Document:

Unassociated Document

DDS
TECHNOLOGIES USA, INC.

CERTIFICATE
OF DESIGNATION OF PREFERENCES, 

RIGHTS
AND LIMITATIONS

OF

SERIES
A 6% CONVERTIBLE PREFERRED STOCK

PURSUANT
TO SECTION 78.1955 OF THE 

NEVADA
REVISED STATUTES

The
undersigned, Spencer L. Sterling and Joseph Fasciglione, do hereby certify
that:

1. They
are the President and Secretary, respectively, of DDS Technologies USA, Inc., a
Nevada corporation (the “Corporation”).

2. The
Corporation is authorized to issue 1,000,000 shares of preferred stock, none of
which have been issued.

3. The
following resolutions were duly adopted by the Board of Directors:

WHEREAS,
the Certificate of Incorporation of the Corporation provides for a class of its
authorized stock known as preferred stock, comprised of 1,000,000 shares, $.0001
par value, issuable from time to time in one or more series;

WHEREAS,
the Board of Directors of the Corporation is authorized to fix the dividend
rights, dividend rate, voting rights, conversion rights, rights and terms of
redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any Series and the
designation thereof, of any of them; and

WHEREAS,
it is the desire of the Board of Directors of the Corporation, pursuant to its
authority as aforesaid, to fix the rights, preferences, restrictions and other
matters relating to a series of the preferred stock, which shall consist of,
except as otherwise set forth in the Purchase Agreement, up to 4,000 shares of
the preferred stock which the corporation has the authority to issue, as
follows:

NOW,
THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for
the issuance of a series of preferred stock for cash or exchange of other
securities, rights or property and does hereby fix and determine the rights,
preferences, restrictions and other matters relating to such series of preferred
stock as follows:

 

1

TERMS
OF PREFERRED STOCK

Section
1.
 Definitions.
Capitalized terms used and not otherwise defined herein that are defined in the
Purchase Agreement shall have the meanings given such terms in the Purchase
Agreement. For the purposes hereof, the following terms shall have the following
meanings:

“Alternate
Consideration” shall
have the meaning set forth in Section 7(e).

 

“Bankruptcy
Event” means
any of the following events: (a) the Corporation or any Significant Subsidiary
(as such term is defined in Rule 1.02(s) of Regulation S-X) thereof commences a
case or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction relating to the Corporation or any Significant
Subsidiary thereof; (b) there is commenced against the Corporation or any
Significant Subsidiary thereof any such case or proceeding that is not dismissed
within 60 days after commencement; (c) the Corporation or any Significant
Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
or other order approving any such case or proceeding is entered; (d) the
Corporation or any Significant Subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property that is not
discharged or stayed within 60 days; (e) the Corporation or any Significant
Subsidiary thereof makes a general assignment for the benefit of creditors; (f)
the Corporation or any Significant Subsidiary thereof calls a meeting of its
creditors with a view to arranging a composition, adjustment or restructuring of
its debts; or (g) the Corporation or any Significant Subsidiary thereof, by any
act or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action for
the purpose of effecting any of the foregoing.

“Base
Conversion Price” shall
have the meaning set forth in Section 7(b).

“Buy-In” shall
have the meaning set forth in Section 6(e)(iii).

“Change
of Control Transaction” means
the occurrence after the date hereof of any of (i) an acquisition after the date
hereof by an individual or legal entity or “group” (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Corporation, by
contract or otherwise) of in excess of 33% of the voting securities of the
Corporation, or (ii) the Corporation merges into or consolidates with any other
Person, or any Person merges into or consolidates with the Corporation and,
after giving effect to such transaction, the stockholders of the Corporation
immediately prior to such transaction own less than 66% of the aggregate voting
power of the Corporation or the successor entity of such transaction, or (iii)
the Corporation sells or transfers its assets, as an entirety or substantially
as an entirety, to another Person and the stockholders of the Corporation
immediately prior to such transaction own less than 66% of the aggregate voting
power of the acquiring entity immediately after the transaction, (iv) a
replacement at one time or within a one year period of more than one-half of the
members of the Corporation’s board of directors which is not approved by a
majority of those individuals who are members of the board of directors on the
date hereof (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on the date
hereof), or (v) the execution by the Corporation of an agreement to which the
Corporation is a party or by which it is bound, providing for any of the events
set forth above in (i) or (iv).

2

“Closing
Date” means
the Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all conditions precedent to (i)
the Holders’ obligations to pay the Subscription Amount and (ii) the
Corporation’s obligations to deliver the Securities have been satisfied or
waived.

“Commission” means
the Securities and Exchange Commission.

“Common
Stock” means
the Corporation’s common stock, par value $0.0001 per share, and stock of any
other class of securities into which such securities may hereafter have been
reclassified or changed into.

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

“Conversion
Amount” means
the sum of the Stated Value at issue.

“Conversion
Date” shall
have the meaning set forth in Section 6(a).

“Conversion
Price” shall
have the meaning set forth in Section 6(b). 

“Conversion
Shares” means,
collectively, the shares of Common Stock into which the shares of Preferred
Stock are convertible in accordance with the terms hereof.

“Conversion
Shares Registration Statement” means a
registration statement that meets the requirements of the Registration Rights
Agreement and registers the resale of all Conversion Shares by the Holder, who
shall be named as a “selling stockholder” thereunder, all as provided in the
Registration Rights Agreement.

“Dividend
Payment Date” shall
have the meaning set forth in Section 3(a).

“Dilutive
Issuance” shall
have the meaning set forth in Section 7(b).

3

“Dilutive
Issuance Notice” shall
have the meaning set forth in Section 7(b).

“Effective
Date” means
the date that the Conversion Shares Registration Statement is declared effective
by the Commission.

“Equity
Conditions” shall
mean, during the period in question, (i) the
Corporation shall have duly honored all conversions scheduled to occur or
occurring by virtue of one or more Notices of Conversion of the Holder, if any,
(ii) all liquidated damages and other amounts owing to the Holder in respect of
the Preferred Stock shall have been paid; (iii)
there is an effective Conversion Shares Registration Statement pursuant to which
the Holder is permitted to utilize the prospectus thereunder to resell all of
the shares issuable pursuant to the Transaction Documents (and the Corporation
believes, in good faith, that such effectiveness will continue uninterrupted for
the foreseeable future), (iv) the Common Stock is trading on the Trading Market
and all of the shares issuable pursuant to the Transaction Documents are listed
for trading on a Trading Market (and the Corporation believes, in good faith,
that trading of the Common Stock on a Trading Market will continue uninterrupted
for the foreseeable future), (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all
of the shares issuable pursuant to the Transaction Documents, (vi) there is then
existing no Triggering Event or event which, with the passage of time or the
giving of notice, would constitute a Triggering Event, (vii) the issuance of the
shares in question to the Holder would not violate the limitations set forth in
Section 6(c) and (viii) no
public announcement of a pending or proposed Fundamental Transaction, Change of
Control Transaction or acquisition transaction has occurred that has not been
consummated.

“Exchange
Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.

“Exempt
Issuance” means
the issuance of (a) shares of Common Stock or options to employees, officers or
directors of the Corporation pursuant to any stock or option plan duly adopted
by a majority of the non-employee members of the Board of Directors of the
Corporation or a majority of the members of a committee of non-employee
directors established for such purpose, (b) securities issued upon the exercise
of or conversion of or as dividends on any securities issued hereunder,
convertible securities, options or warrants issued and outstanding on the date
of the Purchase Agreement, provided that such securities have not been amended
since the date of the Purchase Agreement to increase the number of such
securities or to decrease the exercise or conversion price of any such
securities, and (c) securities issued pursuant to acquisitions or strategic
transactions, provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Corporation and in which the Corporation
receives benefits in addition to the investment of funds, but shall not include
a transaction in which the Corporation is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities.

 

4

“Forced
Conversion Notice” shall
have the meaning set forth in Section 8(a).

 

“Forced
Conversion Notice Date” shall
have the meaning set forth in Section 8(a).

 

“Fundamental
Transaction” shall
have the meaning set forth in Section 7(e).

“Holder” shall
have the meaning given such term in Section 2.

“Junior
Securities” means
the Common Stock and all other equity or equity equivalent securities of the
Corporation other than those securities that are (a) outstanding on the Original
Issue Date and (b) which are explicitly senior or pari passu in rights or
liquidation preference to the Preferred Stock.

“Liquidation” shall
have the meaning given such term in Section 5.

“Nevada
Courts” shall
have the meaning given such term in Section 10(d).

“Notice
of Conversion” shall
have the meaning given such term in Section 6(a).

“Original
Issue Date” shall
mean the date of the first issuance of any shares of the Preferred Stock
regardless of the number of transfers of any particular shares of Preferred
Stock and regardless of the number of certificates which may be issued to
evidence such Preferred Stock.

“Person” means a
corporation, an association, a partnership, an organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.

“Purchase
Agreement” means
the Securities Purchase Agreement, dated as of the Original Issue Date, to which
the Corporation and the original Holders are parties, as amended, modified or
supplemented from time to time in accordance with its terms.

“Registration
Rights Agreement” means
the Registration Rights Agreement, dated as of the date of the Purchase
Agreement, to which the Corporation and the original Holder are parties, as
amended, modified or supplemented from time to time in accordance with its
terms.

“Securities
Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

“Share
Delivery Date” shall
have the meaning given such term in Section 6(e).

“Stated
Value” shall
have the meaning given such term in Section 2.

“Subscription
Amount” shall
mean, as to each Purchaser, the amount to be paid for the Preferred Stock
purchased pursuant to the Purchase Agreement as specified below such Purchaser’s
name on the signature page of the Purchase Agreement and next to the heading
“Subscription Amount”, in United States Dollars and in immediately available
funds.

5

“Subsidiary” shall
have the meaning given to such term in the Purchase Agreement.

“Threshold
Period” shall
have the meaning set forth in Section 8(a).

“Trading
Day” means a
day on which the Common Stock is traded on a Trading Market.

“Trading
Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the Nasdaq SmallCap Market, the American
Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the
OTC Bulletin Board.

“Transaction
Documents” shall
have the meaning set forth in the Purchase Agreement.

“Triggering
Event” shall
have the meaning set forth in Section 9(a).

“Triggering
Redemption Amount” for
each share of Preferred Stock means the sum of (i) the greater of (A) 130% of
the Stated Value and (B) the product of (a) the VWAP on the Trading Day
immediately preceding the date of the Triggering Event and (b) the Stated Value
divided by the then Conversion Price, (ii) all accrued but unpaid dividends
thereon and (iii) all liquidated damages and other amounts due in respect of the
Preferred Stock.

“Triggering
Redemption Payment Date” shall
have the meaning set forth in Section 9(b).

“Two
Year Redemption” shall
have the meaning set forth in Section 8(b).

“Two
Year Redemption Date” shall
have the meaning set forth in Section 8(b).

“Two
Year Redemption Amount” shall
mean the sum of (i) 100% of the aggregate Stated Value then outstanding, (ii)
accrued but unpaid dividends and (iii) all liquidated damages and other amounts
due in respect of the Preferred Stock.

“VWAP” means,
for any date, the price determined by the first of the following clauses that
applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the primary Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on
a Trading Day from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP
function; (b) if the Common Stock is not then listed or quoted on the
Trading Market and if prices for the Common Stock are then reported in the “Pink
Sheets” published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by a nationally
recognized-independent appraiser selected in good faith by Purchasers holding a
majority of the Stated Value of the shares of Preferred Stock then
outstanding.

6

Section
2.
 Designation,
Amount and Par Value. The
series of preferred stock shall be designated as its Series A 6% Convertible
Preferred Stock (the “Preferred
Stock”) and
the number of shares so designated shall be up to 4,000 (which shall not be
subject to increase without the consent of all of the holders of the Preferred
Stock (each, a “Holder” and
collectively, the “Holders”)). Each
share of Preferred Stock shall have a par value of $.0001 per share and a stated
value equal to $1,000 (the “Stated
Value”).
Capitalized terms not otherwise defined herein shall have the meaning given such
terms in Section 1 hereof.

 

Section
3.
 Dividends.

a)  Dividends
in Cash or in Kind. Holders
shall be entitled to receive and the Corporation shall pay, cumulative dividends
at the rate per share (as a percentage of the Stated Value per share) of 6% per
annum (subject to increase pursuant to Section 9(b)), payable
quarterly on March 1, June 1, September 1 and December 1, beginning with the
first such date after the Original Issue Date and on any Conversion Date (except
that, if such date is not a Trading Day, the payment date shall be the next
succeeding Trading Day)(“Dividend
Payment Date”). The
form of dividend payments to each Holder shall be made in the following order:
(i) if funds are legally available for the payment of dividends and the Equity
Conditions have not been met, in cash only, (ii) if funds are legally available
for the payment of dividends and the Equity Conditions have been met, at the
sole election of the Corporation, in cash or shares of Common Stock which shall
be valued solely for such purpose at 90% of the average of the 20 VWAPs
immediately prior to the Dividend Payment Date; (iii) if funds are not legally
available for the payment of dividends and the Equity Conditions have been met,
in shares of Common Stock which shall be valued at 90% of the average of the 20
VWAPs immediately prior to the Dividend Payment Date; (iv) if funds are not
legally available for the payment of dividends and the Equity Conditions
relating to registration have been waived by such Holder, as to such Holder
only, in unregistered shares of Common Stock which shall be valued at 90% of the
average of the 20 VWAPs immediately prior to the Dividend Payment Date; and (v)
if funds are not legally available for the payment of dividends and the Equity
Conditions have not been met, then, at the election of such Holder, such
dividends shall accrue to the next Dividend Payment Date or shall be accreted to
the outstanding Stated Value. The Holders shall have the same rights and
remedies with respect to the delivery of any such shares as if such shares were
being issued pursuant to Section 6. On the Closing Date the Corporation shall
have notified the Holders whether or not it may lawfully pay cash dividends. The
Corporation shall promptly notify the Holders at any time the Corporation shall
become able or unable, as the case may be, to lawfully pay cash dividends. If at
any time the Corporation has the right to pay dividends in cash or Common Stock,
the Corporation must provide the Holder with at least 20 Trading Days’ notice of
its election to pay a regularly scheduled dividend in Common Stock. Dividends on
the Preferred Stock shall be calculated on the basis of a 360-day year, shall
accrue daily commencing on the Original Issue Date, and shall be deemed to
accrue from such date whether or not earned or declared and whether or not there
are profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Except as otherwise provided herein, if at any time the
Corporation pays dividends partially in cash and partially in shares, then such
payment shall be distributed ratably among the Holders based upon the number of
shares of Preferred Stock held by each Holder. Any dividends, whether paid in
cash or shares, that are not paid within three Trading Days following a Dividend
Payment Date shall continue to accrue and shall entail a late fee, which must be
paid in cash, at the rate of 18% per annum or the lesser rate permitted by
applicable law (such fees to accrue daily, from the Dividend Payment Date
through and including the date of payment).

 

7

b)  So long
as any Preferred Stock shall remain outstanding, neither the Corporation nor any
Subsidiary thereof shall redeem, purchase or otherwise acquire directly or
indirectly any Junior Securities. So long as any Preferred Stock shall remain
outstanding, neither the Corporation nor any Subsidiary thereof shall directly
or indirectly pay or declare any dividend or make any distribution (other than a
dividend or distribution described in Section 6 or dividends due and paid in the
ordinary course on preferred stock of the Corporation at such times when the
Corporation is in compliance with its payment and other obligations hereunder)
upon, nor shall any distribution be made in respect of, any Junior Securities so
long as any dividends due on the Preferred Stock remain unpaid, nor shall any
monies be set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities or shares pari passu with
the Preferred Stock.

Section
4.
 Voting
Rights. Except
as otherwise provided herein and as otherwise required by law, the Preferred
Stock shall have no voting rights. However, so long as any shares of Preferred
Stock are outstanding, the Corporation shall not, without the affirmative vote
of the Holders of the shares of the Preferred Stock then outstanding, (a) alter
or change adversely the powers, preferences or rights given to the Preferred
Stock or alter or amend this Certificate of Designation, (b) authorize or create
any class of stock ranking as to dividends, redemption or distribution of assets
upon a Liquidation (as defined in Section 5) senior to or otherwise pari passu
with the Preferred Stock, (c) amend its certificate of incorporation or other
charter documents so as to affect adversely any rights of the Holders, (d)
increase the authorized number of shares of Preferred Stock, or (e) enter into
any agreement with respect to the foregoing.

 

Section
5.
 Liquidation. Upon
any liquidation, dissolution or winding-up of the Corporation, whether voluntary
or involuntary (a “Liquidation”), the
Holders shall be entitled to receive out of the assets of the Corporation,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share plus any accrued and unpaid dividends
thereon and any other fees or liquidated damages owing thereon before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Corporation shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the Holders shall be
distributed among the Holders ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. A Fundamental Transaction or Change of Control Transaction shall not be
treated as a Liquidation. The Corporation shall mail written notice of any such
Liquidation, not less than 45 days prior to the payment date stated therein, to
each record Holder.

8

Section
6.
 Conversion.

a)  Conversions
at Option of Holder. Each
share of Preferred Stock shall be convertible into that number of shares of
Common Stock (subject to the limitations set forth in Section 6(c)) determined
by dividing the Stated Value of such share of Preferred Stock by the Conversion
Price, at the option of the Holder, at any time and from time to time from and
after the Original Issue Date. Holders shall effect conversions by providing the
Corporation with the form of conversion notice attached hereto as Annex
A (a
“Notice
of Conversion”). Each
Notice of Conversion shall specify the number of shares of Preferred Stock to be
converted, the number of shares of Preferred Stock owned prior to the conversion
at issue, the number of shares of Preferred Stock owned subsequent to the
conversion at issue and the date on which such conversion is to be effected,
which date may not be prior to the date the Holder delivers such Notice of
Conversion to the Corporation by facsimile (the “Conversion
Date”). If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the date that such Notice of Conversion to the Corporation is deemed
delivered hereunder. The calculations and entries set forth in the Notice of
Conversion shall control in the absence of manifest or mathematical error. To
effect conversions, as the case may be, of shares of Preferred Stock, a Holder
shall not be required to surrender the certificate(s) representing such shares
of Preferred Stock to the Corporation unless all of the shares of Preferred
Stock represented thereby are so converted, in which case the Holder shall
deliver the certificate representing such share of Preferred Stock promptly
following the Conversion Date at issue. Shares of Preferred Stock converted into
Common Stock or redeemed in accordance with the terms hereof shall be canceled
and may not be reissued.

b)  Conversion
Price. The
conversion price for the Preferred Stock shall equal $.70 (the
“Initial
Conversion Price”),
subject to adjustment herein; provided,
however, if for
the fiscal year ending December 31, 2005 (i) the Corporation fails to generate a
net operating income (revenues minus cost of sales) equal to or greater than
$1,500,000 and (ii) the Corporation fails to sell at least eight machines, which
eight machines shall be sold to at least two different purchasers, then
the
Initial Conversion Price shall be adjusted equal to the lesser of (i) the
Initial Conversion Price (as adjusted herein) and (ii) $0.50,
subject to further adjustment herein (the “Conversion
Price”).
Within 1
Trading Day of the determination of the Conversion Price hereunder, the Company
shall notify the Holders in writing.

9

c)  Beneficial
Ownership Limitation. Except as
set forth in Section 8(a), the Corporation shall not effect any conversion of
the Preferred Stock, and a Holder shall not have the right to convert any
portion of the Preferred Stock to the extent that after giving effect to such
conversion, such Holder (together with such Holder’s affiliates), as set forth
on the applicable Notice of Conversion, would beneficially own in excess of
4.99% of the number of shares of the Common Stock outstanding immediately after
giving effect to such conversion.  For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by such Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of the Preferred Stock with respect to which the determination of
such sentence is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (A) conversion of the remaining, nonconverted
Stated Value of Preferred Stock beneficially owned by such Holder or any of its
affiliates and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Corporation (including the Warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for purposes of
this Section 6(c), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act. To the extent that the limitation contained
in this Section 6(c) applies, the determination of whether the Preferred Stock
is convertible (in relation to other securities owned by such Holder together
with any affiliates) and of which shares of Preferred Stock is convertible shall
be in the sole discretion of such Holder, and the submission of a Notice of
Conversion shall be deemed to be such Holder’s determination of whether the
shares of Preferred Stock may be converted (in relation to other securities
owned by such Holder) and which shares of the Preferred Stock is convertible, in
each case subject to such aggregate percentage limitations. To ensure compliance
with this restriction, each Holder will be deemed to represent to the
Corporation each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and the
Corporation shall have no obligation to verify or confirm the accuracy of such
determination. For purposes of this Section 6(c), in determining the number of
outstanding shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock as reflected in the most recent of the
following: (A) the Corporation’s most recent Form 10-QSB or Form 10-KSB, as the
case may be, (B) a more recent public announcement by the Corporation or (C) any
other notice by the Corporation or the Corporation’s transfer agent setting
forth the number of shares of Common Stock outstanding.  Upon the written
or oral request of a Holder, the Corporation shall within two Trading Days
confirm orally and in writing to such Holder the number of shares of Common
Stock then outstanding.  In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Corporation, including the Preferred Stock, by
such Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. The provisions of this Section
6(c) may be waived by such Holder, at the election of such Holder, upon not less
than 61 days’ prior notice to the Corporation, and the provisions of this
Section 6(c) shall continue to apply until such 61st day (or
such later date, as determined by such Holder, as may be specified in such
notice of waiver).

10

d)  RESERVED.

 

e)  Mechanics
of Conversion

i.  Delivery
of Certificate Upon Conversion. Not
later than three Trading Days after each Conversion Date (the “Share
Delivery Date”), the
Corporation shall deliver or cause to be delivered to the Holder (A) a
certificate or certificates which, after the Effective Date, shall be free of
restrictive legends and trading restrictions (other than those required by the
Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of shares of Preferred Stock, and (B) a bank check
in the amount of accrued and unpaid dividends (if the Corporation has elected or
is required to pay accrued dividends in cash). After the Effective Date, the
Corporation shall, upon request of the Holder, deliver any certificate or
certificates required to be delivered by the Corporation under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If in the case of any Notice
of Conversion such certificate or certificates are not delivered to or as
directed by the applicable Holder by the third Trading Day after the Conversion
Date, the Holder shall be entitled to elect by written notice to the Corporation
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Corporation shall
immediately return the certificates representing the shares of Preferred Stock
tendered for conversion.

 

ii.  Obligation
Absolute; Partial Liquidated Damages. The
Corporation’s obligations to issue and deliver the Conversion Shares upon
conversion of Preferred Stock in accordance with the terms hereof are absolute
and unconditional, irrespective of any action or inaction by the Holder to
enforce the same, any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action to enforce the
same, or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Corporation or any violation or alleged violation of law by the Holder or
any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to the Holder in connection
with the issuance of such Conversion Shares. In the event a Holder shall elect
to convert any or all of the Stated Value of its Preferred Stock, the
Corporation may not refuse conversion based on any claim that such Holder or any
one associated or affiliated with the Holder of has been engaged in any
violation of law, agreement or for any other reason, unless, an injunction from
a court, on notice, restraining and or enjoining conversion of all or part of
this Preferred Stock shall have been sought and obtained and the Corporation
posts a surety bond for the benefit of the Holder in the amount of 150% of the
Stated Value of Preferred Stock outstanding, which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the dispute and the proceeds of which shall be payable to such Holder to the
extent it obtains judgment. In the absence of an injunction precluding the same,
the Corporation shall issue Conversion Shares or, if applicable, cash, upon a
properly noticed conversion. If the Corporation fails to deliver to the Holder
such certificate or certificates pursuant to Section 6(e)(i) within two Trading
Days of the Share Delivery Date applicable to such conversion, the Corporation
shall pay to such Holder, in cash, as liquidated damages and not as a penalty,
for each $5,000 of Stated Value of Preferred Stock being converted, $50 per
Trading Day (increasing to $100 per Trading Day after 3 Trading Days and
increasing to $200 per Trading Day 6 Trading Days after such damages begin to
accrue) for each Trading Day after the Share Delivery Date until such
certificates are delivered. Nothing herein shall limit a Holder’s right to
pursue actual damages for the Corporation’s failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

 

11

iii.  Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. If the
Corporation fails to deliver to the Holder such certificate or certificates
pursuant to Section 6(e)(i) by a Share Delivery Date, and if after such Share
Delivery Date the Holder purchases (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale by such Holder of the
Conversion Shares which the Holder was entitled to receive upon the conversion
relating to such Share Delivery Date (a “Buy-In”), then
the Corporation shall pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder was entitled to receive from the
conversion at issue multiplied by (2) the price at which the sell order giving
rise to such purchase obligation was executed. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of shares of Preferred Stock with
respect to which the aggregate sale price giving rise to such purchase
obligation is $10,000, under clause (A) of the immediately preceding sentence
the Corporation shall be required to pay the Holder $1,000. The Holder shall
provide the Corporation written notice indicating the amounts payable to the
Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Corporation. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Corporation’s failure
to timely deliver certificates representing shares of Common Stock upon
conversion of the shares of Preferred Stock as required pursuant to the terms
hereof.

 

iv.  Reservation
of Shares Issuable Upon Conversion. The
Corporation covenants that it will at all times reserve and keep available out
of its authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of the Preferred Stock and payment of dividends on the
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holder (and
the other Holders of the Preferred Stock), not less than such number of shares
of the Common Stock as shall (subject to any additional requirements of the
Corporation as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and restrictions of
Section 7) upon the conversion of all outstanding shares of Preferred Stock. The
Corporation covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Conversion Shares Registration Statement is then
effective under the Securities Act, registered for public sale in accordance
with such Conversion Shares Registration Statement.

12

v.  Fractional
Shares. Upon a
conversion hereunder, the Corporation shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the VWAP at such time. If the Corporation elects not, or is
unable, to make such a cash payment, the Holder shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common
Stock.

vi.  Transfer
Taxes. The
issuance of certificates for shares of the Common Stock on conversion of this
Preferred Stock shall be made without charge to the Holder hereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Corporation shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such shares of Preferred Stock so converted and
the Corporation shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Corporation the amount of such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.

Section
7.
 Certain
Adjustments.

a)  Stock
Dividends and Stock Splits. If the
Corporation, at any time while this Preferred Stock is outstanding: (A) pays a
stock dividend or otherwise make a distribution or distributions on shares of
its Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Corporation pursuant to this Preferred
Stock), (B) subdivides outstanding shares of Common Stock into a larger number
of shares, (C) combines (including by way of reverse stock split) outstanding
shares of Common Stock into a smaller number of shares, or (D) issues by
reclassification of shares of the Common Stock any shares of capital stock of
the Corporation, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding immediately before such event and of which
the denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to this Section 7(a)
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

 

13

b)  Subsequent
Equity Sales. If the
Corporation or any Subsidiary thereof, as applicable, at any time while this
Preferred Stock is outstanding, shall offer, sell, grant any option to purchase
or offer, sell or grant any right to reprice its securities, or otherwise
dispose of or issue (or announce any offer, sale, grant or any option to
purchase or other disposition) any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at an effective price
per share less than the then Conversion Price (such lower price, the
“Base
Conversion Price” and
such issuances collectively, a “Dilutive
Issuance”), as
adjusted hereunder (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share which is issued in
connection with such issuance, be entitled to receive shares of Common Stock at
an effective price per share which is less than the Conversion Price, such
issuance shall be deemed to have occurred for less than the Conversion Price on
such date of the Dilutive Issuance), then the Conversion Price shall be reduced
to equal the Base Conversion Price. Notwithstanding
the foregoing, no adjustment will be made under this Section 7(b) in respect of
an Exempt Issuance. The
Corporation shall notify the Holder in writing, no later than the Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other pricing terms
(such notice the “Dilutive
Issuance Notice”). For
purposes of clarification, whether or not the Corporation provides a Dilutive
Issuance Notice pursuant to this Section 7(b), upon the occurrence of any
Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price regardless of whether the Holder accurately refers to the Base Conversion
Price in the Notice of Conversion. 

 

c)  Subsequent
Rights Offerings. If the
Corporation, at any time while the Preferred Stock is outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to Holders)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the VWAP at the record date mentioned below, then the
Conversion Price shall be multiplied by a fraction, of which the denominator
shall be the number of shares of the Common Stock Outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock Outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered (assuming
receipt by the Corporation in full of all consideration payable upon exercise of
such rights, options or warrants) would purchase at such VWAP. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.

 

14

d)  Pro
Rata Distributions. If the
Corporation, at any time while Preferred Stock is outstanding, shall distribute
to all holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets (including cash and cash dividends) or rights or warrants
to subscribe for or purchase any security, then in each such case the Conversion
Price shall be adjusted by multiplying such Conversion Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of which
the numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

e)  Fundamental
Transaction. If, at
any time while this Preferred Stock is outstanding, (A) the Corporation effects
any merger or consolidation of the Corporation with or into another Person, (B)
the Corporation effects any sale of all or substantially all of its assets in
one or a series of related transactions, (C) any tender offer or exchange offer
(whether by the Corporation or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or (D) the Corporation effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a “Fundamental
Transaction”), then
upon any subsequent conversion of this Preferred Stock, the Holder shall have
the right to receive, for each Conversion Share that would have been issuable
upon such conversion immediately prior to the occurrence of such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the “Alternate
Consideration”). For
purposes of any such conversion, the determination of the Conversion Price shall
be appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Corporation shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Preferred Stock following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Corporation or surviving entity in such Fundamental Transaction
shall file a new Certificate of Designation with the same terms and conditions
and issue to the Holder new preferred stock consistent with the foregoing
provisions and evidencing the Holder’s right to convert such preferred stock
into Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 7(e)
and insuring that this Preferred Stock (or any such replacement security) will
be similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.

 

15

f)  Calculations. All
calculations under this Section 7 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section 7,
the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.

g)  Notice
to Holders.

i.  Adjustment
to Conversion Price.
Whenever the Conversion Price is adjusted pursuant to any of this Section 7, the
Corporation shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment. 

 

ii.  Notice
to Allow Conversion by Holder. If (A)
the Corporation shall declare a dividend (or any other distribution) on the
Common Stock; (B) the Corporation shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock; (C) the Corporation shall
authorize the granting to all holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital stock of any class or of any
rights; (D) the approval of any stockholders of the Corporation shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Corporation is a party, any sale or
transfer of all or substantially all of the assets of the Corporation, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the
Corporation shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation; then, in each case,
the Corporation shall cause to be filed at each office or agency maintained for
the purpose of conversion of this Preferred Stock, and shall cause to be mailed
to the Holder at its last address as its shall appear upon the stock books of
the Corporation, at least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to convert the Conversion Amount of this
Preferred Stock (or any part hereof) during the 20-day period commencing the
date of such notice to the effective date of the event triggering such notice.

 

16

  Section
8.
 Forced
Conversion and Two Year Redemption.

a)  Notwithstanding
anything herein to the contrary, if after the Effective Date (i) the Corporation
has generated a net operating income (revenues minus cost of sales) for the
fiscal year ending December 31, 2005 equal to or greater than $1,500,000, or
(ii) the VWAP for each of any 30 consecutive Trading Days (“Threshold
Period”), which
30 consecutive Trading Day period shall have commenced only after the Effective
Date, exceeds $1.60, subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of the Common
Stock that occur after the date of the Purchase Agreement and (iii) the average
daily volume for any Threshold Period, which Threshold Period shall have
commenced only after the Effective Date, exceeds 100,000 shares of Common Stock
per Trading Day, the Corporation may, within 2 Trading Days after any such
Threshold Period, deliver a notice to all Holders (a “Forced
Conversion Notice” and the
date such notice is received by the Holders, the “Forced
Conversion Notice Date”) to
cause each Holder to immediately convert all or part of such Holder’s Preferred
Stock plus all accrued but unpaid dividends thereon and all liquidated damages
and other amounts due in respect of the Preferred Stock. The Corporation may
only effect a Forced Conversion Notice if all of the Equity Conditions have been
met during the Threshold Period through and including the date that the
Conversion Shares are issued to the Holder pursuant to a Forced Conversion. Any
Forced Conversion Notices shall be applied ratably to all of the Holders in
proportion to each Holder’s initial purchases of Preferred Stock hereunder,
provided that any voluntary conversions by a Holder shall be applied against
such Holder’s pro-rata allocation thereby decreasing the aggregate amount
forcibly converted hereunder.

b)  Two
Year Redemption. On the
second anniversary of the Original Issue Date (the “Two
Year Redemption Date”), the
Corporation shall redeem all of the then outstanding Preferred Stock, for an
amount in cash equal to the Two Year Redemption Amount (such redemption, the
“Two
Year Redemption”). The
Corporation covenants and agrees that it will honor all Conversion Notices
tendered up until such amounts are paid in full.

c)  Redemption
Procedure. The
payment of cash pursuant to a Two Year Redemption shall be made on the Two Year
Redemption Date. If any portion of the cash payment for a Two Year Redemption
shall not be paid by the Corporation by the respective due date, interest shall
accrue thereon at the rate of 18% per annum (or the maximum rate permitted by
applicable law, whichever is less) until the such payment, plus all amounts
owing thereon, is paid in full.

17

Section
9.
 Redemption
Upon Triggering Events.

 

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

i.  the
failure of a Conversion Shares Registration Statement to be declared effective
by the Commission on or prior to the 180th day
after the Original Issue Date;

 

ii.  if,
during the Effectiveness Period, the effectiveness of the Conversion Shares
Registration Statement lapses for any reason for more than an aggregate of 60
calendar days (which need not be consecutive days) during any 12 month period,
or the Holder shall not be permitted to resell Registrable Securities under the
Conversion Shares Registration Statement for more than an aggregate of 60
calendar days (which need not be consecutive days) during any 12 month
period;

iii.  the
Corporation shall fail to deliver certificates representing Conversion Shares
issuable upon a conversion hereunder that comply with the provisions hereof
prior to the 5th Trading
Day after such shares are required to be delivered hereunder, or the Corporation
shall provide written notice to any Holder, including by way of public
announcement, at any time, of its intention not to comply with requests for
conversion of any shares of Preferred Stock in accordance with the terms
hereof;

iv.  one of
the Events (as defined in the Registration Rights Agreement) described in
subsections (i), (ii) or (iii) of Section 2(b) of the Registration Rights
Agreement shall not have been cured to the reasonable satisfaction of the
Holders prior to the expiration of 30 days from the Event Date (as defined in
the Registration Rights Agreement) relating thereto (other than an Event
resulting from a failure of a Conversion Shares Registration Statement to be
declared effective by the Commission on or prior to the 180th day after the
Original Issue Date, which shall be covered by Section 9(a)(i));

18

v.  the
Corporation shall fail for any reason to pay in full the amount of cash due
pursuant to a Buy-In within 5 days after notice therefor is delivered hereunder
or shall fail to pay all amounts owed on account of an Event within five days of
the date due;

vi.  the
Corporation shall fail to have available a sufficient number of authorized and
unreserved shares of Common Stock to issue to such Holder upon a conversion
hereunder;

vii.  the
Corporation shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach of the Transaction
Documents, and such failure or breach shall not, if subject to the possibility
of a cure by the Corporation, have been remedied within 30 calendar days after
the date on which written notice of such failure or breach shall have been
given;

viii.  the
Corporation shall redeem more than a de minimis number of Junior
Securities;

ix.  the
Corporation shall be party to a Change of Control Transaction; 

x.  there
shall have occurred a Bankruptcy Event; or

xi.  the
Common Stock shall fail to be listed or quoted for trading on a Trading Market
for more than 5 Trading Days, which need not be consecutive Trading
Days.

b)  Upon the
occurrence of a Triggering Event, each Holder shall (in addition to all other
rights it may have hereunder or under applicable law) have the right,
exercisable at the sole option of such Holder, to require the Corporation to
redeem all of the Preferred Stock then held by such Holder for a redemption
price, in cash, equal to the Triggering Redemption Amount. The Triggering
Redemption Amount shall be due and payable within 5 Trading Days of the date on
which the notice for the payment therefor is provided by a Holder (the
“Triggering
Redemption Payment Date”). If
the Corporation fails to pay the Triggering Redemption Amount hereunder in full
pursuant to this Section on the date such amount is due in accordance with this
Section the Corporation will pay interest thereon at a rate of 18% per annum (or
such lesser amount permitted by applicable law), accruing daily from such date
until the Triggering Redemption Amount, plus all such interest thereon, is paid
in full. For purposes of this Section, a share of Preferred Stock is outstanding
until such date as the Holder shall have received Conversion Shares upon a
conversion (or attempted conversion) thereof that meets the requirements hereof
or has been paid the Triggering Redemption Amount plus all accrued but unpaid
dividends and all accrued but unpaid liquidated damages in cash.

19

Section
10.
 Miscellaneous.

a)  Notices. Any and
all notices or other communications or deliveries to be provided by the Holder
hereunder, including, without limitation, any Notice of Conversion, shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Corporation, at the address set
forth above, facsimile number 561-750-4310,
Attn: Spencer Sterling, President and Chief Executive Officer,
or such
other address or facsimile number as the Corporation may specify for such
purposes by notice to the Holders delivered in accordance with this Section. Any
and all notices or other communications or deliveries to be provided by the
Corporation hereunder shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service addressed
to each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Corporation, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be
given.

 

b)  Absolute
Obligation. Except
as expressly provided herein, no provision of this Certificate of Designation
shall alter or impair the obligation of the Corporation, which is absolute and
unconditional, to pay the liquidated damages (if any) on, the shares of
Preferred Stock at the time, place, and rate, and in the coin or currency,
herein prescribed. 

 

c)  Lost
or Mutilated Preferred Stock Certificate. If a
Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or
destroyed, the Corporation shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated certificate, or in lieu of
or in substitution for a lost, stolen or destroyed certificate, a new
certificate for the shares of Preferred Stock so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such certificate, and of the ownership hereof, and indemnity, if requested,
all reasonably satisfactory to the Corporation.

20

d)  Governing
Law. All
questions concerning the construction, validity, enforcement and interpretation
of this Certificate of Designation shall be governed by and construed and
enforced in accordance with the internal laws of the State of Nevada, without
regard to the principles of conflicts of law thereof. Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced exclusively in
the state and federal courts sitting in the City of New York. Each party hereby
irrevocably submits to the 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 herein (including with respect to
the enforcement of any of the Transaction Documents), 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 improper or inconvenient venue for such
proceeding. 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 via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Certificate of Designation and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Certificate of
Designation or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Certificate
of Designation, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.

 

e)  Waiver. Any
waiver by the Corporation or the Holder of a breach of any provision of this
Certificate of Designation shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Certificate of Designation. The failure of the Corporation or the Holder to
insist upon strict adherence to any term of this Certificate of Designation on
one or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other
term of this Certificate of Designation. Any waiver must be in
writing.

 

f)  Severability. If any
provision of this Certificate of Designation is invalid, illegal or
unenforceable, the balance of this Certificate of Designation shall remain in
effect, and if any provision is inapplicable to any person or circumstance, it
shall nevertheless remain applicable to all other persons and circumstances. If
it shall be found that any interest or other amount deemed interest due
hereunder violates applicable laws governing usury, the applicable rate of
interest due hereunder shall automatically be lowered to equal the maximum
permitted rate of interest. 

21

g)  Next
Business Day.
Whenever any payment or other obligation hereunder shall be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day.

h)  Headings. The
headings contained herein are for convenience only, do not constitute a part of
this Certificate of Designation and shall not be deemed to limit or affect any
of the provisions hereof.

*********************

 

22

RESOLVED,
FURTHER, that the Chairman, the president or any vice-president, and the
secretary or any assistant secretary, of the Corporation be and they hereby are
authorized and directed to prepare and file a Certificate of Designation of
Preferences, Rights and Limitations in accordance with the foregoing resolution
and the provisions of Nevada law.

IN
WITNESS WHEREOF, the undersigned have executed this Certificate this ___ day of
April 2005.

	
      __________________________________________

      Name:
      

      Title:
      
	
      __________________________________________

      Name:
      

      Title:
      

 

23

ANNEX
A

NOTICE OF
CONVERSION

(TO BE
EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED
STOCK)

The
undersigned hereby elects to convert the number of shares of Series ___ 6%
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.0001 per share (the “Common
Stock”), of
DDS Technologies USA, Inc., a Nevada corporation (the “Corporation”),
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the
Corporation in accordance therewith. No fee will be charged to the Holder for
any conversion, except for such transfer taxes, if any.

Conversion
calculations:

	
      Date
      to Effect Conversion:
      _____________________________________________

	
      Number
      of shares of Preferred Stock owned prior to Conversion:
      _______________

	
      Number
      of shares of Preferred Stock to be Converted:
      ________________________

	
      Stated
      Value of shares of Preferred Stock to be Converted:
      ____________________

	
      Number
      of shares of Common Stock to be Issued:
      ___________________________

	
      Applicable
      Conversion
    Price:____________________________________________

	
      Number
      of shares of Preferred Stock subsequent to Conversion:
      ________________

	
       

 

[HOLDER]

 

By:___________________________________

                                                                Name:

                                                                Title:

24Unassociated Document

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

LONG
TERM COMMON STOCK PURCHASE WARRANT

To
Purchase __________ Shares of Common Stock of

 

DDS
Technologies USA, Inc.

 

THIS LONG
TERM COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received, _____________ (the “Holder”), is
entitled, upon the terms and subject to the limitations on exercise and the
conditions hereinafter set forth, at any time on or after the date hereof (the
“Initial
Exercise Date”) and on
or prior to the close of business on the five year anniversary of the Initial
Exercise Date (the “Termination
Date”) but
not thereafter, to subscribe for and purchase from DDS Technologies USA, Inc., a
Nevada corporation (the “Company”), up to
______ shares (the “Warrant
Shares”) of
Common Stock, par value $0.0001 per share, of the Company (the “Common
Stock”). The
purchase price of one share of Common Stock under this Warrant shall be equal to
the Exercise Price, as defined in Section 2(b). 

 

Section
1. Definitions.
Capitalized terms used and not otherwise defined herein shall have the meanings
set forth in that certain Securities Purchase Agreement (the “Purchase
Agreement”), dated
April 12, 2005, among the Company and the purchasers signatory
thereto.

 

Section
2. Exercise.

 

a)  Exercise
of Warrant.
Exercise of the purchase rights represented by this Warrant may be made, in
whole or in part, at any time or times on or after the Initial Exercise Date and
on or before the Termination Date by delivery to the Company of a duly executed
facsimile copy of the Notice of Exercise Form annexed hereto (or such other
office or agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the
Company); provided,
however, within
5 Trading Days of the date said Notice of Exercise is delivered to the Company,
the Holder shall have surrendered this Warrant to the Company and the Company
shall have received payment of the aggregate Exercise Price of the shares
thereby purchased by wire transfer or cashier’s check drawn on a United States
bank. 

 

1

b)  Exercise
Price. The
exercise price of the Common Stock under this Warrant shall be $____1
125% of the initial Conversion Price., subject
to adjustment hereunder (the “Exercise
Price”).

 

c)  Cashless
Exercise. If at
any time after one year from the date of issuance of this Warrant there is no
effective Registration Statement registering, or no current prospectus available
for, the resale of the Warrant Shares by the Holder, then this Warrant may also
be exercised at such time by means of a “cashless exercise” in which the Holder
shall be entitled to receive a certificate for the number of Warrant Shares
equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where:

 

(A) = the
VWAP on the Trading Day immediately preceding the date of such
election;

(B) = the
Exercise Price of this Warrant, as adjusted; and 

(X) = the
number of Warrant Shares issuable upon exercise of this Warrant in accordance
with the terms of this Warrant by means of a cash exercise
rather   than a cashless exercise.

Notwithstanding
anything herein to the contrary, on the Termination Date, this Warrant shall be
automatically exercised via cashless exercise pursuant to this Section
2(c).

d)  Exercise
Limitations;
Holder’s
Restrictions. A
Holder shall not have the right to exercise any portion of this Warrant,
pursuant to Section 2(c) or otherwise, to the extent that after giving effect to
such issuance after exercise, such Holder (together with such Holder’s
affiliates), as set forth on the applicable Notice of Exercise, would
beneficially own in excess of 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such issuance.  For purposes
of the foregoing sentence, the number of shares of Common Stock beneficially
owned by such Holder and its affiliates shall include the number of shares of
Common Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by such
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 shares of Preferred Stock or Warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for purposes of
this Section 2(d), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act, it being acknowledged by a Holder that the
Company is not representing to such Holder that such calculation is in
compliance with Section 13(d) of the Exchange Act and such Holder is solely
responsible for any schedules required to be filed in accordance therewith. To
the extent that the limitation contained in this Section 2(d) applies, the
determination of whether this Warrant is exercisable (in relation to other
securities owned by such Holder) and of which a portion of this Warrant is
exercisable shall be in the sole discretion of a Holder, and the submission of a
Notice of Exercise shall be deemed to be each Holder’s determination of whether
this Warrant is exercisable (in relation to other securities owned by such
Holder) and of which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination. For purposes
of this Section 2(d), in determining the number of outstanding shares of Common
Stock, a Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the
case may be, (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Company’s Transfer Agent setting forth the
number of shares of Common Stock outstanding.  Upon the written or oral
request of a Holder, the Company shall within two Trading Days confirm orally
and in writing to such Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by such Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The provisions of this Section 2(d) may be waived by
such Holder, at the election of such Holder, upon not less than 61 days’ prior
notice to the Company, and the provisions of this Section 2(d) shall continue to
apply until such 61st day (or
such later date, as determined by such Holder, as may be specified in such
notice of waiver).

_______________

1 125% of
the initial Conversion Price

 

2

e)  Mechanics
of Exercise.

 

i.  Authorization
of Warrant Shares. The
Company covenants that all Warrant Shares which may be issued upon the exercise
of the purchase rights represented by this Warrant will, upon exercise of the
purchase rights represented by this Warrant, be duly authorized, validly issued,
fully paid and nonassessable and free from all taxes, liens and charges in
respect of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue). 

 

ii.  Delivery
of Certificates Upon Exercise.
Certificates for shares purchased hereunder shall be transmitted by the transfer
agent of the Company to the Holder by crediting the account of the Holder’s
prime broker with the Depository Trust Company through its Deposit Withdrawal
Agent Commission (“DWAC”) system
if the Company is a participant in such system, and otherwise by physical
delivery to the address specified by the Holder in the Notice of Exercise within
3 Trading Days from the delivery to the Company of the Notice of Exercise Form,
surrender of this Warrant and payment of the aggregate Exercise Price as set
forth above (“Warrant
Share Delivery Date”). This
Warrant shall be deemed to have been exercised on the date the Exercise Price is
received by the Company. The Warrant Shares shall be deemed to have been issued,
and Holder or any other person so designated to be named therein shall be deemed
to have become a holder of record of such shares for all purposes, as of the
date the Warrant has been exercised by payment to the Company of the Exercise
Price and all taxes required to be paid by the Holder, if any, pursuant to
Section 2(e)(vii) prior to the issuance of such shares, have been paid.

 

iii.  Delivery
of New Warrants Upon Exercise. If this
Warrant shall have been exercised in part, the Company shall, at the time of
delivery of the certificate or certificates representing Warrant Shares, deliver
to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

 

iv.  Rescission
Rights. If the
Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares pursuant to this
Section 2(e)(iv) by the Warrant Share Delivery Date, then the Holder will have
the right to rescind such exercise.

 

3

v.  Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Exercise. In
addition to any other rights available to the Holder, if the Company fails to
cause its transfer agent to transmit to the Holder a certificate or certificates
representing the Warrant Shares pursuant to an exercise on or before the Warrant
Share Delivery Date, and if after such date the Holder is required by its broker
to purchase (in an open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by the Holder of the Warrant Shares which
the Holder anticipated receiving upon such exercise (a “Buy-In”), then
the Company shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of Warrant Shares that the Company was required to
deliver to the Holder in connection with the exercise at issue times (B) the
price at which the sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either reinstate the portion of
the Warrant and equivalent number of Warrant Shares for which such exercise was
not honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted exercise of shares of Common Stock with an aggregate sale price
giving rise to such purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the Company. Nothing
herein shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.

 

vi.  No
Fractional Shares or Scrip. No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. As to any fraction of a share which Holder would
otherwise be entitled to purchase upon such exercise, the Company shall pay a
cash adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.

 

vii.  Charges,
Taxes and Expenses.
Issuance of certificates for Warrant Shares shall be made without charge to the
Holder for any issue or transfer tax or other incidental expense in respect of
the issuance of such certificate, all of which taxes and expenses shall be paid
by the Company, and such certificates shall be issued in the name of the Holder
or in such name or names as may be directed by the Holder; provided,
however, that in
the event certificates for Warrant Shares are to be issued in a name other than
the name of the Holder, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the Holder;
and the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.

 

viii.  Closing
of Books. The
Company will not close its stockholder books or records in any manner which
prevents the timely exercise of this Warrant, pursuant to the terms
hereof.

 

4

Section
3. Certain Adjustments.

 

a)  Stock
Dividends and Splits. If the
Company, at any time while this Warrant is outstanding: (A) pays a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Warrant), (B)
subdivides outstanding shares of Common Stock into a larger number of shares,
(C) combines (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company, then
in each case the Exercise Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event and the number of shares issuable upon exercise of
this Warrant shall be proportionately adjusted. Any adjustment made pursuant to
this Section 3(a) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.

 

b)  Subsequent
Equity Sales. If the
Company or any Subsidiary thereof, as applicable, at any time while this Warrant
is outstanding, shall offer, sell, grant any option to purchase or offer, sell
or grant any right to reprice its securities, or otherwise dispose of or issue
(or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any Person
to acquire shares of Common Stock, at an effective price per share less than the
then Exercise Price (such lower price, the “Base
Share Price” and
such issuances collectively, a “Dilutive
Issuance”), as
adjusted hereunder (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share which is issued in
connection with such issuance, be entitled to receive shares of Common Stock at
an effective price per share which is less than the Exercise Price, such
issuance shall be deemed to have occurred for less than the Exercise Price on
such date of the Dilutive Issuance), then, the Exercise Price shall be reduced
and only reduced to equal the Base Share Price and the number of Warrant Shares
issuable hereunder shall be increased such that the aggregate Exercise Price
payable hereunder, after taking into account the decrease in the Exercise Price,
shall be equal to the aggregate Exercise Price prior to such adjustment. Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued. Notwithstanding the foregoing, no adjustments shall be made, paid or
issued under this Section 3(b) in respect of an Exempt Issuance. The Company
shall notify the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms (such
notice the “Dilutive
Issuance Notice”). For
purposes of clarification, whether or not the Company provides a Dilutive
Issuance Notice pursuant to this Section 3(b), upon the occurrence of any
Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Warrant Shares based upon the Base Share Price
regardless of whether the Holder accurately refers to the Base Share Price in
the Notice of Exercise. 

 

5

c)  Pro
Rata Distributions. If the
Company, at any time prior to the Termination Date, shall distribute to all
holders of Common Stock (and not to Holders of the Warrants) evidences of its
indebtedness or assets (including cash and cash dividends) or rights or warrants
to subscribe for or purchase any security other than the Common Stock (which
shall be subject to Section 3(b)), then in each such case the Exercise Price
shall be adjusted by multiplying the Exercise Price in effect immediately prior
to the record date fixed for determination of stockholders entitled to receive
such distribution by a fraction of which the denominator shall be the VWAP
determined as of the record date mentioned above, and of which the numerator
shall be such VWAP on such record date less the then per share fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

 

d)  Fundamental
Transaction. If, at
any time while this Warrant is outstanding, (A) the Company effects any merger
or consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one or a series of
related transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “Fundamental
Transaction”), then,
upon any subsequent exercise of this Warrant, the Holder shall have the right to
receive, for each Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction, at the
option of the Holder, (a) upon exercise of this Warrant, the number of shares of
Common Stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and any additional consideration (the
“Alternate
Consideration”)
receivable upon or as a result of such reorganization, reclassification, merger,
consolidation or disposition of assets by a Holder of the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to such
event or (b) if the Company is acquired in an all cash transaction, cash equal
to the value of this Warrant as determined in accordance with the Black-Scholes
option pricing formula. For purposes of any such exercise, the determination of
the Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect
of one share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Exercise Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any exercise of this Warrant following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new warrant consistent with the foregoing provisions
and evidencing the Holder’s right to exercise such warrant into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this Section 3(d) and insuring
that this Warrant (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental
Transaction.

 

6

e)  Calculations. All
calculations under this Section 3 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section 3,
the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.

 

f)  Voluntary
Adjustment By Company. The
Company may at any time during the term of this Warrant reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.

 

g)  Notice
to Holders.

 

i.  Adjustment
to Exercise Price.
Whenever the Exercise Price is adjusted pursuant to this Section 3, the Company
shall promptly mail to each Holder a notice setting forth the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment. If the Company issues a variable rate security, despite the
prohibition thereon in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion or exercise price at which such securities may be converted or
exercised in the case of a Variable Rate Transaction (as defined in the Purchase
Agreement).

 

ii.  Notice
to Allow Exercise by Holder. If (A)
the Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash dividend on or
a redemption of the Common Stock; (C) the Company shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection with
any reclassification of the Common Stock, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company; then, in each case, the Company shall cause to be
mailed to the Holder at its last address as it shall appear upon the Warrant
Register of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to exercise this Warrant during the
20-day period commencing on the date of such notice to the effective date of the
event triggering such notice.

 

7

Section
4. Transfer
of Warrant.

 

a)  Transferability. Subject
to compliance with any applicable securities laws and the conditions set forth
in Sections 5(a) and 4(d) hereof and to the provisions of Section 4.1 of the
Purchase Agreement, this Warrant and all rights hereunder are transferable, in
whole or in part, upon surrender of this Warrant at the principal office of the
Company, together with a written assignment of this Warrant substantially in the
form attached hereto duly executed by the Holder or its agent or attorney and
funds sufficient to pay any transfer taxes payable upon the making of such
transfer. Upon such surrender and, if required, such payment, the Company shall
execute and deliver a new Warrant or Warrants in the name of the assignee or
assignees and in the denomination or denominations specified in such instrument
of assignment, and shall issue to the assignor a new Warrant evidencing the
portion of this Warrant not so assigned, and this Warrant shall promptly be
cancelled. A Warrant, if properly assigned, may be exercised by a new holder for
the purchase of Warrant Shares without having a new Warrant issued.

 

b)  New
Warrants. This
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the Holder or its agent or attorney. Subject to compliance with
Section 4(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.

 

c)  Warrant
Register. The
Company shall register this Warrant, upon records to be maintained by the
Company for that purpose (the “Warrant
Register”), in
the name of the record Holder hereof from time to time. The Company may deem and
treat the registered Holder of this Warrant as the absolute owner hereof for the
purpose of any exercise hereof or any distribution to the Holder, and for all
other purposes, absent actual notice to the contrary.

 

d)  Transfer
Restrictions.
If, at the
time of
the surrender of this Warrant in connection with any transfer of this Warrant,
the transfer of this Warrant shall not be registered pursuant to an effective
registration
statement under the Securities Act and
under
applicable state securities or blue sky laws, the Company may require, as a
condition of allowing such transfer (i) that the Holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of counsel
(which opinion shall be in form, substance and scope customary for opinions of
counsel in comparable transactions) to the effect that such transfer may be made
without
registration under
the
Securities Act and under applicable state securities or blue sky laws, (ii) that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee be
an “accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a qualified institutional buyer as
defined in Rule 144A(a) under the Securities Act.

 

8

Section
5. Miscellaneous.

 

a)  Title
to Warrant. Prior
to the Termination Date and subject to compliance with applicable laws and
Section 4 of this Warrant, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
Holder in person or by duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form annexed hereto properly endorsed. The
transferee shall sign an investment letter in form and substance reasonably
satisfactory to the Company.

 

b)  No
Rights as Shareholder Until Exercise. This
Warrant does not entitle the Holder to any voting rights or other rights as a
shareholder of the Company prior to the exercise hereof. Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price (or by means of a
cashless exercise), the Warrant Shares so purchased shall be and be deemed to be
issued to such Holder as the record owner of such shares as of the close of
business on the later of the date of such surrender or payment.

 

c)  Loss,
Theft, Destruction or Mutilation of Warrant. The
Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which, in the case of the Warrant, shall not include the posting of any bond),
and upon surrender and cancellation of such Warrant or stock certificate, if
mutilated, the Company will make and deliver a new Warrant or stock certificate
of like tenor and dated as of such cancellation, in lieu of such Warrant or
stock certificate.

 

d)  Saturdays,
Sundays, Holidays, etc. If the
last or appointed day for the taking of any action or the expiration of any
right required or granted herein shall be a Saturday, Sunday or a legal holiday,
then such action may be taken or such right may be exercised on the next
succeeding day not a Saturday, Sunday or legal holiday.

 

9

e)  Authorized
Shares.

 

The
Company covenants that during the period the Warrant is outstanding, it will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of the Warrant Shares upon the exercise of
any purchase rights under this Warrant. The Company further covenants that its
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for the Warrant Shares upon the exercise of the purchase
rights under this Warrant. The Company will take all such reasonable action as
may be necessary to assure that such Warrant Shares may be issued as provided
herein without violation of any applicable law or regulation, or of any
requirements of the Trading Market upon which the Common Stock may be listed.

 

Except
and to the extent as waived or consented to by the Holder, the Company shall not
by any action, including, without limitation, amending 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
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant against
impairment. Without limiting the generality of the foregoing, the Company will
(a) not increase the par value of any Warrant Shares above the amount payable
therefor upon such exercise immediately prior to such increase in par value, (b)
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares upon the exercise of this Warrant, and (c) use commercially reasonable
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.

 

Before
taking any action which would result in an adjustment in the number of Warrant
Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.

 

f)  Jurisdiction. All
questions concerning the construction, validity, enforcement and interpretation
of this Warrant shall be determined in accordance with the provisions of the
Purchase Agreement.

 

g)  Restrictions. The
Holder acknowledges that the Warrant Shares acquired upon the exercise of this
Warrant, if not registered, will have restrictions upon resale imposed by state
and federal securities laws.

 

h)  Nonwaiver
and Expenses. No
course of dealing or any delay or failure to exercise any right hereunder on the
part of Holder shall operate as a waiver of such right or otherwise prejudice
Holder’s rights, powers or remedies, notwithstanding the fact that all rights
hereunder terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results in
any material damages to the Holder, the Company shall pay to Holder such amounts
as shall be sufficient to cover any costs and expenses including, but not
limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto or
in otherwise enforcing any of its rights, powers or remedies
hereunder.

 

10

i)  Notices. Any
notice, request or other document required or permitted to be given or delivered
to the Holder by the Company shall be delivered in accordance with the notice
provisions of the Purchase Agreement.

 

j)  Limitation
of Liability. No
provision hereof, in the absence of any affirmative action by Holder to exercise
this Warrant or purchase Warrant Shares, and no enumeration herein of the rights
or privileges of Holder, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the
Company.

 

k)  Remedies. Holder,
in addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Warrant and hereby agrees to waive the defense in any action
for specific performance that a remedy at law would be adequate.

 

l)  Successors
and Assigns. Subject
to applicable securities laws, this Warrant and the rights and obligations
evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and permitted assigns of Holder.
The provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and shall be enforceable by any such Holder or
holder of Warrant Shares.

 

m)  Amendment. This
Warrant may be modified or amended or the provisions hereof waived with the
written consent of the Company and the Holder.

 

n)  Severability.
Wherever possible, each provision of this Warrant shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Warrant.

 

o)  Headings. The
headings used in this Warrant are for the convenience of reference only and
shall not, for any purpose, be deemed a part of this Warrant.

 

********************

11

IN
WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.

 

Dated:
April __, 2005

 

	
      DDS
      TECHNOLOGIES USA, INC.

       

	
      By:__________________________________________

      Name:

      Title:

 

12

NOTICE
OF EXERCISE

TO: DDS
TECHNOLOGIES USA, INC.

(1)  The
undersigned hereby elects to purchase ________ Warrant Shares of the Company
pursuant to the terms of the attached Warrant (only if exercised in full), and
tenders herewith payment of the exercise price in full, together with all
applicable transfer taxes, if any.

 

(2)  Payment
shall take the form of (check applicable box):

 

[ ] in
lawful money of the United States; or

 

[ ] the
cancellation of such number of Warrant Shares as is necessary, in accordance
with the formula set forth in subsection 2(c), to exercise this Warrant with
respect to the maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).

 

(3)  Please
issue a certificate or certificates representing said Warrant Shares in the name
of the undersigned or in such other name as is specified below:

 

_______________________________

The
Warrant Shares shall be delivered to the following:

_______________________________

_______________________________

_______________________________

(4)
Accredited
Investor. The
undersigned is an “accredited investor” as defined in Regulation D promulgated
under the Securities Act of 1933, as amended.

[SIGNATURE
OF HOLDER]

Name of
Investing Entity:
________________________________________________________________

Signature
of Authorized Signatory of Investing Entity:
_________________________________________________

Name of
Authorized Signatory:
___________________________________________________________________

Title of
Authorized Signatory:
____________________________________________________________________

Date:
______________________________________________________________________________________

13

 

ASSIGNMENT
FORM

(To
assign the foregoing warrant, execute

this form
and supply required information. 

Do not
use this form to exercise the warrant.)

FOR VALUE
RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

 

_______________________________________________
whose address is

_______________________________________________________________.

_______________________________________________________________

                        Dated:
______________, _______

Holder’s
Signature: _____________________________

Holder’s
Address: _____________________________

        
                _____________________________

Signature
Guaranteed: ___________________________________________

NOTE: The
signature to this Assignment Form must correspond with the name as it appears on
the face of the Warrant, without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing
Warrant.

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