Document:

Exhibit 10.1

 

EMPLOYMENT
SEPARATION AND GENERAL RELEASE AGREEMENT

 

This Employment Separation and General Release
Agreement (this “Separation Agreement”) is entered into this 18 day of March 2008,
by and between William Yeates, an individual (“Executive”), and Power-One, Inc.,
a Delaware corporation (the “Company”).

 

WHEREAS, Executive
has been employed as the Chief Executive Officer for the Company;

 

WHEREAS, Executive
and the Company are parties to that certain Change in Control Agreement dated May 23,
2007 (the “Change in Control Agreement”);

 

WHEREAS, Executive
and the Company are parties to that certain Indemnification Agreement dated April 25,
2006 (the “Indemnification Agreement”);

 

WHEREAS, Executive
is a former director of the Company; and

 

WHEREAS, Executive
and the Company mutually agreed to terminate Executive’s employment
relationship with the Company effective on February 19, 2008 (the “Separation
Date”) upon the terms set forth herein;

 

NOW, THEREFORE, in
consideration of the covenants undertaken and the releases contained in this
Separation Agreement, Executive and the Company agree as follows:

 

I.                                         Resignation.  Executive’s employment by the Company
terminated on the Separation Date. 
Executive hereby confirms that he resigned as an officer, director,
employee, member, manager and in any other capacity with the Company and each
of its affiliates effective as of the Separation Date and that he currently
holds no such position with the Company or any of its affiliates.  The Company confirms that it and each of its
affiliates accepted such resignation effective as of the Separation Date.  Executive acknowledges and agrees that he has
received all amounts owed for his regular and usual salary (including, but not
limited to, any severance (other than the Severance Benefits expressly provided
for in, and subject to the terms of, this Separation Agreement), overtime,
bonus, accrued vacation, commissions, or other wages), reimbursement of
expenses, and usual benefits, and that all payments due to Executive from the
Company after the Separation Date shall be determined under this Separation
Agreement.  As of the Separation Date,
the Executive’s termination of employment resulted in Executive’s “separation
from service” within the meaning of Section 409A of the Internal Revenue
Code of 1986 (as amended, the “Code”) and Treasury Regulation Section 1.409A-1(h)(1).

 

II.                                     Severance.

 

A.           Subject
to Sections II(B) and II(C) below, the Company shall provide to the Executive
the following benefits, collectively the “Severance Benefits”:

 

(i)                                     Severance Pay.  The
Company shall provide as severance pay to Executive continued payment of his
base salary in effect immediately prior to the Separation Date during the
twelve (12) month period 

 

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following
the Separation Date (the “Severance Pay”), less standard withholding and
authorized deductions.  The Severance Pay
shall be paid in substantially equal monthly installments beginning in the
month following the month in which the Separation Date occurs.

 

(ii)                                  Outplacement Services Reimbursement. 
The Company shall reimburse Executive’s costs for reasonable outplacement
services during the twelve (12) month period following the Separation Date up
to a maximum of $50,000 (fifty thousand and 00/100), payable quarterly in
arrears upon the Company’s receipt of satisfactory invoices (the “Outplacement
Benefits”).

 

(iii)                               Benefits
Continuation.  The Company
shall provide to the Executive reimbursement of medical and dental benefits
under COBRA ( the “Benefits Continuation”) for up to twelve (12) months
following the Separation Date.  Benefits
Continuation shall cease upon the Executive being eligible to obtain coverage
from a new employer.

 

(iv)                              Life Insurance Continuation.                   The Company
shall maintain in good standing for a period of twelve (12) months following
the Separation Date, the life insurance policy maintained at Met Life in the
approximate amount of $500,000 for the benefit of Executive and his designated
beneficiaries.

 

(v)                                 Continued Vesting of Equity Awards. 
As of the Separation Date, Executive holds 975,000 fully
vested stock options to purchase shares of the Company’s common stock (the “Options”).
Notwithstanding anything to the contrary under any equity plan or award
agreement evidencing the Options, the Company shall permit the Options to
remain exercisable for a period of twelve (12) months following the Separation
Date (subject to earlier termination on a change in control or similar event in
accordance with the provisions of the equity compensation plan under which such
awards were granted and the applicable stock option agreement).  As of the Separation Date, Executive also
holds 275,000 outstanding and unvested restricted stock units (collectively,
the “Restricted Awards”).  Notwithstanding
anything to the contrary under any equity plan or award agreement evidencing
the Restricted Awards, the Company shall permit the Restricted Awards to
continue to vest for twelve (12) months following the Separation Date (to the
extent they are scheduled to vest during that period in accordance with their
customary vesting schedules).  Any
Restricted Awards not scheduled (in accordance with the usual vesting schedule
applicable to such awards) to vest within one year after the Separation Date,
terminated on the Separation Date and Executive has no further right with
respect thereto or in respect thereof.

 

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B.             The
Company’s obligation to provide the Severance Benefits (or to continue
providing any portion thereof, as applicable) is subject to the Executive’s
continuing compliance with the restrictive covenants set forth in Section VII
hereof.  The Company shall have no
obligation to provide the Severance Benefits at any time after a breach by Executive
of either or both of the covenants set forth in Sections VII.A and B, or after
any material breach of any other covenant set forth in Section VII.  For purposes of clarity, upon any breach by
Executive of either or both of the covenants set forth in Sections VII.A and B,
or after any material breach of any other covenant set forth in Section VII
(which material breach remains uncured following written notice thereof), the
Options and Restricted Awards shall be immediately forfeited by the Executive. Notwithstanding
the foregoing provisions of this Section II(B), in no event shall the
amount of the Severance Pay actually paid by the Company to Executive be less
than Ten Thousand Dollars ($10,000) in the aggregate, regardless of any breach
by Executive of the restrictive covenants set forth in Section VII, which
amount the parties agree is good and sufficient consideration for the Release
and other obligations of Executive under this Separation Agreement.

 

C.             The
Company’s obligation to provide the Severance Benefits (or any portion thereof,
as applicable) is further subject to the condition that Executive shall not
have revoked the Release set forth in Section III hereof pursuant to any
revocation rights afforded by applicable law. 
The Company shall have no obligation to provide the Severance Benefits
to Executive unless and until the Release becomes irrevocable by Executive
under all applicable laws.

 

D.            If,
and only to the extent, required to avoid the imputation of any tax, penalty or
interest pursuant to Section 409A of the Code, the Executive shall not be
entitled to any Severance Benefits until the date which is six (6) months
after the Separation Date.  Any amounts
otherwise payable to the Executive upon or in the six (6) month period
following the Separation Date that are not so paid by reason of this paragraph
shall be paid (without interest) as soon as practicable (and in all events
within thirty (30) days) after the date that is six (6) months after the Separation
Date.  To the extent that the
Outplacement Benefits or Benefits Continuation are taxable to the Executive,
any reimbursement payment due to the Executive pursuant to such provisions
shall be paid to the Executive on or before the last day of the Executive’s
taxable year following the taxable year in which the related expense was
incurred.  The Outplacement Benefits and
Benefits Continuation are not subject to liquidation or exchange for another
benefit and the amount of such benefits and reimbursements that the Executive
receives in one taxable year shall not affect the amount of such benefits or
reimbursements that the Executive receives in any other taxable year.

 

III.                                 Release.  Executive, on behalf of himself, his
descendants, dependents, heirs, executors, administrators, assigns, and
successors, and each of them, hereby covenants not to sue and fully releases
and discharges the Company and each of its parents, subsidiaries and
affiliates, 

 

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past and present, as well as its and their trustees,
directors, officers, members, managers, partners, agents, attorneys, insurers,
employees, stockholders, representatives, assigns, and successors, past and
present, and each of them, hereinafter together and collectively referred to as
the “Releasees,” with respect to and from any and all claims, wages,
demands, rights, liens, agreements or contracts (written or oral), covenants,
actions, suits, causes of action, obligations, debts, costs, expenses,
attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or
nature in law, equity or otherwise, whether now known or unknown, suspected or
unsuspected, and whether or not concealed or hidden (each, a “Claim”),
which he now owns or holds or he has at any time heretofore owned or held or
may in the future hold as against any of said Releasees (including, without
limitation, any Claim arising out of or in any way connected with Executive’s
service as an officer, director, employee, member or manager of any Releasee,
Executive’s separation from his position as an officer, director, employee,
manager and/or member, as applicable, of any Releasee, or any other
transactions, occurrences, acts or omissions or any loss, damage or injury
whatever), whether known or unknown, suspected or unsuspected, resulting from
any act or omission by or on the part of said Releasees, or any of them,
committed or omitted prior to the date of this Release Agreement including,
without limiting the generality of the foregoing, any Claim under Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967,
the Americans with Disabilities Act, the Family and Medical Leave Act of 1993,
the California Fair Employment and Housing Act, the California Family Rights
Act, or any other federal, state or local law, regulation, or ordinance, or any
Claim for severance pay, bonus, sick leave, holiday pay, vacation pay, life
insurance, health or medical insurance, pension, retirement or any other fringe
benefit, workers’ compensation or disability (the “Release”); provided,
however, that the foregoing Release does not apply to any obligation of the
Company to Executive pursuant to any of the following: (1) the Executive’s
rights to receive the Severance Benefits pursuant to the terms and conditions
of this Agreement ; (2) any right to indemnification that Executive may
have pursuant to the Bylaws of the Company, its Articles of Incorporation, the
laws of the State of Delaware, or under any written indemnification agreement
with the Company (or any corresponding provision of any subsidiary or affiliate
of the Company) with respect to any loss, damages or expenses (including but
not limited to attorneys’ fees to the extent otherwise provided) that Executive
may in the future incur with respect to his service as an employee, officer or
director of the Company or any of its subsidiaries or affiliates; (3) with
respect to any rights that Executive may have to insurance coverage for such
losses, damages or expenses under any Company (or subsidiary or affiliate) directors
and officers liability insurance policy; (4) any rights to continued
medical or dental coverage that Executive may have under COBRA; or (5) any
rights to payment of benefits that Executive may have under a retirement plan
sponsored or maintained by the Company that is intended to qualify under Section 401(a) of
the Internal Revenue Code of 1986, as amended. 
In addition, this Release does not cover any Claim that cannot be so
released as a matter of applicable law. 
Executive acknowledges and agrees that he has received any and all leave
and other benefits that he has been and is entitled to pursuant to the Family
and Medical Leave Act of 1993.

 

IV.                                 1542 Waiver.  It is the intention of Executive in executing
this Separation Agreement that the same shall be effective as a bar to each and
every Claim hereinabove specified.  In
furtherance of this intention, Executive hereby expressly waives any and all
rights and benefits conferred upon him by the provisions of SECTION 1542
OF THE CALIFORNIA CIVIL CODE and expressly consents that this Separation
Agreement (including, without 

 

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limitation, the Release set forth above) shall be
given full force and effect according to each and all of its express terms and
provisions, including those related to unknown and unsuspected Claims, if any,
as well as those relating to any other Claims hereinabove specified. SECTION 1542
provides:

 

“A GENERAL RELEASE
DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST
IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

 

Executive acknowledges
that he may hereafter discover Claims or facts in addition to or different from
those which Executive now knows or believes to exist with respect to the
subject matter of this Separation Agreement and which, if known or suspected at
the time of executing this Separation Agreement, may have materially affected
this settlement.  Nevertheless, Executive
hereby waives any right, Claim or cause of action that might arise as a result
of such different or additional Claims or facts.  Executive acknowledges that he understands
the significance and consequences of the foregoing Release and such specific
waiver of SECTION 1542.

 

V.                                     ADEA Waiver.  Executive expressly acknowledges and agrees
that by entering into this Separation Agreement, he is waiving any and all
rights or claims that he may have arising under the Age Discrimination in
Employment Act of 1967, as amended (“ADEA”), which have arisen on or
before the date of execution of this Separation Agreement.  Executive further expressly acknowledges and
agrees that:

 

A.           In return
for this Separation Agreement, he will receive consideration beyond that which
he was already entitled to receive before entering into this Separation
Agreement, including, without limitation, the Severance Benefits;

 

B.             He is
hereby advised in writing by this Separation Agreement to consult with an attorney
before signing this Separation Agreement;

 

C.             He was
given a copy of this Separation Agreement on February 19, 2008 and
informed that he had twenty-one (21) days within which to consider the
Separation Agreement and that if he wished to execute this Separation Agreement
prior to expiration of such 21-day period, he should execute the
Acknowledgement and Waiver attached hereto as Exhibit A;

 

D.            Nothing
in this Separation Agreement prevents or precludes Executive from challenging
or seeking a determination in good faith of the validity of this waiver under
the ADEA, nor does it impose any condition precedent, penalties or costs from
doing so, unless specifically authorized by federal law; and

 

E.              He was
informed that he has seven (7) days following the date of execution of
this Separation Agreement in which to revoke this Separation Agreement, and
this Separation Agreement will become null and void if Executive elects 

 

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revocation during that time.  Any
revocation must be in writing and must be received by the Company during the
seven-day revocation period.  In the
event that Executive exercises his right of revocation, neither the Company nor
Executive will have any obligations under this Separation Agreement.

 

VI.                                 No Transferred Claims.  Executive warrants and represents that
Executive has not heretofore assigned or transferred to any person not a party
to this Separation Agreement any released matter or any part or portion thereof
and he shall defend, indemnify and hold the Company and each of its affiliates
harmless from and against any claim (including the payment of attorneys’ fees
and costs actually incurred whether or not litigation is commenced) based on or
in connection with or arising out of any such assignment or transfer made,
purported or claimed.

 

VII.                             Restrictive Covenants.

 

A.           Solicitation of Customers.  Executive promises and agrees that, for a
period of one (1) year following the Separation Date, he will not
influence or attempt to influence customers, vendors, or business partners of
the Company or any of its subsidiaries, either directly or indirectly, to
divert their business from the Company or any of its subsidiaries to any
individual, partnership, firm, corporation or other entity then in competition
with the business of the Company or any subsidiary.  Notwithstanding the foregoing, the Company
acknowledges that Executive is entitled to seek and obtain employment and
business opportunities within the same industry as the Company, and that
Executive may compete, directly or indirectly, with the Company.

 

B.             Solicitation of Employees.  Executive promises and agrees that, for a
period of one (1) year following the Separation Date, he will not directly
or indirectly solicit any employee of the Company or any of its subsidiaries to
work for any business, individual, partnership, firm, corporation, or other
entity then in competition with the business of the Company or any subsidiary.

 

C.             Confidentiality.  Executive promises and agrees that he will
not at any time after the Separation Date, unless compelled by lawful process,
disclose or use for his own benefit or purposes or the benefit or purposes of
any other person, firm, partnership, joint venture, association, corporation or
other business organization, entity or enterprise (other than the Company and
any of its subsidiaries or affiliates), any trade secrets, or other
confidential data or information relating to customers, design programs, costs,
marketing, sales activities, promotion, credit and financial data, financing
methods, or plans of the Company or any subsidiary or affiliate of the Company;
provided that the foregoing shall not apply to information which is not
unique to the Company (or subsidiary or affiliate, as applicable) or which is
generally known to the industry or the public other than as a result of
Executive’s breach of this covenant. 
Executive agrees that, to the extent he has not already done so, he will
return to the Company immediately all memoranda, books, papers, plans,
information, letters and other data, and all copies thereof or therefrom, in
any way relating to the business of the Company or any subsidiary or affiliate
of the Company, whether such information is in tangible or electronic form.  Executive further agrees that he has not
retained and will not retain or use for his account at any time any trade
names, trademark or other proprietary business designation used or owned in
connection with the 

 

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business of the Company or any subsidiary or affiliate
of the Company; provided, however, that Executive may retain his rolodex,
address books, information relating to his compensation or relating to
reimbursement of expenses, documents relating to his participation in employee
benefit plans or programs of the Company or any of its subsidiaries, any
agreement between Executive and the Company or a subsidiary relating to his
employment with the Company or a subsidiary, and other personal property
provided that such items do not contain any confidential information of the
Company or a subsidiary.

 

D.            Non-Disparagement.  Executive promises and agrees that, for a
period of one (1) year following the Separation Date, he will not by any
means issue or communicate any private or public statement that may be critical
or disparaging of any member of the Company or its affiliates, or any of their
respective products, services, officers, directors or employees.  The Company promises and agrees that it will
not by any means issue or communicate any private or public statement that may
be critical or disparaging of Executive. 
However, nothing in this paragraph shall affect Executive’s or the
Company’s ability or obligation to provide complete and truthful testimony or
other information in connection with any (i) governmental and/or
regulatory investigation or proceeding, (ii) required public, governmental
or regulatory disclosure or filing, or (iii) pleadings, discovery and/or
trial in litigation.

 

E.              Injunctive Relief.  Executive expressly agrees that the Company
will or would suffer irreparable injury if he were to breach any of the
provisions of this Section VII and that the Company would by reason of
such conduct be entitled, in addition to any other remedies, to injunctive relief.  Executive consents and stipulates to the
entry of such injunctive relief prohibiting him from engaging in conduct which
violates any of the provisions of this Section VII.

 

VIII.                         Miscellaneous

 

A.                Company Insider Trading Restrictions.  The Company agrees to immediately notify
E*Trade, as the administrative brokerage for the Executive’s stock options and
equity grants, that as of the Separation Date the Executive is no longer
considered a “company insider” for the purposes of trading of any Company stock
options.  Executive hereby acknowledges
that he is personally responsible for complying with all applicable securities
laws regarding trading while in possession of material inside information.

 

B.                  Section 16 Officer Status/SEC Reporting
Requirements.  The parties
hereby acknowledge and agree that as of the Separation Date, the Executive will
cease to be considered an officer of the Company who is subject to Section 16
of the Securities Exchange Act of 1934. 
The Company will arrange for necessary public filings and reports, as
applicable, which confirm and memorialize this Section 16 status change,
and such other reports (e.g. 8-K, 10-Q) as are required.  The Executive may be subject to certain
additional filings and Section 16 considerations for a period of up to six
(6) months following the Separation Date, in the event he engages in any
transaction in Company common stock. 
Executive is encouraged to coordinate with Randy Holliday, the Company’s
General Counsel, and/or his own personal legal advisor, as may be relevant for
any transaction in Company stock within a period of up to six (6) months
following the Separation Date.  Any
contact with Randy Holliday, however, must be coordinated and conducted with
and through Tisha Shokat pursuant to Section VIII(L) below.

 

7

 

C.                  Return of Company Property.  On the Separation Date, the Executive
shall return the Company automobile, laptop computer, cellular phone, employee
identification, and all other equipment, devices, or items provided to the
Executive by the Company.  Except as
otherwise provided herein, all Company provided services will be discontinued
as of the Separation Date.

 

D.                 Successors.

 

(i)                                     This
Separation Agreement is personal to Executive and shall not, without the prior
written consent of the Company, be assignable by Executive.  However, should Executive die during the twelve
(12) month period following the Separation Date, then, so long as Executive had
not theretofore materially breached his obligations under this Separation
Agreement, (and such material breach remains uncured following notice thereof)
the Company agrees to pay any then remaining balance of the Severance Benefits
to the Executive’s heirs or his estate, as applicable.

 

(ii)                                  This
Separation Agreement shall inure to the benefit of and be binding upon the
Company and its respective successors and assigns and any such successor or
assignee shall be deemed substituted for the Company under the terms of this
Separation Agreement for all purposes. 
As used herein, “successor” and “assignee” shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger, acquisition of assets, or otherwise, directly or indirectly
acquires the ownership of the Company, acquires all or substantially all of the
Company’s assets, or to which the Company assigns this Separation Agreement by
operation of law or otherwise.

 

E.                   Waiver. 
No waiver of any breach of any term or provision of this Separation
Agreement shall be construed to be, nor shall be, a waiver of any other breach
of this Separation Agreement.  No waiver
shall be binding unless in writing and signed by the party waiving the breach.

 

F.                   Modification.  This Separation Agreement shall not be
modified by any oral agreement, either express or implied, and all
modifications hereof shall be in writing and signed by the parties hereto.

 

G.                  Complete Agreement.  This Separation Agreement embodies the entire
agreement of the parties hereto respecting the matters within its scope.  This Separation Agreement supersedes all
prior agreements of the parties hereto on the subject matter hereof.  Any prior negotiations, correspondence, agreements,
proposals, or understandings relating to the subject matter hereof shall be
deemed to be merged into this Separation Agreement and to the extent
inconsistent herewith, such negotiations, correspondence, agreements,
proposals, or understandings shall be deemed to be of no force or effect.  There are no representations, warranties, or
agreements, whether express or implied, or oral or written, with respect to the
subject matter hereof, except as set forth herein.  Notwithstanding the foregoing, the Company’s
rights under any confidentiality, trade secret, proprietary information,
inventions or similar agreement to which Executive was a party or otherwise
bound are not integrated into this Agreement and such rights of the Company
shall continue in effect.

 

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H.            Termination and Cessation of Change in Control
Agreement.                        For
the avoidance of doubt, the Company and Executive acknowledge and agree that
the Change in Control Agreement terminated as of the Separation Date, as of and
as a direct result of Executive’s termination of employment as of the
Separation Date, independent of and unrelated to this Separation
Agreement.  The Company and Executive
further acknowledge and agree that Executive retains no further rights,
interests, claims for benefits, or eligibility for coverage under the terms and
conditions of such Change in Control Agreement.

 

I.                 Severability.  In the event that a court of competent
jurisdiction determines that any portion of this Separation Agreement is in
violation of any statute or public policy, then only the portions of this
Separation Agreement which violate such statute or public policy shall be
stricken, and all portions of this Separation Agreement which do not violate
any statute or public policy shall continue in full force and effect.  Furthermore, any court order striking any
portion of this Separation Agreement shall modify the stricken terms as
narrowly as possible to give as much effect as possible to the intentions of
the parties under this Separation Agreement.

 

J.                Governing Law.  This Separation Agreement and the legal
relations hereby created between the parties hereto shall be governed by and
construed under and in accordance with the internal laws of the State of California,
without regard to conflicts of laws principles thereof.

 

K.            Legal Counsel; Mutual Drafting.  Each party recognizes that this is a legally
binding contract and acknowledges and agrees that they have had the opportunity
to consult, and have consulted, with legal counsel of their choice.  Each party has cooperated in the drafting,
negotiation and preparation of this Separation Agreement.  Hence, in any construction to be made of this
Separation Agreement, the same shall not be construed against either party on
the basis of that party being the drafter of such language.  Executive agrees and acknowledges that he has
read and understands this Separation Agreement, is entering into it freely and
voluntarily, and has been advised to seek counsel prior to entering into this
Separation Agreement, has had ample opportunity to do so, and has had the
benefit of such counsel.

 

L.           Notices.  All notices under this Separation
Agreement shall be in writing and shall be either personally delivered or
mailed postage prepaid, by certified mail, return receipt requested:

 

	
   

  	
  (i)

  	
  if to the Company:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Power-One, Inc.

  
	
   

  	
   

  	
  Attention: General
  Counsel

  
	
   

  	
   

  	
  740 Calle Plano

  
	
   

  	
   

  	
  Camarillo, California
  93012

  
	
   

  	
   

  	
   

  
	
   

  	
  (ii)

  	
  if to Executive:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  At the address on file
  with the Company

  

 

Notice shall be effective
when personally delivered, or five (5) business days after being so
mailed.  Any party may change its address
for purposes of giving future notices pursuant to this 

 

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Agreement by notifying
the other party in writing of such change in address, such notice to be delivered
or mailed in accordance with the foregoing.

 

M.         On-going Communication and Cooperation with the
Company.  For the purposes
of coordinating and controlling any ongoing communications, contacts, or
interactions between the Executive and the Company following the Separation
Date, Tisha Shokat, Vice President, Corporate Human Resources, is to be the
sole and exclusive point of contact between the Executive and the Company.  Any and all communications, contacts,
questions, requests, or other interactions of any nature by the Executive or on
the Executive’s behalf whatsoever must be directed to Ms. Shokat as the
exclusive point of contact with and “entry” to the Company for any matter
dealing with the Company, or for any matter which arises from or relates in any
way to the Executive’s involvement with the Company.  This arrangement includes, by way of example
and not as any limitation or restriction on the generality of the foregoing,
requests involving employee benefit questions, matters involving any transaction
with equity awards the Executive beneficially owns from whatever source, or
matters of administration of any aspect of this Separation Agreement.  Ms. Shokat will arrange for contact
with, response by, or communication with, the applicable personnel of the
Company on a case-by-case basis.  Ms. Shokat
may be reached at office phone 805-383-5885. 
If Ms. Shokat is not then employed by the Company, the Company’s
General Counsel will designate the appropriate new contact person.

 

N.            Counterparts.  This Separation Agreement may be executed
in any number of counterparts, each of which shall be deemed an original and
all of which together shall constitute one and the same instrument.

 

O.            Arbitration.  Any controversy arising out of or relating to
this Separation Agreement, its enforcement or interpretation, or because of an
alleged breach, default, or misrepresentation in connection with any of its
provisions, or any other controversy arising out of Executive’s employment or
the termination thereof, including, but not limited to, any state or federal
statutory claims, shall be submitted to arbitration before a sole arbitrator
(the “Arbitrator”) selected from Judicial Arbitration and Mediation
Services, Inc., or its successor (“JAMS”), or if JAMS is no longer
able to supply the arbitrator, such arbitrator shall be selected from the
American Arbitration Association, and shall be conducted in accordance with the
provisions of California Code of Civil Procedure §§ 1280 et seq. as the
exclusive forum for the resolution of such dispute.  The arbitration shall be held in the JAMS’
office nearest to the city in which the Executive was last employed by the
Company or at a mutually agreeable location. 
Pursuant to California Code of Civil Procedure § 1281.8, provisional
injunctive relief may, but need not, be sought by either party to this
Separation Agreement in a court of law while arbitration proceedings are
pending, and any provisional injunctive relief granted by such court shall
remain effective until the matter is finally determined by the Arbitrator.  Final resolution of any dispute through
arbitration may include any remedy or relief which the Arbitrator deems just
and equitable, including any and all remedies provided by applicable state or
federal statutes.  At the conclusion of
the arbitration, the Arbitrator shall issue a written decision that sets forth
the essential findings and conclusions upon which the Arbitrator’s award or
decision is based.  Any award or relief
granted by the Arbitrator hereunder shall be final and binding on the parties
hereto and may be enforced by any court of competent jurisdiction.  The parties acknowledge and agree that they
are hereby waiving any rights to trial by jury in any action, proceeding or 

 

10

 

counterclaim brought by either of the parties against
the other in connection with any matter whatsoever arising out of or in any way
connected with this Separation Agreement or Executive’s employment.  The parties agree that (i) the Company
shall be responsible for payment of the forum costs of any arbitration
hereunder, including the Arbitrator’s fee, in connection with any proceeding to
enforce the terms of this Separation Agreement, and (ii) in any such
arbitration, the prevailing party shall be entitled to his or its reasonable
attorney’s fees and expenses, including costs of expert witnesses (if any)
(except that in all cases the Company shall be responsible for payment of the
forum costs of such arbitration, including the Arbitrator’s fee).

 

P.              Number and Gender.  Where
the context requires, the singular shall include the plural, the plural shall
include the singular, and any gender shall include all other genders.

 

Q.            Headings.  The section headings in this Separation
Agreement are for the purpose of convenience only and shall not limit or
otherwise affect any of the terms hereof.

 

R.             Taxes. 
The Company has the right to withhold from any payment hereunder or
under any other agreement between the Company and Executive the amount required
by law to be withheld with respect to such payment or other benefits provided
to Executive.  Other than as to such
withholding right, Executive shall be solely responsible for any taxes due as a
result of the payments and benefits received by Executive contemplated by this
Separation Agreement.

 

[Remainder of page intentionally
left blank.]

 

11

 

I have read the foregoing Separation Agreement and I
accept and agree to the provisions it contains and hereby execute it
voluntarily with full understanding of its consequences.

 

EXECUTED
this 18th day of March 2008, at Camarillo, California.

 

	
   

  	
  “Executive”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ William T. Yeates

  
	
   

  	
  William Yeates

  

 

 

EXECUTED
this 18th day of March 2008, at Camarillo, California.

 

	
   

  	
   “Company”

  
	
   

  	
   

  	
   

  
	
   

  	
  Power-One, Inc.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/   Clara Shokat-Fadai

  
	
   

  	
  By:

  	
  Clara Shokat-Fadai

  
	
   

  	
  Its:

  	
  Vice President, Global Human

  Resources

  

 

12

 

EXHIBIT
A

 

ACKNOWLEDGEMENT
AND WAIVER

 

I, William
Yeates, hereby acknowledge that I was given 21 days to consider the foregoing
Employment Separation and General Release Agreement and voluntarily chose to
sign the Employment Separation and General Release Agreement prior to the expiration
of the 21-day period.

 

I
declare under penalty of perjury under the laws of the state of California,
that the foregoing is true and correct.

 

EXECUTED
this 18th day of March 2008, at Camarillo, California.

 

 

	
   

  	
  /s/ William T. Yeates

  
	
   

  	
  William Yeates

  

 

C-1EXHIBIT 4.3

 

[FORM OF 2008 INVESTOR WARRANT]

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS.  THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN
THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL
IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

AMERICAN DEFENSE SYSTEMS, INC.

 

WARRANT TO PURCHASE COMMON SECURITIES

 

Warrant
No.:

 

Number
of Shares of Common Securities:

 

Date
of Issuance: March 7, 2008 (“Issuance
Date”)

 

American
Defense Systems, Inc., a Delaware corporation (the “Company”), hereby certifies that, for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, [WEST COAST OPPORTUNITY FUND, LLC] [CENTAUR VALUE FUND, LP]
[UNITED CENTAUR MASTER FUND], the registered holder hereof or its
permitted assigns (the “Holder”),
is entitled, subject to the terms set forth below, to purchase from the
Company, at the Exercise Price (as defined below) then in effect, upon
surrender of this Warrant to Purchase Common Securities (including any Warrants
to Purchase Common Securities issued in exchange, transfer or replacement
hereof, the “Warrant”), at any
time or times on or after the date hereof, but not after 11:59 p.m., New
York time, on the Expiration Date (as defined below), (x) prior to the
Public Company Date (as defined below), [THREE MILLION FIVE HUNDRED SIX
THOUSAND TWO HUNDRED AND FIFTY (3,506,250)] [ONE HUNDRED THIRTY THREE THOUSAND
(133,000)] [ONE HUNDRED TEN THOUSAND SEVEN HUNDRED AND FIFTY (110,750)]  fully paid
nonassessable shares (the “Warrant Securities”)
of common stock, par value $0.001 per share (the “Common Stock”).  Except as otherwise defined herein,
capitalized terms in this Warrant shall have the meanings set forth in Section 17.  This Warrant is one of the Warrants (the “SPA Warrants”) issued pursuant to Section 1
of that certain securities purchase agreement, dated as of March 7, 2008
(the 

 

 

 

 

 

“Subscription Date”), by and among
the Company and the investors (the “Buyers”)
referred to therein (the “Securities Purchase
Agreement”).

 

1.             EXERCISE
OF WARRANT.

 

(a)           Mechanics
of Exercise.  Subject to the terms and
conditions hereof (including, without limitation, the limitations, if any, set
forth in Section 1(f)), this Warrant may be exercised by the Holder on any
day on or after the date hereof, in whole or in part, by (i) delivery of a
written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this
Warrant and (ii) (A) payment to the Company of an amount equal to the
applicable Exercise Price multiplied by the number of Warrant Securities as to
which this Warrant is being exercised (the “Aggregate
Exercise Price”) in cash or by wire transfer of immediately
available funds or (B) by notifying the Company that this Warrant is being
exercised pursuant to a Cashless Exercise (as defined in
Section 1(d)).  The Holder shall not
be required to deliver the original Warrant in order to effect an exercise
hereunder.  Execution and delivery of the
Exercise Notice with respect to less than all of the Warrant Securities shall
have the same effect as cancellation of the original Warrant and issuance of a
new Warrant evidencing the right to purchase the remaining number of Warrant
Securities.  On or before the fifth (5th) Business Day following the date (the “Security Delivery Date”) on which the Company has received
each of the Exercise Notice and the Aggregate Exercise Price (the “Exercise Delivery Documents”), the Company shall (X) at
any time (A) prior to Public Company Date or (B) after the Public
Company Date if the Company’s transfer agent (the “Transfer
Agent”) is not participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, issue and
dispatch by overnight courier to the address as specified in the Exercise
Notice, a certificate, registered in the share register of the Company in the
name of the Holder or its designee, for the number of Warrant Securities to
which the Holder is entitled pursuant to such exercise or (Y) on or after
the Public Company Date, provided that the Transfer Agent is participating in
the DTC Fast Automated Securities Transfer Program and the Warrant Securities
do not require any legend, upon the request of the Holder, credit such
aggregate number of Warrant Securities to which the Holder is entitled pursuant
to such exercise to the Holder’s or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system.  Notwithstanding the foregoing, if prior to
the Public Company Date no Warrant Securities have been issued in certificated
form, in lieu of the Company’s or its Transfer Agent’s obligation to deliver
certificates with respect to such Warrant Securities to the Holder or its designee,
the Company shall amend the applicable schedules to the Securities Purchase
Agreement to list such Holder or its designee as the owner of such Warrant
Securities.  Upon delivery of the
Exercise Notice and Aggregate Exercise Price referred to in clause
(ii) above, the Holder shall be deemed for all corporate purposes to have
become the holder of record of the Warrant Securities with respect to which
this Warrant has been exercised, irrespective of the date of delivery of the
certificates, if any, evidencing such Warrant Securities.  If this Warrant is submitted in connection
with any exercise pursuant to this Section 1(a) and the number of
Warrant Securities represented by this Warrant submitted for exercise is
greater than the number of Warrant Securities being acquired upon an exercise,
then the Company shall as soon as practicable and in no event later than three
(3) Business Days after any exercise and at its own expense, issue a new
Warrant (in accordance with Section 8(d)) representing the right to
purchase the number of Warrant Securities purchasable immediately prior to such
exercise under this Warrant, less the number of Warrant Securities with respect
to which this Warrant is 

 

 

 

 

 

 

2

 

exercised. 
No fractional Warrant Securities are to be issued upon the exercise of
this Warrant, but rather the number of Warrant Securities to be issued shall be
rounded up to the nearest whole number.

 

(b)           Exercise
Price.  For purposes of this Warrant,
“Exercise Price” means (A) initially
$2.40 and (B) on and after May 30, 2008, if the Common Securities are
not listed on an Eligible Market, the then applicable Exercise Price shall be
decreased by $0.10 (as adjusted for stock splits, stock dividends, recapitalizations,
reorganizations, reclassifications, combinations, reverse stock splits or other
similar events) and shall further be decreased by $0.04 (as adjusted for stock
splits, stock dividends, recapitalizations, reorganizations, reclassifications,
combinations, reverse stock splits or other similar events) on each thirtieth
(30th) day thereafter until the Common Securities are listed on an Eligible
Market, provided, however, that all decreases under this clause (B) shall
in no event result in a reduction in excess of $0.24 (as adjusted for stock
splits, stock dividends, recapitalizations, reorganizations, reclassifications,
combinations, reverse stock splits or other similar events).

 

(c)           Company’s
Failure to Timely Deliver Securities. 
If, after the Public Company Date, the Company shall fail for any reason
or for no reason to issue to the Holder by the Security Delivery Date, a
certificate for the number of shares of Public Company Stock to which the
Holder is entitled and register such shares of Public Company Stock on the
Company’s share register or to credit the Holder’s balance account with DTC for
such number of shares of Public Company Stock to which the Holder is entitled
upon the Holder’s exercise of this Warrant, then, in addition to all other remedies
available to the Holder, but subject to the Limitation on damages contained in
the Certificate of Designations, the Company shall pay in cash to the Holder on
each day after such third (3rd) Business Day that the issuance of such shares
of Public Company Stock is not timely effected an amount equal to 1.0% of the
product of (A) the sum of the number of shares of Public Company Stock not
issued to the Holder on a timely basis and to which the Holder is entitled and
(B) the Closing Sale Price of the shares of Public Company Stock on the
Trading Day immediately preceding the last possible date which the Company
could have issued such shares of Public Company Stock to the Holder without
violating Section 1(a).  In addition
to the foregoing, if, after the Public Company Date, by the Security Delivery
Date the Company shall fail to issue and deliver a certificate to the Holder
and register such shares of Public Company Stock on the Company’s share
register or credit the Holder’s balance account with DTC for the number of
shares of Public Company Stock to which the Holder is entitled upon such
holder’s exercise hereunder, and if on or after such Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Public Company
Stock to deliver in satisfaction of a sale by the Holder of shares of Public
Company Stock issuable upon such exercise that the Holder anticipated receiving
from the Company (a “Buy-In”), then
the Company shall, within three (3) Business Days after the Holder’s
request and in the Holder’s discretion, either (i) pay cash to the Holder
in an amount equal to the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Public Company Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such shares of Public Company Stock) or
credit such Holder’s balance account with DTC shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate
or certificates representing such shares of Public Company Stock or credit such
Holder’s balance account with DTC and pay cash to the Holder in an amount equal
to the 

 

 

 

 

 

 

 

3

 

excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Public
Company Stock, times (B) the Closing Bid Price on the date of exercise.

 

(d)           Cashless
Exercise.  Notwithstanding anything contained
herein to the contrary, from and after the Public Company Date, the Holder may,
in its sole discretion, exercise this Warrant in whole or in part and, in lieu
of making the cash payment otherwise contemplated to be made to the Company
upon such exercise in payment of the Aggregate Exercise Price, elect instead to
receive upon such exercise the “Net Number” of shares of Public Company Stock
determined according to the following formula (a “Cashless Exercise”):

 

	
  Net Number = (A x B) -
  (A x C)

  
	
   

  
	
  B

  
	
   

  
	
  For purposes of the
  foregoing formula:

  

 

A= the total number of shares with respect to which this Warrant is
then being exercised.

 

B= the Closing Sale Price of the Public Company Stock (as reported by
Bloomberg) on the date immediately preceding the date of the Exercise Notice.

 

C= the Exercise Price then in effect for the applicable Warrant
Securities at the time of such exercise.

 

(e)           Disputes.  In the case of a dispute as to the
determination of the Exercise Price or the arithmetic calculation of the
Warrant Securities, the Company shall promptly issue to the Holder the number
of Warrant Securities that are not disputed and resolve such dispute in
accordance with Section 13.

 

(f)            Limitations
on Exercises.  At any time after the
date the Common Stock is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the “1934 Act”),
the Company shall not effect the exercise of this Warrant, and the Holder shall
not have the right to exercise this Warrant, to the extent that after giving
effect to such exercise, the Holder (together with such Holder’s affiliates)
would beneficially own in excess of 9.99% (the “Maximum
Percentage”) of the shares of Public Company Stock outstanding
immediately after giving effect to such exercise.  For purposes of the foregoing sentence, the
aggregate number of shares of Public Company Stock beneficially owned by such
Holder and its affiliates shall include the number of shares of Public Company
Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude shares of Public
Company Stock which would be issuable upon (i) exercise of the remaining,
unexercised portion of this Warrant beneficially owned by such Person and its
affiliates and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company beneficially owned
by such Holder and its affiliates (including, without limitation, any
convertible notes or convertible preferred securities or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein.  Except as set forth in the
preceding sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the 1934 Act.  For purposes of this Warrant, in 

 

 

4

 

determining the number of outstanding shares of Public Company Stock,
the Holder may rely on the number of outstanding shares of Public Company Stock
as reflected in (1) the Company’s most recent Form 10-K,
Form 10-KSB, Form 10-Q, Form 10-QSB, Current Report on
Form 8-K or other public filing with the Securities and Exchange
Commission, as the case may be, (2) a more recent public announcement by
the Company or (3) any other notice by the Company or the Transfer Agent
setting forth the number of shares of Public Company Stock outstanding.  For any reason at any time, upon the written
or oral request of the Holder, the Company shall within one (1) Business
Day confirm orally and in writing to the Holder the number of shares of Public Company
Stock then outstanding.  In any case, the
number of outstanding shares of Public Company Stock shall be determined after
giving effect to the conversion or exercise of securities of the Company,
including the SPA Warrants, by the Holder and its affiliates since the date as
of which such number of outstanding shares of Public Company Stock was
reported.  By written notice to the
Company, the Holder may from time to time increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such
notice; provided that (i) any such increase will not be effective until
the sixty-first (61st) day after such notice is delivered to the Company, and
(ii) any such increase or decrease will apply only to the Holder and not
to any other holder of SPA Warrants.  The
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this
Section 1(f) to correct this paragraph (or any portion hereof) which
may be defective or inconsistent with the intended beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such limitation.

 

(g)           Insufficient
Authorized Shares.  If at any time
while this Warrant remain outstanding the Company does not have a sufficient
number of authorized and unreserved Common Securities to satisfy its obligation
to reserve for issuance upon exercise of this Warrant at least a number of
Common Securities equal to 130% (the “Required Reserve Amount”) of the number of Common Securities as shall from time to time
be necessary to effect the exercise of all of this Warrant then outstanding (an
“Authorized
Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized Common Securities to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for this Warrant then
outstanding.  Without limiting the
generality of the foregoing sentence, as soon as practicable after the date of
the occurrence of an Authorized Share Failure, but in no event later than
ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an
increase in the number of authorized Common Securities.  In connection with such meeting, the Company
shall provide each shareholder with a proxy statement and shall use its best
efforts to solicit its shareholders’ approval of such increase in authorized
Common Securities and to cause its board of directors to recommend to the
shareholders that they approve such proposal.

 

2.             ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SECURITIES.  The Exercise Price and the number of Warrant
Securities shall be adjusted from time to time as follows:

 

(a)           Adjustment
upon Issuance of Common Securities. 
If and whenever on or after the Subscription Date and through the third
anniversary of the Public Company Date the Company issues or sells, or in
accordance with this Section 2 is deemed to have issued or sold, any
Common Securities (including the issuance or sale of Common Securities owned or
held by 

 

 

 

 

 

5

 

or for the account of the
Company, but excluding Common Securities deemed to have been issued by the
Company in connection with any Excluded Securities (as defined in the
Certificate of Designations) for a consideration per share (the “New Issuance Price”) less than the Exercise Price (the “Applicable Price”) in effect immediately prior
to such issue or sale or deemed issuance or sale (the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance,
the Exercise Price then in effect shall be reduced to an amount equal to the
product of (A) the Exercise Price in effect immediately prior to such
Dilutive Issuance and (B) the quotient determined by dividing (1) the
sum of (I) the product derived by multiplying the Exercise Price in effect
immediately prior to such Dilutive Issuance and the number of shares of Common
Securities Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the
consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the
product derived by multiplying (I) the Exercise Price in effect
immediately prior to such Dilutive Issuance by (II) the number of shares
of Common Securities Deemed Outstanding immediately after such Dilutive
Issuance.  Upon each such adjustment of
the Exercise Price hereunder, the number of Warrant Securities shall be
adjusted to the number of Common Securities determined by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Securities acquirable upon exercise of this Warrant immediately prior
to such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment.  For
purposes of determining the adjusted Exercise Price under this Section 2(a),
the following shall be applicable:

 

(i)            Issuance of Options.  If the Company in any manner grants any
Options and the lowest price per share for which one share of Common Securities
is issuable upon the exercise of any such Option or upon conversion, exercise
or exchange of any Convertible Securities issuable upon exercise of any such
Option is less than the Applicable Price, then such share of Common Securities
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share.  For purposes of this Section 2(a)(i),
the “lowest price per share for which one share of Common Securities is
issuable upon exercise of such Options or upon conversion, exercise or exchange
of such Convertible Securities” shall be equal to the sum of the lowest amounts
of consideration (if any) received or receivable by the Company with respect to
any one share of Common Securities upon the granting or sale of the Option,
upon exercise of the Option and upon conversion, exercise or exchange of any
Convertible Security issuable upon exercise of such Option.  No further adjustment of the Exercise Price
or number of Warrant Securities shall be made upon the actual issuance of such
Common Securities or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Securities upon conversion,
exercise or exchange of such Convertible Securities.

 

(ii)           Issuance of Convertible Securities.  If the Company in any manner issues or sells
any Convertible Securities and the lowest price per share for which one share
of Common Securities is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, 

 

 

 

 

 

 

 

 

 

 

6

 

then such share of Common Securities shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 2(a)(ii),
the “lowest price per share for which one share of Common Securities is
issuable upon the conversion, exercise or exchange” shall be equal to the sum
of the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of Common Securities upon the issuance or
sale of the Convertible Security and upon conversion, exercise or exchange of
such Convertible Security.  No further
adjustment of the Exercise Price or number of Warrant Securities shall be made
upon the actual issuance of such Common Securities upon conversion, exercise or
exchange of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of this Warrant has been or is to be made pursuant to other
provisions of this Section 2(a), no further adjustment of the Exercise
Price or number of Warrant Securities shall be made by reason of such issue or
sale.

 

(iii)          Change in Option Price or Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exercise or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exercisable or
exchangeable for Common Securities increases or decreases at any time, the
Exercise Price and the number of Warrant Securities in effect at the time of
such increase or decrease shall be adjusted to the Exercise Price and the
number of Warrant Securities which would have been in effect at such time had
such Options or Convertible Securities provided for such increased or decreased
purchase price, additional consideration or increased or decreased conversion
rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section 2(a)(iii),
if the terms of any Option or Convertible Security that was outstanding as of
the date of issuance of this Warrant are increased or decreased in the manner
described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Securities Stock deemed issuable upon
exercise, conversion or exchange thereof shall be deemed to have been issued as
of the date of such increase or decrease. 
No adjustment pursuant to this Section 2(a) shall be made if
such adjustment would result in an increase of the Exercise Price then in
effect or a decrease in the number of Warrant Securities.

 

(iv)          Calculation of Consideration Received.  In case any Option is issued in connection
with the issue or sale of other securities of the Company, together comprising
one integrated transaction (x) the Options will be deemed to have been
issued for a value determined by use of the Black Scholes Option Pricing Model
(the “Option Value”) and (y) the other
securities issued or sold in such integrated transaction shall be 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

deemed to have been issued for the difference
of (I) the aggregate consideration received by the Company, less (II) the
Option Value.  If any Common Securities,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor.  If any Common Securities, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of such consideration received by the Company will be the fair value
of such consideration, except where such consideration consists of publicly
traded securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such security on the date of
receipt.  If any Common Securities,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be the fair
value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Securities, Options or Convertible
Securities, as the case may be.  The fair
value of any consideration other than cash or publicly traded securities will
be determined jointly by the Company and the Required Holders.  If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation
(the “Valuation Event”), the fair
value of such consideration will be determined within five (5) Business
Days after the tenth day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required
Holders.  The determination of such
appraiser shall be final and binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the Company.

 

(v)           Record Date. 
If the Company takes a record of the holders of Common Securities for
the purpose of entitling them (A) to receive a dividend or other
distribution payable in Common Securities, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Securities, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Securities deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.

 

(b)           Adjustment
upon Subdivision or Combination of Common Securities.  If the Company at any time on or after the
Subscription Date subdivides (by any security split, security dividend, recapitalization
or otherwise) one or more classes of its outstanding Common Securities into a
greater number of Common Securities, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced and the number of
Warrant Securities will be proportionately increased.  If the Company at any time on or after the
Subscription Date combines (by combination, reverse security split or
otherwise) one or more classes of its outstanding Common Securities into a
smaller number of Common Securities, the Exercise Price 

 

 

8

 

in effect immediately prior to such
combination will be proportionately increased and the number of Warrant
Securities will be proportionately decreased. 
Any adjustment under this Section 2(b) shall become effective
at the close of business on the date the subdivision or combination becomes
effective.

 

(c)           Other
Events.  If any event occurs of the
type contemplated by the provisions of this Section 2 but not expressly
provided for by such provisions (including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate
adjustment in the Exercise Price and the number of Warrant Securities so as to
protect the rights of the Holder; provided that no such adjustment pursuant to
this Section 2(c) will increase the Exercise Price or decrease the
number of Warrant Securities as otherwise determined pursuant to this Section 2.

 

3.             RIGHTS
UPON DISTRIBUTION OF ASSETS.  If the
Company shall declare or make any dividend or other distribution of its assets
(or rights to acquire its assets) to holders of Common Securities, by way of
return of capital or otherwise (including, without limitation, any distribution
of cash, stock or other securities, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement, scheme of arrangement or
other similar transaction) (a “Distribution”),
at any time after the issuance of this Warrant, then, in each such case:

 

(a)           any
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of Common Securities
entitled to receive the Distribution shall be reduced, effective as of the
close of business on such record date, to a price determined by multiplying
such Exercise Price by a fraction of which (i) the numerator shall be the
Closing Bid Price of the Common Securities on the Trading Day immediately
preceding such record date minus the value of the Distribution (as determined
in good faith by the Company’s Board of Directors) applicable to one share of
Common Securities, and (ii) the denominator shall be the Closing Bid Price
of the Common Securities on the Trading Day immediately preceding such record
date; and

 

(b)           the
number of Warrant Securities shall be increased to a number of shares equal to
the number of Common Securities obtainable immediately prior to the close of
business on the record date fixed for the determination of holders of Common
Securities entitled to receive the Distribution multiplied by the reciprocal of
the fraction set forth in the immediately preceding paragraph (a); provided
that in the event that the Distribution is of Common Securities (or common
stock) (“Other Shares of Common Stock”)
of a company whose common shares are traded on a national securities exchange
or a national automated quotation system, then the Holder may elect to receive
a warrant to purchase Other Shares of Common Stock in lieu of an increase in
the number of Warrant Securities, the terms of which shall be identical to
those of this Warrant, except that such warrant shall be exercisable into the
number of shares of Other Shares of Common Stock that would have been payable
to the Holder pursuant to the Distribution had the Holder exercised this
Warrant immediately prior to such record date and with an aggregate exercise
price equal to the product of the amount by which the exercise price of this Warrant
was decreased with respect to the Distribution pursuant to the terms of the
immediately preceding paragraph (a) and the number of Warrant Securities
calculated in accordance with the first part of this paragraph (b).

 

 

 

 

9

 

4.             PURCHASE
RIGHTS; FUNDAMENTAL TRANSACTIONS.

 

(a)           Purchase
Rights.  In addition to any
adjustments pursuant to Section 2 above, if at any time the Company
grants, issues or sells any Options, Convertible Securities or rights to purchase
stock, warrants, securities or other property pro rata to the record holders of
any class of Common Securities (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the
terms applicable to such Purchase Rights, the aggregate Purchase Rights which
the Holder could have acquired if the Holder had held the number of Common
Securities acquirable upon complete exercise of this Warrant (without regard to
any limitations on the exercise of this Warrant) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Securities are to be determined for the grant, issue or sale of such
Purchase Rights.

 

(b)           Fundamental Transactions.  The
Company shall not enter into or be party to a Fundamental Transaction unless
the Successor Entity assumes in writing all of the obligations of the Company
under this Warrant and the other Transaction Documents in accordance with the
provisions of this Section (4)(b) pursuant to written agreements in form and
substance reasonably satisfactory to the Required Holders and approved by the
Required Holders prior to such Fundamental Transaction, including agreements to
deliver to each holder of Warrants in exchange for
such Warrants a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Warrant, including, without limitation, an adjusted
exercise price equal to the value for the Common Securities reflected by the
terms of such Fundamental Transaction, and exercisable for a corresponding
number of shares of capital stock equivalent to the Common Securities
acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental
Transaction, and satisfactory to the Required Holders.  Upon
the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Warrant referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every
right and power of the Company and shall assume all of the obligations of the
Company under this Warrant with the same effect as if such Successor Entity had
been named as the Company herein.  Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon exercise of this Warrant at any time after the consummation
of the Fundamental Transaction, in lieu of the shares of the Common
Securities (or

 

 

10

 

 

other securities, cash, assets or other property) purchasable upon the
exercise of the Warrant prior to such Fundamental Transaction, such shares of
the publicly traded Common Securities (or its equivalent) of the Successor
Entity (including its Parent Entity) which the Holder would have been entitled
to receive upon the happening of such Fundamental Transaction had this Warrant been converted immediately prior to such
Fundamental Transaction, as adjusted in accordance with the provisions of this Warrant. 
In addition to and not in substitution for any other rights hereunder,
prior to the consummation of any Fundamental Transaction pursuant to which
holders of Common Securities are entitled to receive securities or other assets
with respect to or in exchange for Common Securities (a “Corporate
Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon an exercise of this
Warrant at any time after the consummation of the Fundamental Transaction but
prior to the Expiration Date, in lieu of the Common Securities (or other
securities, cash, assets or other property) purchasable upon the exercise of
the Warrant prior to such Fundamental Transaction, such shares of stock,
securities, cash, assets or any other property whatsoever (including warrants
or other purchase or subscription rights) which the Holder would have been
entitled to receive upon the happening of such Fundamental Transaction had the
Warrant been exercised immediately prior to such Fundamental Transaction.  Provision made pursuant to the preceding
sentence shall be in a form and substance reasonably satisfactory to the
Required Holders.  The provisions of this
Section shall apply similarly and equally to successive Fundamental Transactions
and Corporate Events and shall be applied without regard to any limitations on
the exercise of this Warrant.

 

(c)           Notwithstanding
the foregoing and the provisions of Section 4(b) above, in the event
of a Fundamental Transaction (other than a Fundamental Transaction of the type
described in clause (v) of the definition thereof in
which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities), at the
request of the Holder delivered before the ninetieth (90th) day after the consummation of such Fundamental
Transaction, the Company (or the Successor Entity) shall purchase this Warrant
from the Holder by paying to the Holder, within five (5) Business Days of
such request (or, if later, on the effective date of the Fundamental
Transaction), cash in an amount equal to the Black Scholes Value of the
remaining unexercised portion of this Warrant on the date of such Fundamental
Transaction.

 

5.             COMPANY OPTIONAL EXERCISE.

 

(a)           Optional Exercise. 
If (A) (x) at any time after the second (2nd)
anniversary of the Public Company Date (the “Optional
Exercise Eligibility Date”), (i) the median price of the
Weighted Average Price of the Common Securities over any consecutive thirty
(30) Trading Day period occurring after the Optional Exercise Eligibility Date
(an “Optional Exercise Measuring Period”)
is greater than $3.00 (subject to adjustment for stock splits, stock dividends,
recapitalizations, reorganizations, reclassification, combinations, reverse
stock splits or other similar events) and (ii) the median trading volume
(as reported on Bloomberg) of the Common Securities on the Principal Market
over the Optional Exercise Measuring Period is greater than 75,000 shares  of Common Securities or (y) at any time the after the
six (6) month anniversary of the completion of a Qualified Public Offering
and (B) there has been no Equity Conditions Failure (unless the Holder has
waived such Equity Conditions Failure), the Company shall have the right to
require the Holder to exercise as of the Optional Exercise Date all or any
portion of this Warrant (an “Optional
Exercise”) at an exercise price equal to the then applicable
Exercise Price.  The Company may exercise
its right to require exercise of this Warrant under this Section 5(a) by
delivering a written notice thereof by facsimile and overnight courier to all,
but not less than all, of the holders of SPA Warrants and the Company’s transfer
agent (the “Optional Exercise Notice”
and the date all of the holders received such notice is referred to as the “Optional Exercise Notice Date”) no later
than ten (10) Trading Days after the applicable Optional Exercise
Measuring Period.  The Optional Exercise
Notice delivered shall be irrevocable and shall state (A) the date on
which the Optional Exercise shall occur (the “Optional
Exercise Date”) which date shall be the fifteenth (15th)
Trading Day 

 

 

 

11

 

after the Optional Exercise
Notice Date, and (B) the aggregate number of Warrant Securities which the
Company has elected to be subject to Optional Exercise by all of the holders of
the SPA Warrants pursuant to this Section 5(a) (and analogous provisions
under the other SPA Warrants) on the Optional Exercise Date.  Notwithstanding the foregoing, nothing in
this subsection shall prevent the Holder from exercising this Warrant, in whole
or part, prior to such Optional Exercise Date.

 

(b)           Pro Rata Exercise Requirement.  If the Company elects to cause an Optional
Exercise pursuant to Section 5(a), then it must simultaneously take the
same action with respect to the other SPA Warrants.  If the Company elects to cause an Optional
Exercise pursuant to Section 5(a) (or similar provisions under the
other SPA Warrants) with respect to less than all of the Warrant Securities
underlying the SPA Warrants then outstanding, then the Company shall require
exercise of the Warrant Securities from each of the holders of the SPA Warrants
equal to the product of (i) the aggregate number of Warrant Securities
which the Company has elected to cause to be exercised pursuant to Section 5(a),
multiplied by (ii) a fraction, the numerator of which is the sum of the
aggregate number of Warrant Securities underlying the SPA Warrants issued to
such holder pursuant to the Securities Purchase Agreement and the denominator
of which is the sum of the aggregate number of Warrant Securities underlying
the SPA Warrants issued to all holders pursuant to the Securities Purchase
Agreement (such fraction with respect to each holder is referred to as its “Exercise Allocation
Percentage”, and such amount with respect to each holder is referred
to as its “Pro Rata Exercise Amount”).  In the event that the initial holder of any
SPA Warrants shall sell or otherwise transfer any of such holder’s SPA
Warrants, the transferee shall be allocated a pro rata portion of such holder’s
Exercise Allocation Percentage and Pro Rata Exercise Amount.

 

6.             NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its articles of incorporation, bylaws or
other organization documents or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the Holder.  Without limiting the generality of the
foregoing, the Company (i) shall not increase the par value of any Warrant
Securities receivable upon the exercise of this Warrant above the Exercise Price
then in effect, (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Securities upon the exercise of this Warrant, and (iii) shall,
so long as any of the SPA Warrants are outstanding, take all action necessary
to reserve and keep available out of its authorized and unissued shares of
Common Securities, solely for the purpose of effecting the exercise of the SPA
Warrants, 130% of the number of shares of Common Securities as shall from time
to time be necessary to effect the exercise of the SPA Warrants then
outstanding (without regard to any limitations on exercise).

 

7.             WARRANT HOLDER NOT DEEMED A
SECURITY HOLDER.  Except as otherwise
specifically provided herein, the Holder, solely in such Person’s capacity as a
holder of this Warrant, shall not be entitled to vote or receive dividends or
be deemed the holder of Common Securities of the Company for any purpose, nor
shall anything contained in this Warrant be construed to confer upon the
Holder, solely in such Person’s capacity as the Holder of 

 

 

 

 

 

 

12

 

this
Warrant, any of the rights of a security holder of the Company or any right to
vote, give or withhold consent to any corporate action (whether any
reorganization, issue of Common Securities, reclassification of Common
Securities, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the Holder of the Warrant Securities which such Person is then
entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this
Warrant shall be construed as imposing any liabilities on the Holder to
purchase any securities (upon exercise of this Warrant or otherwise) or as a
security holder of the Company, whether such liabilities are asserted by the
Company or by creditors of the Company. 
Notwithstanding this Section 7, the Company shall provide the
Holder with copies of the same notices and other information given to the
security holders of the Company generally, contemporaneously with the giving
thereof to the security holders.

 

8.             REISSUANCE
OF WARRANTS.

 

(a)           Transfer
of Warrant.  If this Warrant is to be
transferred, the Holder shall surrender this Warrant to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new
Warrant (in accordance with Section 8(d)), registered as the Holder may
request, representing the right to purchase the number of Warrant Securities
being transferred by the Holder and, if less then the total number of Warrant
Securities then underlying this Warrant is being transferred, a new Warrant (in
accordance with Section 8(d)) to the Holder representing the right to
purchase the number of Warrant Securities not being transferred.

 

(b)           Lost,
Stolen or Mutilated Warrant.  Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender
and cancellation of this Warrant, the Company shall execute and deliver to the
Holder a new Warrant (in accordance with Section 8(d)) representing the
right to purchase the Warrant Securities then underlying this Warrant.

 

(c)           Warrant
Exchangeable for Multiple Warrants. 
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Company, for a new Warrant or Warrants (in
accordance with Section 8(d)) representing in the aggregate the right to
purchase the number of Warrant Securities then underlying this Warrant, and
each such new Warrant will represent the right to purchase such portion of such
Warrant Securities as is designated by the Holder at the time of such
surrender; provided, however, that no Warrants for fractional Warrant
Securities shall be given.

 

(d)           Issuance
of New Warrant.  Whenever the Company
is required to issue a new Warrant pursuant to the terms of this Warrant, such
new Warrant (i) shall be of like tenor with this Warrant, (ii) shall
represent, as indicated on the face of such new Warrant, the right to purchase
the Warrant Securities then underlying this Warrant (or in the case of a new
Warrant being issued pursuant to Section 8(a) or Section 8(c),
the Warrant Securities designated by the Holder which, when added to the number
of Securities underlying the other new Warrants issued in connection with such
issuance, does not exceed the number of Warrant Securities then 

 

 

 

 

13

 

underlying this Warrant), (iii) shall
have an issuance date, as indicated on the face of such new Warrant which is
the same as the Issuance Date, and (iv) shall have the same rights and
conditions as this Warrant.

 

9.             NOTICES. 
Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of
the Securities Purchase Agreement.  The
Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Warrant, including in reasonable detail a description of
such action and the reason therefore. 
Without limiting the generality of the foregoing, the Company will give
written notice to the Holder (i) immediately upon any adjustment of the
Exercise Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least fifteen (15) days prior
to the date on which the Company closes its books or takes a record (A) with
respect to any dividend or distribution upon the Warrant Securities, (B) with
respect to any grants, issues or sales of any Options, Convertible Securities
or rights to purchase Common Securities, warrants, securities or other property
to holders of Warrant Securities or (C) for determining rights to vote
with respect to any dissolution or liquidation, provided in each case,
following the Public Company Date, that such information shall be made known to
the public prior to or in conjunction with such notice being provided to the
Holder.

 

10.           AMENDMENT AND WAIVER.  Except as otherwise provided herein, the provisions
of this Warrant may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Required Holders;
provided that no such action may increase the exercise price of any SPA
Warrants or decrease the number of Warrant Securities or class of Warrant
Securities obtainable upon exercise of any SPA Warrants without the written
consent of the Holder.  No such amendment
shall be effective to the extent that it applies to less than all of the
holders of the SPA Warrants then outstanding.

 

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

 

12.           CONSTRUCTION; HEADINGS.  This Warrant shall be deemed to be jointly
drafted by the Company and the Holder and shall not be construed against any
Person as the drafter hereof.  The
headings of this Warrant are for convenience of reference and shall not form
part of, or affect the interpretation of, this Warrant.

 

13.           DISPUTE RESOLUTION. 
In the case of a dispute as to the determination of the Exercise Price
or the arithmetic calculation of the Warrant Securities, the Company shall
submit the disputed determinations or arithmetic calculations via facsimile
within two (2) Business Days of receipt of the Exercise Notice giving rise
to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to
agree upon such determination or calculation of the Exercise Price or the
Warrant Securities within three (3) Business Days of such 

 

 

 

 

 

14

 

disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within two (2) Business Days submit via facsimile (a) the disputed
determination of the Exercise Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the
disputed arithmetic calculation of the Warrant Securities to the Company’s
independent, outside accountant.  The
Company shall cause at its expense the investment bank or the accountant, as
the case may be, to perform the determinations or calculations and notify the
Company and the Holder of the results no later than ten Business Days from the
time it receives the disputed determinations or calculations.  Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.

 

14.           REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF.  The remedies provided in
this Warrant shall be cumulative and in addition to all other remedies
available under this Warrant and the other Transaction Documents, at law or in
equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the right of the Holder right to pursue
actual damages for any failure by the Company to comply with the terms of this
Warrant.  The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to the
Holder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

 

15.           TRANSFER. This Warrant and the Warrant
Securities may not be offered for sale, sold, transferred, pledged or assigned
without the consent of the Company, except as may otherwise be permitted under Section 2(h) of
the Securities Purchase Agreement.

 

16.           SEVERABILITY. If any provision
of this Agreement is prohibited by law or otherwise determined to be invalid or
unenforceable by a court of competent jurisdiction, the provision that would
otherwise be prohibited, invalid or unenforceable shall be deemed amended to
apply to the broadest extent that it would be valid and enforceable, and the
invalidity or unenforceability of such provision shall not affect the validity
of the remaining provisions of this Agreement so long as this Agreement as so
modified continues to express, without material change, the original intentions
of the parties as to the subject matter hereof and the prohibited nature,
invalidity or unenforceability of the provision(s) in question does not
substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise
be conferred upon the parties.  The parties
will endeavor in good faith negotiations to replace the prohibited, invalid or
unenforceable provision(s) with a valid provision(s), the effect of which
comes as close as possible to that of the prohibited, invalid or unenforceable
provision(s).

 

17.           CERTAIN DEFINITIONS.  For purposes of this Warrant, the following
terms shall have the following meanings:

 

(a)           “Black Scholes Value” means the value of this Warrant based
on the Black and Scholes Option Pricing Model obtained from the “OV” function
on Bloomberg determined as of the day of closing of the applicable Fundamental
Transaction for pricing 

 

 

 

15

 

purposes and reflecting (i) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the
remaining term of this Warrant as of such date of request, (ii) an
expected volatility equal to the lesser of 75% and the 100 day volatility
obtained from the HVT function on Bloomberg as of the day immediately following
the public announcement of the applicable Fundamental Transaction and (iii) the
underlying price per share used in such calculation shall be the sum of the
price per share being offered in cash, if any, plus the value of any non cash
consideration, if any, being offered in the Fundamental Transaction.

 

(b)           “Bloomberg” means Bloomberg Financial
Markets.

 

(c)           “Board of Directors” means the board of directors of the
Company.

 

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

 

(e)           “Certificate of Designations” means the
certificate of designations for the Series A Convertible Preferred Stock
in the form attached as Exhibit A to the Securities Purchase
Agreement.

 

(f)            “Closing Bid Price” and “Closing Sale Price” means, for any security
as of any date on or after the Public Company Date, the last closing bid price
and last closing trade price, respectively, for such security on the Principal
Market, as reported by Bloomberg, or, if the Principal Market begins to operate
on an extended hours basis and does not designate the closing bid price or the
closing trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m., New York
Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing bid price or last trade price, respectively, of such security on the
principal securities exchange or trading market where such security is listed
or traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). 
If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases either before
or after the Public Company Date, the Closing Bid Price or the Closing Sale
Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 13. 
All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.

 

(g)           “Common Securities” means (x) prior to the Public
Company Date, the shares of Common Stock or (y) after the Public Company
Date, the Public Company Stock.

 

 

 

 

 

16

 

(h)           “Common Securities Deemed
Outstanding” means, at any given time, the number of shares of
Common Securities actually outstanding at such time, plus the number of shares
of Common Securities deemed to be outstanding pursuant to Sections 2(a)(i) and
2(a)(ii) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, but excluding any Common
Securities owned or held by or for the account of the Company or issuable upon
exercise of the SPA Warrants.

 

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

 

(j)            “Eligible
Market” means The New York Stock Exchange, Inc., the
American Stock Exchange, The NASDAQ Global Market, The NASDAQ Global Select
Market or The NASDAQ Capital Market.

 

(k)           “Equity Conditions” means:  (i) on each day during the
period beginning thirty (30) days prior to the applicable date of determination
and ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”),
either (x) with respect to Dividend Shares (as defined in the Certificate
of Designations), a registration statement covering the Dividend Shares shall
be effective and available for the resale of all Dividend Shares not previously
sold, provided that the foregoing condition shall not apply prior to the
one-year anniversary of the Public Company Date, or (y) all shares of
Common Securities issued and issuable upon conversion of the Preferred Shares
(as defined in the Certificate of Designations), and upon cashless exercise of
the Warrants shall be eligible for sale pursuant to Rule 144 without
restriction or limitation including without the requirement to be subject to Rule 144(c)(1) and
without the need for registration under any applicable federal or state
securities laws; provided, however, that the foregoing condition shall not
apply prior to September 30, 2008, (ii) on each day during the Equity
Conditions Measuring Period, the Common Securities designated for quotation on
an Eligible Market and shall not have been suspended from trading on such
Eligible Market (other than suspensions of not more than five (5) days due
to business announcements by the Company) nor shall proceedings for such
delisting or suspension by such Eligible Market have been commenced, threatened
or pending either (A) in writing by such Eligible Market or (B) by
falling below the minimum listing maintenance requirements of such Eligible
Market; provided, however, that the foregoing condition shall not apply prior
to September 30, 2008, (iii) on each day during the Equity Conditions
Measuring Period, the Company shall have delivered Common Securities upon
conversion of the Preferred Shares, as Dividend Shares and upon exercise of the
Warrants to the Holders on a timely basis as set forth in Section 2(d)(ii) of
the Certificate of Designations and Section 1(a) hereof,
respectively; (iv) any applicable Common Securities to be issued in
connection with the event requiring determination may be issued in full without
violating Section 8 of the Certificate of Designations or the rules or
regulations of the applicable Eligible Market; (v) during the Equity
Conditions Measuring Period, the Company shall not have failed to timely make
any payments when such payment is due pursuant to any Transaction Document (as
defined in the Securities Purchase Agreement) if such failure shall have
continued uncured for five (5) or more Business Days; (vi) during the
Equity Conditions Measuring Period, there shall not have occurred a Triggering
Event (as defined in the Certificate of Designations) or an event that with the
passage of time or giving of notice would constitute a Triggering Event; and (vii) 

 

 

 

 

 

17

 

the Company shall have no knowledge of any
fact that would cause (x) with respect to Dividend Shares, any
registration statements covering the Dividend Shares not to be effective and
available for the resale of all Dividend Shares not previously sold, provided
that the foregoing condition shall not apply prior to the one-year anniversary
of the Public Company Date, or (y) all shares of Common Stock issued and
issuable upon conversion of the Preferred Shares, as Dividend Shares and upon
cashless exercise of the Warrants not to be eligible for sale pursuant to Rule 144
without restriction or limitation including without the requirement to be
subject to Rule 144(c)(1) and without the need for registration under
any applicable federal or state securities laws.

 

(l)            “Equity
Conditions Failure” means that during the period commencing on the
first Trading Day of the Optional Exercise Measuring Period through the
Optional Exercise Date, the Equity Conditions have not been satisfied (or
waived in writing by the Holder).

 

(m)          “Expiration Date” means the date that is
thirty-six (36) months after the Public Company Date or, if such date falls on
a day other than a Business Day or on which trading does not take place on the
Principal Market (a “Holiday”),
the next date that is not a Holiday.

 

(n)           “Fundamental Transaction” means that the
Company shall, directly or indirectly, in one or more
related transactions, (i) consolidate or merge with or into (whether or not
the Company is the surviving corporation) another Person, or (ii) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of
the properties or assets of the Company to another Person, or (iii) allow another Person
to make a purchase, tender or exchange offer that is accepted by the holders of
more than the 50% of the outstanding Common Securities (not
including any Common Securities held by the Person
or Persons making or party to, or associated or affiliated with the Person or Persons
making or party to, such purchase, tender or exchange offer), or (iv) consummate
a stock purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding Common Securities (not
including any Common Securities held by the other
Person or other Persons making or party to, or associated or affiliated with
the other Persons making or party to, such stock purchase agreement or other
business combination), or (v) reorganize, recapitalize or
reclassify its Common Securities, or (vi) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Common Securities.

 

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

 

(p)           “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable
Person and whose common stock or equivalent equity security is quoted
or listed on an Eligible Market,
or, if there is more than one such Person or Parent 

 

 

 

 

 

 

18

 

Entity,
the Person or Parent Entity with the largest public market capitalization as of
the date of consummation of the Fundamental Transaction.

 

(q)           “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any
department or agency thereof.

 

(r)            “Principal Market” means the Eligible Market
that the Company’s Public Company Stock is traded immediately following the
Public Company Date.

 

(s)           “Public Company Date” means the date the shares of Common
Stock of the Company (or its successor by merger, recapitalization,
reorganization, or otherwise) is registered under the 1934 Act or the
Securities Act of 1933, as amended (the “1933 Act”) (a “Public Company Event”).

 

(t)            “Public Company Stock” means shares of the class of common equity
of the Company registered under the 1934 Act or the 1933 Act.

 

(u)           “Qualified  Public Offering”
means a public offering of the Common Stock at a price of at least $4.00 per
share (subject to adjustment for stock splits, stock dividends, recapitalizations,
reorganizations, reclassification, combinations, reverse stock splits or other
similar events) which generates gross proceeds to the Company in excess of
$25,000,000; provided, however, that such public offering may not
(i) include warrants with an exercise price of less than $5.00 (subject to
adjustment for stock splits, stock dividends, recapitalizations,
reorganizations, reclassification, combinations, reverse stock splits or other
similar events) and (ii) the number of warrants may not exceed fifty percent
(50%) of the shares of Common Stock being offered in such public offering.

 

(v)           “Required Holders” means the holders of the
SPA Warrants representing at least a majority of Warrant Securities underlying
the SPA Warrants then outstanding.

 

(w)          “SPA Securities” means the Preferred Shares
issued pursuant to the Securities Purchase Agreement.

 

(x)            “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent
Entity) formed by, resulting from or surviving any Fundamental Transaction or
the Person (or, if so elected by the Required Holders, the Parent Entity) with
which such Fundamental Transaction shall have been entered into.

 

(y)           “Trading Day” means (i) prior to the Public
Company Date, any Business Day or (ii) on or after the Public Company
Date, any day on which the Public Company Stock is traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the
Public Company Stock, then on the principal securities exchange or securities
market on which the Public Company Stock is then traded; provided that “Trading
Day” shall not include any day on which the Public Company Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Public Company Stock are suspended from trading during the final hour of
trading on such exchange or market (or if such exchange or 

 

19

 

market does not designate in advance the
closing time of trading on such exchange or market, then during the hour ending
at 4:00:00 p.m., New York time).

 

(z)            “Weighted Average Price” means, for any
security as of any date, the dollar volume-weighted average price for such
security on the Principal Market during the period beginning at 9:30:01 a.m.,
New York City Time, and ending at 4:00:00 p.m., New York City Time, as
reported by Bloomberg through its “Volume at Price” function or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York City
Time, and ending at 4:00:00 p.m., New York City Time, as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the Required Holders.  If the Company and the Required Holders are
unable to agree upon the fair market value of the Common Securities, then such
dispute shall be resolved pursuant to Section 13 below with the term
“Weighted Average Price” being substituted for the term “Closing Sale Price.”
All such determinations shall be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period.

 

[Signature Page Follows]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

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

 

	
   

  	
   

  	
  AMERICAN DEFENSE SYSTEMS, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
						

 

 

 

 

 

 

 

 

 

 

 

 

21

 

EXHIBIT A

 

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO 

EXERCISE THIS WARRANT TO PURCHASE COMMON SECURITIES

 

AMERICAN DEFENSE SYSTEMS, INC.

 

                The undersigned holder hereby
exercises the right to purchase
                                  
of shares of Common Securities (“Warrant
Securities”) of American Defense Systems, Inc., a Delaware
corporation (the “Company”),
evidenced by the attached Warrant (the “Warrant”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

 

                1.  Form of Exercise
Price.  The Holder intends that payment
of the Exercise Price shall be made as:

 

	
   

  	
   

  	
  a
  “Cash Exercise” with respect to

  	
   

  	
  Warrant
  Securities; and/or

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  a
  “Cashless Exercise” with respect to

  	
   

  	
  Warrant
  Securities.

  

 

 

                2.  Payment of Exercise Price.  In the event that the holder has elected a
Cash Exercise with respect to some or all of the Warrant Securities to be
issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in
the sum of
$                                      
to the Company in accordance with the terms of the Warrant.

 

                3.  Delivery of Warrant Securities.  The Company shall deliver to the holder
                    
Warrant Securities in accordance with the terms of the Warrant.

 

	
  Date:
                                
      ,

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  Name of Registered Holder

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
				

 

 

 

ACKNOWLEDGMENT

 

                The Company hereby acknowledges
this Exercise Notice and, if after the Public Company Date, hereby directs the
Transfer Agent to issue the
above indicated number of Warrant Securities.

 

	
   

  	
  AMERICAN DEFENSE SYSTEMS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

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