Document:

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE
AGREEMENT (the “Agreement”), dated as of February 26, 2003
by and among SuperGen, Inc., a Delaware corporation, with headquarters located
at 4140 Dublin Boulevard, Suite 200, Dublin, California 94568 (the “Company”),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

A.  The Company and each Buyer is executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Section 4(2) of the Securities Act of 1933, as amended
(the “1933
Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated
by the United States Securities and Exchange Commission (the “SEC”)
under the 1933 Act;

 

B.  The Company has authorized senior
exchangeable convertible notes of the Company in the form attached hereto as Exhibit
A (together with any senior exchangeable convertible notes issued in
replacement or exchange thereof in accordance with the terms thereof, the “Notes”),
which Notes shall be, in accordance with the terms of the Notes, in whole or in
part, (i) convertible into shares of the Company’s common stock, par value
$.001 per share (“Company Common Stock”) (as converted, the “Conversion
Shares”) and (ii) exchangeable for up to an aggregate of 2,634,211
shares (the “AVII Shares”) of the common stock, par value $.0001 per share
(“AVII
Common Stock”), of AVI BioPharma, Inc. (“AVII”);

 

C.  The Notes bear interest, which at the option
of the Company, subject to certain conditions, may be paid in shares of Company
Common Stock (“Interest Shares”);

 

D.  The Company is agreeing to pledge the AVII
Shares to secure its obligations (i) to pay interest on and principal of the
Notes and (ii) to deliver AVII Shares to the Buyers upon exchange or otherwise
pursuant to the terms of the Notes.  The
pledge will be evidenced by the Pledge Agreement, dated as of the date hereof,
by and among the Company and the Buyers, substantially in the form attached
hereto as Exhibit B (the “Pledge Agreement”), and the Securities
Account Control Agreement, dated as of the date hereof, by and among the
Company, the Buyers and Mellon Investor Services, LLC, as Custodian (the “Custodian”),
substantially in the form attached hereto as Exhibit C (the “Securities
Account Control Agreement”);

 

E.  Each Buyer wishes to purchase, severally but
not jointly, and the Company wishes to sell, upon the terms and conditions
stated in this Agreement, (i) that aggregate principal amount of Notes set
forth opposite such Buyer’s name in column (3) on the Schedule of Buyers (which
aggregate principal amount for all Buyers shall be $21,250,000) and (ii)
warrants, in substantially the form attached hereto as Exhibit D (the “Warrants”),
to acquire that number of shares of Company Common Stock (as exercised,
collectively, the “Warrant Shares”) set forth opposite such
Buyer’s name in column (4) on the Schedule of Buyers;

 

F.  Contemporaneously with the execution and
delivery of this Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement, substantially in the form

 

 

attached
hereto as Exhibit E (the “Registration Rights Agreement”), pursuant
to which the Company has agreed to provide certain registration rights with
respect to the Conversion Shares, the Warrant Shares and the Interest Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws; and

 

G.  The Notes, the Conversion Shares, the
Interest Shares, the Warrants and the Warrant Shares collectively are referred
to herein as the “Securities”.

 

NOW, THEREFORE,
the Company and each Buyer hereby agree as follows:

 

1.  PURCHASE AND SALE OF NOTES AND
WARRANTS.

 

(a)  Purchase of Notes and Warrants.

 

(i)            Notes and Warrants.  Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the
Company shall issue and sell to each Buyer, and each Buyer severally, but not
jointly, agrees to purchase from the Company on the Closing Date (as defined
below), a principal amount of Notes, as is set forth opposite such Buyer’s name
in column (3) on the Schedule of Buyers,  along with Warrants to acquire that number
of Warrant Shares as is set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers.

 

(ii)           Closing.  The closing (the “Closing”) of the purchase of
the Notes and the Warrants by the Buyers shall occur at the offices of Schulte
Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.  The date and time of the Closing (the “Closing Date”)
shall be 10:00 a.m., New York City Time, on the date hereof, subject to
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6(a) and 7(a) below (or such later date as is mutually agreed
to by the Company and each Buyer).

 

(iii)          Purchase Price.  The purchase price for each Buyer (the “Purchase
Price”) of the Notes and related Warrants to be purchased by each
such Buyer at the Closing shall be equal to $1.00 for each $1.00 of principal
amount of Notes being purchased by such Buyer at the Closing.

 

(b)  Form of Payment.  On the Closing Date, (i) each Buyer shall
pay its aggregate Purchase Price to the Company for the Notes and the Warrants
to be issued and sold to such Buyer at the Closing, by wire transfer of
immediately available funds in accordance with the Company’s written wire
instructions, and (ii) the Company shall deliver to each Buyer the Notes
(in the principal amounts as such Buyer shall have requested prior to the Closing)
which such Buyer is then purchasing along with the Warrants (in the amounts as
such Buyer shall have requested prior to the Closing) such Buyer is purchasing,
duly executed on behalf of the Company and registered in the name of such Buyer
or its designee.

 

2.  BUYER’S REPRESENTATIONS AND WARRANTIES.

 

Each Buyer represents and warrants with respect to only itself that:

 

(a)  No Public Sale or Distribution.  Such Buyer is (i) acquiring the Notes and
the Warrants, and (ii) upon conversion of the Notes and exercise of the
Warrants will acquire the

 

2

 

Conversion Shares issuable upon conversion of
the Notes and the Warrant Shares issuable upon exercise of the Warrants, for
its own account and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making
the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.  Such Buyer is acquiring the Securities hereunder
in the ordinary course of its business.

 

(b)  Accredited Investor Status.  Such Buyer is an “accredited investor” as
that term is defined in Rule 501(a) of Regulation D.

 

(c)  Reliance on Exemptions.  Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws
and that the Company is relying in part upon the truth and accuracy of, and
such Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

 

(d)  Information.  Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities which have been requested by such Buyer.  Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. 
Neither such inquiries nor any other due diligence investigations
conducted by such Buyer or its advisors, if any, or its representatives shall
modify, amend or affect such Buyer’s right to rely on the Company’s
representations and warranties contained herein.

 

(e)  Experience of such Buyer.  Such Buyer understands that its investment
in the Securities involves a high degree of risk.  Such Buyer, either alone or together with its representatives,
has such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the merits and risks of the
prospective investment in the Securities, and has so evaluated the merits and risks
of such investment.  Such Buyer is able
to bear the economic risk of an investment in the Securities and, at the
present time, is able to afford a complete loss of such investment.

 

(f)  Tax Liability.  Such Buyer has sought such accounting, legal
and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.  With respect to such matters, such Buyer
relies solely on such advisors and not on any statements or representations of
the Company or any of its agents other than the representations and warranties
set forth in the Transaction Documents (as defined in Section 3(b)).  Such Buyer understands that it (and not the
Company) shall be responsible for its own tax liability that may arise as a
result of this investment or the transactions contemplated by the Agreements.

 

(g)  General Solicitation.  Such Buyer is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at

 

3

 

any seminar or any other general solicitation
or general advertisement (as defined in Regulation D).

 

(h)  No Governmental Review.  Such Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

 

(i)  Transfer or Resale.  Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a form reasonably acceptable to the Company,
to the effect that such Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Buyer provides the Company with reasonable assurance that such
Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule
144A promulgated under the 1933 Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any sale of the Securities made in reliance
on Rule 144 may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the Person (as defined in Section 3(r))
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the 1933 Act) may require compliance with some other exemption
under the 1933 Act or the rules and regulations of the SEC thereunder, and may
be made only in accordance with such exemption or rules and regulations; and
(iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.  The Securities may be pledged in connection
with a bona fide margin account or other loan or financing arrangement secured
by the Securities and such pledge of Securities shall not be deemed to be a
transfer, sale or assignment of the Securities hereunder, and no Buyer
effecting a pledge of Securities shall be required to provide the Company with
any notice thereof or otherwise make any delivery to the Company pursuant to
this Agreement or any other Transaction Document (as defined in Section 3(b)),
including, without limitation, this Section 2(i); provided, that in
order to make any sale, transfer or assignment of Securities, such Buyer and
its pledgee makes such disposition in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.

 

(j)  Legends.  Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of
the Conversion Shares and the Warrant Shares have been registered under the
1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares and the Warrant Shares, except
as set forth below, shall bear any legend as required by the “blue sky” laws of
any state and a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of such stock certificates):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[CONVERTIBLE][EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS
CERTIFICATE

 

4

 

HAVE NOT 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, AND APPLICABLE STATE
SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE
TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS 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.

 

The legend set
forth above shall be removed and the Company shall issue a certificate without
such legend to the holder of the Securities upon which it is stamped, if,
unless otherwise required by state securities laws, (i) such Securities are
registered for resale under the 1933 Act, provided, however, that
each Buyer has complied with or covenants and agrees that it will comply with
the prospectus delivery requirements of the 1933 Act as applicable to it in
connection with sales of such Securities pursuant to a registration statement,
(ii) in connection with a sale, assignment or other transfer, such holder
provides the Company with an opinion of counsel, in a form reasonably
acceptable to the Company, to the effect that such legend is not required under
applicable requirements of the 1933 Act, or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or
transferred pursuant to Rule 144.

 

(k)  Organization; Validity; Enforcement.  Such Buyer is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate, limited liability company or
partnership, as applicable, power and authority to enter into and to consummate
the transactions contemplated by the Transaction Documents to which it is a
party and otherwise to carry out its obligations hereunder and thereunder.  This Agreement, the Pledge Agreement, the
Registration Rights Agreement and the Securities Account Control Agreement have
been duly and validly authorized, executed and delivered on behalf of such
Buyer and shall constitute the legal, valid and binding obligations of such
Buyer, enforceable against such Buyer in accordance with their respective
terms, except as such enforceability may be limited by general principles of
equity or to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except that the
indemnification provisions under the Registration Rights Agreement may further
be limited by principles of public policy.

 

(l)  Residency.  Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.

 

5

 

3.  REPRESENTATIONS AND WARRANTIES OF THE
COMPANY.

 

Except as set forth under the corresponding section of the disclosure
schedule supplied by the Company to each Buyer as of the date of this Agreement
(the “Disclosure Schedules”), the Company represents and warrants to each of
the Buyers that:

 

(a)  Organization and Qualification.  The Company and its “Subsidiaries” (which for
purposes of this Agreement means any entity, other than AVII, in which the
Company, directly or indirectly, owns 10% or more of the capital stock or holds
10% or more of an equity or similar interest) are corporations duly organized
and validly existing in good standing under the laws of the jurisdiction in
which they are incorporated, and have the requisite corporate power and
authorization to own their properties and to carry on their business as now
being conducted.  Each of the Company
and its Subsidiaries is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect.  As used in this Agreement, “Material
Adverse Effect” means any material adverse effect on the business,
properties, assets, operations, results of operations or condition (financial
or otherwise) of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and the other Transaction Documents or by the
agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents. 
The Company has no Subsidiaries except as set forth on Schedule 3(a).  None of such Subsidiaries is material to the
Company.

 

(b)  Authorization; Enforcement; Validity.  The Company has the requisite corporate
power and authority to enter into and perform its obligations under this
Agreement, the Notes, the Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions (as defined in Section 5(b)), the Warrants, the
Pledge Agreement, the Securities Account Control Agreement and each of the
other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction
Documents”), to issue the Securities and to pledge and transfer the
AVII Shares in accordance with the terms hereof and thereof.  The execution and delivery of the Transaction
Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation,
the issuance of the Notes and the Warrants, the reservation for issuance and
the issuance of the Conversion Shares  and the Warrant Shares issuable upon
conversion or exercise thereof and the pledging and transfer of the AVII
Shares, as the case may be, have been duly authorized by the Company’s Board of
Directors and (other than the Stockholder Approval pursuant to Section 4(n) for
certain issuances that may require such approval pursuant to the rules of the
NASDAQ National Market (the “Principal Market”)) no further consent or
authorization is required by the Company, its Board of Directors or its stockholders.  This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies

 

6

 

and except that the indemnification
provisions under the Registration Rights Agreement may further be limited by
principles of public policy.

 

(c)  Issuance of Securities.  The Notes and the Warrants are duly
authorized and, upon issuance in accordance with the terms hereof, shall be
free from all taxes, liens and charges with respect to the issue thereof.  As of the Closing, a number of shares of
Company Common Stock shall have been duly authorized and reserved for issuance
which equals the sum of 130% of the maximum number of shares of Company Common
Stock issuable upon conversion of, or as payment for interest on, the Notes to
be issued at the Closing and 100% of the number of shares of Company Common
Stock issuable upon exercise of the Warrants to be issued at the Closing.  Upon conversion or exercise in accordance
with the Notes or the Warrants, as the case may be, and upon issuance of
Interest Shares as interest on the Notes, the Conversion Shares, the Warrant
Shares and the Interest Shares, respectively, will be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, with the holders being entitled to all rights accorded to
a holder of Company Common Stock. 
Assuming the accuracy of the Buyers representations and warrants set
forth in Section 2 hereof, the issuance by the Company of the Securities is
exempt from registration under the 1933 Act.

 

(d)  No Conflicts.  The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Notes and Warrants, the pledge and any transfer
of the AVII Shares and reservation for issuance and issuance of the Conversion
Shares, the Interest Shares and the Warrant Shares) will not (i) result in a
violation of the certificate of incorporation, any certificate of designations,
preferences and rights of any outstanding series of preferred stock or bylaws
of the Company or any Subsidiary or (ii) except as disclosed in Schedule
3(d), conflict with, or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the Principal Market)
applicable to the Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound or affected, except in
the case of each of clauses (ii) and (iii), such as would not, individually or
in the aggregate, have or reasonably be expected to result in a Material
Adverse Effect.

 

(e)  Consents.  Other than (i) the filing with the SEC of the Registration
Statement (as defined in the Registration Rights Agreement), (ii) any filings
required pursuant to Section 4(b) hereof and (iii) the application(s) to the
Principal Market for the listing of the Conversion Shares, Interest Shares and
Warrant Shares for trading thereon, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court, governmental agency or any regulatory or self-regulatory agency or
any other Person in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents, in each case in
accordance with the terms hereof or thereof. 
Other than the filing with the SEC of the Registration Statement, all
consents, authorizations, orders, filings and registrations which the Company
is required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the Closing Date. 
The Company and its Subsidiaries are 

 

7

 

unaware of any facts or circumstances which
might reasonably be expected to prevent the Company from obtaining or effecting
any of the registration, application or filings pursuant to the preceding
sentence.  The Company is not in
violation of the listing requirements of the Principal Market.  The Company has no knowledge, without having
undertaken any affirmative independent inquiry of AVII, of any violation by
AVII of the listing requirements of the Principal Market with respect to the
AVII Common Stock.  The Company has no
knowledge, without having undertaken any affirmative independent inquiry of
AVII, of any facts which would reasonably lead to delisting or suspension of
the Company Common Stock or the AVII Common Stock in the foreseeable future.

 

(f)  Acknowledgment Regarding Buyer’s Purchase
of Securities.  The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby, and that no Buyer is (i) an
officer or director of the Company, (ii) an “affiliate” of the Company (as
defined in Rule 144) or (iii) to the Company’s knowledge, a “beneficial owner”
of more than 10% of the Company Common Stock (as defined for purposes of Rule
13d-3 of the Securities Exchange Act of 1934, as amended (the “1934 Act”)).  The Company further acknowledges that no
Buyer is acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to the Transaction Documents and the
transactions contemplated hereby and thereby, and any advice given by a Buyer
or any of its representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is merely
incidental to such Buyer’s purchase of the Securities.  The Company further represents to each Buyer
that the Company’s decision to enter into the Transaction Documents has been
based solely on the independent evaluation by the Company and its
representatives.

 

(g)  No General Solicitation; Placement
Agent’s Fees.  Neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the
Securities.  The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or brokers’ commissions (other than for persons engaged by any Buyer or
its investment advisor) relating to or arising out of the transactions
contemplated hereby.  The Company shall
pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, attorney’s fees and out-of-pocket expenses)
arising in connection with any such claim. 
Other than engaging Rodman & Renshaw, Inc. as placement agent (the “Agent”),
the Company has not engaged any placement agent or other agent in connection with
the sale of the Notes and the Warrants.

 

(h)  No Integrated Offering.  None of the Company, its Subsidiaries, any
of their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to
be integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system
on which any of the securities of the Company are listed or designated.  None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
referred to in the preceding

 

8

 

sentence that would require registration of
any of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.

 

(i)  Dilutive Effect.  The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the Notes will
increase in certain circumstances. 
Subject to the Stockholder Approval requirement, the Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Notes in accordance with this Agreement and the Notes  is, in each case, absolute
and unconditional regardless of the dilutive effect that such issuance may have
on the ownership interests of other stockholders of the Company.

 

(j)  Application of Takeover Protections;
Rights Agreement.  The Company and
its board of directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation (as defined in
Section 3(q)) or the laws of the state of its incorporation which is or could
become applicable to any Buyer as a result of the transactions contemplated by
this Agreement, including, without limitation, the Company’s issuance of the
Securities and any Buyer’s ownership of the Securities.  The Company has not adopted a stockholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Company Common Stock or a change in control of the Company.

 

(k)  SEC Documents; Financial Statements.  Since December 31, 2000, the Company has
filed all reports, schedules, forms, statements and other documents required to
be filed by it with the SEC pursuant to the reporting requirements of the 1934
Act (all of the foregoing filed prior to the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “SEC
Documents”).  The Company has
delivered to the Buyers or their respective representatives true, correct and
complete copies of the SEC Documents not available on the EDGAR system.  As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were
filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. 
As of their respective dates, the financial statements of the Company
included in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto.  Such
financial statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto, or (ii) in the case of unaudited interim statements, to the
extent they may exclude footnotes or may be condensed or summary statements)
and fairly present in all material respects the financial position of the
Company as of the dates thereof and the results of its operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments). 
No other information provided by or on behalf of the Company to the
Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) of this

 

9

 

Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made and, taken together with the information set forth
in the SEC Documents, not misleading.

 

(l)  Absence of Certain Changes.  Since the date of the most recent quarterly
report on Form 10-Q, except as specifically disclosed in the SEC Documents
filed not later than 10 days prior to the date hereof, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise) or results of
operations of the Company or its Subsidiaries. 
Since the date of the most recent quarterly report on Form 10-Q and
except as specifically disclosed in the SEC Documents filed not later than 10
days prior to the date hereof, the Company has not (i) declared or paid any
dividends, (ii) sold any assets, individually or in the aggregate, in excess of
$1,000,000 outside of the ordinary course of business or (iii) had capital
expenditures, individually or in the aggregate, in excess of $1,000,000.  The Company has not taken any steps to seek
protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings or any actual knowledge of any fact which
would reasonably lead a creditor to do so. 
The Company is not as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing, will not be Insolvent
(as defined below).  For purposes of
this Section 3(l), “Insolvent” means (i) the present fair
saleable value of the Company’s assets is less than the amount required to pay
the Company’s total indebtedness, contingent or otherwise, (ii) the Company is
unable to pay its debts and liabilities, subordinated, contingent or otherwise,
as such debts and liabilities become absolute and matured or (iii) the Company
intends to incur or believes that it will incur debts that would be beyond its
ability to pay as such debts mature.

 

(m)  No Undisclosed Events, Liabilities,
Developments or Circumstances. 
Except as disclosed in Schedule 3(m), no event, liability,
development or circumstance has occurred or exists, or is contemplated to
occur, with respect to the Company or its Subsidiaries or their respective
business, properties, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a
registration statement on Form S-1 filed with the SEC relating to an issuance
and sale by the Company of the Company Common Stock and which has not been so
disclosed or otherwise publicly announced.

 

(n)  Conduct of Business; Regulatory Permits.  Neither the Company nor its Subsidiaries is
in violation of any term of or in default under its Certificate of
Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of preferred stock of the Company or Bylaws or their
organizational charter or bylaws, respectively.  Neither the Company nor any of its Subsidiaries is in violation
of any judgment, decree or order or any statute, ordinance, rule or regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any
of its Subsidiaries will conduct its business in violation of any of the
foregoing, except for possible violations which would not, individually or in
the aggregate, have a Material Adverse Effect. 
Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market, and has no knowledge of any facts or circumstances which would
reasonably lead to delisting or suspension of the Company Common Stock by the
Principal Market in the foreseeable future. 
Since December 31, 2001, (i) the Company Common Stock has been
designated for quotation or listed

 

10

 

on the Principal Market, (ii) trading in the
Company Common Stock has not been suspended by the SEC or the Principal Market,
(iii) the Company has received no communication, written or oral, from the SEC
or the Principal Market regarding the suspension or delisting of the Company
Common Stock from the Principal Market, (iv) to the knowledge of the Company,
without having undertaken any affirmative independent inquiry of AVII, AVII
Common Stock has been designated for quotation or listed on the Principal
Market, (v) to the knowledge of the Company, without having undertaken any
affirmative independent inquiry of AVII, trading in AVII Common Stock has not
been suspended by the SEC or the Principal Market and (vi) to the knowledge of
the Company, without having undertaken any affirmative independent inquiry of
AVII, AVII has received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the AVII Common Stock
from the Principal Market.  The Company
and its Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.

 

(o)  Foreign Corrupt Practices.  Neither the Company, nor any of its
Subsidiaries, nor, to the knowledge of the Company, any director, officer,
agent, employee or other Person acting on behalf of the Company or any of its
Subsidiaries has, in the course of its actions for, or on behalf of, the
Company (i) used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; (ii)
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; (iii) violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any foreign or domestic government
official or employee.

 

(p)  Transactions With Affiliates.  Except as set forth on Schedule 3(p)
and in the SEC Documents filed at least ten days prior to the date hereof and
other than the grant of stock options disclosed on Schedule 3(q), none
of the officers or directors and, to the knowledge of the Company, none of the
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for ordinary course services as
employees, officers or directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any such officer, director or employee or, to the knowledge of the
Company, any corporation, partnership, trust or other entity in which any such
officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

 

(q)  Equity Capitalization.  As of the date hereof, the authorized
capital stock of the Company consists of (x) 150,000,000 shares of Company
Common Stock, of which as of the date hereof, 32,892,674 shares are issued and
outstanding, options for the purchase of 5,112,151 shares outstanding pursuant
to the Company’s stock option plan, stock purchase plan and non plan options,
and 4,185,889 shares are issuable pursuant to securities (other than the
aforementioned options, the Notes and the Warrants) exercisable or exchangeable
for, or

 

11

 

convertible into, shares of Company Common
Stock, and (y) 2,000,000 shares of preferred stock, of which as of the date
hereof, none are issued and outstanding. 
All of such outstanding shares have been, or upon issuance will be,
validly issued and are fully paid and nonassessable.  Except as disclosed herein and in Schedule 3(q): (i) no
shares of the Company’s capital stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries, or
contracts, commitments, understandings or arrangements by which the Company or
any of its Subsidiaries is bound to issue additional shares of capital stock of
the Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries; (iii) there
are no outstanding debt securities, notes, credit agreements, credit facilities
or other agreements, documents or instruments evidencing Indebtedness (as
defined in Section 3(r)) of the Company or any of its Subsidiaries or by which
the Company or any of its Subsidiaries is bound; (iv) there are no financing
statements securing obligations in any material amounts, either singly or in
the aggregate, filed in connection with the Company; (v) there are no
agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to register the sale of any of their securities under the 1933 Act
(except the Registration Rights Agreement); (vi) there are no outstanding
securities or instruments of the Company or any of its Subsidiaries which
contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is bound to redeem a security of the Company or any of its
Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents (as defined herein) but not so
disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company’s or its Subsidiaries’ respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect.  The Company has furnished to
the Buyer, to the extent not available on the EDGAR system in the SEC Documents
filed at least 10 days prior to the date hereof, true, correct and complete
copies of the Company’s Certificate of Incorporation, as amended and as in
effect on the date hereof (the “Certificate of Incorporation”), and the
Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or
exchangeable for, Company Common Stock and the material rights of the holders
thereof in respect thereto.

 

(r)  Indebtedness and Other Contracts.  Except as disclosed in Schedule 3(r),
neither the Company nor any of its Subsidiaries (i) has any outstanding
Indebtedness (as defined below), (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument would result in a Material
Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where
such violations and defaults would not result, individually or in the
aggregate, in a Material Adverse Effect, or (iv) is a party to any contract,
agreement or instrument relating to any Indebtedness, the performance of which,

 

12

 

in the judgment of the Company’s officers,
has or is expected to have a Material Adverse Effect.  Schedule 3(r) provides a detailed description of the
material terms of any such outstanding Indebtedness.  For purposes of this Agreement: 
(x) “Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed
as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(E) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with
respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through (F)
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance (each, a “Lien”) upon or in any
property or assets (including accounts and contract rights) owned by any
Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; (y) “Contingent
Obligation” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the
primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
liability will be protected (in whole or in part) against loss with respect
thereto; and (z) “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.

 

(s)  Absence of Litigation.  There is no action, suit, proceeding,
inquiry or investigation before or by the Principal Market, any court, public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company, threatened against or affecting the Company, the
Company Common Stock or any of the Company’s Subsidiaries or any of the
Company’s or the Company’s Subsidiaries’ officers or directors in their
capacities as such, except as set forth in Schedule 3(s).

 

(t)  Insurance.  The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as management of the Company believes to be prudent and customary
in the businesses in which the Company and its Subsidiaries are engaged.  Neither the Company nor any such Subsidiary
has been refused any insurance coverage sought or applied for and neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers

 

13

 

as may be necessary to continue its business
at a cost that would not have a Material Adverse Effect.

 

(u)  Employee Relations. (i) Neither the
Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union. 
The Company and its Subsidiaries believe that their relations with their
employees are good.  No executive
officer of the Company (as defined in Rule 501(f) of the 1933 Act) has notified
the Company that such officer intends to leave the Company or otherwise
terminate such officer’s employment with the Company.  No executive officer of the Company, to the knowledge of the
Company, is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.

 

(ii)           The Company and its Subsidiaries are
in compliance with all federal, state, local and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.

 

(v)  Title.  The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(v)
or such as do not materially affect the value of such property and do not
interfere in any material respect with the use made and proposed to be made of
such property by the Company and any of its Subsidiaries.  Any real property and facilities held under
lease by the Company and any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.

 

(w)  Intellectual Property Rights.  The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted and which the
failure to so own or possess could, individually or in aggregate, have
reasonably be expected to result in a Material Adverse Effect.  None of the Company’s material Intellectual
Property Rights have expired or terminated or are expected to expire or
terminate within two years from the date of this Agreement.  The Company does not have any knowledge of
any infringement by the Company or its Subsidiaries of Intellectual Property
Rights of others.  There is no claim,
action or proceeding being made or brought, or to the knowledge of the Company,
being threatened, against the Company or its Subsidiaries regarding its
Intellectual Property Rights.  The
Company is unaware of any facts or circumstances which would reasonably be
expected to give rise to any of the foregoing infringements or claims, actions
or proceedings.  The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.

 

14

 

(x)  Environmental Laws.  The Company and its Subsidiaries (i) are in
compliance with any and all Environmental Laws (as hereinafter defined), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. 
The term “Environmental Laws” means all federal, state, local or foreign
laws relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), including, without limitation, laws relating to
emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”)  into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

 

(y)  Tax Status.  The Company and each of its Subsidiaries (i) has made or filed
all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply.  There are no unpaid
taxes in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.

 

(z)  Internal Accounting Controls.  The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset and liability
accountability, (iii) access to assets or incurrence of liabilities is
permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets and liabilities
is compared with the existing assets and liabilities at reasonable intervals
and appropriate action is taken with respect to any difference.

 

(aa)         Investment Company.  The Company is not, and is not an affiliate
of, an “investment company” within the meaning of the Investment Company Act of
1940, as amended.

 

(bb)         Form S-3 Eligibility.  The Company is eligible to register the
Company Common Stock for resale by the Buyers under Form S-3 promulgated under
the 1933 Act.

 

(cc)         AVII Common Stock.

 

(i)            The transfer of the AVII Shares by
the Company have been registered by AVII under the 1933 Act.  1,000,000 of the AVII Shares were registered
by AVII pursuant to a registration statement filed on Form S-3 on December 21,
1999, as amended on

 

15

 

January 25, 2000, and 1,684,211
of the AVII Shares were registered by AVII pursuant to a registration statement
filed on Form S-3 on September 15, 2000 (the “AVII Registration Statements”).  The “Plan of Distribution” section under
each of the AVII Registration Statements permits the pledge and transfer of the
AVII Shares as required pursuant to the Transaction Documents.

 

(ii)           The Company is the beneficial and
record owner of all of the AVII Shares, free and clear of any Liens, and upon
transfer in accordance with the applicable Transaction Documents, the Company
will transfer to the Buyers good and marketable title to such AVII Shares, free
and clear of any Liens.  Upon any such
transfer in accordance with the applicable Transaction Documents to the Buyers
of any AVII Shares, the AVII Shares shall be unrestricted and freely tradable
on the Principal Market without any delivery or other requirements whatsoever
and without the need to make any registration or other filing with the SEC.

 

(iii)          The Company has no legal obligation,
absolute or contingent, to any other Person to transfer or sell any of the AVII
Shares.  There is no action, claim,
suit, investigation or proceeding pending or, to the knowledge of the Company,
threatened by or against or affecting the Company or the Company’s ownership of
the AVII Shares before any court or governmental or regulatory authority or
body, that could effect the ability of the Company to pledge and transfer to
the Buyers any AVII Shares.  There are
no writs, decrees, injunctions or orders of any court or governmental or
regulatory agency, authority or body outstanding against the Company with
respect to the AVII Shares.

 

4.  COVENANTS.

 

(a)  Best Efforts.  Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in Sections
6 and 7 of this Agreement.

 

(b)  Form D and Blue Sky.  The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing.  The Company shall, on or before the Closing Date, take such
action as the Company shall reasonably determine is necessary in order to
obtain an exemption for or to qualify the Securities for sale to the Buyers at
the Closing pursuant to this Agreement under applicable securities or “Blue
Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall provide evidence of any such action so taken to
the Buyers on or prior to the Closing Date. 
The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following the Closing Date.

 

(c)  Reporting Status.  Except as set forth in Section 6 of the
Notes or as set forth in Section 4(b) of the Warrants, until the date on which
the Investors (as defined in the Registration Rights Agreement) shall have sold
all the Conversion Shares, Interest Shares and Warrant Shares  and
none of the Notes  or Warrants is outstanding (the “Reporting Period”), the
Company shall file all reports required to be filed with the SEC pursuant to
the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would otherwise permit such termination.

 

16

 

(d)  Use of Proceeds.  The Company will use the proceeds from the
sale of the Securities for working capital purposes and not for the (i)
repayment of any outstanding Indebtedness of the Company or any of its
Subsidiaries or (ii) redemption or repurchase of any of its equity securities.

 

(e)  Financial Information.  The Company agrees to send the following to
each Investor during the Reporting Period (i) unless the following are filed
with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day after the filing thereof with the SEC, a
copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as
the release thereof, facsimile copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.  As used herein, “Business
Day” means any day other than Saturday, Sunday or other day on which
banking institutions in The City of New York are authorized or required by law
to remain closed.

 

(f)  Listing.  The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which shares of Company Common Stock are then listed (subject to official
notice of issuance) and shall maintain, so long as any other shares of Company
Common Stock shall be so listed, such listing of all Registrable Securities
from time to time issuable under the terms of the Transaction Documents.  The Company shall maintain the Company
Common Stock’s authorization for quotation on the Principal Market.  Neither the Company nor any of its
Subsidiaries shall take any action which would be reasonably expected to result
in the delisting or suspension of the Company Common Stock on the Principal
Market.  The Company shall pay all fees
and expenses in connection with satisfying its obligations under this Section
4(f).

 

(g)  Fees.  Subject to Section 8 below, at the Closing, the Company shall pay
an expense allowance of $117,000 to Smithfield Fiduciary LLC (a Buyer) or its
designee(s) (in addition to any other expense amounts paid to any Buyer prior
to the date of this Agreement) for reimbursement of reasonable legal and due
diligence expenses incurred in connection with the transactions contemplated by
the Transaction Documents, which amount shall be withheld by such Buyer from
its Purchase Price at the Closing.  The
Company shall be responsible for the payment of any placement agent’s fees or
broker’s commissions relating to or arising out of the transactions
contemplated hereby, including, without limitation, any fees or commissions
payable to the Agent.  The Company shall
pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, reasonable attorney’s fees and out-of-pocket
expenses) arising in connection with any claim relating to any such payment.  Except as otherwise set forth in the
Transaction Documents, each party to this Agreement shall bear its own expenses
in connection with the sale of the Securities to the Buyers.

 

(h)  Pledge of Securities.  The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities.  The pledge of Securities shall not be deemed
to be a transfer, sale or

 

17

 

assignment of the Securities
hereunder, and no Investor effecting a pledge of Securities shall be required
to provide the Company with any notice thereof or otherwise make any delivery
to the Company pursuant to this Agreement or any other Transaction Document,
including, without limitation, Section 2(i) of this Agreement; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(i) hereof in order to effect a sale, transfer or assignment of
Securities to such pledgee.  At the
appropriate Buyer’s expense, the Company shall execute and deliver such
reasonable documentation as a pledgee of the Securities may reasonably request
in connection with a pledge of the Securities to such pledgee by an Investor.

 

(i)  Disclosure of Transactions and Other
Material Information.  On or before
8:30 a.m., New York City Time, on  the first Trading Day following the
Closing Date, the Company shall file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Transaction Documents in the
form required by the 1934 Act, and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of each of the Notes, the form of Warrant, the Pledge
Agreement, the Securities Account Control Agreement  and the Registration Rights
Agreement) as exhibits to such Form 8-K (including all attachments, the “8-K Filing”).  From and after the filing of the 8-K Filing
with the SEC, unless required pursuant to Section 3(i) of the Registration
Rights Agreement, no Buyer shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents, that is not disclosed in
the 8-K Filing.  Unless required
pursuant to Section 3(i) of the Registration Rights Agreement, the Company
shall not, and shall cause each of its Subsidiaries and its and each of their
respective officers, directors, employees and agents, not to, provide any Buyer
with any material nonpublic information regarding the Company or any of its
Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express written consent of such Buyer. 
In the event of a breach of the foregoing covenant by the Company, any
of its Subsidiaries, or any of its or their respective officers, directors,
employees and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Buyer shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material nonpublic information without the prior approval by the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents.  No
Buyer shall have any liability to the Company, its Subsidiaries, or any of its
or their respective officers, directors, employees, stockholders or agents for
any such disclosure.  Subject to the foregoing,
neither the Company nor any Buyer shall issue any press releases or any other
public statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval
of any Buyer, to make any press release or other public disclosure with respect
to such transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) the Buyers shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release).

 

(j)  Restriction on Redemption and Cash
Dividends.  So long as any Notes are
outstanding, the Company shall not, directly or indirectly, redeem, or declare
or pay any cash dividend or distribution on, the Company Common Stock without
the prior express written consent of the holders of Notes representing not less
than a majority of the aggregate principal amount of the then outstanding
Notes.

 

18

 

(k)  Additional Notes.  For so long as any Buyer beneficially owns
any Securities, the Company will not issue any additional Notes and, except as
described in Schedule 4(k), the Company shall not issue any other securities
that would cause a breach or default under the Notes.

 

(l)  Conduct of Business.  So long as any Notes are outstanding, the
business of the Company and its Subsidiaries shall not be conducted in violation
of any law, ordinance or regulation of any governmental entity, except where
such violations would not result, either individually or in the aggregate, in a
Material Adverse Effect.

 

(m)  Variable Securities.  So long as any Notes or Warrants are outstanding,
the Company shall not, in any manner, issue or sell any rights, warrants or
options to subscribe for or purchase Company Common Stock or directly or
indirectly convertible into or exchangeable or exercisable for Company Common
Stock at a price which varies or may vary with the market price of the Company
Common Stock, including by way of one or more reset(s) to any fixed price
unless the conversion, exchange or exercise price of any such security cannot
be less than the then applicable Conversion Price (as defined in the Notes)
with respect to the Company Common Stock under any Note or the then applicable
Exercise Price (as defined in the Warrants) with respect to the Company Common
Stock under any Warrant.

 

(n)  Proxy Statement.  The Company shall provide each stockholder
entitled to vote at the next meeting of stockholders of the Company, which
shall not be later than August 15, 2003 (the “Stockholder Meeting Deadline”),
a proxy statement, which has been previously reviewed by the Buyers and a
counsel of their choice, soliciting each such stockholder’s affirmative vote at
such stockholder meeting for approval of the Company’s issuance of all of the
Securities as described in the Transaction Documents in accordance with
applicable law and the rules and regulations of the Principal Market (such
affirmative approval being referred to herein as the “Stockholder Approval”), and
the Company shall use its best efforts to solicit its stockholders’ approval of
such issuance of the Securities and to cause the Board of Directors of the
Company to recommend to the stockholders that they approve such proposal.  The Company shall be obligated to seek to
obtain the Stockholder Approval by the Stockholder Meeting Deadline.

 

(o)  Corporate Existence.  So long as any Buyer beneficially owns any
Notes, the Company shall maintain its corporate existence and shall not sell
all or substantially all of the Company’s assets, except in the event of a
merger or consolidation or sale of all or substantially all of the Company’s assets,
where the surviving or successor entity in such transaction (i) assumes the
Company’s obligations hereunder and under the agreements and instruments
entered into in connection herewith and (ii) is a publicly traded corporation
whose common stock is quoted on or listed for trading on the Principal Market
or The New York Stock Exchange, Inc.

 

(p)  Incurrence of Liens.  So long as any Notes are outstanding, the
Company shall not, directly or indirectly, allow or suffer to exist any Lien,
other than Permitted Liens (as defined in the Notes), upon any property or
assets (including accounts and contract rights) owned by the Company.

 

(q)  Reservation of Shares.  The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, no
less than 130% of the sum of

 

19

 

(i) the number of shares of
Company Common Stock issuable upon conversion of, or as payment for interest
on, the Notes and (ii) the number of shares of Common Stock issuable upon
exercise of the Warrants.

 

(r)  AVII.  At the Closing, the Company shall deliver to each Buyer a true,
correct and complete copy of each prospectus pursuant to the AVII Registration
Statements.  Any transfer of the AVII
Shares by the Company to the Buyers shall be made pursuant to the AVII
Registration Statements, Rule 144(k) or other method acceptable to holders of
at least a majority of the aggregate principal amount the Notes then
outstanding.  The Company hereby agrees
to use its reasonable best efforts to cause AVII (i) unless Rule 144(k) is
available and to be used in order to transfer the AVII Shares by the Company to
the Buyers, until the date that the Company shall have transferred the AVII
Shares to the Buyers or none of the Notes is outstanding, to keep each AVII
Registration Statement continuously effective under the 1933 Act and, if and
when the Company deems it necessary, use reasonable best efforts to cause AVII
to file one or more prospectus supplements pursuant to Rule 424(b) and (ii) so
long as any other shares of AVII Common Stock shall be listed on the Principal
Market, to maintain the authorization for quotation on the Principal Market of
the AVII Shares.  The Company shall take
all actions necessary such that the AVII Shares shall remain free of any Lien.

 

(s)  Transfer of AVII Shares.  Upon transfer of any AVII Shares to a Buyer
pursuant to the terms of the Transaction Documents, including, without
limitation, pursuant to an Exchange, a Company Exchange or an Event of Default
(as each such term is defined in the Notes), the Company shall take all actions
necessary to transfer to Buyer, in accordance with the applicable terms of the
Transaction Documents, the AVII Shares free and clear of all Liens or restrictions
such that after such transfer the AVII Shares will be unrestricted and freely
tradable by the Buyer.  In connection
with the foregoing, the Company shall (i) cause Wilson, Sonsini, Goodrich &
Rosati, PC or other counsel reasonably acceptable to holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then outstanding to deliver to the transfer agent of AVII any necessary legal
opinion, and (ii) use reasonable best efforts to take any other actions
reasonably requested by any Buyer in connection with any such transfer.

 

5.  REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a)  Register.  The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to
each holder of Notes or Warrants), a register for the Notes and the Warrants,
in which the Company shall record the name and address of the Person in whose
name the Notes  and the Warrants have been issued (including the name and
address of each transferee), the principal amount of Notes held by such Person
and the number of Warrant Shares issuable upon exercise of the Warrants held by
such Person.  The Company shall keep the
register open and available during business hours for inspection by any Buyer or
its legal representatives upon prior written notice.

 

(b)  Transfer Agent Instructions.  The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer
or its respective nominee(s), for the Conversion Shares, the Interest Shares,
if any, and the Warrant Shares  in such amounts as specified from time to
time by each Buyer to the Company upon conversion of the Notes or exercise of
the Warrants in the form of

 

20

 

Exhibit F attached
hereto (the “Irrevocable Transfer Agent Instructions”).  The Company warrants that no instruction
other than the Irrevocable Transfer Agent Instructions referred to in this
Section 5(b), and stop transfer instructions to give effect to Section 2(j)
hereof, will be given by the Company to its transfer agent, and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the other
Transaction Documents.  If a Buyer
effects a sale, assignment or transfer of the Securities in accordance with
Section 2(i), the Company shall permit the transfer and shall promptly instruct
its transfer agent to issue one or more certificates or credit shares to the
applicable balance accounts at DTC in such name and in such denominations as
specified by such Buyer to effect such sale, transfer or assignment.  In the event that such sale, assignment or
transfer involves Conversion Shares, Interest Shares or Warrant Shares sold,
assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the
Buyer, assignee or transferee, as the case may be, without any restrictive
legend.  The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to a
Buyer.  Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that a
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.

 

6.  CONDITIONS TO THE COMPANY’S OBLIGATION TO
SELL.

 

(a)  Closing Date.  The obligation of the Company hereunder to
issue and sell the Notes  and the related Warrants to each Buyer at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:

 

(i)            Such Buyer shall have executed each
of the Transaction Documents to which it is a party and delivered the same to
the Company.

 

(ii)           Such Buyer shall have delivered to
the Company the Purchase Price (less, in the case of Smithfield Fiduciary LLC,
the amounts withheld pursuant to Section 4(g)) for the Notes and the related
Warrants being purchased by such Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.

 

(iii)          The representations and warranties of
such Buyer shall be true and correct as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Closing Date.

 

21

 

7.  CONDITIONS TO EACH BUYER’S OBLIGATION TO
PURCHASE.

 

(a)  Closing Date.  The obligation of each Buyer hereunder to
purchase the Notes  and the related Warrants at the Closing is
subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for each Buyer’s sole
benefit and may be waived by such Buyer at any time in its sole discretion by
providing the Company with prior written notice thereof:

 

(i)            The Company shall have executed and
delivered to such Buyer (i) each of the Transaction Documents and (ii) the
Notes (in such principal amounts as such Buyer shall have requested prior to
the Closing)  and the related Warrants (in such amounts as such Buyer shall
have requested prior to the Closing) being purchased by such Buyer at the
Closing pursuant to this Agreement.

 

(ii)           Such Buyer shall have received the
opinion of Wilson Sonsini Goodrich & Rosati, PC, the Company’s counsel,
dated as of the Closing Date, in form, scope and substance reasonably satisfactory
to such Buyer and in substantially the form of Exhibit G attached
hereto.

 

(iii)          The Company shall have delivered to
such Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form
of Exhibit F attached hereto, which instructions shall have been
delivered to and acknowledged in writing by the Company’s transfer agent.

 

(iv)  The Company shall have delivered to such
Buyer a certificate evidencing the incorporation and good standing of the
Company and Sparta Pharmaceuticals, Inc. in each such corporation’s state of
incorporation issued by the Secretary of State of such state of incorporation
as of a date within 10 days of the Closing Date.

 

(v)           The Company shall have delivered to
such Buyer a certificate evidencing the Company’s qualification as a foreign
corporation and good standing issued by the Secretary of State of California as
of a date within 10 days of the Closing Date.

 

(vi)           The Company shall have delivered to
such Buyer a certified copy of the Certificate of Incorporation as certified by
the Secretary of State of the State of Delaware within 10 days of the Closing
Date.

 

(vii)         The Company shall have delivered to
such Buyer a certificate, executed by the Chief Executive Officer of the
Company and dated as of the Closing Date, as to (i) the resolutions consistent
with Section 3(b) as adopted by the Company’s Board of Directors (the “Resolutions”),
(ii) the Certificate of Incorporation and (iii) the Bylaws, each as in effect
at the Closing, in the form attached hereto as Exhibit H.

 

(viii)        The representations and warranties of
the Company shall be true and correct as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all respects with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with

 

22

 

by the Company at or prior to
the Closing Date.  Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the Company,
dated as of the Closing Date, to the foregoing in the form attached hereto as Exhibit
I.

 

(ix)           The Company shall have delivered to
such Buyer a letter from the Company’s transfer agent certifying the number of
shares of Company Common Stock outstanding as of a date within five days of the
Closing Date.

 

(x)            The Company Common Stock (I) shall
be designated for quotation or listed on the Principal Market and (II) shall
not have been suspended by the SEC or the Principal Market from trading on the
Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened either (A) in writing by the SEC or the Principal Market or (B)
by falling below the minimum listing maintenance requirements of the Principal
Market.

 

(xi)           The Company shall have obtained all
governmental, regulatory or third party consents and approvals, if any,
necessary for the sale of the Notes and the Warrants.

 

(xii)          The Company shall have delivered to
such Buyer such other documents relating to the transactions contemplated by
this Agreement as such Buyer or its counsel may reasonably request.

 

(xiii)         In accordance with the terms of the
Pledge Agreement and the Securities Account Control Agreement, the Company
shall have delivered to the Custodian certificate(s) representing the AVII
Shares, along with duly executed blank stock powers.

 

(xiv)        The Company shall have delivered to such
Buyer a true, correct and complete copy of each prospectus pursuant to the AVII
Registration Statements in accordance with Section 4(r).

 

8.  TERMINATION.  In the event that the Closing shall not have
occurred with respect to a Buyer on or before five (5) Business Days from the
date hereof due to the Company’s or such Buyer’s failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s
failure to waive such unsatisfied condition(s)), the nonbreaching party shall have
the option to terminate this Agreement with respect to such breaching party at
the close of business on such date without liability of any party to any other
party; provided, however, this if this Agreement is terminated pursuant to this
Section 8, the Company shall remain obligated to reimburse the non-breaching
Buyers for the expenses described in Section 4(g) above.

 

9.  MISCELLANEOUS.

 

(a)  Governing Law; Jurisdiction; Jury Trial.  All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York
or any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.  Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting in The City of New York,
Borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed

 

23

 

herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper. 
Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

 

(b)  Counterparts.  This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original,
not a facsimile signature.

 

(c)  Headings.  The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.

 

(d)  Severability.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

 

(e)  Entire Agreement; Amendments.  This Agreement supersedes all other prior
oral or written agreements between the Buyers, the Company, their affiliates
and Persons acting on their behalf with respect to the matters discussed
herein, and this Agreement and the instruments referenced herein contain the
entire understanding of the parties with respect to the matters covered herein
and therein and, except as specifically set forth herein or therein, neither
the Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters. 
No provision of this Agreement may be amended other than by an
instrument in writing signed by the Company and the holders of Notes
representing at least a majority of the aggregate principal amount of the
Notes, or, if prior to the Closing Date, the Company and the Buyers listed on
the Schedule of Buyers as being obligated to purchase at least a majority of
the aggregate principal amount of the Notes, and any amendment to this
Agreement made in conformity with the provisions of this Section 9(e) shall be
binding on all Buyers and holders of Notes, as applicable.  No provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought.  No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Notes then outstanding.  No
consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any provision of any of the Transaction Documents
unless the same consideration also is offered to all of the parties to the
Transaction Documents, holders of Notes or holders of the Warrants, as the case
may be.  The Company has not, directly
or indirectly,

 

24

 

made any agreements with any Buyers relating
to the terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents.

 

(f)  Notices.  Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: 
(i) upon receipt, when delivered personally; (ii) upon receipt, when
sent by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
Business Day after deposit with an overnight courier service, in each case
properly addressed to the party to receive the same.  The addresses and facsimile numbers for such communications shall
be:

 

If to the Company:

 

SuperGen, Inc.

4140 Dublin Boulevard

Suite 200

Dublin, California 94568

Telephone:            (925) 560-0100

Facsimile:               (925) 560-0101

Attention:              Chief Executive
Officer

 

with a copy to:

 

Wilson Sonsini Goodrich & Rosati, PC

650 Page Mill Road

Palo Alto, California 93404

Telephone:            (650) 493-9300

Facsimile:               (650) 493-6811

Attention:              John V. Roos, Esq.

 

If to the Transfer Agent:

 

Mellon Investor Services LLC

235 Montgomery Street

23rd Floor

San Francisco, California  94104

Telephone:            (415) 743-1422

Facsimile:               (415) 989-8251

Attention:              Sharon Magidson

 

If to a Buyer,
to its address and facsimile number set forth on the Schedule of Buyers, with
copies to such Buyer’s representatives as set forth on the Schedule of Buyers,
or to such other address and/or facsimile number and/or to the attention of
such other Person as the recipient party has specified by written notice given
to each other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt
(A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender’s
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by an overnight
courier service shall

 

25

 

be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

 

(g)  Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Notes or the Warrants.  The Company shall not assign this Agreement
or any rights or obligations hereunder without the prior written consent of the
holders of Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding, including by merger or consolidation,
except pursuant to a Change of Control (as defined in Section 6(a) of the
Notes) with respect to which the Company is in compliance with Section 6 of the
Notes and Section 4(b) of the Warrants. 
A Buyer may assign some or all of its rights hereunder without the consent
of the Company, in which event such assignee shall be deemed to be a Buyer
hereunder with respect to such assigned rights.

 

(h)  No Third Party Beneficiaries.  This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns,
and is not for the benefit of, nor may any provision hereof be enforced by, any
other Person.

 

(i)  Survival.  Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5
and 9 shall survive the Closing.  Each
Buyer shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.

 

(j)  Further Assurances.  Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

 

(k)  Indemnification.  In consideration of each Buyer’s execution
and delivery of the Transaction Documents and acquiring the Securities
thereunder and in addition to all of the Company’s other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or
indirect investors and any of the foregoing Persons’ agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any
Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents
or any other certificate, instrument or document contemplated hereby or thereby
or (c) any cause of action, suit or claim brought or made against such
Indemnitee by a third party (including for these purposes a derivative action

 

26

 

brought on behalf of the Company) and arising
out of or resulting from (i) the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (ii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iii) the status of such Buyer or holder of
the Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents. 
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. 
Except as otherwise set forth herein, the mechanics and procedures with
respect to the rights and obligations under this Section 9(k) shall be the same
as those set forth in Section 6 of the Registration Rights Agreement.

 

(l)  No Strict Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.

 

(m)  Remedies.  Each Buyer and each holder of the Securities shall have all
rights and remedies set forth in the Transaction Documents and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law.  Any Person having any rights under
any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. 
Furthermore, the Company recognizes that in the event that it fails to
perform, observe, or discharge any or all of its obligations under this
Agreement, any remedy at law may prove to be inadequate relief to the
Buyers.  The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages and
without posting a bond or other security.

 

(n)  Payment Set Aside.  To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to any of the other
Transaction Documents or the Buyers enforce or exercise their rights hereunder
or thereunder, and such payment or payments or the proceeds of such enforcement
or exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a
trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

 

(o)  Independent Nature of Buyers’ Obligations
and Rights.  The obligations of each
Buyer under any Transaction Document are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way
for the performance of the obligations of any other Buyer under any Transaction
Document.  Nothing contained herein or
in any other Transaction Document, and no action taken by any Buyer pursuant
hereto or thereto, shall be deemed to constitute the Buyers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group

 

27

 

with respect to such obligations or the
transactions contemplated by the Transaction Documents.  Each Buyer confirms that it has
independently participated in the negotiation of the transaction contemplated
hereby with the advice of its own counsel and advisors.  Each Buyer shall be entitled to
independently protect and enforce its rights, including, without limitations,
the rights arising out of this Agreement or out of any other Transaction
Documents, and it shall not be necessary for any other Buyer to be joined as an
additional party in any proceeding for such purpose.

 

[Signature
Page Follows]

 

28

 

IN WITNESS WHEREOF,
each Buyer and the Company have caused this Securities Purchase Agreement to be
duly executed as of the date first written above.

 

	
  COMPANY:

  	
   

  	
  BUYERS:

  
	
   

  	
   

  	
   

  
	
  SUPERGEN, INC.

  	
   

  	
  SMITHFIELD
  FIDUCIARY LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By: 

  	
  /s/ JOSEPH RUBINFELD

  	
   

  	
  By: 

  	
  /s/ Adam J. Chill

  
	
   

  	
  Name:

  	
  Joseph Rubinfeld

  	
   

  	
   

  	
  Name:

  	
  Adam J. Chill

  
	
   

  	
  Title:

  	
  President/Chief Executive Officer

  	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  OMICRON MASTER
  TRUST

  
	
   

  	
   

  	
  By:  Omicron Capital L.P., as
  advisor

  
	
   

  	
   

  	
  By:  Omicron Capital Inc., its
  general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ OLIVIER MORALI

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  Olivier Morali

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  MAINFIELD
  ENTERPRISES INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ AVI VIGDER

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  Avi Vigder

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CRANSHIRE CAPITAL
  L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ MITCHELL P. KOPIN

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  Mitchell P. Kopin

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
  President-Downsview Capital, Inc.,

  The General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  OTAPE LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ RICHARD CAYNE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  Richard Cayne

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
  General Counsel

  
								

 

 

SCHEDULE
OF BUYERS

 

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  
	
  Buyer

  	
   

  	
  Address and
  Facsimile Number

  	
   

  	
  Aggregate

  Principal

  Amount of

  Notes

  	
   

  	
  Aggregate

  Number of

  Warrants

  	
   

  	
  Legal
  Representative’s

  Address and Facsimile Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Smithfield
  Fiduciary LLC

  	
   

  	
  c/o Highbridge Capital Management, LLC

  9 West 57th Street, 27th Floor

  New York, New York  10019

  Attention:  Ari J. Storch
                   Adam
  J. Chill Facsimile:  (212) 751-0755

  Telephone: (212) 287-4720

  Residence:  Cayman Islands

  	
   

  	
  $

  	
  10,750,000

  	
   

  	
  1,010,500

  	
   

  	
  Schulte Roth & Zabel LLP

  919 Third Avenue

  New York, New York  10022

  Attention:  Eleazer Klein, Esq.

  Facsimile: (212) 593-5955

  Telephone:  (212) 756-2376

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Omicron Master
  Trust

  	
   

  	
  c/o Omicron
  Capital L.P.

  153 E. 53rd Street

  48th Floor

  New York, New York 10022

  Attention:  Olivier Morali

  Facsimile:  (212) 508-7028

  Telephone:  (212) 508-7027

  Residence: Bermuda

  	
   

  	
  $

  	
  4,250,000

  	
   

  	
  399,500

  	
   

  	
  The Law Offices of Brian Pusch

  29 West 57th Street

  New York, NY 10019

  Attention:  Brian Pusch, Esq.

  Facsimile:  (212) 980-7055

  Telephone:  (212) 980-0408

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mainfield
  Enterprises Inc.

  	
   

  	
  c/o Cavallo
  Capital Corp.

  660 Madison Avenue, 18th Floor,

  New York, New York  10021

  Attention:  Mor Sagi

  Facsimile:  (212) 651-9010

  Telephone:  (212) 651-9005

  Residence: British Virgin Islands

  	
   

  	
  $

  	
  4,000,000

  	
   

  	
  376,000

  	
   

  	
  Bryan Cave LLP

  1290 Ave of the Americas

  New York, NY 10104

  Attention:  Ken Henderson, Esq.

  Facsimile:  (212) 541-1357

  Telephone:  (212) 541-2275

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cranshire Capital
  L.P.

  	
   

  	
  c/o
  Downsview Capital, Inc.

  The General Partner

  666 Dundee Road, Suite 1901

  Northbrook, IL  60062

  Attention:  Mitchell D. Kopin

  Facsimile:  (847) 562-9031

  Telephone:  (847) 562-9030

  Residence: Illinois

  	
   

  	
  $

  	
  1,250,000

  	
   

  	
  117,500

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTAPE LLC

  	
   

  	
  c/o OTA LLC

  1 Manhattanville Rd.

  Purchase, NY  10577

  Attention:  Paul Masters

  Facsimile:  (914) 694-6335

  Telephone:  (914) 694-5857

  Residence: Delaware

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  94,000

  	
   

  	
  Piper Rudnick LLP

  1251 Avenue of the Americas

  New York, NY  10020

  Attention:  Theodore Altman, Esq.

  Facsimile:  (212) 835-6001

  Telephone:  (212) 835-6000

  

 

 

EXHIBITS

 

Exhibit A                Form of Notes

Exhibit B                Form of Pledge Agreement

Exhibit C                Form of Securities Account
Control Agreement

Exhibit D                Form of Warrants

Exhibit E                 Form of Registration Rights
Agreement

Exhibit F                 Form of Irrevocable Transfer
Agent Instructions

Exhibit G                Form of Company Counsel Opinion

Exhibit H                Form of Chief Executive
Officer’s Certificate

Exhibit I                  Form of Officer’s Certificate

 

SCHEDULES

 

Schedule 3(a)        Subsidiaries

Schedule 3(d)        No Conflict

Schedule 3(m)       Undisclosed Liabilities

Schedule 3(p)        Transactions with Affiliates

Schedule 3(q)        Capitalization

Schedule 3(r)         Indebtedness and Other Contracts

Schedule 3(s)        Litigation

Schedule 3(v)        TitleExhibit
10.2

 

[FORM OF
SENIOR EXCHANGEABLE CONVERTIBLE NOTE]

 

NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN
A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. 
ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii), 4(c)(iii) AND 21(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS
NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION OR EXCHANGE
HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO
SECTIONS 3(c)(iii) AND 4(c)(iii) OF THIS NOTE.

 

SENIOR EXCHANGEABLE CONVERTIBLE NOTE

 

	
  Issuance Date: February 26, 2003

  	
   

  	
  Principal: U.S.
  $                      

  

 

FOR VALUE RECEIVED, SUPERGEN, INC., a
Delaware corporation (the “Company”), hereby promises to pay to the
order of
                             
or its registered assigns (“Holder”) the amount set out above as the
Principal (as reduced pursuant to the terms hereof pursuant to redemption,
conversion, exchange or otherwise, the “Principal”) when due, whether upon the
Maturity Date, on any Installment Date with respect to the Installment Amount
due on such Installment Date (each, as defined herein), acceleration,
redemption or otherwise (in each case, in accordance with the terms hereof) and
to pay interest (“Interest”) on any outstanding Principal at the rate of 4.00%
per annum, subject to periodic adjustment pursuant to Section 2 (the “Interest
Rate”), from the date set out above as the Issuance Date (the “Issuance
Date”) until the same becomes due and payable, whether upon an
Interest Date, any Installment Date or the Maturity Date (each, as defined
herein), acceleration, conversion, exchange, redemption or otherwise (in each
case in accordance with the terms hereof). 
For avoidance of doubt, (i) any Principal that comprises a portion of
the Conversion Amount pursuant to Section 3(b) in connection with any
conversion of this Note pursuant to Section 3(a) (a “Principal Conversion Amount”)
and any Principal that comprises a portion of the Exchange Amount pursuant to
Section 4(b) in connection with any exchange of this Note pursuant to Section
4(a) (a “Principal
Exchange Amount”) shall reduce the outstanding Principal of this
Note, (ii) any

 

 

Principal that is included as part of a Principal Conversion Amount
shall not be included also as part of a Principal Exchange Amount and (iii) any
Principal that is included as part of a Principal Exchange Amount shall not be
included also as part of a Principal Conversion Amount.  This Senior Exchangeable Convertible Note
(including all Senior Exchangeable Convertible Notes issued in exchange,
transfer or replacement hereof, this “Note”) is one of an issue of Senior
Exchangeable Convertible Notes issued on the Issuance Date pursuant to the
Securities Purchase Agreement (as defined below) (collectively, the “Notes”
and such other Notes, the “Other Notes”).  Certain capitalized terms used herein are defined in Section 31.

 

(1)           PAYMENTS
OF PRINCIPAL.  On each Installment
Date, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date (each, as defined in Section 10(h)) in
accordance with Section 12.  If any
Principal remains outstanding on the Maturity Date (as defined herein), then
the Holder shall surrender this Note to the Company and the Company shall pay
to the Holder in cash an amount equal to any outstanding Principal, accrued and
unpaid Interest and accrued and unpaid Late Charges, if any.  The “Maturity Date” shall be August 26, 2004,
as extended at the option of the Holder (i) in the event that, and for so long
as, an Event of Default (as defined in Section 5(a)) shall have occurred and be
continuing or any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in an Event of Default and
(ii) through the date that is ten days after a the consummation of a Change of
Control (as defined in Section 6(a)) in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 6(a))
is delivered prior to the Maturity Date.

 

(2)           INTEREST;
INTEREST RATE.  Interest on this
Note shall commence accruing on the Issuance Date and shall be computed on the
basis of a 365-day year and actual days elapsed and shall be payable during the
period beginning on the Issuance Date and ending on, and including, the
Maturity Date, on May 26, 2003, August 26, 2003, November 26, 2003, February
26, 2004, May 26, 2004, August 26, 2004 and the Maturity Date (each, an “Interest
Date”).  Interest shall be
payable on each Interest Date, to the record holder of this Note on the fifth
Business Day prior to the applicable Interest Date, in cash or, at the option
of the Company, in shares of Company Common Stock (“Interest Shares”) provided
that the Interest which accrued during any period shall be payable in Interest
Shares if, and only if, the Company delivers written notice of such election (“Interest
Election Notice”) to each holder of the Notes at least 10 Company
Trading Days prior to the Interest Date (each, an “Interest Election Date”).  Interest to be paid on an Interest Date in
Interest Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of
Company Common Stock equal to the quotient of (a) the amount of Interest
payable on such Interest Date and (b) the Interest Conversion Price in effect
on the applicable Interest Date.  If any
Interest Shares are to be paid on an Interest Date, then the Company shall (X)
issue and deliver on the applicable Interest Date, to such address as specified
by the Holder in writing to the Company at least two Business Days prior to the
applicable Interest Date, a certificate, registered in the name of the Holder
or its designee, for the number of Interest Shares to which

 

2

 

the Holder shall be entitled, or (Y) provided that the Company’s
transfer agent (the “Transfer Agent”) is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer
Program and such Interest Shares do not require the placement of any legends
restricting transfer of such Interest Shares, upon the request of the Holder,
credit such aggregate number of Interest Shares to which the Holder shall be
entitled to the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system. 
Notwithstanding the foregoing, the Company shall not be entitled to pay
Interest in Interest Shares and shall be required to pay such Interest in cash
on the applicable Interest Date if (w) any event constituting an Event of
Default or an event that with the passage of time and assuming it were not
cured would constitute an Event of Default has occurred and is continuing on
the applicable Interest Election Date or the Interest Date, unless consented to
in writing by the Holder, (x) on each day during the period beginning on the
applicable Interest Election Date and ending on and including the applicable
Interest Date, the Company Common Stock is not listed on the Principal Market
or The New York Stock Exchange, Inc. (the “NYSE”), and delisting or suspension of the
Company Common Stock by such market or exchange shall have been threatened
either (A) in writing by such market or exchange or (B) by falling below the
minimum listing maintenance requirements of such market or exchange for the
Company Common Stock, (y) the Registration Statement (as defined in the
Registration Rights Agreement) covering the Interest Shares is not effective
and available for the resale of all of the Registrable Securities (as defined
in the Registration Rights Agreement) relating to this Note on the Interest
Election Date or on the Interest Date or (z) the Company has not obtained the
Stockholder Approval (as defined in the Securities Purchase Agreement) prior to
the Interest Election Date.  Prior to
the payment of Interest on an Interest Date, Interest on this Note shall accrue
at the Interest Rate and be payable by way of inclusion of the Interest in the
Conversion Amount (as defined below) in accordance with Section 3(b)(i) and by
way of inclusion of the Interest in the Exchange Amount (as defined below) in
accordance with Section 4(b)(i).  From
and after the occurrence of an Event of Default, the Interest Rate shall be
increased to 12%.  In the event that
such Event of Default is subsequently cured, the adjustment referred to in the
preceding sentence shall cease to be effective as of the date of such cure; provided
that the Interest as calculated at such increased rate during the continuance
of such Event of Default shall continue to apply to the extent relating to the
days after the occurrence of such Event of Default through and including the
date of cure of such Event of Default. 
The Company shall pay any and all taxes that may be payable with respect
to the issuance and delivery of Interest Shares; provided that the
Company shall not be required to pay any tax that may be payable in respect of
any issuance of Interest Shares to any Person other than the Holder or with
respect to any income tax due by the Holder with respect to such Interest
Shares.

 

(3)           CONVERSION
OF NOTES.  This Note shall be
convertible into shares of the Company’s common stock, par value $.001 per
share (the “Company Common Stock”), on the terms and conditions set forth
in this Section 3.

 

(a)           Conversion
Right.  Subject to the provisions of
Section 3(d), at any

 

3

 

time or times on or after the Issuance Date, the Holder shall be entitled
to convert any portion of the outstanding and unpaid Conversion Amount  into fully paid and nonassessable shares of
Company Common Stock in accordance with Section 3(c), at the Conversion Rate
(as defined below) then in effect.  The
Company shall not issue any fraction of a share of Company Common Stock upon
any conversion.  If the issuance would
result in the issuance of a fraction of a share of Company Common Stock, the
Company shall round such fraction of a share of Company Common Stock up to the
nearest whole share.  The Company shall
pay any and all taxes that may be payable with respect to the issuance and
delivery of Company Common Stock upon conversion of any Conversion Amount; provided
that the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue and delivery of Company Common
Stock to any Person other than the Holder or with respect to any income tax due
by the Holder with respect to such Company Common Stock issued upon conversion.

 

(b)           Conversion
Rate.  The number of shares of
Company Common Stock issuable upon conversion of any Conversion Amount pursuant
to Section 3(a) shall be determined by dividing (x) such Conversion Amount by
(y) the Conversion Price (as defined below) (the “Conversion Rate”).

 

(i)            “Conversion
Amount” means the sum of (A) the portion of the outstanding
Principal to be converted, redeemed or otherwise with respect to which this
determination is being made (provided that such portion of the Principal shall
be equal to $1,000 or an integral multiple of $1,000 in excess thereof), (B)
accrued and unpaid Interest with respect to such Principal and (C) accrued and
unpaid Late Charges with respect to such Principal and Interest.

 

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

 

(iii)          “Fixed
Conversion Price” means $4.25, subject to adjustment as provided
herein.

 

(c)           Mechanics
of Conversion.

 

(i)            Optional
Conversion.  To convert any
Conversion Amount into shares of Company Common Stock on any date (a “Conversion
Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., 

 

4

 

New York City Time, on such date, a copy of an
executed notice of conversion in the form attached hereto as Exhibit I
(the “Conversion
Notice”) to the Company, (B) if required by Section 3(c)(iii),
surrender this Note to a common carrier for delivery to the Company as soon as
practicable on or following such date (or an indemnification undertaking
reasonably satisfactory to the Company with respect to this Note in the case of
its loss, theft or destruction) and (C) pay any transfer taxes or other
applicable taxes or duties, if any, required in connection with the issuance of
shares of Company Common Stock to a Person other than the Holder.  On or before the first Business Day
following the date of receipt by the Company of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such
Conversion Notice to the Holder and the Transfer Agent.  On or before the third Business Day
following the date of receipt by the Company of a Conversion Notice (the “Share
Delivery Date”), the Company shall (X) issue and deliver to the
address as specified in the Conversion Notice, a certificate, registered in the
name of the Holder or its designee, for the number of shares of Company Common
Stock to which the Holder shall be entitled, or (Y) provided that the Transfer
Agent is participating in DTC Fast Automated Securities Transfer Program and
such shares of Company Common Stock do not require the placement of any legends
restricting transfer of such shares of Company Common Stock, upon the request
of the Holder, credit such aggregate number of shares of Company Common Stock
to which the Holder shall be entitled to the Holder’s or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission system.  If this Note is physically surrendered for
conversion as required by Section 3(c)(iii) and the outstanding Principal of
this Note is greater than the Principal portion of the Conversion Amount being
converted, then the Company shall as soon as practicable and in no event later
than three Business Days after receipt of this Note (the “Note Delivery Date”) and at
its own expense, issue and deliver to the holder a new Note (in accordance with
Section 21(d)) representing the outstanding Principal not converted.  The Person or Persons entitled to receive
the shares of Company Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of such
shares of Company Common Stock on the Conversion Date.

 

(ii)           Company’s
Failure to Timely Convert.  If the
Company shall fail to issue a certificate to the Holder or credit the Holder’s
balance account with DTC for the number of shares of Company Common Stock to
which the Holder is entitled upon conversion of any Conversion Amount on or
prior to the date which is five Business Days after the Conversion Date (a “Conversion
Failure”), then (A) the Company shall pay damages to the Holder for
each date of such Conversion Failure in an amount equal to 1.0%  of
the product of (I) the number of shares of Company Common Stock not issued to
the Holder on or prior to the Share Delivery Date and to which the Holder is
entitled, and (II) the Closing Sale Price of the Company Common Stock on the
Share Delivery Date and (B) the Holder, upon written notice to the Company, may
void its Conversion Notice with respect to, and retain or have returned, as the
case may be, any portion of this Note that

 

5

 

has not been converted pursuant to such Conversion
Notice; provided that the voiding of a Conversion Notice shall not affect the
Company’s obligations to make any payments which have accrued prior to the date
of such notice pursuant to this Section 3(c)(ii) or otherwise.

 

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

 

(iv)          Pro
Rata Conversion; Disputes.  In the
event that the Company receives a Conversion Notice from more than one holder
of Notes for the same Conversion Date and the Company can convert some, but not
all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing to
have Notes converted on such date a pro rata amount of such holder’s portion of
its Notes submitted for conversion based on the principal amount of Notes
submitted for conversion on such date by such holder relative to the aggregate
principal amount of all Notes submitted for conversion on such date.  In the event of a dispute as to the number
of shares of Company Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of
shares of Company Common Stock not in dispute and resolve such dispute in
accordance with Section 26.

 

(v)           Application
of Conversion Amounts.  Subject to
Section 10(b), any Conversion Amount which the Holder elects to convert in
accordance with this Section 3 (other than pursuant to Company Conversions)
shall be deducted first from the Installment Amount relating to the latest
Installment Date (i.e., nearest to the Maturity Date) with respect to which
Installment Amounts remain outstanding and then sequentially from the
Installment Amounts relating to the immediately preceding Installment Dates.

 

(vi)          Holder
Status.  Except as specifically
provided in this Note, the Holder shall not be entitled to any rights relating
to the Company Common Stock issuable upon conversion of the Notes until the
Holder has converted this Note into Company Common Stock.

 

6

 

(d)           Limitations
on Conversions.

 

(i)            Beneficial
Ownership.  The Company shall not
effect any conversion of this Note, and the Holder of this Note shall not have
the right to convert any portion of this Note, pursuant to Section 3(a),
Section 10 or otherwise, to the extent that after giving effect to such
conversion, the Holder (together with the Holder’s affiliates), as set forth on
the applicable Conversion Notice, would beneficially own in excess of 4.99% of
the number of shares of Company Common Stock outstanding immediately after
giving effect to such conversion.  For
purposes of the foregoing sentence, the number of shares of Company Common
Stock beneficially owned by the Holder and its affiliates shall include the
number of shares of Company Common Stock issuable upon conversion of this Note
with respect to which the determination of such sentence is being made, but
shall exclude the number of shares of Company Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this
Note beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any other Notes or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the
preceding sentence, for purposes of this Section 3(d)(i), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended (the “1934 Act”).  For purposes of this Section 3(d)(i), in determining the number
of outstanding shares of Company Common Stock, the Holder may rely on the
number of outstanding shares of Company Common Stock as reflected in (x) the
Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Company
Common Stock outstanding.  Upon the
written or oral request of the Holder, the Company shall within two Business
Days confirm orally and in writing to the Holder the number of shares of
Company Common Stock then outstanding. 
In any case, the number of outstanding shares of Company Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Company Common
Stock was reported.

 

(ii)           Principal
Market Regulation.  The Company
shall not be obligated to issue any shares of Company Common Stock upon
conversion of this Note, whether pursuant to this Section 3, Section 10 or
otherwise, if the issuance of such shares of Company Common Stock would exceed
that number of shares of Company Common Stock which the Company may issue upon
conversion of the Notes and exercises of the Warrants without breaching the
Company’s obligations under the rules or regulations of the Principal Market
(the “Principal
Market Cap”), except that such limitation shall not apply in the
event that the Company (A) obtains the approval of its stockholders as required
by the applicable rules of the Principal Market for issuances of Company

 

7

 

Common Stock in excess of such amount or (B) obtains a
written opinion from outside counsel to the Company that such approval is not
required, which opinion shall be reasonably satisfactory to the holders of the
Notes representing a majority of the aggregate principal amount of the Notes
then outstanding.  Until such approval
or written opinion is obtained, no purchaser of the Notes pursuant to the
Securities Purchase Agreement (the “Purchasers”) shall be issued, upon
conversion of Notes or exercise of any Warrants held by such Purchaser, shares
of Company Common Stock in an amount greater than the product of the Principal
Market Cap multiplied by a fraction, the numerator of which is the principal
amount of Notes issued to such Purchaser pursuant to the Securities Purchase
Agreement on the Issuance Date and the denominator of which is the aggregate
principal amount of all Notes issued to the Purchasers pursuant to the
Securities Purchase Agreement on the Issuance Date (with respect to each
Purchaser, the “Principal Market Cap Allocation”).  In the event that any Purchaser shall sell or otherwise transfer
any of such Purchaser’s Notes or Warrants, the transferee shall be allocated a
pro rata portion of such Purchaser’s Principal Market Cap Allocation, and the
restrictions of the prior sentence shall apply to such transferee with respect
to the portion of the Principal Market Cap Allocation allocated to such
transferee.  In the event that any
holder of Notes shall convert all of such holder’s Notes and exercise all of
such holder’s Warrants into a number of shares of Company Common Stock which,
in the aggregate, is less than such holder’s Principal Market Cap Allocation,
then the difference between such holder’s Principal Market Cap Allocation and
the number of shares of Company Common Stock actually issued to such holder
shall be allocated to the respective Principal Market Cap Allocations of the
remaining holders of Notes on a pro rata basis in proportion to the aggregate principal
amount of the Notes then held by each such holder.

 

(4)           EXCHANGE
OF NOTES.  In addition to the rights
of the Holder under Section 3 hereof, this Note shall be exchangeable into
shares of common stock, par value $.0001 per share (the “AVII Common Stock”) of AVI
BioPharma, Inc. (“AVII”), on the terms and conditions set forth in this Section
4.

 

(a)           Exchange
Right.  Subject to the provisions of
Section 4(d), at any time or times on or after the six-month anniversary of the
Issuance Date, the Holder shall be entitled to exchange any portion of the
outstanding and unpaid Exchange Amount (as defined below) into fully paid and
nonassessable shares of AVII Common Stock in accordance with Section 4(c), at
the Exchange Rate (as defined below). 
The Company shall not deliver any fraction of a share of AVII Common
Stock upon any exchange.  If the
delivery would result in the transfer of a fraction of a share of AVII Common
Stock, the Company shall round such fraction of a share of AVII Common Stock up
to the nearest whole share.  The Company
shall pay any and all taxes that may be payable with respect to the transfer
and delivery of AVII Common Stock upon exchange of any Exchange Amount for AVII
Common Stock; provided that the Company shall not be required to pay any
tax that may be payable in respect of any transfer involved in the issue and
delivery of AVII Common Stock to any Person other than the

 

8

 

Holder or with respect to any income tax due by the Holder with respect
to such AVII Common Stock issued upon exchange.

 

(b)           Exchange
Rate.  The number of shares of AVII
Common Stock transferable upon exchange of any Exchange Amount pursuant to
Section 4(a) shall be determined by dividing (x) such Exchange Amount by (y)
the Exchange Price (as defined below) (the “Exchange Rate”).

 

(i)            “Exchange
Amount” means the sum of (A) the portion of the outstanding
Principal to be exchanged with respect to which this determination is being
made (provided that such portion of the Principal shall be equal to $1,000 or
an integral multiple of $1,000 in excess thereof), (B) accrued and unpaid
Interest with respect to such Principal and (C) accrued and unpaid Late Charges
with respect to such Principal and Interest.

 

(ii)           “Exchange Price”
means (A) as of any Exchange Date (as defined below) or other date of
determination (other than with respect to an Installment Amount on an
Installment Date pursuant to a Company Exchange (as defined in Section 10(a))
during the period beginning on the six month anniversary of the  Issuance Date and ending on and including
the Maturity Date, the Fixed Exchange Price, and (B) with respect to any
Installment Amount on an Installment Date pursuant to a Company Exchange, at
the option of the Holder, either the Fixed Exchange Price or the AVII Exchange
Price, each in effect as of such date and subject to adjustment as provided
herein.

 

(iii)          “Fixed
Exchange Price” means $5.00, subject to adjustment as provided
herein.

 

(c)           Mechanics
of Exchange.

 

(i)            Optional
Exchange.  To exchange any Exchange
Amount into shares of AVII Common Stock on any date (an “Exchange Date”), the Holder
shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior
to 11:59 p.m.,  New York City Time, on
such date, a copy of an executed notice of exchange in the form attached hereto
as Exhibit II (the “Exchange Notice”) to the Company, and (B)
if required by Section 4(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note reasonably satisfactory
to the Company in the case of its loss, theft or destruction).  On or before the first Business Day following
the date of receipt by the Company of an Exchange Notice, the Company shall
transmit by facsimile a confirmation of receipt of such Exchange Notice to the
Holder and the transfer agent for AVII (the “AVII Transfer Agent”).  On or before the third Business Day
following the date of receipt by the Company of an Exchange Notice (the “AVII Share
Delivery Date”), the Company shall use its reasonable best efforts
to cause AVII or the AVII

 

9

 

Transfer Agent to (X) transfer and deliver to the
address as specified in the Exchange Notice, a certificate, registered in the
name of the Holder or its designee, for the number of shares of AVII Common
Stock to which the Holder shall be entitled, or (Y) provided that the AVII
Transfer Agent is participating in DTC Fast Automated Securities Transfer
Program and such shares of AVII Common Stock do not require the placement of
any legends restricting transfer of such shares of AVII Common Stock, upon the
request of the Holder, credit such aggregate number of shares of AVII Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission
system.  Upon any such transfer of any
AVII Common Stock to the Holder, the Holder shall have good and marketable
title to such shares, free and clear of any liens, encumbrances, restrictions,
rights of first refusal or rights of any other Person and such shares of AVII
Common Stock shall be unrestricted and freely tradable on the Principal Market
without any delivery or other requirements whatsoever and without the need for
registration under the Securities Act or any state securities laws.  If this Note is physically surrendered for
exchange as required by Section 4(c)(iii) and the outstanding Principal of this
Note is greater than the Principal portion of the Exchange Amount being
exchanged, then the Company shall as soon as practicable and in no event later
than the Note Delivery Date and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 21(d)) representing the
outstanding Principal not exchanged. 
The Company shall use its reasonable best efforts to cause AVII and the
AVII Transfer Agent to treat for all purposes the Person or Persons entitled to
receive the shares of AVII Common Stock issuable upon an exchange of this Note
s as the transferee or transferees of such shares of AVII Common Stock on the
Exchange Date.  Notwithstanding the
provisions of this Section 4(c)(i), the Company shall not be required to
deliver shares of AVII Common Stock if (i) the transfer of AVII Common Stock
cannot be made pursuant to Rule 144 (as defined in the Securities Purchase
Agreement) and the registration statement covering the resale by the Company to
the Holder of the AVII Common Stock subject to such Exchange Notice (each such
registration statement, an “AVII Registration Statement”) is not
effective and available for resales by the Company, (ii) the Company has
previously delivered notice to the Holder that the use of such Registration
Statement has been suspended in accordance with the terms of the registration
rights agreement between the Company and AVII governing such AVII Registration
Statement (each such registration rights agreement, an “AVII Registration Rights Agreement”)
and (iii) the Company is using its reasonable best efforts to have the
effectiveness of such AVII Registration Statement reinstated and otherwise is
promptly pursuing its rights and remedies under such AVII Registration Rights
Agreement.  If the Company does not
deliver AVII Common Stock pursuant to the terms of the immediately preceding
sentence, then the Company promptly shall deliver such shares of AVII Common
Stock, unrestricted and freely tradable on the Principal Market without any
delivery or other requirements whatsoever and without the need for registration
under the Securities Act or any state securities laws, either immediately after
such AVII Registration Statement once

 

10

 

again becomes effective and available for use by the
Company or as soon as possible pursuant to Rule 144.

 

(ii)           Company’s
Failure to Timely Exchange.  If the
Company shall fail to transfer and deliver to the Holder or have credited to
the Holder’s balance account with DTC the number of shares of AVII Common Stock
to which the Holder is entitled upon exchange of any Exchange Amount on or
prior to the date which is five Business Days after the Exchange Date (an “Exchange
Failure”), then (A) the Company shall pay damages to the Holder for
each date of such Exchange Failure in an amount equal to 1.0%  of
the product of (I) the sum of the number of shares of AVII Common Stock not
transferred and delivered to the Holder on or prior to the AVII Share Delivery
Date and to which the Holder is entitled and (II) the Closing Sale Price of the
AVII Common Stock on the AVII Share Delivery Date and (B) the Holder, upon
written notice to the Company, may void its Exchange Notice with respect to,
and retain or have returned, as the case may be, any portion of this Note
surrendered by the Holder to the AVII Transfer Agent that has not been
exchanged pursuant to such Exchange Notice; provided that the voiding of an
Exchange Notice shall not affect the Company’s obligations to make any payments
which have accrued prior to the date of such notice pursuant to this Section
4(c)(ii) or otherwise.

 

(iii)          Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon exchange of any
portion of this Note in accordance with the terms hereof, the Holder shall not
be required to physically surrender this Note to the Company unless (A) the
full Conversion Amount represented by this Note is being exchanged or (B) the
Holder has provided the Company with prior written notice (which notice may be
included in an Exchange Notice) requesting physical surrender and reissue of
this Note.  The Company shall maintain
records showing the Principal, Interest and Late Charges exchanged and the
dates of such exchanges or shall use such other method, reasonably satisfactory
to the Holder, so as not to require physical surrender of this Note upon
exchange.

 

(iv)          Pro
Rata Exchange; Disputes.  In the
event that the Company receives an Exchange Notice from more than one holder of
Notes for the same Exchange Date and the Company can exchange some, but not
all, of such portions of the Notes submitted for exchange, the Company, subject
to Section 4(d), shall exchange from each holder of Notes electing to have
Notes exchanged on such date a pro rata amount of such holder’s portion of its
Notes submitted for exchange based on the principal amount of Notes submitted
for exchange on such date by such holder relative to the aggregate principal
amount of all Notes submitted for exchange on such date.  In the event of a dispute as to the number
of shares of AVII Common Stock transferable to the Holder in connection with an
exchange of this Note, the Company shall transfer and deliver to the Holder the
number of shares of AVII Common Stock not in dispute and resolve such dispute
in accordance with Section 26.

 

11

 

(v)           Application
of Exchange Amounts. Subject to Section 10(b), any Exchange Amount which
the Holder elects to exchange in accordance with this Section 4 (other than pursuant
to Company Exchanges) shall be deducted first from the Installment Amount
relating to the latest Installment Date (i.e., nearest to the Maturity Date)
with respect to which Installment Amounts remain outstanding and then
sequentially from the Installment Amounts relating to the immediately preceding
Installment Dates.

 

(d)           Limitations
on Exchanges.

 

(i)            Beneficial
Ownership.  The Company shall not
effect any exchange of this Note, and the Holder of this Note shall not have
the right to exchange any portion of this Note, pursuant to Section 4(a),
Section 10 or otherwise, to the extent that after giving effect to such
exchange, the Holder (together with the Holder’s affiliates), as set forth on
the applicable Exchange Notice, would beneficially own in excess of 4.99% of
the number of shares of AVII Common Stock outstanding immediately after giving
effect to such exchange.  For purposes
of the foregoing sentence, the number of shares of AVII Common Stock
beneficially owned by the Holder and its affiliates shall include the maximum
number of shares of AVII Common Stock deliverable upon exchange of this Note
with respect to which the determination of such sentence is being made, but
shall exclude the number of shares of AVII Common Stock which would be deliverable
upon (A) exchange of the remaining, nonexchanged portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise,
conversion or exchange of the unexercised, unconverted or nonexchanged portion
of any other securities (including, without limitation, any Other Notes or
warrants) subject to a limitation on exchange, conversion or exercise analogous
to the limitation contained herein beneficially owned by the Holder or any of
its affiliates.  Except as set forth in
the preceding sentence, for purposes of this Section 4(d)(i), beneficial
ownership shall be calculated in accordance with Section 13(d) of the 1934
Act.  For purposes of this Section
4(d)(i), in determining the number of outstanding shares of AVII Common Stock,
the Company and the Holder may rely on the number of outstanding shares of AVII
Common Stock as reflected in (x) the most recent Form 10-Q or Form 10-K of
AVII, as the case may be, or (y) a more recent public announcement by AVII.  In any case, the number of outstanding
shares of AVII Common Stock shall be determined after giving effect to the
conversion, exchange or exercise of securities of AVII, including this Note, by
the Holder or its affiliates since the date as of which such number of
outstanding shares of AVII Common Stock was reported and to the extent that
such securities of AVII include securities other than this Note, the Holder
shall inform the Company of any such conversions, exchanges or exercises.

 

(ii)           Maximum
AVII Shares.  The Company shall not
be obligated to deliver any shares of AVII Common Stock upon exchange of this
Note, whether pursuant to this Section 4, Section 10 or otherwise, if the
delivery of such shares of AVII Common Stock

 

12

 

would require the delivery of more than 2,634,211
shares of AVII Common Stock in the aggregate upon exchange of all the Notes (as
adjusted for any stock dividend, stock split, stock combination or other
similar transaction that proportionately decreases or increases the AVII Common
Stock after the Issuance Date) (the “AVII Exchange Cap”).  No Purchaser shall have delivered to it,
upon exchange of Notes, a number of shares of AVII Common Stock in an amount
greater than the product of the AVII Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to such Purchaser
pursuant to the Securities Purchase Agreement on the Issuance Date and the
denominator of which is the aggregate principal amount of all Notes issued to the
Purchasers pursuant to the Securities Purchase Agreement on the Issuance Date
(with respect to each Purchaser, the “AVII Exchange Cap Allocation”).  In the event that any Purchaser shall sell
or otherwise transfer any of such Purchaser’s Notes, the transferee shall be
allocated a pro rata portion of such Purchaser’s AVII Exchange Cap Allocation,
and the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the AVII Exchange Cap Allocation allocated to such transferee.  In the event that any such holder shall have
converted and exchanged such holder’s Notes in their entirety (such that such
holder no longer has any Notes) and such holder shall have received a number of
shares of AVII Common Stock which, in the aggregate, is less than such holder’s
AVII Exchange Cap Allocation, then the difference between such holder’s AVII
Exchange Cap Allocation and the number of shares of AVII Common Stock actually
delivered to such holder shall be allocated to the respective AVII Exchange Cap
Allocations of the remaining holders of Notes on a pro rata basis in proportion
to the aggregate principal amount of the Notes then held by each such holder.

 

(5)           RIGHTS
UPON EVENT OF DEFAULT.

 

(a)           Event
of Default.  Each of the following events
shall constitute an “Event of Default”:

 

(i)            the
failure of any Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior
to the date that is 60 days after the applicable Effectiveness Deadline (as
defined in the Registration Rights Agreement), or, while the applicable
Registration Statement is required to be maintained effective pursuant to the
terms of the Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to any holder of the Notes for
sale of all of such holder’s Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of the Registration
Rights Agreement, and such lapse or unavailability continues for a period of 10
consecutive days or for more than an aggregate of 30 days in any 365-day period
(other than days during an Allowable Grace Period (as defined in the
Registration Rights Agreement));

 

13

 

(ii)           the
suspension from trading or failure of the Company Common Stock to be listed on
the Principal Market or the NYSE for a period of five consecutive days or for
more than an aggregate of 10 days in any 365-day period;

 

(iii)          the
Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of shares of Company Common Stock within 10 Business Days after the
applicable Conversion Date or (B) notice, written or oral, to any holder of the
Notes, including by way of public announcement or through any of its agents, at
any time, of its intention not to comply with a permitted request for
conversion of any Notes into shares of Company Common Stock that are tendered
for conversion in accordance with the provisions of the Notes (other than
notice delivered by the Company in good faith in connection with a dispute that
is being resolved in accordance with Section 26 as to the appropriate number of
shares of Company Common Stock to be delivered upon conversion of the Notes);

 

(iv)          the
Company’s (A) failure to cure an Exchange Failure by delivery of the required
number of shares of AVII Common Stock within 10 Business Days after the
applicable Exchange Date or (B) notice, written or oral, to any holder of the
Notes, including by way of public announcement or through any of its agents, at
any time, of its intention not to comply with a request for exchange of any
Notes into shares of AVII Common Stock that are tendered for exchange in
accordance with the provisions of the Notes (other than notice delivered by the
Company in good faith in connection with a dispute that is being resolved in
accordance with Section 26 as to the appropriate number of shares of AVII
Common Stock to be delivered upon exchange of the Notes);

 

(v)           at
any time following the tenth consecutive Business Day that the Holder’s
Authorized Share Allocation is less than the number of shares of Company Common
Stock that the Holder would be entitled to receive upon a conversion of the
full Conversion Amount of this Note (without regard to any limitations on
conversion set forth in Section 3(d) or otherwise);

 

(vi)          the
Company’s failure to pay to the Holder any amount of Principal, Interest, Late
Charges or other amounts when and as due under this Note (including, without
limitation, the Company’s failure to pay any redemption payments or amounts
hereunder), or any other Transaction Document or any other agreement, document,
certificate or other instrument delivered in connection with the transactions
contemplated hereby and thereby to which the Holder is a party, except, in the
case of a failure to pay Interest and Late Charges when and as due, in which
case only if such failure continues for a period of at least five Business
Days;

 

(vii)         any
default under, redemption of or acceleration prior to maturity of any
Indebtedness (as defined in Section 3(r) of the Securities Purchase Agreement)
in excess

 

14

 

of $500,000 in the aggregate of the Company or any of
its Subsidiaries (as defined in Section 3(a) of the Securities Purchase
Agreement);

 

(viii)        the
Company or any of its Significant Subsidiaries pursuant to or within the meaning
of Title 11, U.S. Code, or any similar Federal or state law for the relief of
debtors (collectively, “Bankruptcy Law”), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a
general assignment for the benefit of its creditors or (E) admits in writing
that it is generally unable to pay its debts as they become due;

 

(ix)           a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that (A) is for relief against the Company or any of its Significant
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Significant Subsidiaries or (C) orders the liquidation of the
Company or any of its Significant Subsidiaries;

 

(x)            a
final judgment or judgments for the payment of money aggregating in excess of
$1,000,000 are rendered against the Company or any of its Subsidiaries and
which judgments are not, within 60 days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within 60 days after
the expiration of such stay; provided, however, that any judgment which is
covered by insurance or an indemnity from a credit worthy party shall not be
included in calculating the $1,000,000 amount set forth above so long as the
Company provides the Holder a written statement from such insurer or indemnity
provider (which written statement shall be reasonably satisfactory to the
Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within 60 days of the issuance of such judgment;

 

(xi)           the
Company breaches any representation, warranty, covenant or other term or
condition of this Note or any Other Note, any other Transaction Document or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby and hereby to which the
Holder is a party, except, other than in connection with a breach of Section 33
hereof, (A) to the extent that such breach would not have a Material Adverse
Effect (as defined in Section 3(a) of the Securities Purchase Agreement) and
(B) in the case of a breach of a covenant which is curable, only if such breach
continues for a period of at least five consecutive Business Days;

 

(xii)          any
breach or failure in any material respect to comply with either of Sections 10
or 17 of this Note;

 

15

 

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

 

(xiv)        the
Company shall, directly or indirectly, repay, prepay, redeem, defease or
otherwise make any payment on any Indebtedness existing on the Issuance Date
(other than Purchase Money Indebtedness and other than regularly scheduled
interest payments on Permitted Indebtedness at a rate that is not in excess of
7% per annum) in cash or cash equivalents.

 

(b)           Redemption
Right.  Promptly after the
occurrence of an Event of Default with respect to this Note or any Other Note,
the Company shall deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder.  At any time after the earlier of the
Holder’s receipt of an Event of Default Notice and the Holder becoming aware of
an Event of Default, the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (the “Event of
Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note that the Holder is
electing to redeem.  Each portion of
this Note subject to redemption by the Company pursuant to this Section 5(b)
shall be redeemed by the Company at a price equal to the greater of (i) the
product of (x) the Conversion Amount to be redeemed and (y) the Redemption
Premium and (ii) the product of (A) the Conversion Rate with respect to such
Conversion Amount in effect at such time as the Holder delivers an Event of
Default Redemption Notice and (B) the Closing Sale Price of the Company Common
Stock on the date immediately preceding such Event of Default (the “Event of
Default Redemption Price”). 
Redemptions required by this Section 5(b) shall be made in accordance
with the provisions of Section 14.

 

(6)           RIGHTS
UPON CHANGE OF CONTROL.

 

(a)           Change
of Control.  Each of the following
events shall constitute a “Change of Control”:

 

(i)            the
consolidation, merger or other business combination (including, without
limitation, a reorganization or recapitalization) of the Company with or into
another Person (other than (A) a consolidation, merger or other business
combination (including, without limitation, reorganization or recapitalization)
in which holders of the Company’s voting power immediately prior to the
transaction continue after the transaction to hold, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities, or (B) pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation
of the Company);

 

(ii)           the
sale or transfer of all or substantially all of the Company’s assets; or

 

16

 

(iii)          a
purchase, tender or exchange consummated pursuant to an offer made to and
accepted by a sufficient number of holders of the outstanding shares of Company
Common Stock such that after consummation of such purchase, tender or exchange,
the Person or group of Persons proposing such purchase, tender or exchange
beneficially own 50% or more of the outstanding Company Common Stock.

 

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

 

(b)           Assumption.  Prior to the consummation of any Change of
Control, the Company will secure from any Person purchasing the Company’s
assets or Company Common Stock or any successor resulting from such Change of
Control (in each case, an “Acquiring Entity”) a written agreement (in
form and substance satisfactory to the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding) to
deliver to each holder of Notes in exchange for such Notes, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to the Notes, including, without limitation, having a
principal amount and interest rate equal to the principal amounts and the
interest rates of the Notes held by such holder, and satisfactory to the
holders of Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding.

 

(c)           Holder
Redemption Right.  At any time
during the period beginning after the Holder’s receipt of a Change of Control
Notice and ending on the date of the consummation of such Change of Control
(or, in the event a Change of Control Notice is not delivered at least 10 days
prior to a Change of Control, at any time on or after the date which is 10 days
prior to a Change of Control and ending 10 days after the consummation of such
Change of Control), the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (“Change of Control Redemption Notice”)
to the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem.  The portion of this Note subject to redemption pursuant to this
Section 6(c) shall be redeemed by the Company at a price equal to the greater
of (i) the product of (x) the Conversion Amount being redeemed and (y) the
quotient determined by dividing (A) the Closing Sale Price of the Company
Common Stock on the Company Trading Day immediately preceding consummation of
such Change of Control by (B) the Conversion Price and (ii) 120% of the
Conversion Amount being redeemed (the “Change of Control Redemption Price”).  Redemptions required by this Section 6(c)
shall be made in accordance with the provisions of Section 14 and, to the
extent permitted by applicable law, shall have priority to payments by the
Company or the Acquiring Entity, as applicable, to the stockholders of the
Company in connection with a Change of Control.  Notwithstanding anything to the contrary in this Section 6,

 

17

 

but subject to Section 3(d) and Section 4(d), until the Change of
Control Redemption Price (together with any interest thereon) is paid in full,
the Conversion Amount submitted for redemption under this Section 6(c)
(together with any interest thereon) may be converted, in whole or in part, by
the Holder into Company Common Stock pursuant to Section 3 or may be exchanged,
in whole or in part, by the Holder into AVII Common Stock pursuant to Section
4.

 

(d)           Company
Redemption Right.  At any time from
and after the delivery of a Change of Control Notice but not later than the day
immediately preceding the consummation of such Change of Control, the Company
at its option may deliver a written notice via facsimile and overnight courier
to the Holder indicating that if the Company shall not receive from the Holder
a Change of Control Redemption Notice in accordance with Section 6(c), then the
Company is electing to redeem all or any portion of the Principal of this Note
and all Other Notes (an “Company Change of Control Redemption Notice”).  The Company Change of Control Redemption
Notice shall be irrevocable.  If the
Company shall not receive from the Holder a Change of Control Redemption Notice
in accordance with Section 6(c) and if the Conditions to Company Change of
Control Redemption (as set forth below) are satisfied or waived in writing by
the Holder, then the Company shall have the right to require the Holder to
submit for redemption all or any such portion of the Principal of this Note
designated in the Company Change of Control Redemption Notice in exchange for
(i) an amount in cash, payable by wire transfer of immediately available funds,
equal to the sum of (A) 120% of the Principal of this Note being redeemed
pursuant to this Section 6(d), plus (B) accrued and unpaid Interest with
respect to such Principal plus (C) accrued and unpaid Late Charges with respect
to such Principal and (ii) delivery of the Change of Control Warrants to the
Holder, duly executed and authorized by the Acquiring Entity (the “Company
Change of Control Redemption Price”).  “Conditions to Company Change of Control Redemption” means the
following conditions: (i) on each day during the period beginning on the date
of delivery of the Company Change of Control Redemption Notice to each holder
of the Notes and ending on and including the date immediately preceding the
Company Change of Control Redemption Date, no Grace Period (as defined in the
Registration Rights Agreement) shall be in effect and either (x) the
Registration Statement or Registration Statements required pursuant to the
Registration Rights Agreement shall be effective and available for the resale
of all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Company Common Stock
issuable upon conversion of the Notes and shares of Company Common Stock
issuable upon exercise of the Warrants shall be eligible for sale without
restriction pursuant to Rule 144(k) and the state securities laws; (ii) the
Company shall have no knowledge of any fact that would cause (x) the
Registration Statements required pursuant to the Registration Rights Agreement
not to be effective and available for the resale of at least all of the
Registrable Securities in accordance with the terms of the Registration Rights
Agreement or (y) any shares of Company Common Stock issuable upon conversion or
redemption of the Notes and shares of Company Common Stock issuable upon
exercise of the Warrants not to be eligible for sale without restriction
pursuant to Rule 144(k) and any applicable state securities laws; (iii) on each
day during the period beginning on the date of delivery of the Company Change
of Control

 

18

 

Redemption Notice and ending on and including the date immediately
preceding the Company Change of Control Redemption Date, the Company Common
Stock is designated for quotation on the Principal Market or the NYSE and shall
not have been suspended from trading on such exchange or market nor shall
delisting or suspension by such market or exchange been threatened or pending
either (A) in writing by such market or exchange or (B) by falling below the
minimum listing maintenance requirements of such market or exchange; (iv)
during the period beginning on the Issuance Date and ending on and including
the date immediately preceding the Company Change of Control Redemption Date,
the Company shall have delivered shares of Company Common Stock upon any
conversion of Conversion Amounts on a timely basis as set forth in Section
3(c)(i) of this Note (and analogous provisions under the Other Notes) and
delivered shares of Company Common Stock upon exercise of any Warrants on a
timely basis as set forth in Section 1(a) of the Warrants; (v) during the
period beginning on the Issuance Date and ending on and including the date
immediately preceding the Company Change of Control Redemption Date, the Company
shall have delivered shares of AVII Common Stock upon any exchange of Exchange
Amounts on a timely basis as set forth in Section 4(c)(i) of this Note (and
analogous provisions under the Other Notes); and (vi) the Company otherwise
shall have been in material compliance with and shall not have breached, in any
material respect, any provision, covenant, representation or warranty of this
Note or any of the Other Notes or any other Transaction Document.

 

(e)           Pro
Rata Company Change of Control Redemption Requirement. If the Company
elects to cause a redemption of all or any portion of the Principal of this
Note pursuant to Section 6(d), then it must simultaneously take the same action
with respect to all Other Notes.  If the
Company elects to cause the redemption of this Note pursuant to Section 6(d)
(or analogous provisions under all Other Notes) with respect to less than the
aggregate Principal of the Notes then outstanding, then the Company shall
require redemption of Principal from each of the holders of the Notes equal to
the product of (i) the aggregate Principal amount of Notes which the Company
has elected to cause to be converted pursuant to Section 6(d), multiplied by
(ii) the fraction, the numerator of which is the sum of the aggregate Principal
amount of the Notes initially purchased by such holder on the Issuance Date and
the denominator of which is the sum of the aggregate Principal amount of the
Notes purchased by all holders on the Issuance Date (such fraction with respect
to each holder is referred to as its “Change of Control Allocation Percentage,”
and such amount with respect to each holder is referred to as its “Pro Rata
Change of Control Redemption Amount”).  In the event that the initial holder of any Notes shall sell or
otherwise transfer any of such holder’s Notes, the transferee shall be
allocated a pro rata portion of such holder’s Change of Control Allocation
Percentage.  The Company Change of
Control Redemption Notice shall state (i) the date selected for the redemption
in accordance with Section 6(d), which date shall be the date of consummation
of the Change of Control, (ii) the aggregate principal amount of the Notes
which the Company has elected to redeem from all of the holders of the Notes
pursuant to this Section 6(d) (and analogous provisions under all Other Notes)
and (iii) each holder’s Pro Rata Change of Control Redemption Amount of the
aggregate Principal amount of the Notes that the Company has

 

19

 

elected to redeem pursuant to Section 6(d) (and analogous provisions
under all Other Notes).  All Principal
of this Note redeemed by the Company pursuant to Section 6(d) shall be deducted
first from the Installment Amount relating to the latest Installment Date
(i.e., nearest to the Maturity Date) with respect to which Installment Amounts
remain outstanding and then sequentially from the Installment Amounts relating
to the immediately preceding Installment Dates.  Redemptions under Section 6(d) shall be made in accordance with
the provisions of Section 14. 
Notwithstanding anything to the contrary in this Section 6, but subject
to Section 3(d) and Section 4(d), until the Company Change of Control
Redemption Price (together with any interest thereon) is paid in full, the Pro
Rata Change of Control Redemption Amount (together with any interest thereon)
may be converted, in whole or in part, by the Holder into Company Common Stock
pursuant to Section 3 or may be exchanged, in whole or in part, by the Holder
into AVII Common Stock pursuant to Section 4.

 

(7)           RIGHTS
UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

 

(a)           Purchase
Rights.

 

(i)  Company
Purchase Rights.  If at any time the
Company grants, issues or sells any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property pro rata to the
record holders of any class of Company Common Stock (the “Company Purchase Rights”),
then the Holder will be entitled to acquire, upon the terms applicable to such
Company Purchase Rights, the aggregate Company Purchase Rights which the Holder
could have acquired if the Holder had held the number of shares of Company
Common Stock acquirable upon complete conversion of this Note (without taking
into account any limitations or restrictions on the convertibility of this
Note) immediately before the date on which a record is taken for the grant,
issuance or sale of such Company Purchase Rights, or, if no such record is
taken, the date as of which the record holders of Company Common Stock are to
be determined for the grant, issue or sale of such Company Purchase Rights.

 

(ii)  AVII
Purchase Rights.  If at any time
AVII 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 AVII Common Stock (the “AVII Purchase Rights”), then
the Company shall use its reasonable best efforts to cause the Holder to
acquire, upon the terms applicable to such AVII Purchase Rights, the aggregate
AVII Purchase Rights which the Holder could have acquired if the Holder had
held the number of shares of AVII Common Stock acquirable upon complete
exchange of this Note (without taking into account any limitations or
restrictions on the exchangeability of this Note (other than Section 4(d)(ii))
immediately before the date on which a record is taken for the grant, issuance
or sale of such AVII Purchase Rights, or, if no such record is taken, the date
as of which the record holders of AVII Common Stock are to be determined for
the grant, issue or sale of such AVII Purchase Rights.

 

20

 

(b)           Other
Corporate Events. Prior to the consummation of any recapitalization,
reorganization, consolidation, merger, spin-off or other business combination
(other than a Change of Control) pursuant to which holders of Company Common
Stock are entitled to receive securities or other assets with respect to or in
exchange for Company Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon a conversion of this Note, (i) in addition to the shares of
Company Common Stock receivable upon such conversion, such securities or other
assets to which the Holder would have been entitled with respect to such shares
of Company Common Stock had such shares of Company Common Stock been held by
the Holder upon the consummation of such Corporate Event or (ii) in lieu of the
shares of Company Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of Company Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Company Common Stock) at a conversion rate for such consideration
commensurate with the Conversion Rate. 
Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding.

 

(8)           ADJUSTMENT
OF FIXED CONVERSION PRICE.

 

(a)           Adjustment
of Fixed Conversion Price upon Subdivision or Combination of Company Common
Stock.  If the Company at any time
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Company Common Stock into a
greater number of shares, the Fixed Conversion Price in effect immediately
prior to such subdivision will be proportionately reduced.  If the Company at any time combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Company Common Stock into a smaller number of shares, the
Fixed Conversion Price in effect immediately prior to such combination will be
proportionately increased.

 

(b)           Other
Considerations.  All calculations
under this Section 8 shall be made by the Company in good faith.

 

(9)           ADJUSTMENT
OF FIXED EXCHANGE PRICE.

 

(a)           Adjustment
of Fixed Exchange Price upon Subdivision or Combination of AVII Common Stock.  If AVII at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of
its outstanding shares of AVII Common Stock into a greater number of shares,
the Fixed Exchange Price in effect immediately prior to such subdivision will
be proportionately reduced.  If AVII at
any time combines (by

 

21

 

combination, reverse stock split or otherwise) one or more classes of
its outstanding shares of AVII Common Stock into a smaller number of shares,
the Fixed Exchange Price in effect immediately prior to such combination will
be proportionately increased.

 

(b)           Other
Considerations.  All calculations
under this Section 9 shall be made by the Company in good faith as soon as
practicable after the Company has knowledge of any such adjustment or the basis
for any such adjustment.

 

(10)         COMPANY
INSTALLMENT CONVERSION, EXCHANGE OR REDEMPTION.

 

(a)           General.  On each Installment Date, the Company shall
pay to the Holder of this Note the Installment Amount as of such Installment
Date by the combination of any of the following, but subject to and in
accordance with the terms of this Section 10, (i) requiring the conversion of a
portion of the applicable Installment Amount, in whole or in part, in
accordance with this Section 10 but subject to the satisfaction of the
Conditions to Company Conversion (as defined below) (a “Company Conversion”), (ii)
requiring the exchange of a portion of the applicable Installment Amount, in
whole or in part, in accordance with this Section 10 but subject to the
satisfaction of the Conditions to Company Exchange (as defined below) (a “Company
Exchange”), and/or (iii) redeeming the applicable Installment
Amount, in whole or in part, in accordance with this Section 10 (a “Company
Redemption”); provided that all of the outstanding applicable
Installment Amount as of each such Installment Date must be converted,
exchanged and/or redeemed by the Company on the applicable Installment Date,
subject to the provisions of this Section 10; provided further that, subject to
the satisfaction (or waiver in writing by the Holder) of the Conditions to
Company Exchange in respect of the payment of any Installment Amount due on any
Installment Date and the availability of a sufficient number of shares of AVII
Common Stock to be delivered to the Holder pursuant to the Pledge Agreement and
the Securities Account Control Agreement on such Installment Date, at least 35%
(or such lesser percentage as shall be agreed to in writing by the Holder) (the
“Required
Company Exchange Percentage”) of each payment of an Installment
Amount shall be paid through the delivery of AVII Common Stock and the
remainder shall be paid, at the option of the Company, by way of a Company
Conversion, subject to the satisfaction (or waiver in writing by the Holder) of
the Conditions to Company Conversion, or a Company Redemption in such amounts
as shall be designated by the Company in the applicable Company Installment
Notice (as defined below).  On or prior
to the date which is at least 21 Company Trading Days prior to each Installment
Date, the Company shall deliver written notice to the Holder (each, a “Company
Installment Notice”), which Company Installment Notice shall state
(i) the portion, if any, of the applicable Installment Amount which the Company
elects to convert pursuant to a Company Conversion, which amount when added to
the Company Redemption Amount and the Company Exchange Amount must equal the
applicable Installment Amount (the “Company Conversion Amount”), (ii) the
portion of the applicable Installment Amount which the Company elects to
exchange pursuant to a Company Exchange (the “Company Exchange Amount”),
which, unless the

 

22

 

Conditions to Company Exchange have not been satisfied (or have not
been waived in writing by the Holder), shall be not less than the Required
Company Exchange Percentage of the total Installment Amount due (subject to the
limitations set forth in Section 4(d)), and which amount when added to the
Company Conversion Amount and the Company Redemption Amount must equal the applicable
Installment Amount, (iii) the portion, if any, of the applicable Installment
Amount which the Company elects to redeem pursuant to a Company Redemption (the
“Company
Redemption Amount”), which amount when added to the Company
Conversion Amount and the Company Exchange Amount must equal the applicable
Installment Amount and (iv) if the Company has elected, in whole or in part, a
Company Conversion or a Company Exchange, then the Company Installment Notice
shall certify that the Conditions to Company Conversion and/or the Conditions
to Company Exchange are satisfied as of the date of the Company Installment
Notice.  If the Company does not deliver
a Company Installment Notice in accordance with this Section 10(a), then the
“Company Exchange Amount,” the “Company Redemption Amount” and the “Company
Conversion Amount” with respect to such Installment Date shall be in such
amounts and proportions as the Holder shall designate in writing to the Company
in its sole discretion and the Company shall be deemed to have delivered a
Company Installment Notice setting forth such amounts.  Each Company Installment Notice shall be
irrevocable.  Except as expressly
provided in this Section 10(a), the Company shall redeem, exchange and convert
the applicable Installment Amount of this Note pursuant to this Section 10 and
the corresponding Installment Amounts of the Other Notes pursuant to the
corresponding provisions of the Other Notes in the same ratio of the
Installment Amount being redeemed, converted and exchanged hereunder.  The Company Redemption Amount (whether set
forth in the Company Installment Notice or by operation of this Section 10)
shall be redeemed in accordance with Section 10(b), the Company Conversion
Amount shall be converted in accordance with Section 10(c) and the Company
Exchange Amount shall be exchanged in accordance with Section 10(d).

 

(b)           Mechanics
of Company Redemption.  If the
Company elects, or is deemed to have elected, a Company Redemption in
accordance with Section 10(a), then the Company Redemption Amount, if any,
which is to be paid to the Holder on the applicable Installment Date shall be
redeemed by the Company on such Installment Date, and the Company shall pay to
the Holder on such Installment Date, by wire transfer of immediately available
funds (provided that the Holder has provided the Company with written wire
transfer instructions not later than the second Business Day immediately
preceding the Installment Date), an amount in cash (the “Company Installment Redemption Price”)
equal to the sum of 100% of the Company Redemption Amount.  Notwithstanding anything to the contrary in
this Section 10(b), but subject to Section 3(d) and Section 4(d), until the
Company Installment Redemption Price (together with any interest thereon) is
paid in full, the Company Redemption Amount (together with any interest
thereon) may be converted, in whole or in part, by the Holder into Company
Common Stock pursuant to Section 3, or may be exchanged, in whole or in part,
by the Holder into AVII Common Stock pursuant to Section 4.

 

23

 

(c)           Mechanics
of Company Conversion.  Subject to
Sections 3(d) and 10(e), if the Company delivers a Company Installment Notice
and elects or is deemed to have elected, in whole or in part, a Company
Conversion in accordance with Section 10(a), then the applicable Company
Conversion Amount, if any, which remains outstanding shall be converted as of
the applicable Installment Date by converting on such Installment Date such
Company Conversion Amount as if the Holder had delivered a Conversion Notice
pursuant to Section 3 with respect to such Company Conversion Amount on such
Installment Date but without the Holder being required to actually deliver such
Conversion Notice; provided that the Conditions to Company Conversion are
satisfied (or waived in writing by the Holder) on such Installment Date.  If the Conditions to Company Conversion are
not satisfied (or waived in writing by the Holder) on such Installment Date,
then at the option of the Holder designated in writing to the Company, the
Holder may require the Company to do any one or more of the following: (i) the
Company shall redeem all or any part designated by the Holder of the
unconverted Company Conversion Amount (such designated amount is referred to as
the “First
Redemption Amount”) on such Installment Date and the Company shall
pay to the Holder on such Installment Date, by wire transfer of immediately
available funds (provided that the Holder has provided the Company with written
wire transfer instructions not later than the second Business Day immediately
preceding the Installment Date), an amount in cash equal to such First
Redemption Amount, (ii) the Company shall exchange all or any part designated
by the Holder of the unconverted Company Conversion Amount into shares of AVII
Common Stock (such designated amount is referred to as the “First
Exchange Amount”) on such Installment Date and the Company shall
deliver to the Holder on such Installment Date a number of shares of AVII
Common Stock as if the Company had designated such First Exchange Amount as a
Company Exchange Amount in accordance with Section 10(d) hereof, or (iii) the
Company Conversion shall be null and void with respect to all or any part
designated by the Holder of the unconverted Company Conversion Amount and the
Holder shall be entitled to all the rights of a holder of this Note with
respect to such amount of the Company Conversion Amount.  If the Company fails to redeem any First
Redemption Amount on the applicable Installment Date by payment of such amount
on the applicable Installment Date, then the Holder shall have the rights set
forth in Section 10(b) as if the Company failed to pay the applicable Company
Redemption Price and all other rights under this Note (including, without
limitation, such failure constituting an Event of Default described in Section
5(a)(xiii)).  If the Company fails to
exchange any First Exchange Amount on the applicable Installment Date by
delivery of shares of AVII Common Stock, then the Holder shall have the rights
set forth in Section 10(d) as if the Conditions to Company Exchange had not
been satisfied and all other rights under this Note (including, without
limitation, such failure constituting an Event of Default described in Section
5(a)(xiii)).  Notwithstanding anything
to the contrary in this Section 10(c), but subject to Sections 3(d) and 4(d),
until the applicable portion of the Company Conversion Amount is converted in
accordance with this Section 10(c), the Company Conversion Amount may be
exchanged by the Holder into AVII Common Stock pursuant to Section 4.  In the event the Holder delivers a
Conversion Notice to the Company after the earlier of the date which is 10 days
prior to the applicable Installment Date and the Holder’s receipt of the
Company Installment Notice in respect of such

 

24

 

Installment Date in which the Company elects or is deemed to have
elected a Company Redemption, the Principal amount specified in such Conversion
Notice shall be deducted (1) first, from the Principal represented by the
Company Redemption Amount and then (2) second, in accordance with Section
3(c)(v).

 

(d)           Mechanics
of Company Exchange.  Subject to
Sections 4(d) and 10(f), if the Company delivers a Company Installment Notice
and elects or is deemed to have elected, in whole or in part, a Company
Exchange in accordance with Section 10(a), then the applicable Company Exchange
Amount, if any, which remains outstanding shall be exchanged as of the
applicable Installment Date by exchanging on such Installment Date such Company
Exchange Amount, as if the Holder had delivered an Exchange Notice pursuant to
Section 4 with respect to such Company Exchange Amount on such Installment Date
but without the Holder being required to actually deliver such Exchange Notice;
provided that the Company will inform the AVII Transfer Agent of such Company
Exchange Amount immediately prior to such Installment Date; provided further
that the Conditions to Company Exchange are satisfied (or waived in writing by
the Holder) on such Installment Date. 
If the Conditions to Company Exchange are not satisfied (or waived in
writing by the Holder) on such Installment Date, then at the option of the
Holder designated in writing to the Company, the Holder may require the Company
to do any one or more of the following: (i) the Company shall redeem all or any
part designated by the Holder of the unexchanged Company Exchange Amount (such
designated amount is referred to as the “Second Redemption Amount”) on such
Installment Date and the Company shall pay to the Holder on such Installment
Date, by wire transfer of immediately available funds (provided that the Holder
has provided the Company with written wire transfer instructions not later than
the second Business Day immediately preceding the Installment Date), an amount
in cash equal to such Second Redemption Amount, (ii) the Company shall convert
all or any part designated by the Holder of the unconverted Company Exchange Amount
into shares of Company Common Stock (such designated amount is referred to as
the “First
Conversion Amount”) on such Installment Date and the Company shall
deliver to the Holder on such Installment Date a number of shares of Company
Common Stock as if the Company had designated such First Conversion Amount as a
Company Conversion Amount in accordance with Section 10(c) hereof, or (iii) the
Company Exchange shall be null and void with respect to all or any part
designated by the Holder of the unexchanged Company Exchange Amount and the
Holder shall be entitled to all the rights of a holder of this Note with
respect to such amount of the Company Exchange Amount.  If the Company fails to redeem any Second
Redemption Amount on the applicable Installment Date by payment of such amount
on the applicable Installment Date, then the Holder shall have the rights set
forth in Section 10(b) as if the Company failed to pay the applicable Company
Redemption Price and all other rights under this Note (including, without
limitation, such failure

 

25

 

constituting an Event of Default described in Section 5(a)(xiii)).  If the Company fails to convert any First
Conversion Amount on the applicable Installment Date by delivery of shares of
Company Common Stock, then the Holder shall have the rights set forth in
Section 10(c) as if the Conditions to Company Conversion had not been satisfied
and all other rights under this Note (including, without limitation, such
failure constituting an Event of Default described in Section 5(a)(xiii)).  Notwithstanding anything to the contrary in
this Section 10(d), but subject to Section 3(d), until the applicable portion
of the Company Exchange Amount is exchanged in accordance with this Section
10(d), the Company Exchange Amount may be converted by the Holder into Company
Common Stock pursuant to Section 3.  In
the event the Holder delivers an Exchange Notice to the Company after the
earlier of the date which is 10 days prior to the applicable Installment Date
and the Holder’s receipt of the Company Installment Notice in respect of such
Installment Date in which the Company elects or is deemed to have elected a
Company Redemption, the Principal amount specified in such Exchange Notice
shall be deducted (1) first, from the Principal represented by the Company
Redemption Amount and then (2) second, in accordance with Section 4(c)(v).

 

(e)           Conditions
to Company Conversion.  For purposes
of this Section 10, “Conditions to Company Conversion” means (i)
during the period beginning on the Issuance Date and ending on and including
the applicable Installment Date, the Company shall have delivered shares of
Company Common Stock upon any conversion of Conversion Amounts on a timely
basis as set forth in Section 3(c)(i), shares of AVII Common Stock upon any
exchange of Exchange Amounts on a timely basis as set forth in Section 4(c)(i),
and delivered shares of Company Common Stock upon exercise of any Warrants on a
timely basis as set forth in Section 1(a) of the Warrants; (ii) on each day
during the period beginning on the first Company Trading Day of the Company
Total Dollar Trading Volume Measuring Period in respect of any Installment Date
and ending on and including the applicable Installment Date, the Company Common
Stock shall be listed on the Principal Market or the NYSE and delisting or
suspension of the Company Common Stock by such market or exchange shall not
have been threatened either (A) in writing by such market or exchange or (B) by
falling below the minimum listing maintenance requirements of such market or
exchange for the Company Common Stock; (iii) during the period beginning on the
Issuance Date and ending on and including the applicable Installment Date,
there shall not have occurred either (x) the public announcement of a pending,
proposed or intended Change of Control which has not been abandoned, terminated
or consummated or (y) an Event of Default; (iv) during the period beginning on
the date which is the first Company Trading Day of the Company Total Dollar
Trading Volume Measuring Period and ending on and including the applicable
Installment Date, there shall not have occurred an event that with the passage
of time or giving of notice, and assuming it were not cured, would constitute
an Event of Default; (v) on each day of the period beginning on the date of
delivery of an Installment Notice with respect to an Installment Date and
ending on the applicable Installment Date either (x) the Registration Statement
or Registration Statements required pursuant to the Registration Rights
Agreement shall be effective and available for the resale of all of the
Registrable Securities in accordance with the terms of the Registration Rights
Agreement or (y) all shares of Company Common Stock issuable upon conversion of
the Notes and shares of Company Common Stock issuable upon exercise of the
Warrants shall be eligible for sale without restriction (other than any
restriction arising under applicable federal or state securities laws as a
result of the holder of such securities states as an Affiliate of the Company)
and without the need for registration under any applicable

 

26

 

federal or state securities laws; (vi) on each day of the period
beginning on the applicable Installment Date and ending thirty Company Trading
Days thereafter either (x) the Registration Statements required pursuant to the
Registration Rights Agreement shall be expected to be effective and available
for the resale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Company
Common Stock issuable upon conversion of the Notes and shares of Company Common
Stock issuable upon exercise of the Warrants shall be eligible for sale without
restriction (other than any restriction arising under applicable federal or
state securities laws as a result of the holder of such securities states as an
Affiliate of the Company) and without the need for registration under any applicable
federal or state securities laws; (vii) the Company shall have obtained the
Stockholder Approval prior to the date of delivery of the Company Installment
Notice; and (viii) the Company otherwise shall have been in material compliance
with and shall not have breached, in any material respect, any provision,
covenant, representation or warranty of the Securities Purchase Agreement, any
of the Warrants, the Pledge Agreement, the Securities Account Control Agreement
or any of the Notes.

 

(f)            Conditions
to Company Exchange.  For purposes
of this Section 10, “Conditions to Company Exchange” means (i)
during the period beginning on the Issuance Date and ending on and including
the applicable Installment Date, the Company shall have delivered shares of Company
Common Stock upon any conversion of Conversion Amounts on a timely basis as set
forth in Section 3(c)(i), shares of AVII Common Stock upon any exchange of
Exchange Amounts on a timely basis as set forth in Section 4(c)(i), and
delivered shares of Company Common Stock upon exercise of any Warrants on a
timely basis as set forth in Section 1(a) of the Warrants; (ii) on each day
during the period beginning on the 31st AVII Trading Day preceding
delivery of the applicable Company Installment Notice and ending on and
including the applicable Installment Date, the AVII Common Stock shall be
listed on the Principal Market or the NYSE and delisting or suspension of the
AVII Common Stock by such market or exchange shall not have been threatened
either (A) in writing by such market or exchange or (B) by falling below the
minimum listing maintenance requirements of such market or exchange for the
AVII Common Stock; (iii) during the period beginning on the Issuance Date and
ending on and including the applicable Installment Date, there shall not have
occurred either (x) the public announcement of a pending, proposed or intended
Change of Control which has not been abandoned, terminated or consummated or
(y) an Event of Default; (iv) during the period beginning on the 31st
AVII Trading Day preceding delivery of the applicable Company Installment
Notice, there shall not have occurred an event that with the passage of time or
giving of notice, and assuming it were not cured, would constitute an Event of
Default; (v) on each day of the period beginning on the date of delivery of an
Installment Notice with respect to an Installment Date and ending on the
applicable Installment Date all shares of AVII Common Stock issuable upon
exchange of the Notes shall be eligible for sale by the Holder without
restriction (other than any restriction arising under applicable federal or
state securities laws as a result of the holder of such securities states as an
Affiliate of AVII) and without the need for registration under any applicable
federal or state securities laws; and (vi) on each day of the

 

27

 

period beginning on the applicable Installment Date and ending thirty
AVII Trading Days thereafter all shares of AVII Common Stock issuable upon
exchange of the Notes shall be eligible for sale by the Holder without
restriction and without the need for registration under any applicable federal
or state securities laws.

 

(g)           Limitation
on Company Conversion Amounts. 
Notwithstanding anything herein to the contrary, in no event shall the
Company be required to remit by way of a Company Conversion the portion of any
Installment Amount elected to be paid by Company Conversion that exceeds the
Company Total Dollar Trading Volume during the Company Total Dollar Trading
Volume Measuring Period applicable to such Installment Date; provided, however,
that, the Company may, by so designating in the applicable Company Installment
Notice, elect to extend the Company Total Dollar Trading Volume Measuring Period
until the Conversion Amount may be paid to the Holder without violating this
Section 10(g), but in no event may such period be extended past the Company
Trading Day immediately preceding the applicable Installment Date.  In the event the Company does not remit any
portion of the Installment Amount in the form of a Company Conversion by virtue
of this Section 10(g), such amounts shall be paid in cash in accordance with
Section 10(b).

 

(h)           Certain
Definitions.  For purposes of this
Section 10, the following capitalized terms shall have the following meanings:

 

(i)            “AVII
Exchange Price” means, as of any date of determination, that price
which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the AVII Common Stock on any fifteen AVII Trading Days
designated by the Holder of this Note to the Company during the period
commencing on the twentieth (20th) AVII Trading Day immediately
preceding such date and ending on the AVII Trading Day immediately preceding
such date.  All such determinations to
be appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately decreases or
increases the AVII Common Stock during such period.

 

(ii)           “Company
Conversion Price” means, as of any date of determination, that price
which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the Company Common Stock on any fifteen Company Trading Days
designated by the Holder of this Note to the Company during the period
commencing on the twentieth (20th) Company Trading Day immediately
preceding such date and ending on the Company Trading Day immediately preceding
such date.  All such determinations to
be appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately decreases or
increases the Company Common Stock during such period.

 

(iii)          “Company
Total Dollar Trading Volume” means, with respect to an Installment
Date, the product derived by multiplying (A) the aggregate dollar

 

28

 

amount of the trading volume of shares of Company Common Stock, as
reported by Bloomberg, during all Company Trading Days during the Company Total
Dollar Trading Volume Measuring Period by (B) .15.

 

(iv)          “Company
Total Dollar Trading Volume Measuring Period” means, with respect to
an Installment Date, the period commencing on and including the thirty-first
(31st) Company Trading Day immediately preceding the date of delivery
of the Company Installment Notice in respect of such Installment Date and
ending on and including the Company Trading Day immediately preceding the date
of delivery of the Company Installment Notice in respect of such Installment
Date.

 

(v)           “Installment
Amount” means, with respect to any Installment Date, the lesser of
(A) the quotient of (x) the original Principal amount of this Note on the
Issuance Date divided by (y) 4, and (B) the Principal amount under this Note as
of the Installment Date.  In the event
the Holder shall sell or otherwise transfer any portion of this Note, the
transferee shall be allocated a pro rata portion of the Installment Amount.

 

(vi)          “Installment
Date” means each of November 26, 2003, February 26, 2004, May 26,
2004 and August 26, 2004.

 

(11)         COMPANY’S
RIGHT OF OPTIONAL REDEMPTION.  (a) Optional
Redemption.  At any time from and
after the first anniversary of the date on which a Registration Statement (as
defined in the Registration Rights Agreement) covering all Registrable Securities
(as defined in the Registration Rights Agreement) in accordance with the
Registration Rights Agreement has been declared effective by the SEC, and if
the Conditions to Optional Redemption (as set forth in Section 11(c)) are
satisfied or waived in writing by the Holder, the Company shall have the right
to require the Holder to submit for redemption all or any such portion of the
Principal of this Note designated in the Optional Redemption Notice for an
amount in cash equal to the sum of (i) 120% of the Principal of this Note being
redeemed pursuant to this Section 11, plus (ii) accrued and unpaid Interest
with respect to such Principal being redeemed plus (iii) accrued and unpaid
Late Charges with respect to such Principal being redeemed (the “Optional
Redemption Price”).  The
Company may exercise its right to require redemption under this Section 11(a)
by delivering on the twentieth Trading Date prior to the date on which the
Optional Redemption will be effected (the “Optional Redemption Date”; with the twenty
Company Trading Day period between delivery of the Optional Redemption Notice
(as defined below) and the Optional Redemption Date being referred to as the “Optional
Redemption Measuring Period”)  a written notice thereof by facsimile and
overnight courier to all, but not less than all, of the holders of Notes (the “Optional
Redemption Notice” and the date all of the holders received such
notice is referred to as the “Optional Redemption Notice Date”).  The Optional Redemption Notice shall be
irrevocable.

 

(b)           Pro
Rata Redemption Requirement.  If the
Company elects to

 

29

 

cause a redemption of all or any portion of the Principal of this Note
pursuant to Section 11(a), then it must simultaneously take the same action
with respect to all Other Notes.  If the
Company elects to cause the redemption of this Note pursuant to Section 11(a)
(or analogous provisions under all Other Notes) with respect to less than the
aggregate principal amount of the Notes then outstanding (ignoring for such
purposes all principal amounts that are part of Installment Amounts with
respect to which the Company has delivered a Company Installment Notice prior
to the Optional Redemption Notice Date or the analogous provisions under the
Other Notes), then the Company shall require redemption of a principal amount
from each of the holders of the Notes equal to the product of (i) the aggregate
principal amount of Notes which the Company has elected to cause to be
converted pursuant to Section 11(a), multiplied by (ii) the fraction, the
numerator of which is the sum of the aggregate principal amount of the Notes
initially purchased by such holder on the Issuance Date and the denominator of
which is the sum of the aggregate principal amount of the Notes purchased by
all holders on the Issuance Date (such fraction with respect to each holder is
referred to as its “Allocation Percentage,” and such amount
with respect to each holder is referred to as its “Pro Rata Redemption Amount”).  In the event that the initial holder of any
Notes shall sell or otherwise transfer any of such holder’s Notes, the
transferee shall be allocated a pro rata portion of such holder’s Allocation
Percentage.  The Optional Redemption
Notice shall state (A) the date selected for the optional redemption in
accordance with Section 11(a), which date shall be the twentieth (20th)
Business Day following the Optional Redemption Notice Date, (B) the aggregate
principal amount of the Notes which the Company has elected to redeem from all
of the holders of the Notes pursuant to this Section 11 (and analogous
provisions under all Other Notes) and (C) each holder’s Pro Rata Redemption
Amount of the aggregate principal amount of the Notes that the Company has
elected to redeem pursuant to this Section 11 (and analogous provisions under
all Other Notes).  All Principal of this
Note redeemed by the Company pursuant to this Section 11 shall be deducted
first from the Installment Amount relating to the latest Installment Date
(i.e., nearest to the Maturity Date) with respect to which Installment Amounts
remain outstanding and then sequentially from the Installment Amounts relating
to the immediately preceding Installment Dates.  Redemptions under this Section 11(a) shall be made in accordance
with the provisions of Section 14. 
Notwithstanding anything to the contrary in this Section 11, but subject
to Section 3(d) and Section 4(d), until the Optional Redemption Price (together
with any interest thereon) is paid in full, the Pro Rata Redemption Amount
(together with any interest thereon) may be converted, in whole or in part, by
the Holder into Company Common Stock pursuant to Section 3 or may be exchanged,
in whole or in part, by the Holder into AVII Common Stock pursuant to Section
4.

 

(c)           Conditions
to Optional Redemption.  For
purposes of this Section 11, “Conditions to Optional Redemption” means  the
following conditions: (i) during the period beginning on the Issuance Date and
ending on and including the Optional Redemption Date, the Company shall have
delivered shares of Company Common Stock upon any conversion of Conversion
Amounts on a timely basis as set forth in Section 3(c)(i), shares of AVII
Common Stock upon any exchange of Exchange Amounts on a timely basis as set
forth in Section 4(c)(i) and shares of Company Common Stock upon exercise of
any Warrants on a

 

30

 

timely basis as set forth in Section 1(a) of the Warrants; (ii) on each
day during the period beginning on the first Company Trading Day of the
Optional Redemption Measuring Period and ending on and including the Optional
Redemption Date, the Company Common Stock shall be listed on the Principal
Market or the NYSE and delisting or suspension by such market or exchange shall
not have been threatened either (A) in writing by such market or exchange or
(B) by falling below the minimum listing maintenance requirements of such
market or exchange; (iii) during the period beginning on the Issuance Date and
ending on and including the Optional Redemption Date, there shall not have
occurred either (x) the public announcement of a pending, proposed or intended
Change of Control which has not been abandoned, terminated or consummated or
(y) an Event of Default; (iv) during the period beginning on the date which is
the first Company Trading Day of the Optional Redemption Measuring Period and
ending on and including the Optional Redemption Date, there shall not have
occurred an event that with the passage of time or giving of notice, and assuming
it were not cured, would constitute an Event of Default; (v) on each day of the
period beginning on the date of delivery of the Optional Redemption Notice and
ending on the Optional Redemption Date either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Company Common Stock issuable upon conversion of the Notes
and shares of Company Common Stock issuable upon exercise of the Warrants shall
be eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws, (vi) if less than all of
the principal amounts under this Note and all Other Notes is being redeemed by
the Company pursuant to this Section 11(a), on each day of the period beginning
on the Optional Redemption Date and ending thirty Company Trading Days
thereafter either (x) the Registration Statements required pursuant to the
Registration Rights Agreement shall be expected to be effective and available
for the resale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Company
Common Stock issuable upon conversion of the Notes and shares of Company Common
Stock issuable upon exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws, (vii) the Company shall have obtained the Stockholder
Approval prior to the Optional Redemption Notice Date and (viii) the Company
otherwise shall have been in material compliance with and shall not have
breached, in any material respect, any provision, covenant, representation or
warranty of this Note or any of the Other Notes or any other Transaction
Document.

 

(12)         NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Note, and will at all times in good faith carry out all of the provisions of
this Note.

 

31

 

(13)         RESERVATION
OF AUTHORIZED SHARES.

 

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

 

(b)           Insufficient
Authorized Shares.  If at any time
while any of the Notes remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Company Common Stock
to satisfy its obligation to reserve for issuance upon conversion of the Notes
at least a number of shares of Company Common Stock equal to the Required
Reserve Amount (an “Authorized Share Failure”), then the
Company shall immediately take all action necessary to increase the Company’s
authorized shares of Company Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then
outstanding.  Without limiting the
generality of the foregoing sentence, as soon as practicable after the date of
the occurrence of an Authorized Share Failure, but in no event later than 75 days
after the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Company Common Stock. 
In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its reasonable best efforts to
solicit its stockholders’ approval of such increase in authorized shares of
Company Common Stock.

 

(14)         HOLDER’S
REDEMPTIONS.

 

(a)           Mechanics.  In the event that the Holder has sent a
Redemption Notice to the Company pursuant to Section 5(b) or Section 6(c) or
the Company has sent a

 

32

 

Redemption Notice to the Holder pursuant to Section 6(d) or Section 11,
the Holder shall promptly submit this Note to the Company in accordance with
this Section 14.  The Company shall
deliver the applicable Event of Default Redemption Price to the Holder within
five Business Days after the Company’s receipt of the Holder’s Event of Default
Redemption Notice and thereafter the Holder shall promptly deliver this Note to
the Company.  If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 6(c)
or the Company has submitted a Company Change of Control Redemption Notice, the
Company shall deliver to the Holder the Change of Control Redemption Price or
Company Change of Control Redemption Price, as applicable, concurrently with
the consummation of such Change of Control if such Change of Control Redemption
Notice is received by the Company prior to the consummation of such Change of
Control (or such Company Change of Control Redemption Notice is delivered by
the Company in accordance with Section 6(d)) and within five Business Days
after the Company’s receipt of such Change of Control Redemption Notice
otherwise (the “Company Change of Control Redemption Date”).  The Company shall deliver the applicable
Optional Redemption Price to the Holder on the Optional Redemption Date and
thereafter the Holder shall promptly deliver this Note to the Company.  In the event of a redemption of less than
all of the Conversion Amount of this Note, the Company shall promptly cause to
be issued and delivered to the Holder a new Note (in accordance with Section
21(d)) representing the outstanding Principal which has not been redeemed.  In the event that the Company does not pay
the applicable Redemption Price to the Holder within the time period required,
at any time thereafter and until the Company pays such unpaid Redemption Price
in full, the Holder shall have the option to, in lieu of redemption, require
the Company to promptly return to the Holder all or any portion of this Note
representing the Conversion Amount that was submitted for redemption and for
which the applicable Redemption Price (together with any Late Charges thereon)
has not been paid.  Upon the Company’s
receipt of such notice, (w) the Redemption Notice shall be null and void with
respect to such Conversion Amount, (x) the Company shall immediately return
this Note, or issue a new Note (in accordance with Section 21(d)) to the Holder
representing such Conversion Amount, (y) the Fixed Conversion Price of this
Note or such new Notes shall be adjusted to the lesser of (A) the Fixed
Conversion Price as in effect on the date on which the Redemption Notice is
voided and (B) the lowest Closing Bid Price of the Company Common Stock during
the period beginning on and including the date on which the Redemption Notice
is delivered to the Company and ending on and including the date on which the
Redemption Notice is voided and (z) the Fixed Exchange Price of this Note or
such new Notes shall be adjusted to the lesser of (A) the Fixed Exchange Price
as in effect on the date on which the Redemption Notice is voided and (B) the lowest
Closing Bid Price of the AVII Common Stock during the period beginning on and
including the date on which the Redemption Notice is delivered to the Company
and ending on and including the date on which the Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.

 

33

 

(b)           Redemption
by Other Holders.  Upon the
Company’s receipt of notice from any of the holders of Other Notes for
redemption or repayment as a result of an event or occurrence substantially
similar to the events or occurrences described in Section 5(b) or Section 6(c)
(each, an “Other
Redemption Notice”), the Company shall immediately forward to the
Holder by facsimile a copy of such notice. 
If the Company receives a Redemption Notice and one or more Other
Redemption Notices during the seven Business Day period beginning on and
including the date which is three Business Days prior to the Company’s receipt
of the Holder’s Redemption Notice and ending on and including the date which is
three Business Days after the Company’s receipt of the Holder’s Redemption
Notice and the Company is unable to redeem all principal, interest and other
amounts designated in such Redemption Notice and such Other Redemption Notices
received during such seven Business Day period, then the Company shall redeem a
pro rata amount from each holder of the Notes (including the Holder) based on
the principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven Business Day period.

 

(15)         RESTRICTION
ON REDEMPTION AND CASH DIVIDENDS. 
Until all of the Notes have been converted, redeemed, exchanged or
otherwise satisfied in accordance with their terms, the Company shall not,
directly or indirectly, redeem, repurchase or declare or pay any cash dividend
or distribution on its capital stock without the prior express written consent
of the holders of Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding; provided that the foregoing shall not
prevent the Company from repurchasing Company Common Stock with an aggregate
value not to exceed $1 million (valued at the actual purchase price of the
Company Common Stock on the Principal Market) in transactions on the Principal
Market pursuant to employee benefit plans and employment agreements in
existence on the Issuance Date.

 

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

 

(17)         RANK;
ADDITIONAL INDEBTEDNESS; LIENS.

 

(a)           Rank.  Payments of Principal and Interest and other
payments due under this Note (a) shall rank pari passu with all Other Notes and (b)
shall be senior to all other Indebtedness (as defined in Section 3(r) of the
Securities Purchase Agreement) of the Company and its Subsidiaries (as defined
in the Securities Purchase Agreement), other than Purchase Money Indebtedness
(as defined below).

 

(b)           Incurrence
of Indebtedness.  So long as this
Note is outstanding, the Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume
or suffer to exist any Indebtedness, other than (i) the

 

34

 

Indebtedness evidenced by this Note and the Other Notes, (ii) Purchase
Money Indebtedness and (iii) Permitted Indebtedness.

 

(c)           Existence
of Liens.  So long as this Note is
outstanding, the Company shall not, and the Company shall not permit any of its
Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries other than (i) pursuant to the Pledge
Agreement and (ii) Permitted Liens.

 

(18)         PARTICIPATION.  The Holder, as the holder of this Note,
shall be entitled to receive such dividends paid and distributions made to the
holders of Company Common Stock to the same extent as if the Holder had
converted this Note into Company Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Company Common Stock on the record date for such dividends and
distributions.  Payments under the
preceding sentence shall be made concurrently with the dividend or distribution
to the holders of Company Common Stock. 
The Holder, as the holder of this Note, shall be entitled to receive
such dividends paid and distributions made to the holders of AVII Common Stock
to the same extent as if the Holder had exchanged this Note into AVII Common
Stock (without regard to any limitations on exchange herein or elsewhere (other
than Section 4(d)(ii) hereof) and had held such shares of AVII Common Stock on
the record date for such dividends and distributions.  Payments under the preceding sentence shall be made upon receipt
by the Company of the dividend or distribution from AVII.

 

(19)         VOTE
TO ISSUE, OR CHANGE THE TERMS OF, NOTES. 
The affirmative vote at a meeting duly called for such purpose or the
written consent without a meeting, of the holders of Notes representing not
less than two-thirds of the aggregate principal amount of the then outstanding
Notes, shall be required for any change or amendment to this Note or the Other
Notes; provided that the Holder of this Note may waive any term or provision of
this Note without such vote or written consent.

 

(20)         TRANSFER.  This Note and any shares of Company Common
Stock issued upon conversion of this Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Sections 2(i) and 2(j) of the Securities Purchase Agreement.

 

(21)         REISSUANCE
OF THIS NOTE.

 

(a)           Transfer.  If this Note is to be transferred, the
Holder shall surrender this Note to the Company, whereupon the Company will
forthwith issue and deliver upon the order of the Holder a new Note (in
accordance with Section 21(d)), registered as the Holder may request,
representing the outstanding Principal being transferred by the Holder and,

 

35

 

if less then the entire outstanding Principal is being transferred, a
new Note (in accordance with Section 21(d)) to the Holder representing the
outstanding Principal not being transferred. 
The Holder and any assignee, by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of Section 3(c)(iii) and Section
4(c)(iii), following conversion, exchange or redemption of any portion of this
Note, the outstanding Principal represented by this Note may be less than the
Principal stated on the face of this Note.

 

(b)           Lost,
Stolen or Mutilated Note.  Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Note, and, in the case of
loss, theft or destruction, of an indemnification undertaking by the Holder to
the Company, which undertaking shall be reasonably satisfactory to the Company,
and, in the case of mutilation, upon surrender and cancellation of this Note,
the Company shall execute and deliver to the Holder a new Note (in accordance
with Section 21(d)) representing the outstanding Principal.

 

(c)           Note
Exchangeable for Different Denominations. 
This Note is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Company, for a new Note or Notes (in accordance
with Section 21(d) and in principal amounts of at least $100,000) representing
in the aggregate the outstanding Principal of this Note, and each such new Note
will represent such portion of such outstanding Principal as is designated by
the Holder at the time of such surrender.

 

(d)           Issuance
of New Notes.  Whenever the Company
is required to issue a new Note pursuant to the terms of this Note, such new
Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated
on the face of such new Note, the Principal remaining outstanding (or in the
case of a new Note being issued pursuant to Section 21(a) or Section 21(c), the
Principal designated by the Holder which, when added to the principal
represented by the other new Notes issued in connection with such issuance,
does not exceed the Principal remaining outstanding under this Note immediately
prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note which is the same as the Issuance Date
of this Note, (iv) shall have the same rights and conditions as this Note, and
(v) shall represent the proportionate amount of accrued Interest and Late
Charges on the Principal and Interest of this Note that correspond to the
Principal of the new Notes, from the Issuance Date.

 

36

 

(22)         REMEDIES,
CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note and
any of 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 Holder’s right to pursue actual and consequential damages for
any failure by the Company to comply with the terms of this Note.  Amounts set forth or provided for herein
with respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the Holder and shall not, except as
expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof).  The
Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holder and that the remedy at law for any such
breach may be inadequate.  The Company
therefore agrees that, in the event of any such breach or threatened breach,
the Holder shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

 

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

 

(24)         CONSTRUCTION;
HEADINGS.  This Note shall be deemed
to be jointly drafted by the Company and all the Purchasers and shall not be
construed against any person as the drafter hereof.  The headings of this Note are for convenience of reference and
shall not form part of, or affect the interpretation of, this Note.

 

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

 

(26)         DISPUTE
RESOLUTION.  In the case of a
dispute as to the determination of the Closing Bid Price, the Closing Sale
Price, the Weighted Average Price, the Redemption Price or the arithmetic
calculation of the Conversion Rate, the Exchange Rate or the Redemption Price,
the Company shall submit the disputed determinations or arithmetic calculations
via facsimile within one Business Day of receipt of the Conversion Notice, the
Exchange Notice or the Redemption Notice giving rise to such dispute, as the
case may be, to the Holder.  If the

 

37

 

Holder and the Company are unable to agree upon such determination or
calculation of the Redemption Price, the Conversion Rate or the Exchange Rate,
as applicable, within one Business Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within one Business Day submit via facsimile (a) the disputed determination of
the Closing Bid Price, the Closing Sale Price or the Weighted Average Price to
an independent, reputable investment bank selected by the Company and approved
by the Holder or (b) the disputed arithmetic calculation of the Conversion
Rate, the Exchange Rate or the Redemption Price to the Company’s independent,
outside accountant.  The Company, at the
Company’s expense, shall use its reasonable best efforts to cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five Business Days from the time it receives the disputed
determinations or calculations.  Such
investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.

 

(27)         NOTICES;
PAYMENTS.

 

(a)           Notices.  Whenever notice is required to be given
under this Note, unless otherwise provided herein, such notice shall be given
in accordance with Section 9(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore.  Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Fixed Conversion Price or the Fixed Exchange Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least ten 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 Company Common Stock, (B) with respect to any pro rata
subscription offer to holders of Company Common Stock or (C) for determining
rights to vote with respect to any Change of Control, dissolution or
liquidation, provided in each case that such information shall be made known to
the public prior to or in conjunction with such notice being provided to the
Holder, and (iii) immediately upon obtaining knowledge (A) with respect to any
dividend or distribution upon the AVII Common Stock or (B) with respect to any
pro rata subscription offer to holders of AVII Common Stock, provided in each
case that such information has been made known to the public prior to or in
conjunction with such notice being provided to the Holder.  Notwithstanding the foregoing, Section 4(i)
of the Securities Purchase Agreement shall apply to all notices given pursuant
to this Note.

 

(b)           Payments.  Whenever any payment of cash is to be made
by the Company to any Person pursuant to this Note, such payment shall be made
in lawful money of the United States of America by a check drawn on the account
of the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Purchasers (as defined in Section 3(d)(ii)),

 

38

 

shall initially be as set forth on the Schedule of Buyers attached to
the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and
the Holder’s wire transfer instructions. 
Whenever any amount expressed to be due by the terms of this Note is due
on any day which is not a Business Day, the same shall instead be due on the
next succeeding day which is a Business Day and, in the case of any Interest
Date which is not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes of
determining the amount of Interest due on such date.  Any amount of Interest, Principal or other amount due under the
Transaction Documents (as defined in the Securities Purchase Agreement) which
is not paid when due shall result in a late charge being incurred and payable
by the Company in an amount equal to interest on such amount at the rate of 18%
per annum from the date such amount was due until the same is paid in full (“Late
Charge”).

 

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

 

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

 

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

 

(31)         CERTAIN
DEFINITIONS.  For purposes of this
Note, the following terms shall have the following meanings:

 

(a)           “Affiliate”
of any specified Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such specified Person.  For the purposes
of this definition, “control”, when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms “controlling” and “controlled” have meanings
correlative to the foregoing.

 

(b)           “AVII
Trading Day” means any day on which AVII Common

 

39

 

Stock is traded on the Principal Market, or, if the Principal Market is
not the principal trading market for AVII Common Stock, then on the principal
securities exchange or securities market on which AVII Common Stock is then
traded; provided that “AVII Trading Day” shall not include any day on which
AVII Common Stock is scheduled to trade on such exchange or market for less
than 4.5 hours or any day that AVII Common Stock is suspended from trading
during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00 p.m., New York
City Time).

 

(c)           “Bloomberg” means Bloomberg Financial
Markets.

 

(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)           “Change of Control Warrants” means
(I) a warrant exercisable for the consideration that would be
received at the time of consummation of the Change of Control by holders of
Company Common Stock (such consideration for each share of Company Common
Stock, a “Unit of Consideration”) in substantially the form of the Warrant
attached as Exhibit C to the Securities Purchase Agreement, except that (i) the
warrant shall be exercisable for a number of Units of
Consideration determined by dividing (A) the Conversion Amount being
redeemed pursuant to Section 6(d) by (B) the Fixed Conversion Price in effect
on the date of the Change of Control (rounded upward in the case of fractional
shares), (ii) the exercise price for each Unit of Consideration shall be equal
to the Fixed Conversion Price in effect on the date of the Change of
Control and (iii) the expiration date of the warrant shall be the weighted
average remaining term of the portion of this Note and the Other Notes that are
outstanding immediately prior to the date of the Change of Control (without
giving effect to any redemption thereof pursuant to Section 6), and (II) a
warrant to purchase AVII Common Stock in substantially the form of the Warrant
attached as Exhibit C to the Securities Purchase Agreement, except that (i) the
warrant shall be exercisable for AVII Common Stock and not Company Common
Stock, (ii) the exercise price shall be equal to the Fixed Exchange Price in
effect on the date of the Change of Control, (iii) the expiration date of the
warrant shall be the weighted average remaining term of the portion of this
Note and the Other Notes that are outstanding immediately prior to the date of
the Change of Control (without giving effect to any redemption thereof pursuant
to Section 6) and (iv) the number of shares of AVII Common Stock into which
such warrant shall be exercisable shall be determined by multiplying (x) the
difference between the AVII Exchange Cap and the number of shares of AVII
Common Stock previously delivered upon exchange of this Note and the Other
Notes by (y) the quotient determined by dividing (A) the Conversion Amount of
this Note being redeemed pursuant to Section 6(d) by (B) the Conversion Amount
of all Notes being redeemed pursuant to Section 6(d).

 

40

 

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

 

(g)           “Company
Board of Directors” means the board of directors of the Company or
any authorized committee of the board of directors.

 

(h)           “Company
Trading Day” means any day on which the Company Common Stock is
traded on the Principal Market, or, if the Principal Market is not the
principal trading market for the Company Common Stock, then on the principal
securities exchange or securities market on which the Company Common Stock is
then traded; provided that “Company Trading Day” shall not include any day on
which the Company Common Stock is scheduled to trade on such exchange or market
for less than 4.5 hours or any day that the Company Common Stock is suspended from
trading during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00 p.m., New York
City Time).

 

(i)            “Convertible
Securities” means with respect to any issuer, any stock or
securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for such issuer’s common stock.

 

(j)            “Issuance
Date” means February 26, 2003.

 

41

 

(k)           “Interest
Conversion Price” means, with respect to any Interest Date, that
price which shall be computed as 95% of the arithmetic average of the Weighted
Average Price of the Company Common Stock on each of the five consecutive
Company Trading Days ending on the second Company Trading Day immediately
preceding such Interest Date.  All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction during such period.

 

(l)            “Options”
means with respect to any issuer, any rights, warrants or options to subscribe
for or purchase such issuer’s common stock or such issuer’s Convertible
Securities.

 

(m)          “Permitted
Indebtedness” means Indebtedness that is unsecured, that is
subordinate in right of payment to this Note and the Other Notes, that shall
not have require principal repayments prior to the Maturity Date and that
provides for an interest that is no greater than market rate interests; provided
that the amount of Permitted Indebtedness shall not exceed the sum of
$1,000,000 in the aggregate.

 

(n)           “Permitted
Liens” means (i) any lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with generally acceptable
accounting principles in the United States applied on a consistent basis, (ii)
any statutory lien arising in the ordinary course of business by operation of
law with respect to a liability that is not yet due or delinquent, (iii) any
lien created by operation of law, such as materialmen’s liens, mechanics’ liens
and other similar liens, arising in the ordinary course of business with
respect to a liability that is not yet due or delinquent, (iv) deposits,
pledges or liens (other than liens arising under ERISA) securing (A)
obligations incurred in respect of workers’ compensation, unemployment
insurance or other forms of governmental insurance or benefits, (B) the
performance of bids, tenders, leases, contracts (other than for the payment of
money) and statutory obligations or (C) obligations on surety or appeal bonds,
but only to the extent such deposits, pledges or liens are incurred or
otherwise arise in the ordinary course of business and secure obligations not
past due or delinquent, (v) restrictions on the use of real property and minor
irregularities in the title thereto which do not (A) secure obligations for the
payment of money or (B) materially impair the value of such property or its use
in the ordinary course of business, and (vi) any minor imperfection of title or
similar lien which individually or in the aggregate with other such liens would
not reasonably be expected to have a Material Adverse Effect.

 

(o)           “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.

 

(p)           “Principal
Market” means the NASDAQ National Market.

 

42

 

(q)           “Purchase
Money Indebtedness” means Indebtedness of the Company or any
Subsidiary incurred solely for the purpose of financing all or any part of the
purchase price, or the cost of construction or improvement of any property in
an aggregate principal amount outstanding at any one time not in excess of
$500,000; provided, however, that the aggregate principal amount
of any such Indebtedness does not exceed the lesser of the fair market value of
such property, as determined in the good faith judgment of the Company Board of
Directors, or such purchase price or cost, including any refinancing of such
Indebtedness that does not increase the aggregate principal amount (or accreted
amount, if less) thereof as of the date of refinancing.

 

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

 

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

 

(t)            “Redemption
Premium” means (i) in the case of the Events of Default described in
Section 5(a)(i) – (vii) and (xi) - (xiv), 120% or (ii) in the case of the
Events of Default described in Section 5(a) (viii) - (x), 100%.

 

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

 

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

 

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

 

(x)            “Significant
Subsidiary” has the meaning assigned to it under Rule 1–02(w)
of Regulation S–X promulgated by the Commission.

 

(y)           “Warrants”
has the meaning ascribed to such term in the Securities Purchase Agreement, and
shall include all warrants issued in exchange therefore or replacement thereof.

 

(z)            “Weighted
Average Price” means, for any security as of any

 

43

 

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 (or such other time as the Principal Market publicly announces is the
official open of trading), and ending at 4:00:00 p.m., New York City Time (or
such other time as the Principal Market publicly announces is the official close
of trading) as reported by Bloomberg through its “Volume at Price” functions,
or, if the foregoing does not apply, the dollar volume-weighted average price
of such security in the over-the-counter market on the electronic bulletin
board for such security during the period beginning at 9:30:01 a.m., New York
City Time (or such other time as the Principal Market publicly announces is the
official open of trading), and ending at 4:00:00 p.m., New York City Time (or
such other time as the Principal Market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted
average price is reported for such security by Bloomberg for such hours, the
average of the highest closing bid price and the lowest closing ask price of
any of the market makers for such security as reported in the “pink sheets” by
Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 26.  All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.

 

(32)         SECURITY.  The Notes shall be secured by and to the
extent provided in the Pledge Agreement.

 

(33)         NIPENT.  In the event that the Company or any of it
subsidiaries sells, assigns, pledges, transfers or otherwise disposes its
rights to, into or with respect to, grants a participation interest in, or
enters into a joint venture relating to, the drug Nipent, or any derivative
thereof (any of the foregoing, a “Nipent Event”), then the Company shall be
required to establish an escrow account (the “Nipent Escrow”) and deposit
or cause to be deposited in the Nipent Escrow the consideration or proceeds
from any such Nipent Event concurrently with the consummation of any such
Nipent Event (the “Nipent Event Proceeds”).  The Nipent Escrow shall be established with
an independent, third-party escrow agent reasonably satisfactory to the Company
and the holders of the Notes representing a majority of the aggregate principal
amount of the Notes then outstanding. 
The Company, the holders of the Notes and such escrow agent shall enter
into an escrow agreement in a form that is reasonably acceptable to the Company
and to the holders of the Notes representing a majority of the aggregate
principal amount of the Notes then outstanding.  The Company shall be required to maintain in the Nipent Escrow a
balance (the “Required Nipent Escrow Balance”) at all times equal to the
lesser of (x) the Nipent Event Proceeds and (y) the sum of (A) the outstanding
Principal of all Notes, (B) accrued and unpaid Interest with respect to such
Principal and (C) accrued and unpaid Late Charges with respect to such
Principal and Interest.  If the
consideration or proceeds from any Nipent Event is in a form other than cash,
the amount of the consideration other than cash

 

44

 

received by the Company will be the fair value of such consideration as
reasonably determined in good faith by the Company Board of Directors, 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 securities on the date of determination.  If the consideration or proceeds from any
Nipent Event is in a form that is partly cash and partly other than cash, then
the Company shall first deposit all cash in the Nipent Escrow and then the
required value of any non-cash consideration or proceeds.  The Company shall be allowed to withdraw
from the Nipent Escrow any such Nipent Proceeds that exceed the Required Nipent
Escrow Balance and if the balance of the Nipent Escrow consists of cash and
non-cash proceeds or consideration, then any such withdrawal shall first be
from the non-cash portion.  The
obligation of the Company to maintain the Required Nipent Escrow Balance in the
Nipent Escrow Account pursuant to this Section 33 shall be inapplicable to and
shall terminate upon a Change of Control provided that such Change of Control
is in conformity with the provisions of the Transaction Documents.

 

[Signature Page Follows]

 

45

 

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

 

	
   

  	
  SUPERGEN,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ JOSEPH RUBINFELD

  
	
   

  	
  Name:

  	
  Joseph Rubinfeld

  
	
   

  	
  Title:

  	
  President / Chief Executive Officer

  
					

 

 

EXHIBIT I

SUPERGEN, INC.

CONVERSION NOTICE

 

TO BE
EXECUTED BY THE REGISTERED HOLDER TO CONVERT THIS NOTE INTO COMMON STOCK

 

Reference is made to the Senior Exchangeable Convertible Note (the “Note”)
issued to the undersigned by SuperGen, Inc. (the “Company”).  In accordance with and pursuant to the Note,
the undersigned hereby elects to convert the Conversion Amount (as defined in
the Note) of the Note indicated below into shares of Company Common Stock, par
value $.001 per share (the “Company Common Stock”), of the Company as
of the date specified below.

 

	
  Date of Conversion:

  	
   

  
	
   

  
	
  Aggregate Conversion Amount to be converted:

  	
   

  
			

 

Please confirm the following information:

 

	
  Conversion Price:

  	
   

  
	
   

  
	
  Number of shares of Company Common Stock to be issued:

  	
   

  
			

 

Notwithstanding anything to the contrary contained herein, this
Conversion Notice shall constitute a representation by the holder of the Note
submitting this Conversion Notice that, after giving effect to the conversion
provided for in this Conversion Notice, such holder (together with its
affiliates) will not have beneficial ownership (together with the beneficial
ownership of such Person’s affiliates) of a number of shares of Company Common
Stock which exceeds 4.99% of the total outstanding shares of Company Common
Stock, all as determined pursuant to the provisions of Section 3(d)(i) of the
Note.

 

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

 

	
  Issue to: 

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  
	
  Facsimile Number:

  	
   

  
	
   

  
	
  Authorization:

  	
   

  
				

 

 

	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  
	
   

  	
   

  
	
   

  	
  Account Number:

  	
   

  
	
   

  	
    (if electronic book entry transfer)

  
	
   

  	
   

  
	
   

  	
  Transaction Code Number:

  	
   

  
	
   

  	
    (if electronic book entry transfer)

  
								

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice
and hereby directs Mellon Investor Services LLC to issue the above indicated
number of shares of Company Common Stock in accordance with the Transfer Agent
Instructions dated February 26, 2003 from the Company and acknowledged and
agreed to by Mellon Investor Services LLC.

 

	
   

  	
  SUPERGEN,
  INC.

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	 

	
   

  	
   

  	
  Title:

  	 

					

 

 

EXHIBIT II

SUPERGEN, INC.

EXCHANGE NOTICE

 

Reference is made to the Senior Exchangeable Convertible Note (the “Note”)
issued to the undersigned by SuperGen, Inc. (the “Company”).  In accordance with and pursuant to the Note,
the undersigned hereby elects to exchange the Exchange Amount (as defined in
the Note) of the Note indicated below into shares of Common Stock, par value
$.001 per share (the “AVII Common Stock”), of AVI as of the date
specified below.

 

	
  Date of Exchange:

  	
   

  
	
   

  
	
  Aggregate Exchange
  Amount to be exchanged:

  	
   

  
			

 

Please confirm the following information:

 

	
  Exchange Price:

  	
   

  
	
   

  
	
  Number of shares of
  AVII Common Stock to be delivered:

  	
   

  
			

 

Notwithstanding anything to the contrary contained herein, this
Exchange Notice shall constitute a representation by the holder of the Note
submitting this Exchange Notice that, after giving effect to the exchange
provided for in this Exchange Notice, such holder (together with its
affiliates) will not have beneficial ownership (together with the beneficial
ownership of such Person’s affiliates) of a number of shares of AVII Common
Stock which exceeds 4.99% of the total outstanding shares of AVII Common Stock,
all as determined pursuant to the provisions of Section 4(d)(i) of the Note.

 

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

 

	
  Deliver to:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  
	
  Facsimile Number:

  	
   

  
	
   

  
	
  Authorization:

  	
   

  
				

 

	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

 

	
   

  	
   

  
	
  Dated:

  	
   

  
	
   

  	
   

  
	
   

  	
  Account Number:

  	
   

  
	
   

  	
    (if electronic book entry transfer)

  
	
   

  	
   

  
	
   

  	
  Transaction Code Number:

  	
   

  
	
   

  	
    (if electronic book entry transfer)

  
						

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exchange Notice
and hereby directs Mellon Investor Services LLC to issue the above indicated
number of shares of AVII Common Stock.

 

	
   

  	
  SUPERGEN,
  INC.

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	 

	
   

  	
   

  	
  Title:

  	 

					

 

 

determination

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