prescribe the terms and provisions of agreements, which need not be identical, evidencing options (“Stock Option Agreements”) and restricted stock (“Restricted Stock Agreements”) granted hereunder, (vii) to adopt, amend and rescind such rules and regulations as the Board deems advisable in the administration of the Plan, (viii) to construe and interpret the Plan, the rules and regulations adopted hereunder and the Stock Option Agreements and Restricted Stock Agreements, and (ix) to make all other determinations deemed necessary or advisable for the administration of the Plan.

III.

SHARES OF STOCK SUBJECT TO THE PLAN

(a)

Except as provided in subparagraph 3(b) hereof, the number of shares that may be issued or transferred pursuant to the exercise of options or pursuant to the grant of restricted stock awards under this Plan shall not exceed 50,000 shares of the Company’s Class A Common Stock (“Class A Common Stock”).  Such shares may be authorized and unissued shares or previously issued shares acquired or to be acquired by the Company and held in treasury.  Any share subject to an option which for any reason expires or is terminated unexercised as to such share shall again be available for award under this Plan.  Any share subject to a restricted stock award which for any reason is forfeited or terminated shall again be available for award under this Plan. 

(b)

In the event that the Board shall determine that any dividends in shares of Class A Common Stock, split of Class A Common Stock, reverse split, recapitalization, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, or other similar corporate transaction or event, affects shares of Class A Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Eligible Directors under the Plan, then the Board shall make such equitable changes and adjustments as it deems appropriate in (i) the number and kind of shares which may thereafter be issued under the Plan, (ii) the number and kind of shares, other securities or other consideration issued or issuable in respect of outstanding options and restricted stock awards under the Plan, and (iii) the option price of shares covered by options.  Any new or additional shares of Class A Common Stock or other securities received by virtue of such adjustment to a restricted stock award shall be subject to the same terms, conditions and restrictions as the shares of restricted stock giving rise to such adjustment. 

IV.

DURATION OF THE PLAN

Subject to the provisions of paragraph 8 hereof, the Plan shall remain in effect until all shares subject or which may become subject to the Plan shall have been purchased pursuant to the exercise of options or issued pursuant to restricted stock awards granted under the Plan, provided that no options or restricted stock awards may be granted after December 10, 2013.

V.

OPTIONS

Options shall be evidenced by Stock Option Agreements in such form, not inconsistent with the Plan, as the Board shall approve from time to time, which agreements shall be consistent with the following terms and conditions.

(a)

Option Price.  The purchase price under each option shall be not less than 100% of the fair market value of the Class A Common Stock on the date the option is granted. 

 (b)

Medium and Time of Payment.  Stock purchased pursuant to a Stock Option Agreement shall be paid for (1) entirely in cash at the time of purchase, (2) entirely in shares by tendering and delivering to the Company shares of the Class A Common Stock or Class B Common Stock of the Company (“Class B Common Stock”) owned beneficially by the optionee and having an aggregate market value equal to the aggregate cash exercise price applicable to the optionee’s option, (3) partly in cash and partly in shares of Class A Common Stock or Class B Common Stock, or (4) by means of deferred payment from the proceeds of sales through a broker on the exercise date of some or all of the shares to which such exercise relates.  The market value per share of such stock shall be the last sales price of the Class A Common Stock or Class B Common Stock, as the case may be, on the New York Stock Exchange on the day preceding the day on which the option is exercised (or if such stock was not traded on that date, then on the next preceding date on which such stock was traded).  Upon receipt of payment, the Company shall, without stock transfer tax to the optionee or other person entitled to exercise the option, deliver to the person exercising the option a certificate or certificates for such shares.  No shares of Class A Common Stock or Class B Common Stock shall be accepted as full or partial payment for the exercise of an option hereunder unless such securities have been beneficially owned for a period of not less than one year by the person tendering them for payment. 

(c)

Waiting Period and Term.  No options may be exercised during the first twelve months of their respective terms other than in the event that death of the grantee occurs prior to the expiration of the twelve-month period.  No option may be exercised after the expiration of ten (10) years from the date of grant of such option. 

(d)

Partial Exercise.  Partial exercise will be permitted from time to time, provided that no partial exercise may result in the issuance or transfer of less than one hundred (100) shares of Class A Common Stock. 

(e)

Rights as a Stockholder.  A recipient of options shall have no rights as a stockholder with respect to any shares issuable or transferable upon exercise thereof until the date a stock certificate is issued to him or her for such shares.  No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 

(f)

Non-Assignability of Options.  No option shall be assignable or transferable by the recipient except by will or by the laws of descent and distribution.  During the life of the recipient, options shall be exercisable only by him or her. 

(g)

Effect of Termination of Status as a Director.  An Eligible Director shall be deemed to have terminated his or her status as a director of the Company in a “Qualifying Termination” if the Eligible Director: 

(i)

Dies while in office,

(ii)

Becomes mentally or physically disabled while in office and is unable as a result thereof to continue as a director of the Company,

(iii)

Is not requested and/or nominated to run for reelection to the Board by a majority of the other directors, or

(iv)

Runs for reelection to the Board but fails to be reelected by a plurality of the aggregate votes cast, in accordance with Article II, Section 3, of the Company’s Bylaws.

In the event that an Eligible Director’s status as a director of the Company terminates in a Qualifying Termination other than by reason of death, the Eligible Director’s unexercised options (or portions thereof) shall expire on the date of Qualifying Termination, except for unexercised options (or portions thereof) that were exercisable on the date of Qualifying Termination, which shall expire unless exercised within a period of one year after the date of Qualifying Termination.  In the event of the death of an optionee within the one-year period following Qualifying Termination, unexercised options (or portions thereof) that were exercisable on the date of Qualifying Termination shall be exercisable by his or her personal representatives, heirs or legatees at any time prior to the expiration of one (1) year from the date of his or her death.  In the event of the death of an optionee while a director of the Company, unexercised options ( or portions thereof), whether or not they were exercisable on the date of death, shall be exercisable by his or her personal representatives, heirs or legatees at any time prior to the expiration of one (1) year from the date of his or her death.  In no event, however, shall an option be exercisable after the expiration of ten (10) years from the date the option was granted.  In the event that an Eligible Director’s status as a director of the Company terminates for any reason other than a “Qualifying Termination,” the Eligible Director’s unexercised options (or portions thereof) shall expire on the date of termination of the Eligible Director’s status as a director of the Company.

VI.

RESTRICTED STOCK

(a)

Grants of Restricted Stock.  There shall be granted on January 15 of each calendar year beginning with 2004 (or if that day is not a business day, on the next succeeding business day) to each person who is an Eligible Director on the date of grant a number of shares of restricted stock having a market value equal to $10,000 (rounded to the nearest whole number of shares), unless the Board determines in its discretion prior to the grant date that a greater or lesser number of shares of restricted stock, or no shares of restricted stock, will be granted on that date.  For this purpose, the market value of a share of restricted stock shall be the last sales price of the Class A Common Stock on the New York Stock Exchange on the day preceding the date of grant (or, if such stock was not traded on that date, then on the next preceding date on which the stock was traded).  The Board shall have the full and final authority to grant shares of restricted stock to Eligible Directors at other times and in other amounts. 

(b)

Restrictions on Restricted Stock.  All shares of restricted stock granted to an Eligible Director under this Plan shall be restricted as follows and may not be transferred, pledged, assigned, sold or otherwise disposed of while any of such restrictions remain in force.  Unless otherwise provided in the applicable Restricted Stock Agreement or the resolutions of the Board granting the award of restricted stock, such restrictions shall remain in force until the first anniversary of the date of grant of the restricted stock award. 

(c)

Termination of Restrictions on Stock.  Notwithstanding the provisions of subparagraph 6(b) hereof, the applicable restrictions as set forth in subparagraph 6(b) hereof shall immediately terminate, and the previously restricted Class A Common Stock may thereupon be transferred, pledged, assigned, sold or otherwise disposed of, with respect to an Eligible Director whose status as a director of the Company terminates in a Qualifying Termination (as defined in subparagraph 5(g) hereof). 

(d)

Forfeiture of Stock.  An Eligible Director will forfeit all Class A Common Stock that has been issued to him or her under the Plan and that remains restricted in the event that his or her status as a director of the Company terminates for any reason other than a Qualifying Termination (as defined in subparagraph 5(g) hereof).

(e)

Legending of Stock Certificates.  All certificates representing restricted stock issued pursuant to the Plan shall contain the following legend: 

The transferability of this certificate and the shares of stock represented hereby are restricted by and subject to the terms and conditions (including forfeiture) of Sequa Corporation’s 2003 Directors’ Stock Award Plan.  Copies of such Plan are on file in the offices of Sequa Corporation, 200 Park Avenue, New York, New York.

(f)

Delivery and Return of Stock Certificates.  Certificates for Class A Common Stock issued pursuant to the Plan shall be issued in the name of the applicable Eligible Director on such date or dates during the first year of the restriction period as shall be determined by an appropriate officer of the Company and shall be held by the Company until the restriction period has expired pursuant to subparagraphs 6(b) and 6(c) hereof.  Thereafter, a certificate shall be delivered, without stock transfer tax, to the applicable Eligible Director.  Initially, such certificates shall be legended when issued in accordance with subparagraph 6(e) hereof.  At the time a certificate is delivered to an Eligible Director, it shall be unlegended. 

(g)

Rights as a Stockholder.  Subject to the restrictions hereunder, an Eligible Director shall, during the period in which any Class A Common Stock issued under the Plan is restricted, have all of the rights of a stockholder with respect to such stock, including, without limitation, the right to vote the shares in any matter with respect to which the stock is permitted to be voted and to collect all dividends that may be paid thereon. 

VII.

LEGAL RESTRICTIONS

All Class A Common Stock issued under the Plan shall be subject to the requirement that, if at any time the Board shall determine, in its discretion, that the listing, registration, or qualification of the shares issuable hereunder upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issue or transfer of shares hereunder, such shares may not be issued or transferred unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board.

VIII.

AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN

(a)

Subject to subparagraph 8(b) hereof, the Board may at any time amend, modify or terminate the Plan in any respect; provided, however, that no such action may affect the restrictions, terms and conditions applicable to Class A Common Stock or options previously issued under the Plan without the consent of the applicable Eligible Director.

(b)

Any increase in the number of shares of Class A Common Stock that may be issued or transferred under the Plan (except as contemplated by subparagraph 3(b) hereof) and any other amendment or modification of the Plan for which stockholder approval is required under any applicable law or applicable rule or regulation of any governmental regulatory body or under the rules of any stock exchange on which the Class A Common Stock is listed shall be subject to the approval of the Company’s stockholders.

IX.

EFFECTIVE DATE OF PLAN

The effective date of the Plan shall be December 11, 2003, subject, however, to the approval of the Plan by a majority of votes cast at the annual meeting of the stockholders of the Company held in 2004, provided that the total vote cast represents over fifty percent (50%) in interest of all stock of the Company entitled to vote.  Options and restricted stock may be granted pursuant to the Plan prior to such approval by stockholders, provided, however, that if the Plan is not approved by stockholders as aforesaid, all such grants shall become null and void.

X.

GOVERNING LAW

The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be construed and enforced in accordance with the laws of the State of New York, without regard to principles of conflict of laws.

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