Document:

Exhibit
4.1

 

SECURITIES
PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”),
dated as of September 26, 2003, by and among 24/7 Real Media, Inc., a Delaware
corporation, with headquarters located at 1250 Broadway, 27th
Floor, New York, New York 10001 (the “Company”), and the investors listed on the
Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

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

 

B.            The Company has authorized a new series of
subordinated convertible debentures of the Company in the form attached hereto
as Exhibit A (together with any subordinated convertible debentures
issued in replacement thereof in accordance with the terms thereof, the “Debentures”), which Debentures shall be
convertible into shares of the Company’s Common Stock, par value $0.01 per
share (the “Common Stock”) (as
converted, the “Conversion Shares”),
in accordance with the terms of the Debentures;

 

C.            Each Buyer wishes to purchase, and the
Company wishes to sell, upon the terms and conditions stated in this Agreement,
(i) that aggregate principal amount of Debentures set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers (which aggregate principal
amount for all Buyers shall be $15,000,000) and (ii) warrants, in substantially
the form attached hereto as Exhibit B (the “ Warrants”), to acquire that number of shares of Common
Stock for each $1,000 of principal amount of Debentures purchased (as
exercised, collectively, the “Warrant Shares”)
equal to the quotient of (i) $200 divided by (ii) $1.6641 (the “Valuation Price”) as set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers;

 

D.            Contemporaneously with the execution and
delivery of this Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement, substantially in the form attached hereto as Exhibit
C (the “Registration Rights Agreement”),
pursuant to which the Company has agreed to provide certain registration rights
with respect to the Conversion Shares, the Repayment Shares (as defined in the
Debentures), the Interest Shares (as defined in the Debentures) and the Warrant
Shares under the 1933 Act and the rules and regulations promulgated thereunder,
and applicable state securities laws; and

 

E.             The Debentures, the Conversion Shares, the
Repayment Shares, the Interest Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the “Securities”.

 

 

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

 

1.             PURCHASE AND SALE OF DEBENTURES AND
WARRANTS.

 

(a)           Purchase of Debentures and Warrants.

 

(i)            Debentures and Warrants.  Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company
shall issue and sell to each Buyer, and each Buyer severally, but not jointly,
agrees to purchase from the Company on the Closing Date (as defined below), a
principal amount of Debentures, as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers,  along
with Warrants to acquire that number of Warrant Shares for each $1,000
principal amount of Debentures purchased equal to the quotient of (A) $200
divided by (B) the Valuation Price (the “Closing”).

 

(ii)           Closing.  The Closing shall occur on
the Closing Date at the offices of Schulte Roth & Zabel LLP, 919 Third
Avenue, New York, New York 10022.

 

(iii)          Purchase Price.  The
purchase price for each Buyer (the “Purchase
Price”) of the Debentures and related Warrants to be purchased by
each such Buyer at the Closing shall be equal to $1,000.00 for each $1,000.00
of principal amount of Debentures being purchased by such Buyer at the Closing.

 

(b)           Closing Date.  The
date and time of the Closing (the “Closing
Date”) shall be 4:00 p.m., New York Time, on the date hereof,
subject to notification of satisfaction (or waiver) of the conditions to the
Closing set forth in Sections 6 and 7 below (or such later date as is mutually
agreed to by the Company and each Buyer).

 

(c)           Form of Payment.  On
the Closing Date, (i) each Buyer shall pay its Purchase Price for the
Debentures and Warrants to be issued and sold to such Buyer at the Closing (x)
80% to the escrow agent pursuant to the form of Escrow Agreement attached
hereto as Exhibit H, by wire transfer of immediately available funds in
accordance with the escrow agent’s written wire instructions, and (y) 20% to
the Company, by wire transfer of immediately available funds in accordance with
the Company’s written wire instructions, and (ii) the Company shall
deliver to each Buyer the Debentures (in the principal amounts as such Buyer
shall reasonably request in writing at least one Business Day prior to the
Closing Date) which such Buyer is then purchasing along with the Warrants (in
the amounts as such Buyer shall reasonably request in writing at least one
Business Day prior to the Closing Date) such Buyer is purchasing, duly executed
on behalf of the Company and registered in the name of such Buyer or its
designee.

 

2.             BUYER’S
REPRESENTATIONS AND WARRANTIES.

 

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

 

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

 

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Warrants will acquire the Conversion Shares
issuable upon conversion of the Debentures and the Warrant Shares issuable upon
exercise of the Warrants, in the ordinary course of business for its own
account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act.  Buyer has
no present arrangement (whether or not legally binding) at any time to sell any
of the Debentures, the Warrants, the Conversion Shares or the Warrant Shares to
or through any person or entity; provided, however, that by
making the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.  Such Buyer is acquiring the Securities
hereunder in the ordinary course of its business.

 

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

 

(c)           General Solicitation.  At
no time was Buyer presented with or solicited by or through any leaflet, public
promotional meeting, television advertisement or any other form of general
solicitation or advertising.

 

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

 

(e)           Information.  No prospectus or “offering
memorandum” has been delivered to the undersigned in connection with the
purchase of the Securities.  Such Buyer
and its advisors, if any, have been furnished with all materials relating to
the business, finances and operations of the Company and materials relating to
the offer and sale of the Securities which have been requested by such
Buyer.  Such Buyer and its advisors, if
any, have been afforded the opportunity to ask questions of the Company.  Neither such inquiries nor any other due
diligence investigations conducted by such Buyer or its advisors, if any, or
its representatives shall modify, amend or affect such Buyer’s right to rely on
the Company’s representations and warranties contained herein.  Such Buyer understands that its investment
in the Securities involves a high degree of risk.  Such Buyer is able to bear such risk and is able to afford a
complete loss of such investment.  Such
Buyer has sought such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to its acquisition
of the Securities.  Buyer acknowledges
and agrees that the Company does not make and has not made any representations
or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in the Transaction Documents (as defined below).

 

(f)            No Governmental Review. 
Such Buyer understands that no United States federal or state agency or
any other government or governmental agency has passed on or made

 

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any recommendation or endorsement of the
Securities or the fairness or suitability of the investment in the Securities
nor have such authorities passed upon or endorsed the merits of the offering of
the Securities.

 

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

 

(h)           Legends.  Such Buyer understands that
the certificates or other instruments representing the Debentures and the
Warrants and, the stock certificates representing the Conversion Shares, the
Repayment Shares, the Interest Shares and the Warrant Shares, shall bear any
legend as required by the “blue sky” laws of any state and a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):

 

[NEITHER THE ISSUANCE AND
SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE [CONVERTIBLE][EXERCISABLE] HAVE BEEN][THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY ONLY BE OFFERED FOR SALE,
SOLD,

 

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TRANSFERRED OR ASSIGNED
PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, (B) AN OPINION OF COUNSEL, IN A FORM
REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (C) RULE 144(K) UNDER SAID ACT AND, IN EACH CASE, IN COMPLIANCE
WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.  NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

The legend set forth above shall be removed
and the Company shall issue a certificate without such legend to the holder of
the Securities upon which it is stamped, if, unless otherwise required by state
securities laws, (i) such securities are sold, assigned or transferred pursuant
to an effective registration statement covering the resale of such securities
under the 1933 Act, (ii) such securities are sold, assigned or transferred
pursuant to Rule 144 and in connection with sale, assignment or other transfer,
such holder provides the Company with an opinion of counsel, in a form
reasonably acceptable to the Company, to the effect that such sale, assignment
or transfer of the Securities may be made without registration under the
applicable requirements of the 1933 Act, or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or
transferred pursuant to Rule 144(k).

 

(i)            Organization, Authority. 
Each Buyer is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization with the
requisite power and authority to enter into and consummate the transactions
contemplated by the Transaction Documents and to otherwise carry out its
obligations hereunder and thereunder.

 

(j)            Validity; Enforcement.  This
Agreement and the Registration Rights Agreement have been duly and validly
authorized, executed and delivered on behalf of such Buyer and shall constitute
the legal, valid and binding obligations of such Buyer enforceable against such
Buyer in accordance with their respective terms, except as such enforceability
may be limited by general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws
relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.

 

(k)           No Conflicts.  The
execution, delivery and performance by such Buyer of this Agreement and the
Registration Rights Agreement and the consummation by such Buyer of the
transactions contemplated hereby and thereby will not (i) result in a violation
of the organizational documents of such Buyer or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws) applicable to such Buyer, except in the case of clauses
(ii) and (iii) above, for such conflicts, defaults, rights or

 

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violations which would not, individually or
in the aggregate, reasonably be expected to have a material adverse effect on
the ability of such Buyer to perform its obligations hereunder.

 

(l)            Brokers, Finders. 
Such Buyer has not engaged any placement agent or other agent in
connection with the sale of the Debentures and the Warrants.   Such Buyer shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or brokers’
commissions payable to any persons engaged by any Buyer or its investment
advisor relating to or arising out of the transactions contemplated
hereby.  Such Buyer shall pay, and hold
the Company harmless against, any liability, loss or expense (including,
without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim.

 

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

 

(n)           Beneficial Ownership, Recent Trading Activity. 
Based solely on the most recent SEC Documents filed by the Company
disclosing the number of the Company’s outstanding shares, Buyer is not a
“beneficial owner” of more than 10% of the outstanding shares of Common Stock
of the Company (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the “1934
Act”).

 

3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and
warrants to each of the Buyers that the statements contained in this Section 3
are true and correct as of the date hereof (unless the particular statement is,
by its language, as of another date, in which case, it is true and correct as
of that other date), except as disclosed in the disclosure schedule delivered
by the Company to the Buyers on or before the date of this Agreement and
attached hereto as Exhibit I hereto (the “Disclosure
Schedule”) which Disclosure Schedule shall be arranged in sections
corresponding to the lettered sections contained in this Section 3, and the
disclosure in any such lettered section of the Disclosure Schedule shall
qualify the corresponding section in this Section 3 and any other section in
this Section 3 identified therein.

 

(a)           Organization and Qualification.  The
Company and its “Subsidiaries”
(which for purposes of this Agreement means any “significant subsidiary” of the
Company, as defined in Rule 1-02(w) of Regulation S-X) are corporations duly
organized and validly existing in good standing under the laws of the
jurisdiction in which they are incorporated, and have the requisite corporate
power and authorization to own their properties and to carry on their business
as now being conducted in all material respects.  Each of the Company and its Subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every
jurisdiction in which its ownership of property or the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a Material
Adverse Effect.  As used in this
Agreement, “Material Adverse Effect”
means any material adverse effect on the business, properties, assets,
operations, results of operations or financial condition of the Company and its
Subsidiaries, taken as a whole, or on the transactions contemplated hereby and
the other Transaction

 

6

 

Documents or by the agreements and
instruments to be entered into in connection herewith or therewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined below). 
The Company has no Subsidiaries except as set forth on Schedule 3(a)
of the Disclosure Schedule.

 

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

 

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

 

(d)           No Conflicts. 
Except as set forth in Schedule 3(d) of the Disclosure Schedule, the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and

 

7

 

thereby (including, without limitation, the
issuance of the Debentures and the Warrants and reservation for issuance and
issuance of the Conversion Shares, the Interest Shares, the Repayment Shares
and the Warrant Shares) will not (i) result in a violation of the certificate
of incorporation, any certificate of designations, preferences and rights of
any outstanding series of preferred stock or bylaws of the Company or any of
its Subsidiaries or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any material rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a violation
of any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the
Principal Market) applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected, other than any such violation which would not have a Material
Adverse Effect.

 

(e)           Consents.  Except as contemplated by the
Transaction Documents or as disclosed in Schedule 3(e) of the Disclosure
Schedule, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents, in each case in accordance with the
terms hereof or thereof.  All consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the Closing Date, and the Company and its Subsidiaries are unaware
of any facts or circumstances which might prevent the Company from obtaining or
effecting any of the registration, application or filings pursuant to the
preceding sentence.  The Company is not
in violation of the listing requirements of the Principal Market and has no
knowledge of any facts which would reasonably lead to delisting or suspension
of the Common Stock in the foreseeable future.

 

(f)            Acknowledgment
Regarding Buyer’s Purchase of Securities. 
The Company acknowledges and agrees that each Buyer is acting solely in
the capacity of arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby and that no
Buyer is an officer or director of the Company.  The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated hereby
and thereby, and any advice given by a Buyer or any of its representatives or
agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to such Buyer’s purchase
of the Securities.  The Company further
represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by
the Company and its representatives.

 

(g)           No General Solicitation; Placement Agent’s
Fees.  Neither the Company, nor any of its
affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Securities.  The Company acknowledges that it has engaged

 

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Wedbush Morgan Securities as placement agent
(the “Agent”) in connection with
the sale of the Debentures and the Warrants. 
Other than the Agent, the Company has not engaged any placement agent or
other agent in connection with the sale of the Debentures and the
Warrants.  The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or brokers’ commissions payable to the Agent relating to or arising out
of the transactions contemplated hereby; provided, the Company shall not be
responsible for any such fees or commission for persons engaged by any Buyer or
its investment advisor.  The Company
shall pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, reasonable attorney’s fees and out-of-pocket
expenses) arising in connection with any such claim.

 

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

 

(i)            Dilutive Effect.  The
Company understands and acknowledges that the number of Conversion Shares
issuable upon conversion of the Debentures and the Warrant Shares issuable upon
exercise of the Warrants will increase in certain circumstances.  The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Debentures, the
Company’s option to issue the Repayment Shares and Interest Shares in
accordance with this Agreement and the Debentures  and its obligation to issue the Warrant Shares upon exercise
of the Warrants in accordance with this Agreement and the Warrants is, in each
case, absolute and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interests of other stockholders of the
Company.

 

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

 

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(k)           SEC Documents; Financial Statements. 
Since December 31, 2002, the Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
pursuant to the reporting requirements of the 1934 Act (all of the foregoing
filed prior to the date hereof, and all exhibits included therein and financial
statements and schedules thereto and documents incorporated by reference
therein being hereinafter referred to as the “SEC
Documents”).  Except as
modified by subsequent filings, as of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  Except as modified by
subsequent filings, as of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. 
Such financial statements have been prepared in accordance with generally
accepted accounting principles, consistently applied, during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto, or (ii) in the case of unaudited interim statements, to
the extent they may exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of its operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).

 

(l)            Absence of Certain Changes. 
Except as disclosed in Schedule 3(l) of the Disclosure Schedule,
since June 30, 2003, there has been no Material Adverse Effect with respect to
the Company or its Subsidiaries.  Since
June 30, 2003, the Company has not (i)
declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $100,000 outside
of the ordinary course of business or (iii) had capital expenditures,
individually or in the aggregate, in excess of $500,000.  The
Company has not taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge
of any fact which would reasonably lead a creditor to do so.  The Company is not as of the date hereof,
and after giving effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below).  For purposes of this Section 3(l), “Insolvent” means (i) the present fair saleable value of the
Company’s assets is less than the amount required to pay the Company’s total
Indebtedness ( as defined in Section 3(q)), (ii) the Company is unable to pay
its debts and liabilities, subordinated, contingent or otherwise, as such debts
and liabilities become absolute and matured, (iii) the Company intends to incur
or believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) the Company has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now
conducted and is proposed to be conducted.

 

(m)          No Undisclosed Events, Liabilities,
Developments or Circumstances.  No event, liability, development or
circumstance has occurred or exists with respect to the Company or its
Subsidiaries or their respective business, properties, prospects, operations or
financial

 

10

 

condition, that would be required to be
disclosed by the Company under applicable securities laws on a registration
statement on Form S-1 filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.

 

(n)           Conduct of Business; Regulatory Permits. 
Neither the Company nor its Subsidiaries is in violation of any term of
or in default under its Certificate of Incorporation, any Certificate of
Designations, Preferences and Rights of any outstanding series of preferred stock
of the Company or the Company’s Bylaws, as amended and as in effect on the date
hereof (the “Bylaws”) or their
organizational charter or bylaws, respectively, except for such violations or
defaults that would not have, individually or in the aggregate, a Material
Adverse Effect. Except as disclosed in Schedule 3(n) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries is in violation of
any judgment, decree or order or any statute, ordinance, rule or regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any
of its Subsidiaries will conduct its business in violation of any of the
foregoing, except for possible violations which would not, individually or in
the aggregate, have a Material Adverse Effect. 
Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of The Nasdaq
SmallCap Market (the “Principal Market”)
which would reasonably lead to delisting or suspension of the Common Stock by
the Principal Market in the foreseeable future.  Except as disclosed in Schedule 3(n) of the Disclosure
Schedule, since June 30, 2003, (i) the Common Stock has been designated for
quotation on the Principal Market, (ii) trading in the Common Stock has not
been suspended by the SEC or the Principal Market and (iii) the Company has
received no communication, written or oral, from the SEC or the Principal
Market regarding the suspension or delisting of the Common Stock from the
Principal Market.  The Company and its
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, except where the failure to possess such
certificates, authorizations or permits would not have, individually or in the
aggregate, a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any written notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.

 

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

 

(p)           Equity Capitalization.  As
of the date hereof, the authorized capital stock of the Company consists of (x)
350,000,000 shares of Common
Stock, of which as of September

 

11

 

23, 2003, 84,999,056 are issued and outstanding, 17,760,009
shares are reserved for issuance
pursuant to the Company’s stock option and purchase plans and 70,419,064
shares are reserved for issuance
pursuant to securities (other than the Debentures and the Warrants) exercisable
or exchangeable for, or convertible into, shares of Common Stock, and (y) 10,000,000
shares of preferred stock, of which as
of the date hereof, 1,468,250 are issued and outstanding.  All of such outstanding shares have been, or
upon issuance will be, validly issued and are fully paid and
nonassessable.  Except as disclosed in Schedule
3(p) of the Disclosure Schedule: (i) no shares of the Company’s capital
stock are subject to preemptive rights or any other similar rights or any liens
or encumbrances suffered or permitted by the Company; (ii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries; (iii) there
are no outstanding debt securities, notes, credit agreements, credit facilities
or other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the
aggregate, filed in connection with the Company; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (vi) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company’s or
its Subsidiaries’ respective businesses and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect.

 

(q)           Indebtedness and Other Contracts. 
Except as disclosed in Schedule 3(s) of the Disclosure Schedule
and the SEC Documents, neither the Company nor any of its Subsidiaries has (i)
incurred any Indebtedness that is outstanding on the date hereof and in excess
of $250,000 in the aggregate, (ii) entered into any contract, agreement or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument would reasonably be
expected to result in a Material Adverse Effect, (iii) violated any term of or
defaulted under any contract, agreement or instrument relating to any
Indebtedness, except such violations and defaults which did not or would not
result, individually or in the

 

12

 

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

 

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

 

(s)           Insurance.  The Company and each of its
Subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which

 

13

 

the Company and its Subsidiaries are
engaged.  Neither the Company nor any
such Subsidiary has been refused any insurance coverage sought or applied for
and neither the Company nor any such Subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a Material
Adverse Effect.

 

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

 

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

 

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

 

(v)           Intellectual Property Rights.  The
Company and its Subsidiaries own or possess adequate rights or licenses to use
all material trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and other
intellectual property rights used to conduct their respective businesses as now
conducted (“Intellectual Property Rights”).  Except as set forth in Schedule 3(v),
none of the Company’s Intellectual Property Rights have expired or terminated,
or are expected to expire or terminate, within three years from the date of
this Agreement and the Company does not have any knowledge of any infringement
by the Company or its Subsidiaries of intellectual property rights of
others.  Except as set forth in

 

14

 

Schedule 3(v) of the Disclosure Schedule, there is no
claim, action or proceeding being made or brought, or to the knowledge of the
Company, being threatened, against the Company or its Subsidiaries regarding
its Intellectual Property Rights. 
Except as set forth on Schedule 3(v) of the Disclosure Schedule,
the Company is unaware of any facts or circumstances which might give rise to
any of the foregoing infringements or claims, actions or proceedings.  The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties.

 

(w)          Subsidiary Rights.  The Company or one of its Subsidiaries has
the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital
securities of its material Subsidiaries as owned by the Company or such
Subsidiary.

 

(x)            Tax Status.  The Company and each of its
Subsidiaries (i) has made or filed all federal and state income tax returns,
(ii) has made or filed all other tax returns, reports and declarations required
by any jurisdiction to which it is subject except where the failure to make or
file such other tax returns, reports and declarations would not cause a
Material Adverse Effect, (iii) has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and (iv) has set aside on its books provision reasonably adequate
for the payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. 
There are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.

 

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

 

(x)            Disclosure.  The Company confirms that neither it nor, to
its knowledge, any officer, director or agent of the Company has provided any
of the Buyers or their respective agents or counsel with any information that
constitutes material, nonpublic
information.  The Company understands
and confirms that each of the Buyers will rely on the foregoing representations
in effecting transactions in securities of the Company.  All disclosure provided to the Buyers
regarding the Company, its business and the transactions contemplated hereby,
including the Schedules to this Agreement, furnished by or on behalf of the
Company are true and correct in all material respects and do not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.  The Company acknowledges

 

15

 

and agrees that no Buyer makes or has made any representations or warranties
with respect to the transactions contemplated hereby other than those
specifically set forth in the Transaction Documents.

 

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

 

4.             COVENANTS.

 

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

 

(b)           [Intentionally Omitted.]

 

(c)           Reporting Status. 
Until the later of (i) the date on which the Investors (as defined in
the Registration Rights Agreement) shall have sold all the Conversion Shares,
the Repayment Shares, the Interest Shares and Warrant Shares  and none of the Debentures  or the Warrants is outstanding, or (ii)
the second anniversary of the date hereof (the “Reporting Period”), the Company shall file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
otherwise permit such termination.

 

(d)           Financial Information.  The
Company agrees to send the following to each Investor during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR, within
three (3) Business Days after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act and (ii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.

 

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

 

16

 

(f)            Fees.  The Company shall reimburse
the Buyers in the aggregate amount of $40,000 for the Buyers’ reasonable
expenses incurred in connection with the preparation, execution and performance
of this Agreement and the transactions contemplated hereunder, which amount
will be net funded from the Purchase Price of Riverview Group LLC at the
Closing.  The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (with respect to any Person retained by the
Company, but not for such fees or commission for any Person engaged by any
Buyer), relating to or arising out of the transactions contemplated hereby,
including, without limitation, any fees or commissions payable to the
Agent.  The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.  Except as otherwise set forth in this Agreement
or in the Transaction Documents, each party to this Agreement shall bear its
own expenses in connection with the sale of the Securities to the Buyers.

 

(g)           Pledge of Securities.  The
Company acknowledges and agrees that the Securities may be pledged by an
Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is
secured by the Securities.  The pledge
of Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, Section 2(f) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(f) hereof in order to effect a sale, transfer or assignment of
Securities to such pledgee.  The Company
hereby agrees to execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities
to such pledgee by an Investor.

 

(h)           Disclosure of Transactions and Other Material
Information.  On or before 8:30 a.m., New York Time, on  the first Business Day following the
Closing Date, the Company shall file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Transaction Documents in the
form required by the 1934 Act, and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of Debenture, the form of Warrant and the Registration
Rights Agreement) as exhibits to such filing (including all attachments, the “8-K Filing”).  As of the filing of the 8-K Filing with the SEC, unless required
pursuant to Section 3(i) of the Registration Rights Agreement, no Buyer shall
be in possession of any material, nonpublic information received from the
Company, any of its Subsidiaries or any of its respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing.  Unless required pursuant to Section 3(i) of
the Registration Rights Agreement, the Company shall not, and shall use its
reasonable best efforts to cause each of its Subsidiaries and its and each of
their respective officers, directors, employees and agents, not to, provide any
Buyer with any material, nonpublic information regarding the Company or any of
its Subsidiaries from and after the filing of the 8-K Filing with the SEC
without the express written consent of such Buyer.  Buyer shall not, and shall use its reasonable best efforts to
cause each of its respective officers, directors, employees and agents not to,
solicit

 

17

 

from the Company, or from its officers,
directors, employees and agents any material non-public information regarding
the Company or any of its Subsidiaries. 
Subject to the foregoing, neither the Company nor any Buyer shall issue
any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions (i)
in substantial conformity with the 8-K Filing and (ii) as is required by
applicable law and regulations (provided that in the case of clause (i) each
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release).

 

(i)            Additional Debentures; Variable Securities;
Additional Registration Statement.  For so long as any Buyer
beneficially owns any Debentures, the Company will not issue any Debentures other
than to investors (the “Prior Investors”)
who exercise their right to purchase up to 19.6% of the Debentures (and the
related Warrants) pursuant to the terms currently in effect in Section 3 of the
Investors’ Rights Agreement dated as of May 30, 2003 (the “Prior Agreement”) or the Buyers as
contemplated hereby and the Company shall not issue any other securities that
would cause a breach or default under the Debentures.  Each Prior Investor who purchases Debentures hereunder shall be
considered a “Buyer” for all purposes of this Agreement.  For long as any Debentures remain
outstanding, the Company shall not, in any manner, issue or sell any rights,
warrants or options to subscribe for or purchase Common Stock or directly or
indirectly convertible into or exchangeable or exercisable for Common Stock at
a price which varies or may vary with the market price of the Common Stock,
including by way of one or more reset(s) to any fixed price unless the
conversion, exchange or exercise price of any such security cannot be less than
the then applicable Conversion Price (as defined in the Debentures) with
respect to the Common Stock under any into which any Debenture is
convertible.  Until such time as the Registration Statement (as defined in the
Registration Rights Agreement) is declared effective by the SEC, the Company
will not file a registration statement under the 1933 Act relating to
securities that are not the Securities (including any Debentures and Warrants
sold to Prior Investors), other than warrants to purchase an aggregate of
428,571  shares of Common Stock
issued to the Company’s placement agent and other than a registration statement
on Form S-8, in order to register increases in the shares underlying equity
incentive plans in existence as of the date of this Agreement.

 

(j)            Corporate Existence.  So
long as any Buyer beneficially owns greater than ten percent of the Debentures
issued hereunder, the Company shall maintain its corporate existence and shall
not sell all or substantially all of the Company’s assets, except in the event
of a merger or consolidation or sale of all or substantially all of the
Company’s assets in compliance with the terms of the Debentures.

 

(k)           Waivers.  The Company shall use its
reasonable best efforts (without cost or expense), to obtain in an expeditious
manner, waivers from the Prior Investors with respect to the exercise of their
right to purchase up to 19.6% of the Debentures (and the related Warrants)
pursuant to the Prior Agreement.

 

(l)            Conduct
of Business.  The business of the
Company and its Subsidiaries

 

18

 

shall not be conducted in violation of any law, ordinance or regulation
of any governmental entity, except where such violations would not result,
either individually or in the aggregate, in a Material Adverse Effect.

 

(m)          Right of Participation.

 

(i)            For a period of 12 months following the
Closing Date, the Company shall not issue, sell or exchange, agree or obligate
itself to issue, sell or exchange or reserve or set aside for issuance, sale or
exchange (a “Future Issuance”),
(A) any shares of Common Stock, (B) any other equity security of the Company,
including without limitation shares of preferred stock, (C) any debt security
of the Company (other than debt with no equity feature), including without
limitation any debt security which by its terms is convertible into or
exchangeable for any equity security of the Company, (D) any security of the
Company that is a combination of debt and equity, or (E) any option, warrant or
other right to subscribe for, purchase or otherwise acquire any such equity
security or any such debt security of the Company, unless in each case the
Company shall have first offered to sell (in the case of public offerings, to
the extent permitted by the SEC and other applicable laws, as reasonably
determined by the Company upon consultation with counsel) the Offered
Securities (as defined) to the Buyers (in all respects upon identical terms and
conditions, including, without limitations, unit price and interest rates) as
follows:  The Company shall offer to
sell to each Buyer (1) that portion of the Offered Securities as the principal
amount of Debentures acquired by such Buyer at the Closing bears to the total
principal amount of Debentures acquired by all Buyers at the Closing (the “Basic Amount”), and (2) such additional
portion of the Offered Securities as such Buyer shall indicate it will purchase
should the other Buyers subscribe for less than their Basic Amounts (the “Undersubscription Amount”), at a price and
on such other terms as shall have been specified by the Company in writing
delivered to such Buyer (the “Offer”),
which Offer by its terms shall remain open and irrevocable for a period of 10
days from receipt of the Offer. “Offered
Securities” means the aggregate amount of the securities being
issued or sold in the Future Issuance less any Securities offered to other
stockholders of the Company pursuant to agreements existing as of the date
hereof and set forth on Schedule 3(p) of the Disclosure Schedule; provided,
however, that with respect to Future Issuances that are underwritten
public offerings, “Offered Securities” means the Buyers’ pro rata share of the
aggregate amount of securities being issued or sold in such Future Issuance,
calculated on a fully diluted basis assuming the full conversion of the
Debentures and exercise of the Warrants and all other Options and Convertible
Securities then outstanding.

 

(ii)           Notice of each Buyer’s intention to accept, in whole or in part, any
Offer made pursuant to Section 4(m)(i) shall be evidenced by a writing signed
by such Buyer and delivered to the Company prior to the end of the 10-day
period of such Offer, setting forth such of the Buyer’s Basic Amount as such
Buyer elects to purchase (the “Notice of
Acceptance”).

 

(iii)          Permitted Sales of Refused Securities.  If
Notices of Acceptance are not given in a timely fashion by the Buyers in
respect of all the Offered Securities, the Company shall have 120 days from the
expiration of the period set forth in Section 4(m)(i) to close the sale of all
or any part of such Offered Securities as to which a Notice of Acceptance has

 

19

 

not been given by the Buyers (the “Refused Securities”) (as well as the other
securities proposed to be issued in a Future Issuance) to any other Person or
Persons, but only for cash and otherwise in all respects upon terms and
conditions, including, without limitation, unit price and interest rates, which
are no more favorable, in the aggregate, to such other Person or Persons or
less favorable to the Company than those set forth in the Offer.

 

(iv)          Reduction in Amount of Offered Securities.  If
the Company shall propose to sell less than all the Refused Securities (any such
sale to be in the manner and on the terms specified in Section 4(m)(iii)
above), then each Buyer may, at its sole option and in its sole discretion,
reduce the number or other units of the Offered Securities specified in its
Notice of Acceptance to an amount which shall be not less than the amount of
the Offered Securities which such Buyer elected to purchase pursuant to Section
4(m)(ii) multiplied by a fraction, (A) the numerator of which shall be the
amount of Offered Securities which the Company actually proposes to sell, and
(B) the denominator of which shall be the amount of all Offered
Securities.  In the event that any Buyer
so elects to reduce the number or amount of Offered Securities specified in its
Notice of Acceptance, the Company may not sell or otherwise dispose of more
than the reduced amount of the Offered Securities until such securities have
been offered to the Buyers in accordance with Section 4(m).

 

(v)           Closing.  Upon each closing under this
Section 4(m), which shall include full payment to the Company, the Buyer shall
purchase from the Company, and the Company shall sell to the Buyer the number
of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 4(m)(iv) if the Buyers have so elected, upon the terms and
conditions specified in the Offer.  The
purchase by the Buyers of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Buyers of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form
and substance to the Company and the Buyers and their respective counsel,
provided that such purchase agreement shall not contain terms more favorable
than any terms originally stipulated in connection with the Offered Securities.

 

(vi)          Further Sale.  In
each case, any securities proposed to be issued in a Future Issuance that are
not purchased by the Buyers or other Person or Persons in accordance with
Section 4 may not be sold or otherwise disposed of until they are again offered
to the Buyers to the same extent, and under the procedures specified in,
Section 4(m).

 

(vii)         Exception.  The rights of the Buyers
under this Section 4(m) shall not apply to: (A) Common Stock issued as a stock
dividend to all holders of Common Stock or upon any subdivision or combination
of shares of Common Stock, (B) Securities issued to a Buyer pursuant to terms
of the Debentures or upon exercise of the Warrants or issued upon conversion or
exercise of any other currently outstanding securities of the Company pursuant
to the terms of such securities, (C) pursuant to a bona fide firm commitment
underwritten public offering with a nationally recognized underwriter which
generates gross proceeds to the Company in excess of $20,000,000 (other than an
“at the market offering” as defined in Rule 415(a)(4) under the 1933 Act and
“equity lines”), (D) in connection with any employee benefit plan which
has been approved by the Board of Directors of the Company, pursuant to which
the

 

20

 

Company’s securities may be issued to any employee, officer or director
of, or consultant or other service provider to, the Company for services
provided to the Company,
(E) securities issued not primarily for capital raising purposes and in
connection with bona fide, arm’s length strategic partnerships, acquisitions or
joint ventures (including, without limitation, licenses, licensors, customer
and vendors) in which there is a significant commercial relationship with the
Company, (F) with the prior written approval of a majority in interest of the
Buyers, which will not be unreasonably withheld, conditioned or delayed and (G)
securities issued pursuant to the terms currently in effect in the Prior
Agreement or pursuant to that certain Investor Rights Agreement dated as of
July 2, 2003, by and among the Company and the investors listed on the
signature page thereto (collectively, “Excluded
Securities”).

 

(n)           Limitations on Short Sales. 
Each Buyer agrees that it will not enter into any Short Sales (as
defined below) from the period commencing on the Closing Date and ending on the
date which all of the Debentures it owns have been converted and all of the
Warrants it owns have been exercised provided that from and after the Registration
Deadline such Conversion Shares and Warrant Shares are registered for resale
pursuant to the Registration Statement. 
For purposes of this Section 3(n), a “Short
Sale” by a Buyer shall mean a sale of Common Stock by the Buyer that
is marked as a short sale and that is made at a time when there is no
equivalent offsetting long position in Common Stock held by the Buyer.  For purposes of determining whether there is
an equivalent offsetting long position in Common Stock held by the Buyer, the
amount of shares of Common Stock held in a long position shall include the
number of Warrant Shares issuable pursuant to the Warrants the Buyer owns and
the number of Conversion Shares issuable pursuant to the Debentures the Buyer
owns.  To the extent that the foregoing
sentence permits short sales, then such transactions may only be effected in
accordance with Rule 10a-1 under the 1934 Act.

 

(o)           Directed Selling. 
Each Buyer covenants and agrees that, in the event that it wishes to
arrange a sale of a block of Conversion Shares or Warrant Shares which
represents 2.5% or more of the issued and outstanding Common Stock of the
Company (the “Block Sale Shares”),
the Buyer shall first make an offer in writing to the Company to sell the Block
Sale Shares to the Company or its designee(s) (the “Designated Purchasers”) at
a price and on the same terms and conditions as it wishes to arrange the sale
of the Block Sale Shares.  The
Designated Purchasers may accept such offer within 24 hours of the receipt of
the offer made to the Company failing which the offer shall be deemed to be
refused.  Following such 24-hour notice,
the Buyer shall sell the Block Sale Shares on a basis which is not more
advantageous to a buyer than the terms provided to the Company.

 

5.             REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

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

 

21

 

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

 

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

 

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

 

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

 

(b)           Such Buyer and each other Buyer shall have delivered to the Company the
Purchase Price (less, in the case of The Riverview Group, LLC, the amounts
withheld pursuant to Section 4(f)) for the Debentures and the related Warrants
being purchased by such Buyer and each other Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company.

 

22

 

(c)           The representations and warranties of such Buyer shall be true and
correct in all material respects (except for representations and warranties
that are qualified by materiality, which shall be true and correct in all
respects) as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a
specific date), and such Buyer shall have performed, satisfied and complied in
all material respects (except for covenants, agreements and conditions that are
qualified by materiality, which shall be complied with in all respects) with
the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Buyer at or prior to the Closing
Date.  The Company shall have received a
certificate, executed by an authorized officer of such Buyer, dated as of the Closing
Date, to the foregoing effect in the form attached hereto as Exhibit G-1.

 

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

 

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

 

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

 

(b)           Such Buyer shall have received the opinion of Proskauer Rose
LLP, the Company’s counsel, dated as of
the Closing Date, in substantially the form of Exhibit E attached
hereto.

 

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

 

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

 

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

 

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

 

23

 

the Closing Date.

 

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

 

(h)           The representations and warranties of the Company shall be true and
correct in all material respects (except for representations and warranties
that are qualified by materiality, which shall be true and correct in all
respects) as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a
specific date) and the Company shall have performed, satisfied and complied in
all material respects (except for covenants, agreements and conditions that are
qualified by materiality, which shall be complied with in all respects) with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date.  Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the Company,
dated as of the Closing Date, to the foregoing effect in the form attached
hereto as Exhibit G-2.

 

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

 

(j)            The Common Stock (i)
shall be designated for quotation or listed on the Principal Market and (ii)
shall not have been suspended, as of the Closing Date, by the SEC or the
Principal Market from trading on the Principal Market nor shall suspension by
the SEC or the Principal Market have been threatened, as of the Closing Date,
either (A) in writing by the SEC or the Principal Market or (B) by falling
below the minimum listing maintenance requirements of the Principal Market.

 

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

 

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

 

24

 

9.             MISCELLANEOUS.

 

(a)           Governing Law; Jurisdiction; Jury Trial.  All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New York or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of New York.  Each party hereby
irrevocably submits to the 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, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal service of process
and consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

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

 

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

 

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

 

(e)           Entire Agreement; Amendments. 
This Agreement supersedes all other prior oral or written agreements
between the Buyers, the Company, their affiliates and Persons acting on their
behalf with respect to the matters discussed herein, and this Agreement and the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to
such matters.  No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of Debentures representing at least

 

25

 

two-thirds of the aggregate principal amount
of the Debentures, or, if prior to the Closing Date, the Company and the Buyers
listed on the Schedule of Buyers as being obligated to purchase at least a
majority of the aggregate principal amount of the Debentures, and any amendment
to this Agreement made in conformity with the provisions of this Section 9(e)
shall be binding on all Buyers and holders of Debentures, as applicable.  No provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought.  No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Debentures then outstanding.  No
consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any provision of any of the Transaction Documents
unless the same consideration also is offered to all of the parties to the
Transaction Documents, holders of Debentures or holders of the Warrants, as the
case may be.

 

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

 

	
  If to the Company:

  
	
   

  	
   

  
	
   

  	
  24/7
  Real Media, Inc.

  
	
   

  	
  1250
  Broadway, 27th Floor

  
	
   

  	
  New
  York, New York 10001

  
	
   

  	
  Telephone:

  	
   

  	
  (212)
  231-7100

  
	
   

  	
  Facsimile:

  	
   

  	
  (212)
  760-2811 and

  
	
   

  	
   

  	
   

  	
  (212)
  760-1081

  
	
   

  	
  Attention:

  	
   

  	
  David
  J. Moore, Chief Executive Officer and

  
	
   

  	
   

  	
   

  	
  Mark
  E. Moran, Esq., Executive Vice President and General Counsel

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  with
  a copy (which shall not constitute notice) to:

  
	
   

  	
   

  
	
   

  	
  Proskauer
  Rose LLP

  
	
   

  	
  1585
  Broadway

  
	
   

  	
  New
  York, New York 10036

  
	
   

  	
  Telephone:
  (212) 969-3000

  
	
   

  	
  Facsimile:
  (212) 969-2900

  
	
   

  	
  Attention:  Ronald R. Papa, Esq.

  
	
   

  	
   

  	
   

  	
   

  
	
  If to the Transfer Agent:

  

 

26

 

	
   

  	
  The
  Bank of New York

  
	
   

  	
  101
  Barclay Street

  
	
   

  	
  New
  York, New York 10007-2702

  
	
   

  	
  Telephone:

  	
   

  	
  (212)
  815-4197

  
	
   

  	
  Facsimile:

  	
   

  	
  (212)
  815-6477

  
	
   

  	
  Attention:

  	
   

  	
  Margaret
  Villani

  

 

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

 

(g)           Successors and Assigns. 
This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns, including any purchasers
of the Debentures or the Warrants.  The
Company shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the holders of Debentures representing at
least a majority of the aggregate principal amount of the Debentures then
outstanding, including by merger or consolidation, except pursuant to a Change
of Control (as defined in Section 5 of the Debentures) with respect to which
the Company is in compliance with Section 5 of the Debentures and Section 4(b)
of the Warrants.  A Buyer may assign
some or all of its rights hereunder without the consent of the Company, in
which event such assignee shall be deemed to be a Buyer hereunder with respect
to such assigned rights.

 

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

 

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

 

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

 

27

 

(k)           Indemnification.  In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall,
assuming Buyer and its Indemnitees have complied with all of the terms and
conditions of the Transaction Documents, defend, protect, indemnify and hold
harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or
indirect investors and any of the foregoing Persons’ agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys’ fees and
disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to
(a) any misrepresentation or breach of any representation or warranty made by
the Company in the Transaction Documents, (b) any material breach of any
covenant, agreement or obligation of the Company contained in the Transaction
Documents or (c) any cause of action, suit or claim brought or made against
such Indemnitee by a third party (including for these purposes a derivative
action brought on behalf of the Company) and arising out of or resulting from
(i) the execution, delivery, performance or enforcement of the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, (ii) any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of the issuance of the
Securities, (iii) the status of the Buyer or holder of the Securities as an
investor in the Company other than in connection with affirmative actions taken
by the Buyer which are not pursuant to or contemplated by the Transaction
Documents, or (iv) any indemnification obligations under the Escrow
Agreement.  To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable
law.  The foregoing indemnification
obligations set forth in this Section 9(k) shall not apply to any Indemnified
Liability that is judicially determined on the merits to have been caused primarily
by the gross negligence, bad faith, willful misfeasance, or reckless disregard
of obligations or duties on the part of the Buyer or its Indemnitees. Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

 

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

 

(m)          Remedies.  Each Buyer and each holder of
the Securities shall have all rights and remedies set forth in the Transaction
Documents and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which such
holders have under any law.  Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this

 

28

 

Agreement and to exercise all other rights
granted by law.  Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers.  The Company therefore agrees that the Buyers
shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond
or other security.

 

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

 

(o)           Independent Nature
of Buyers’ Obligations and Rights. 
The obligations of each Buyer under any Transaction Document are several
and not joint with the obligations of any other Buyer, and no Buyer shall be
responsible in any way for the performance of the obligations of any other
Buyer under any Transaction Document. 
Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents.  Each Buyer confirms that it has
independently participated in the negotiation of the transaction contemplated
hereby with the advice of its own counsel and advisors.  Each Buyer shall be entitled to independently
protect and enforce its rights, including, without limitations, the rights
arising out of this Agreement or out of any other Transaction Documents, and it
shall not be necessary for any other Buyer to be joined as an additional party
in any proceeding for such purpose.

 

[Signature Page Follows]

 

29

 

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

 

	
  COMPANY:

  	
  BUYER:

  
	
   

  	
   

  
	
  24/7 REAL
  MEDIA, INC.

  	
  THE
  RIVERVIEW GROUP, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ David J. Moore

  	
   

  	
  By:

  	
  /s/ Terry Feeney

  	
   

  
	
   

  	
  Name: 

  	
  David J. Moore

  	
   

  	
  Name:

  	
  Terry Feeney

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  	
   

  	
  Title:

  	
  Chief Operating Officer

  
								

 

 

SCHEDULE OF BUYERS

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  
	
  Buyer

  	
   

  	
  Address
  and Facsimile Number

  	
   

  	
  Aggregate

  Principal

  Amount of

  Debentures

  	
   

  	
  Number

  of Warrants

  	
   

  	
  Legal
  Representative’s

  Address and Facsimile Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  The
  Riverview Group, LLC

  	
   

  	
  666 Fifth Avenue, 8th
  Floor

  New York, New York  10103

  Attention:  Daniel Cardella

  Facsimile:  (212) 977-1667

  Telephone: (212) 841-4100

  Residence:  Delaware

  	
   

  	
  $

  	
  15,000,000

  	
   

  	
  1,802,820

  	
   

  	
  Schulte Roth & Zabel
  LLP

  919 Third Avenue

  New York, New York  10022

  Attention:  Eleazer Klein, Esq.

  Facsimile:  (212) 593-5955

  Telephone:  (212) 756-2000

  
										

 

 

EXHIBITS

 

 

	
  Exhibit A

  	
   

  	
  Form of Debentures

  
	
  Exhibit B

  	
   

  	
  Form of Warrants

  
	
  Exhibit C

  	
   

  	
  Form of Registration
  Rights Agreement

  
	
  Exhibit D

  	
   

  	
  Form of Irrevocable
  Transfer Agent Instructions

  
	
  Exhibit E

  	
   

  	
  Form of Company Counsel
  Opinion

  
	
  Exhibit F

  	
   

  	
  Form of Secretary’s
  Certificate

  
	
  Exhibit G-1

  	
   

  	
  Form of Buyer Officer’s
  Certificate

  
	
  Exhibit G-2

  	
   

  	
  Form of Company Officer’s
  Certificate

  
	
  Exhibit H

  	
   

  	
  Form of Escrow Agreement

  
	
  Exhibit I

  	
   

  	
  Disclosure SchedulesExhibit
4.2

 

 

[FORM OF
SUBORDINATED CONVERTIBLE DEBENTURE]

 

 

NEITHER THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY ONLY BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED PURSUANT TO (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (C) RULE 144(K)
UNDER SAID ACT AND, IN EACH CASE, IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. 
ANY TRANSFEREE OF THIS DEBENTURE SHOULD CAREFULLY REVIEW THE TERMS OF
THIS DEBENTURE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS
DEBENTURE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY
BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION
3(c)(iii) OF THIS NOTE.

 

 

Subordinated Convertible Debenture

 

 

	
  Issuance Date: September
  26, 2003

  	
  Principal:
  U.S. $15,000,000

  

 

FOR VALUE RECEIVED, 24/7 REAL MEDIA, INC., a Delaware corporation (the “Company”), hereby promises to pay to the
order of THE RIVERVIEW GROUP, LLC or registered assigns (“Holder”) the amount set out above as the
Principal (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on
any outstanding Principal at the rate of 2.00% per annum, subject to periodic
adjustment pursuant to Section 2 (the “Interest
Rate”), from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due
and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof).  This
Subordinated Convertible Debenture (including all Subordinated Convertible
Debentures issued in exchange, transfer or replacement hereof, this “Debenture”) is one of an issue of
Subordinated Convertible Debentures (collectively, the

 

 

“Debentures” and such other Subordinated Convertible
Debentures, the “Other Debentures”)
issued on the Issuance Date pursuant to the Securities Purchase Agreement (as
defined below).  Certain capitalized
terms are defined in Section 29.

 

(1)     MATURITY.  On the Maturity Date, the Holder shall
surrender this Debenture to the Company and the Company shall pay to the Holder
an amount in cash or, at the option of the Company (subject to the satisfaction
of the conditions set forth in this Section 1), in shares of Common Stock (“Repayment Shares”), or a combination of
cash and Repayment Shares, representing all outstanding Principal, accrued and
unpaid Interest and accrued and unpaid Late Charges, if any; provided that the
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if
any payable on the Maturity Date shall be payable in Repayment Shares only if
the Company delivers written notice of such election (“Maturity Date Payment Election Notice”) to
each holder of the Debentures at least 15 Trading Days prior to the Maturity
Date (a “Maturity Payment Election Date”).  The “Original
Maturity Date” shall be September 26, 2006, as may be extended in
accordance with Section 8 hereof or as extended at the option of the Holder (i)
in the event that, and for so long as, an Event of Default (as defined in
Section 4(a)) shall have occurred and be continuing or any event shall have
occurred and be continuing which with the passage of time and the failure to
cure would result in an Event of Default and (ii) through the date that is ten
days after the consummation of a Change of Control (as defined in Section 5(a))
in the event that a Change of Control is publicly announced or a Change of
Control Notice (as defined in Section 5(a)) is delivered prior to the Maturity
Date (as may be extended, the “Maturity Date”).  Payments to be made on the Maturity Date in
Repayment Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of
Common Stock equal to the quotient of (a) the Principal, accrued and unpaid
Interest and accrued and unpaid Late Charges, if any, payable and (b) the
Maturity Date Conversion Price on the Maturity Date.  If any Repayment Shares are to be paid on the Maturity Date, then
the Company shall (X) provided that the Company’s transfer agent (the “Transfer Agent”) is participating in the
Depository Trust Company (“DTC”)
Fast Automated Securities Transfer Program, credit such aggregate number of
Repayment Shares to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver on the Maturity
Date, to such address as specified at least two Business Days prior to the
Maturity Date by the Holder in writing to the Company, a certificate,
registered in the name of the Holder or its designee, for the number of
Repayment Shares to which the Holder shall be entitled.  Notwithstanding the foregoing, the Company
shall not be entitled to make any payment due on the Maturity Date in Repayment
Shares and shall be required to make all such payment in cash on the Maturity
Date if, unless consented to in
writing by the Holder, (x) any event constituting an Event of Default or an
event that with the passage of time and assuming it were not cured would
constitute an Event of Default has occurred and is continuing on the applicable
Maturity Payment Election Date or the Maturity Date, or (y) (i) the
Registration Statement (as defined in the Registration Rights Agreement)
covering the Repayment Shares is not effective and available for the resale of
all of the Registrable Securities (as defined in the

 

2

 

Registration Rights Agreement) relating to this Debenture on the
Maturity Payment Election Date or on the Maturity Date and (ii) the Holder is
not able to sell all of the Registrable Securities held by them pursuant to
Rule 144(k).  The Company shall pay any
and all taxes (other than income taxes which shall be payable by the Holder)
that may be payable with respect to the issuance and delivery of Repayment
Shares.  If the Company elects to pay
the amounts due on the Maturity Date by a combination of cash and Repayment
Shares, then any conversions made by the holder prior to the Maturity Date
shall be applied first to the amount of Repayment Shares which the Company has
elected to pay and then against the amount to be paid by cash under the
Maturity Date Payment Election Notice.

 

(2)     INTEREST; INTEREST RATE.  Interest on this Debenture shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable in arrears on the first day
of each Semi-Annual Period during the period beginning on the Issuance Date and
ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest
Date being January 1, 2004.  Interest
shall be payable on each Interest Date, at the option of the Company, (i) in
cash, (ii) by way of inclusion in the Conversion Amount in accordance with
Section 3(b)(i), or (iii) subject to the satisfaction of the conditions set
forth in this Section 2, in shares of Common Stock (“Interest Shares”); provided, that the Interest which
accrued during any period shall be payable in Interest Shares only if the
Company delivers written notice of such election (“Interest Election Notice”) to each holder of the Debentures at
least ten (10) Trading Days prior to the Interest Date (an “Interest Election Date”).  Interest to be paid on an Interest Date in
Interest Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of
Common Stock equal to the quotient of (a) the Interest payable and (b) the
Interest Conversion Price on the applicable Interest Date.  If any Interest Shares are to be paid on an
Interest Date, then the Company shall (X) provided that the Transfer Agent is
participating in the DTC Fast Automated Securities Transfer Program, credit
such aggregate number of Interest Shares to which the Holder shall be entitled
to the Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
deliver on the applicable Interest Date, to such address as specified at least
two Business Days prior to the applicable Interest Date by the Holder in
writing to the Company, a certificate, registered in the name of the Holder or
its designee, for the number of Interest Shares to which the Holder shall be
entitled.  Notwithstanding the
foregoing, the Company shall not be entitled to pay Interest in Interest Shares
and shall be required to pay such Interest in cash on the applicable Interest
Date if, unless consented to in writing by the Holder, (x) any event
constituting an Event of Default or an event that with the passage of time and
assuming it were not cured would constitute an Event of Default has occurred
and is continuing on the applicable Interest Election Date or the Interest
Date, or (y) (i) the Registration Statement (as defined in the Registration
Rights Agreement) covering the Interest Shares is not effective and available
for the resale of all of the Registrable Securities (as defined in the
Registration Rights Agreement) relating to this Debenture on the Interest Election
Date or on the Interest Date and (ii) the Holder is not able to sell all of the
Registrable Securities held by them pursuant to

 

3

 

Rule 144(k).  Prior to the
payment of Interest on an Interest Date, Interest on this Debenture shall
accrue at the Interest Rate and be payable by way of inclusion of the Interest
in the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event of
Default, the Interest Rate shall be increased to 12%.  In the event that such Event of Default is subsequently cured,
the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
at such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of
Default.  The Company shall pay any and
all taxes (other than income taxes which shall be payable by the Holder) that
may be payable with respect to the issuance and delivery of Interest Shares.

 

(3)     CONVERSION OF DEBENTURES.  This Debenture shall be
convertible into shares of the Company’s common stock, par value $0.01 per
share (the “Common Stock”), on the
terms and conditions set forth in this Section 3.

 

(a)           Conversion Right. 
Subject to the provisions of Section 3(d), at any time or times on or
after the Issuance Date, the Holder shall be entitled to convert any portion of
the outstanding and unpaid Conversion Amount (as defined below) into fully paid
and nonassessable shares of Common Stock in accordance with Section 3(c), at
the Conversion Rate (as defined below). 
The Company shall not issue any fraction of a share of Common Stock upon
any conversion.  If the issuance would
result in the issuance of a fraction of a share of Common Stock, the Company
shall round such fraction of a share of Common Stock up to the nearest whole
share.  The Company shall pay any and
all taxes that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount.

 

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

 

(i)            “Conversion Amount” means the sum of (A) the portion of the
Principal to be converted, redeemed or otherwise with respect to which this
determination is being made, (B) accrued and unpaid Interest with respect to
such Principal and (C) accrued and unpaid Late Charges with respect to such
Principal and Interest.

 

(ii)           “Conversion Price” means, as of any Conversion Date (as defined
below) or other date of determination, and subject to adjustment as provided
herein, $1.75

 

(c)           Mechanics of Conversion.

 

(i)            Optional Conversion.  To
convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A)
transmit by

 

4

 

facsimile (or otherwise
deliver), for receipt on or prior to 9:30 a.m., New York Time, on such date, a
copy of an executed notice of conversion in the form attached hereto as Exhibit
I (the “Conversion Notice”) to
the Company and (B) if required by Section 3(c)(iii), surrender this Debenture
to a common carrier for delivery to the Company as soon as practicable on or
following such date (or an indemnification undertaking with respect to this
Debenture in the case of its loss, theft or destruction).  On or before the first Business Day
following the date of receipt of a Conversion Notice, the Company shall transmit
by facsimile a confirmation of receipt of such Conversion Notice to the Holder
and the Transfer Agent (a “Confirmation
Receipt”).  On or before the
third Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall
(X) credit such aggregate number of shares of Common Stock to which the Holder
shall be entitled to the Holder’s or its designee’s balance account with DTC
through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer
Agent is not participating in DTC Fast Automated Securities Transfer Program,
issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled.  If this Debenture is physically surrendered
for conversion as required by Section 3(c)(iii) and the outstanding Principal
of this Debenture is greater than the Principal portion of the Conversion
Amount being converted, then the Company shall as soon as practicable and in no
event later than three Business Days after receipt of this Debenture and at its
own expense, issue and deliver to the holder a new Debenture (in accordance
with Section 19(d)) representing the outstanding Principal not converted.  The Person or Persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Debenture shall
be treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date. 
All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Debenture
required to be converted on the Mandatory Conversion Date.

 

(ii)           Company’s Failure to Timely Convert. 
Subject to Section 3(d), if the Company shall fail to issue a
certificate to the Holder or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon
conversion of any Conversion Amount on or prior to the date which is five
Business Days after the Conversion Date, provided, that if the Company
shall not have timely delivered a Confirmation Receipt, the Buyer shall have
retransmitted by facsimile its Conversion Notice on or prior to the date which
is three Business Days after the Conversion Date (a “Conversion Failure”), then (A) the Company shall pay damages
to the Holder for each date of such Conversion Failure in an amount equal to
1.0%  of the product of (I) the sum
of the number of shares of Common Stock not issued to the Holder on or prior to
the Share Delivery Date and to which the Holder is entitled, and (II) the
Weighted Average Price of the Common Stock on the Share Delivery Date and (B)
the Holder, upon written notice to the Company, may void its Conversion Notice
with respect to, and retain or have returned, as the case may be, any portion
of this Debenture

 

5

 

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

 

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

 

(iv)          Pro Rata Conversion; Disputes.  In
the event that the Company receives a Conversion Notice from more than one
holder of Debentures for the same Conversion Date and the Company can convert
some, but not all, of such portions of the Debentures submitted for conversion,
the Company, subject to Section 3(d), shall convert from each holder of
Debentures electing to have Debentures converted on such date a pro rata amount
of such holder’s portion of its Debentures submitted for conversion based on
the principal amount of Debentures submitted for conversion on such date by
such holder relative to the aggregate principal amount of all Debentures
submitted for conversion on such date. 
In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Debenture, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 24.

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership.  The
Company shall not effect any conversion of this Debenture, and the Holder of
this Debenture shall neither solicit the conversion nor have the right to
convert any portion of this Debenture pursuant to Section 3(a), to the extent
that after giving effect to such conversion, the Holder (together with the
Holder’s affiliates) would beneficially own in excess of 9.99% of the number of
shares of 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
the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Debenture 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 portion of this Debenture beneficially owned by the
Holder or any of its affiliates and (B) exercise

 

6

 

or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Debentures or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 3(d)(i), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.  For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common
Stock outstanding.  For any reason at
any time, upon the written or oral request of the Holder, the Company shall
within two Business Days confirm orally and in writing to the Holder the number
of shares of 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 Debenture, by the Holder or its affiliates since
the date as of which such number of outstanding shares of Common Stock was
reported.  Any Conversion Notice
requesting a conversion that, after giving effect to such conversion, would
result in a violation of this Section 3(d)(i) shall be null and void as to the
portion of such Conversion Notice that would be in violation of this Section
3(d)(i) as if never delivered to the Company.

 

(ii)           Principal Market Regulation.  The
Company shall not be obligated to issue any shares of Common Stock upon
conversion of all outstanding Debentures and exercise of all outstanding
Warrants (including, the Warrant to purchase 428,571 shares of Common Stock
issued to the Company’s placement agent (the “Placement
Agent Warrants”) if the issuance of such shares of Common Stock
would exceed that number of shares of Common Stock which the Company may issue
upon conversion of the Debentures without breaching the Company’s obligations
under the rules or regulations of the Principal Market (the “Exchange
Cap”).  No purchaser of the
Debentures and Warrants pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued, upon
conversion of the Debentures or exercise of the Warrants, shares of Common
Stock in an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the sum of the number of Conversion Shares
and Warrant Shares underlying the Debentures and the Warrants issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date
and the denominator of which is the sum of the number of Conversion Shares and
Warrant Shares underlying the Debentures and the Warrants issued to all the
Purchasers pursuant to the Securities Purchase Agreement on the Issuance Date
and the number of shares of Common Stock issuable pursuant to the Placement
Agent Warrants issued on the Issuance Date (with respect to each Purchaser, the
“Exchange Cap Allocation”).  In the event that any Purchaser shall sell
or otherwise transfer any of such Purchaser’s Debentures, the transferee shall
be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation,
and the

 

7

 

restrictions of the prior
sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such transferee.  In the event that any holder of Debentures shall convert all of
such holder’s Debentures into a number of shares of Common Stock which, in the
aggregate, is less than such holder’s Exchange Cap Allocation, then the
difference between such holder’s Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of Debentures on a
pro rata basis in proportion to the aggregate principal amount of the
Debentures then held by each such holder. 
Any Conversion Notice requesting a conversion that, after giving effect
to such conversion, would result in a violation of this Section 3(d)(ii) shall
be null and void as to the portion of such Conversion Notice that would be in
violation of this Section 3(d)(ii) as if never delivered to the Company.

 

For the avoidance of doubt,
in no event shall the Company be required to seek stockholder approval with
respect to any of the transactions contemplated by the Transaction Documents.

 

(4)           RIGHTS UPON EVENT OF DEFAULT.

 

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

 

(i)            the failure of the applicable Registration
Statement required to be filed pursuant to the Registration Rights Agreement to
be declared effective by the SEC on or prior to the date that is 60 days after
the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the applicable Registration Statement lapses
for any reason (including, without limitation, the issuance of a stop order) or
is unavailable to any holder of the Debentures for sale of all of such holder’s
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of more than an aggregate of 20
Trading Days in any 365-day period (other than days during an Allowable Grace
Period (as defined in the Registration Rights Agreement));

 

(ii)           the suspension from trading or failure of the Common Stock to be listed
on the Principal Market, the Nasdaq National Market or The New York Stock
Exchange, Inc. for a period of 10 consecutive Trading Days or for more than an
aggregate of 20 Trading Days in any 365-day period;

 

(iii)          the Company’s (A) failure to cure a Conversion Failure by delivery of
the required number of shares of Common Stock within ten (10) Business Days
after the applicable Conversion Date or (B) written notice to any holder of the
Debentures, including by way

 

8

 

of public announcement or
through any of its agents, at any time, of its express intention not to comply
with a request for conversion of any Debentures into shares of Common Stock
that is tendered in accordance with the provisions of the Debentures;

 

(iv)          at any time following the 20th consecutive Business Day that
the Holder’s Authorized Share Allocation is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion of
the full Conversion Amount of this Debenture (without regard to any limitations
on conversion set forth in Section 3(d)(i) or otherwise);

 

(v)           the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Debenture,
the Securities Purchase Agreement, the Registration Rights Agreement, the
Warrants or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated hereby and thereby
to which the Holder is a party, except, in the case of a failure to pay
Interest and Late Charges when and as due, in which case only if such failure
continues for a period of at least seven Business Days after the Company has
received notice of such failure to pay from the Holder;

 

(vi)          any redemption of or acceleration prior to maturity of any material
Indebtedness (as defined in Section 3(s) of the Securities Purchase Agreement)
of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) other than with respect to any Other Debentures;

 

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

 

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

 

(ix)           a final non-appealable judgment or judgments for the payment of money
aggregating in excess of $1,500,000 are rendered against the Company or any of
its Subsidiaries and which judgments are not, within 60 days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within 60 days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating

 

9

 

the $1,500,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within 30 days of the issuance of such judgment;

 

(x)            the Company breaches, in any material
respect, any representation, warranty, covenant or other term or condition of
the Securities Purchase Agreement, the Registration Rights Agreement, the
Warrants, this Debenture, the Other Debentures, or any other agreement,
document, certificate or other instrument delivered in connection with the
transactions contemplated thereby and hereby to which the Holder is a party,
except, in the case of a breach of covenant which is curable, only if such
breach continues for a period of at least ten (10) consecutive Business Days of
the Company’s receipt of notice of same; or

 

(xi)           any breach or failure in any respect to comply with Section 15 of this
Debenture.

 

(b)           Redemption Right. 
Promptly after the Company becomes aware of the occurrence of an Event
of Default with respect to this Debenture or any Other Debenture, the Company
shall deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the
Holder.  At any time after the earlier
of the Holder’s receipt of an Event of Default Notice and the Holder becoming
aware of an Event of Default, the Holder may require the Company to redeem all
or any portion of this Debenture by delivering written notice thereof (the “Event of Default Redemption Notice”) to
the Company, which Event of Default Redemption Notice shall indicate the facts
constituting the Event of Default and the portion of this Debenture the Holder is
electing to redeem.  Each portion of
this Debenture subject to redemption by the Company pursuant to this Section
4(b) shall be redeemed by the Company at a price equal to the greater of (i)
the product of (x) the Conversion Amount to be redeemed and (y) the Redemption
Premium and (ii) the product of (A) the Conversion Rate with respect to such
Conversion Amount in effect at such time as the Holder delivers an Event of
Default Redemption Notice and (B) the Weighted Average Price of the Common
Stock on the date immediately preceding such Event of Default (the “Event of Default Redemption Price”).  Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 12.

 

(5)           RIGHTS UPON CHANGE OF CONTROL.

 

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

 

(i)            the consolidation, merger or other business
combination (including, without limitation, a reorganization or
recapitalization) of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination (including,

 

10

 

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

 

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

 

(iii)          a purchase, tender or exchange offer made to and accepted by the
holders of more than the 50% of the outstanding shares of Common Stock.

 

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

 

(b)           Assumption.  Prior to the consummation of
any Change of Control, the Company will secure from any Person purchasing the
Company’s assets or Common Stock or any successor resulting from such Change of
Control (in each case, an “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of
Debentures representing at least a majority of the aggregate principal amount
of the Debentures then outstanding) to deliver to each holder of Debentures in
exchange for such Debentures, a security of the Acquiring Entity evidenced by a
written instrument substantially similar in form and substance to the
Debentures, including, without limitation, having a principal amount and
interest rate equal to the principal amounts and the interest rates of the
Debentures then held by such holder, and reasonably satisfactory to the holders
of Debentures representing at least a majority of the principal amount of the
Debentures then outstanding.  In the
event that an Acquiring Entity is directly or indirectly controlled by a
company or entity whose common stock or similar equity interest is listed,
designated or quoted on a securities exchange or trading market, the holders of
Debentures representing at least a majority of the aggregate principal amount
of the Debentures then outstanding may elect to treat such Person as the Acquiring
Entity for purposes of this Section 5(b).

 

(c)           Redemption Right.  At
any time during the period beginning after the Holder’s receipt of a Change of
Control Notice and ending on the date of the consummation of such Change of
Control (or, in the event a Change of Control Notice is not delivered at least
10 days prior to a Change of Control, at any time on or after the date which is
10 days prior to a Change of Control and ending 10 days after the consummation
of such Change of Control), the Holder may require the Company to redeem all or
any portion of this Debenture by delivering written notice thereof (“Change of Control Redemption Notice”) to
the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem.  The portion of this Debenture subject to redemption pursuant to
this Section

 

11

 

5(c) shall be redeemed by the Company at a
price equal to the greater of (i) the product of (x) the Conversion
Amount being redeemed and (y) the quotient determined by dividing (A) the Weighted Average Price of the Common
Stock for the full Trading Day immediately following the public announcement of
such proposed Change of Control by (B) the Conversion Price and (ii) 125% of
the Conversion Amount being redeemed
(the “Change of Control Redemption Price”).  If at any time the Weighted Average Price of
the Common Stock exceeds 175% of the Conversion Price as of the Issuance Date (subject
to adjustments pursuant to the terms and conditions of this Debenture) on the date of the occurrence of a Change of
Control, then the Company shall have the right to redeem all or a portion of
this Debenture by providing notice to the Holder at any time on or after the
date of such Change of Control and two days after such Change of Control by
delivering written notice thereof to the Holder, indicating the Conversion
Amount and the Change of Control Redemption Price.  Redemptions required by this Section 5(c) shall be made in accordance
with the provisions of Section 12 and shall have priority to payments to
stockholders in connection with a Change of Control.

 

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

 

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

 

(b)           Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for Common Stock (a “Corporate
Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon a conversion of this
Debenture, (i) in addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder would have been
entitled with respect to such shares of Common Stock had such shares of Common
Stock been held by the Holder upon the consummation of such Corporate Event or
(ii) in lieu of the shares of Common Stock otherwise receivable upon such
conversion, such securities or other assets received by the holders of Common
Stock in connection with the consummation of such Corporate Event in such
amounts as the Holder would have been entitled to receive had this Debenture
initially been issued with conversion rights for the form of such consideration
(as opposed to shares of Common Stock) at a

 

12

 

conversion rate for such consideration
commensurate with the Conversion Rate. 
Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the holders of Debentures representing at least a
majority of the aggregate principal amount of the Debentures then outstanding.

 

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)           Adjustment of Conversion Price upon Issuance of
Common Stock.  If and whenever on or after the Issuance
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock issued or deemed to have
been issued or sold by the Company in connection with any Excluded Security)
for a consideration per share (the “New
Securities Issuance Price”) less than a price (the “Applicable Price”) equal to the Conversion
Price in effect immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal to the greater of (x) the New Securities
Issuance Price and (y) the quotient obtained by dividing (A) the sum of (i) the
aggregate principal face amount of Debentures then outstanding and (ii) the
product of the aggregate number of Warrant Shares (as defined in the Warrant)
issuable pursuant to all of the Warrants then outstanding multiplied by the
Exercise Price (as defined in the Warrant) then in effect by (B) 16,999,811
minus the aggregate number of shares issued pursuant to the Debentures and the
Warrants on or prior to the date of the Dilutive Issuance (such quotient, the “Price Floor”).  For purposes of
determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

 

(i)            Issuance of Options.  If
the Company in any manner grants or sells any Options, other than Excluded
Securities, and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or exchange
or exercise of any Convertible Securities issuable upon exercise of such Option
is less than the Applicable Price, then, solely for purposes of this Section 7,
such share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the granting or sale of such
Option for such price per share.  For
purposes of this Section 7(a)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to
any one share of Common Stock upon granting or sale of the Option, upon
exercise of the Option and upon conversion or exchange or exercise of any
Convertible Security issuable upon exercise of such Option.  No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of such
Convertible Securities.

 

13

 

(ii)           Issuance of Convertible Securities.  If
the Company in any manner issues or sells any Convertible Securities, other
than Excluded Securities, and the lowest price per share for which one share of
Common Stock is issuable upon such conversion or exchange or exercise thereof
is less than the Applicable Price, then, solely for purposes of this Section 7,
such share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance of sale of such Convertible
Securities for such price per share. 
For the purposes of this Section 7(a)(ii), the “price per share for
which one share of Common Stock is issuable upon such conversion or exchange or
exercise” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security.  No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Conversion Price had been or are to be made
pursuant to other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.

 

(iii)          Change in Option Price or Rate of Conversion.  If
the purchase price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion, 
exchange or exercise of any Convertible Securities, or the rate at which
any Convertible Securities are convertible into or exchangeable or exercisable
for Common Stock changes at any time, the Conversion Price in effect at the
time of such change shall be adjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
Issuance Date are changed in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the Common Stock deemed
issuable upon exercise, conversion or exchange thereof shall be deemed to have
been issued as of the date of such change. 
No adjustment shall be made if such adjustment would result in an
increase of the Conversion Price then in effect to a Conversion Price greater
than the Conversion Price in effect on the Issuance Date (subject to
appropriate adjustments for stock splits, stock dividends, stock combinations
and other similar transactions after the Issuance Date).

 

(iv)          Calculation of Consideration Received.  In
case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of $.01.  If any Common Stock, Options or Convertible
Securities are issued or sold or

 

14

 

deemed to have been issued
or sold for cash, the consideration received therefor will be deemed to be the
gross amount received by the Company therefor. 
If any Common Stock, Options or Convertible Securities are issued or
sold for a consideration other than cash, the amount of the consideration other
than cash received by the Company will be the fair value of such consideration,
except where such consideration consists of securities, in which case the
amount of consideration received by the Company will be the Weighted Average
Price of such securities on the date of receipt.  If any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity, the amount of consideration therefor
will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common Stock,
Options or Convertible Securities, as the case may be.  The fair value of any consideration other
than cash or securities will be determined jointly by the Company and the
holders of Debentures representing at least a majority of the principal amounts
of the Debentures, unless the Board of Directors of the Company shall have
obtained a fairness opinion from an independent financial advisor in which case
the fair value shall be as stated in such fairness opinion.  If, in the absence of a fairness opinion,
such parties are unable to reach agreement within ten days after the occurrence
of an event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined in
accordance with Section 24 hereof.

 

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

 

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

 

(c)           Other Events.  If
any event occurs of the type contemplated by the provisions of this Section 7
but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights or
other rights with equity features), then the Company’s Board of Directors, in
their reasonable discretion, will make

 

15

 

an appropriate adjustment in the Conversion
Price so as to protect the rights of the Holder under this Debenture; provided
that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 7.

 

(8)           EXTENSION OF MATURITY DATE.

 

(a)           Holder Maturity Date Extension Option.  The
Holder shall have the right, in its sole discretion, to require that the
Original Maturity Date as to this Debenture (but not any other Debenture) be
extended for a period not to exceed, in the aggregate, three years from the Original
Maturity Date, without the action of any other Person, by delivering written
notice thereof (a “Holder Maturity Date
Extension Notice”) to the Company at any time or from time to time
prior to the Original Maturity Date, as extended, which Holder Maturity Date
Extension Notice shall indicate the Maturity Date, as so extended, of this
Debenture.  Within one Business Day of
receipt of a Holder Maturity Date Extension Notice, the Company shall inform
all other holders of Debentures that such a notice has been received by the
Company.

 

(b)           Automatic Maturity Date Extension.  If
at any time during the 180 day period immediately preceding, but not including,
the Original Maturity Date (the “Maturity
Extension Measuring Period”), the arithmetic average of the Weighted
Average Price of the Common Stock exceeds 175% of the Conversion Price as of
the Issuance Date (subject to appropriate adjustments for stock splits, stock
dividends, stock combinations and other similar transactions after the Issuance
Date) for each of any 30 consecutive Trading Days during the Maturity Extension
Measuring Period, and the Conditions to Automatic Maturity Extension (as
defined below) are satisfied or waived in writing by all holders of Debentures,
the Maturity Date as to this Debenture and all Other Debentures shall be
extended automatically, without further action on the part of any Person, to
September 26, 2009.  For purposes of
this Section 8(b), “Conditions to Automatic
Maturity Extension” means  the
following conditions: (i) during the
period beginning on the Issuance Date and ending on and including the Original
Maturity Date, subject to the terms and conditions of Section 3(d), the Company
shall have delivered shares of Common Stock upon any conversion of Conversion
Amounts on a timely basis as set forth in Section 3(c)(i) and delivered shares
of Common Stock upon exercise of any Warrants on a timely basis as set forth in
Section 1(a) of the Warrants; (ii) on each day during the period beginning on
the first Trading Day of the Maturity Extension Measuring Period and ending on and including the Original
Maturity Date, the Common Stock shall be listed on the Principal Market, the
Nasdaq National Market or The New York Stock Exchange, Inc. and delisting or
suspension by such market or exchange shall not have been threatened either (A)
in writing by such market or exchange or (B) by failing to satisfy the minimum
listing maintenance requirements of such market or exchange; (iii) during the
period beginning on the Issuance Date and ending on and including the Original
Maturity Date, there shall not have occurred (x) the public announcement of a
pending, proposed or intended Change of Control which has not been abandoned,
terminated or consummated, (y) an Event of Default or (z) an event that with
the passage of time or giving of notice, and assuming it were not cured, would
constitute an Event of

 

16

 

Default; (iv) on each day of the period
beginning on the first Trading Day of the Maturity Extension Measuring
Period and ending on and
including the Original Maturity Date either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Debentures and
shares of Common Stock issuable upon exercise of the Warrants shall be eligible
for sale without restriction and without the need for registration under any
applicable federal or state securities laws; and (v) the Company otherwise
shall have been in material compliance with and shall not have breached, in any
material respect, any provision, covenant, representation or warranty of the
Securities Purchase Agreement, the Registration Rights Agreement, the Warrants
or any of the Debentures.

 

(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION AND
PREPAYMENT; HOLDER’S RIGHT TO REQUIRE REPAYMENT.

 

(a)           (i)    Mandatory Conversion.  If at any time from and after the
Issuance Date, the arithmetic average of the Weighted Average Price of the
Common Stock exceeds 175% of the Conversion Price as of the Issuance Date
(subject to adjustments pursuant to the terms and conditions of this Debenture)
for each of any 30 consecutive Trading Days (the “Mandatory Conversion Measuring Period”) and the Conditions to
Mandatory Conversion (as set forth in Section 9(c)) are satisfied or waived in
writing by the Holder, the Company shall have the right to require the Holder
to convert all or any such portion of the Conversion Amount of this Debenture
designated in the Mandatory Conversion Notice into fully paid, validly issued
and nonassessable shares of Common Stock in accordance with Section 3(c)
hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined
below) (a “Mandatory Conversion”).  The Company may exercise its right to
require conversion under this Section 9(a) by delivering within not more than
ten Trading Days following the end of such Mandatory Conversion Measuring
Period a written notice thereof by facsimile and overnight courier to all, but
not less than all, of the holders of Debentures and the Transfer Agent (the “Mandatory Conversion Notice” and the date
all of the holders received such notice is referred to as the “Mandatory Conversion Notice Date”).  The Mandatory Conversion Notice shall be
irrevocable.

 

(ii)           Prepayment.  Notwithstanding
anything to the contrary contained in this Agreement and as long as the
conditions set forth in Section 9(c) are satisfied or waived in writing
by the Holder, the Company shall have the right to prepay all or any such portion of the outstanding Principal (the “Prepayment
Portion”) for an amount in cash equal to 150% of the sum of the
Prepayment Portion plus all accrued and unpaid Interest and accrued and unpaid
Late Charges thereon, if any (such amount, the “Prepayment Premium Amount”). 
The Company may exercise its rights to prepay the Debenture as set forth
hereunder by delivering written notice to the Holder at least twenty (20)
Trading Days and no more than sixty (60) Trading Days prior to the
effectiveness of such election indicating the date of effectiveness of 

 

17

 

delivery of a written notice election, the
Prepayment Portion, and the Prepayment Premium Amount.  The Company shall deliver payment of the
Prepayment Premium Amount by wire transfer of immediately available funds or by
delivery of a certified check. A prepayment election hereunder shall be
irrevocable unless waived by the Holder.

 

(b)           Pro Rata Conversion Requirement.  If
the Company elects to cause a conversion of all or any portion of the
Conversion Amount of this Debenture pursuant to Section 9(a)(i) or to prepay
this Debenture in accordance with Section 9(a)(ii), then it must simultaneously
take the same action with respect to the Other Debentures.  If the Company elects to cause the
conversion of this Debenture pursuant to Section 9(a) (or similar provisions
under the Other Debentures) with respect to less than all of the Conversion
Amounts of the Debentures then outstanding, then the Company shall require
conversion of a Conversion Amount from each of the holders of the Debentures equal
to the product of (I) the aggregate Conversion Amount of Debentures which the
Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Debentures purchased by such holder pursuant
to the Securities Purchase Agreement and the denominator of which is the sum of
the aggregate principal amount of the Debentures then outstanding and purchased
by all holders pursuant to the Securities Purchase Agreement (such fraction
with respect to each holder is referred to as its “Allocation Percentage,” and such amount with respect to each
holder is referred to as its “Pro Rata
Conversion Amount”).  In the
event that the initial holder of any Debentures shall sell or otherwise
transfer any of such holder’s Debentures, the transferee shall be allocated a
pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state
(i) the Trading Day selected for the Mandatory Conversion in accordance
with Section 9(a), which Trading Day shall be at least 10 Business Days but not
more than 60 Business Days following the Mandatory Conversion Notice Date (the
“Mandatory Conversion Date”), (ii) the aggregate Conversion Amount of the
Debentures which the Company has elected to be subject to mandatory conversion
from all of the holders of the Debentures pursuant to this Section 9 (and
analogous provisions under the Other Debentures), (iii) each holder’s Pro Rata
Conversion Amount of the Conversion Amount of the Debentures the Company has
elected to cause to be converted pursuant to this Section 9 (and analogous
provisions under the Other Debentures) and (iv) the number of shares of
Common Stock to be issued to such Holder as of the Mandatory Conversion Date.  All
Conversion Amounts converted by the Holder after the Mandatory Conversion
Notice Date shall reduce the Conversion Amount of this Debenture required to be
converted on the Mandatory Conversion Date. 
If the Company has elected a Mandatory Conversion, the mechanics
of conversion set forth in Section 3(c) shall apply, to the extent applicable,
as if the Company and the Transfer Agent had received from the Holder on the
Mandatory Conversion Date a Conversion Notice with respect to the Conversion
Amount being converted pursuant to the Mandatory Conversion.

 

(c)           Conditions
to Mandatory Conversion.  For
purposes of this Section 9, “Conditions to
Mandatory Conversion” means  the
following conditions: (i) during the
Mandatory Conversion Measuring Period, the Company shall have delivered shares
of Common

 

18

 

Stock upon any conversion of Conversion
Amounts on a timely basis as set forth in Section 3(c)(i) and delivered shares
of Common Stock upon exercise of any Warrants or on a timely basis as set forth
in Section 1(a) of the Warrants; (ii) on each day during the period beginning
on the first Trading Day of the Mandatory Conversion Measuring Period and
ending on and including the Mandatory Conversion Date, the Common Stock shall
be listed on the Principal Market, the Nasdaq National Market or The New York
Stock Exchange, Inc. and delisting or suspension by such market or exchange
shall not have been threatened either (A) in writing by such market or exchange
or (B) by falling below the minimum listing maintenance requirements of such
market or exchange; (iii) during the Mandatory Conversion Measuring Period,
there shall not have occurred (x) the public announcement of a pending,
proposed or intended Change of Control which has not been abandoned, terminated
or consummated, or (y) an Event of Default; (iv) on each day of the period
beginning on the date of delivery of the Mandatory Conversion Notice and ending
on the Mandatory Conversion Date either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Debentures and
shares of Common Stock issuable upon exercise of the Warrants shall be eligible
for sale without restriction and without the need for registration under any
applicable federal or state securities laws; (v) on each day of the period
beginning on the Mandatory Conversion Date and ending thirty Trading Days
thereafter either (x) the Registration Statements required pursuant to the
Registration Rights Agreement shall be expected to be effective and available
for the sale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Common
Stock issuable upon conversion of the Debentures and shares of Common Stock
issuable upon exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; and (vi) the Company otherwise shall have been in
material compliance with and shall not have breached, in any material respect,
any provision, covenant, representation or warranty of the Securities Purchase
Agreement, the Registration Rights Agreement, the Warrants or any of the
Debentures.

 

(d)           Holder’s
Right to Require Redemption.  If at
any time on or after the second anniversary of the Initial Issuance Date, the
Weighted Average Price of the Common Stock is less than the Conversion Price on
any five Trading Days after such second anniversary, the Holder shall have the
right, in its sole discretion, to require that the Company redeem up to
$7,500,000 principal amount of this Note (a “Holder
Optional Redemption”) by delivering written notice thereof (a “Holder Optional Redemption Notice”) to the
Company, which Holder Redemption Notice shall indicate the Conversion Amount
the Holder is electing to redeem.  The
portion of this Note subject to redemption pursuant to this Section 9(d) shall
be redeemed by the Company at a price equal to the Conversion Amount being
redeemed (the “Holder Optional Redemption
Price”).  Redemptions
required by this Section 9(d) shall be made in accordance with the provisions
of Section 12.

 

(10)         NONCIRCUMVENTION.  The
Company hereby covenants and agrees

 

19

 

that the Company will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Debenture, and will at all times in good faith carry
out all of the provisions of this Debenture and take all action as may be
required to reasonably protect the rights of the Holder of this Debenture.

 

(11)         RESERVATION OF AUTHORIZED SHARES.

 

(a)           Reservation.  The Company shall initially
reserve out of its authorized and unissued Common Stock a number of shares of
Common Stock for each of the Debentures equal to 130% of the Conversion Rate
with respect to the Conversion Amount of each such Debenture as of the Issuance
Date.  Thereafter, the Company, so long
as any of the Debentures are outstanding, shall take all action necessary to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Debentures, 110% of
the number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Debentures then outstanding; provided that
at no time shall the number of shares of Common Stock so reserved be less than
the number of shares required to be reserved by the previous sentence (the “Required Reserve Amount”).  The initial number of shares of Common Stock
reserved for conversions of the Debentures and each increase in the number of
shares so reserved shall be allocated pro rata among the holders of the
Debentures based on the principal amount of the Debentures held by each holder
at the time of Issuance Date or increase in the number of reserved shares, as
the case may be (the “Authorized Share
Allocation”).  In the event
that a holder shall sell or otherwise transfer any of such holder’s Debentures,
each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation.  Any shares
of Common Stock reserved and allocated to any Person which ceases to hold any
Debentures shall be allocated to the remaining holders of Debentures, pro rata
based on the principal amount of the Debentures then held by such holders.

 

(b)           Insufficient Authorized Shares.  If
at any time while any of the Debentures remain outstanding the Company does not
have a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the
Debentures at least a number of shares of Common Stock equal to the Required
Reserve Amount (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow
the Company to reserve the Required Reserve Amount for the Debentures then
outstanding.  Without limiting the
generality of the foregoing sentence, as soon as reasonably practicable after the
date of the occurrence of an Authorized Share Failure, but in no event later
than 90 days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its stockholders for the approval of an increase in the
number of authorized shares of Common Stock. 
In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit
its stockholders’ approval of such increase in authorized shares of Common
Stock and to cause its

 

20

 

board of directors to recommend to the
stockholders that they approve such proposal.

 

(12)         HOLDER’S REDEMPTIONS.

 

(a)           Mechanics.  In the event that the Holder
has sent a Redemption Notice to the Company pursuant to Section 4(b) or Section
5(c), the Holder shall promptly submit this Debenture to the Company.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within 10 Business Days after
the Company’s receipt of the Holder’s Event of Default Redemption Notice.  If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(c), the Company shall
deliver the applicable Change of Control Redemption Price to the Holder concurrently
with the consummation of such Change of Control if such notice is received
prior to the consummation of such Change of Control and within five Business
Days after the Company’s receipt of such notice otherwise.  In the event that the Holder has sent
a Holder Optional Redemption Notice pursuant to Section 9(d), the Company shall
deliver the Holder Optional Redemption Price within 45 days after the Company’s
receipt of the Holder Optional Redemption Notice and upon receipt of such
payment, the Holder shall promptly deliver this Debenture to the Company.  In
the event of a redemption of less than all of the Conversion Amount of this
Debenture, the Company shall promptly cause to be issued and delivered to the
Holder a new Debenture (in accordance with Section 19(d)) representing the
outstanding Principal which has not been redeemed.  In the event that the Company does not pay the Redemption Price
or Holder Optional Redemption to the Holder (or deliver any Common Stock to be
issued pursuant to a Company Redemption Share Notice) within the time period
required, at any time thereafter and until the Company pays such unpaid
Redemption Price (and issues any Common Stock required pursuant to a Company
Redemption Share Notice) in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Debenture representing the Conversion Amount that was submitted
for redemption and for which the applicable Redemption Price (or any Common
Stock required to be issued pursuant to a Company Redemption Share Notice)
(together with any Late Charges thereon) has not been paid.  Upon the Company’s receipt of such notice,
(x) the Redemption Notice shall be null and void with respect to such
Conversion Amount, (y) the Company shall immediately return this Debenture, or
issue a new Debenture (in accordance with Section 19(d)) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this
Debenture or such new Debentures shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is
voided and (B) the greater of (I) the Price Floor and (II) the Weighted Average
Price, on the date on which the Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.

 

(b)           Redemption by Other Holders. 
Upon the Company’s receipt of notice from any of the holders of the
Other Debentures for redemption or repayment as a result of an event or
occurrence substantially similar to the events or occurrences described in Section

 

21

 

4(b) (each, an “Other Redemption Notice”), the Company shall immediately
forward to the Holder by facsimile a copy of such notice.  The Holder shall have five Business Days
from receipt of such facsimile copy of such Other Redemption Notice to deliver
a Redemption Notice.  If the Company
receives a Redemption Notice and one or more Other Redemption Notices during
such five Business Day period and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices, then the Company shall redeem a pro rata amount
from each holder of the Debentures (including the Holder) based on the
principal amount of the Debentures submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such five Business Day period.

 

(13)         RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. 
Until all of the Debentures have been converted, redeemed or otherwise
satisfied in accordance with their terms, the Company shall not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock, other than the repurchase of restricted
stock from terminated employees or the redemption of any shares of preferred
stock or payment of dividends or redemptions required to be paid pursuant to
the terms of any securities existing on the date hereof, without the prior
express written consent of the holders of Debentures representing at least a
majority of the aggregate principal amount of the Debentures then outstanding.

 

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

 

(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

(a)           Rank.      All payments due under this
Debenture (a) shall rank pari passu
with all Other Debentures and (b) shall be senior to all other Indebtedness of
the Company and its Subsidiaries, other than Permitted Senior and Pari Passu
Indebtedness (as defined below).

 

(b)           Incurrence
of Indebtedness.  So long as this Debenture is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Debenture and
the Other Debentures and (ii) Permitted Indebtedness.  As used herein, “Permitted
Indebtedness” means (A) any Indebtedness of a third party assumed by
the Company in connection with (and not arising out of) an arms-length
transaction in which the Company acquires such third party, whether by merger,
combination, stock or asset purchase or otherwise (“Permitted Acquisition Indebtedness”); (B) an aggregate amount
of Indebtedness that is senior or pari passu
in right of payment to the Debentures (collectively, “Permitted Senior and Pari Passu Indebtedness”)
not to exceed at any one time $15,000,000; and (C) Permitted Subordinated
Indebtedness.  “Permitted Subordinated Indebtedness” means
Indebtedness that (x) is made expressly subordinate in right of payment to

 

22

 

the Indebtedness evidenced by this Debenture and the Other Debentures
on terms reasonably satisfactory to the holders of Debentures representing not
less than a majority of the aggregate principal amount of the then outstanding
Debentures and (y) does not provide at any time for the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal
or premium, if any, thereon until at least 91 days after the Maturity Date.

 

(c)           Existence
of Liens.  So long as this Debenture is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.  As used herein, “Permitted
Liens” means (i) Liens incurred to secure Permitted Acquisition
Indebtedness and Permitted Senior and Pari Passu Indebtedness, (ii) statutory
Liens for current taxes not yet due, (iii) purchase money Liens on equipment or
other property acquired or held by the Company or any of its Subsidiaries in
the ordinary course of its business to secure the purchase price of such
equipment or Indebtedness incurred solely for the purpose of financing the
acquisition of such equipment or Liens existing on such equipment at the time
of its acquisition; provided, however, that no such Lien shall
extend to or cover any other property of the Company or any of its
Subsidiaries; and (iv) other Liens imposed by law (such a materialmen’s,
mechanics’, carriers’, worker’s and repairman’s Liens).

 

(d)           Restricted Payments.  The
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, redeem, defease, repurchase, repay or make any payments
in respect of, by the payment of cash or cash equivalents (in whole or in part,
whether by way of open market purchases, tender offers, private transactions or
otherwise), all or any portion of any Permitted Subordinated Indebtedness or
Permitted Senior and Pari Passu Indebtedness that is not expressly made senior
in right of payment of the Debentures, the Other Debentures, whether by way of
payment in respect of principal of (or premium, if any) or interest on, such
Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage
of time and without being cured would constitute, an Event of Default has
occurred and is continuing.

 

(16)         PARTICIPATION.  The
Holder, as the holder of this Debenture, shall be entitled to such dividends
paid and distributions made to the holders of Common Stock to the same extent
as if the Holder had converted this Debenture into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such shares
of Common Stock on the record date for such dividends and distributions.  Payments under the preceding sentence shall
be made concurrently with the dividend or distribution to the holders of Common
Stock.

 

(17)         VOTE TO ISSUE, OR CHANGE THE TERMS OF,
DEBENTURES.  The affirmative vote at a meeting duly
called for such purpose or the written consent without a meeting, of the
holders of Debentures representing not less than a majority of the aggregate

 

23

 

principal amount of the then outstanding Debentures, shall be required
for any change or amendment to this Debenture or the Other Debentures.  Any election by the holders of Debentures
representing at least a majority of the aggregate principal amount of the
Debentures then outstanding shall bind the holders of all Debentures then
outstanding.

 

(18)         TRANSFER.  This Debenture may be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, subject only to the provisions of Section 2(f) of the Securities
Purchase Agreement.

 

(19)         REISSUANCE OF THIS DEBENTURE.

 

(a)           Transfer.  If this Debenture is to be
transferred, the Holder shall surrender this Debenture to the Company,
whereupon the Company will forthwith issue and deliver upon the order of the
Holder a new Debenture (in accordance with Section 19(d)), registered as the Holder
may request, representing the outstanding Principal being transferred by the
Holder and, if less then the entire outstanding Principal is being transferred,
a new Debenture (in accordance with Section 19(d)) to the Holder representing
the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
and this Section 19(a), following conversion or redemption of any portion of
this Debenture, the outstanding Principal represented by this Debenture may be
less than the Principal stated on the face of this Debenture.

 

(b)           Lost, Stolen or Mutilated Debenture. 
Upon receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Debenture, and,
in the case of loss, theft or destruction, of any indemnification undertaking
by the Holder to the Company in customary form and, in the case of mutilation,
upon surrender and cancellation of this Debenture, the Company shall execute
and deliver to the Holder a new Debenture (in accordance with Section 19(d))
representing the outstanding Principal.

 

(c)           Debenture Exchangeable for Different
Denominations.  This Debenture is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a
new Debenture or Debentures (in accordance with Section 19(d) and in principal
amounts of at least $100,000) representing in the aggregate the outstanding
Principal of this Debenture, and each such new Debenture will represent such
portion of such outstanding Principal as is designated by the Holder at the
time of such surrender.

 

(d)           Issuance of New Debentures. 
Whenever the Company is required to issue a new Debenture pursuant to
the terms of this Debenture, such new Debenture (i) shall be of like tenor with
this Debenture, (ii) shall represent, as indicated on the face of such new
Debenture, the Principal remaining outstanding (or in the case of a new
Debenture being issued pursuant to Section 19(a) or Section 19(c), the
Principal designated by the Holder which, when added to the principal
represented by the other new Debentures issued in connection with such

 

24

 

issuance, does not exceed the Principal remaining outstanding under
this Debenture immediately prior to such issuance of new Debentures), (iii)
shall have an issuance date, as indicated on the face of such new Debenture,
which is the same as the Issuance Date of this Debenture, (iv) shall have the
same rights and conditions as this Debenture, and (v) shall represent accrued
but unpaid Interest and Late Charges on the Principal and Interest of this
Debenture, from the Issuance Date.

 

(20)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this
Debenture shall be cumulative and in addition to all other remedies available
under this Debenture, the Securities Purchase Agreement, the Warrants and the
Registration Rights Agreement, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit the parties’ right to pursue actual and consequential damages for any
failure by the other party hereto to comply with the terms of this Debenture;
provided, however, that in no event shall any party recover more than once for
the same losses or damages.  Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be received by the Holder
and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof).  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that
the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled to
seek, in addition to all other available remedies, an injunction restraining
any breach without the necessity of showing economic loss and without any bond
or other security being required.

 

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

 

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

 

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

 

25

 

(24)         DISPUTE RESOLUTION.  In
the case of a dispute as to the determination of the Redemption Price or the
arithmetic calculation of the Conversion Rate or the Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder.  If the Holder and
the Company are unable to agree upon such determination or calculation within
one Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one Business Day submit
via facsimile (a) the disputed determination of the Weighted Average Price to
an independent, reputable investment bank selected by the Company and approved
by the Holder or (b) the disputed arithmetic calculation of the Conversion Rate
or the Redemption Price to the Company’s independent, outside accountant.  The Company, at the Company’s expense, shall
cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five Business Days from the time it receives the disputed
determinations or calculations.  Such
investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices.  Whenever notice is required
to be given under this Debenture, unless otherwise provided herein, such notice
shall be given in accordance with Section 9(f) of the Securities Purchase
Agreement.  The Company shall provide
the Holder with prompt written notice of all actions taken pursuant to this
Debenture, including in reasonable detail a description of such action and the
reason therefore.  Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) within three Business Days upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least the same number of days prior to the date
on which the Company provides notice to any other Person who has the right to
receive notice of such an event (A)
with respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C)
for determining rights to vote with respect to any Change of Control,
dissolution or liquidation, provided in each case that such information shall
be made known to the public prior to or in conjunction with such notice being
provided to the Holder.  Notwithstanding
the foregoing, Section 4(i) of the Securities Purchase Agreement shall apply to
all notices given pursuant to this Debenture.

 

(b)           Payments.  Whenever any payment of cash
is to be made by the Company to any Person pursuant to this Debenture, such
payment shall be made in lawful money of the United States of America by a
check drawn on the account of the Company and sent via overnight courier
service to such Person at such address as previously provided to the Company in
writing (which address, in the case of each of the Purchasers, shall initially
be as set forth on the Schedule of Buyers attached to the Securities Purchase
Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by

 

26

 

providing the Company with written notice at least two Business Days
prior to the due date of such payment setting out such request and the Holder’s
wire transfer instructions.  Whenever
any amount expressed to be due by the terms of this Debenture is due on any day
which is not a Business Day, the same shall instead be due on the next
succeeding day which is a Business Day and, in the case of any Interest Date
which is not the date on which this Debenture is paid in full, the extension of
the due date thereof shall not be taken into account for purposes of
determining the amount of Interest due on such date.  Any amount of Principal or other amounts required to be paid
under the Transaction Documents (as defined in the Securities Purchase
Agreement) other than Interest which is not paid when due shall result in a
late charge being incurred and payable by the Company in an amount equal to
interest on such amount at the rate of 12% per annum from the date such amount
was due until the same is paid in full (“Late
Charge”).

 

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

 

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

 

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

 

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

 

(a)           “Approved Stock Plan” means any employee benefit plan which has
been approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, officer, director or other
service provider to the Company for services provided to the Company.

 

(b)           “Bloomberg” means
Bloomberg Financial Markets.

 

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

 

(d)           “Convertible Securities”
means any stock or securities (other than

 

27

 

Options) directly or indirectly convertible into or exercisable or
exchangeable for Common Stock.

 

(e)           “Excluded Securities”
shall have the meaning given to it in the Securities Purchase Agreement.

 

(f)            “Interest Conversion Price” means, with respect to any Interest Date,
that price which shall be computed as 90% of the arithmetic average of the
Weighted Average Price of the Common Stock on each of the five consecutive
Trading Days immediately preceding such Interest Date.  All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction during such period.

 

(g)           “Maturity Date Conversion
Price” means that price
which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the 15 consecutive Trading Days
immediately preceding the Maturity Date. 
All such determinations to be appropriately adjusted for any stock
split, stock dividend, stock combination or other similar transaction during
such period.

 

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

 

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

 

(j)            “Principal
Market” means The Nasdaq SmallCap Market.

 

(k)           “Redemption Premium” means
(i) in the case of the Events of Default described in Section 4(a)(i) - (vii)
and (x) - (xiv), 120% or (ii) in the case of the Events of Default described in
Section 4(a)(viii) - (ix), 100%.

 

(l)            “Registration
Rights Agreement” means that certain registration rights agreement
between the Company and the initial holders of the Debentures relating to the
registration of the resale of the shares of Common Stock issuable upon conversion
of the Debentures.

 

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

 

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

 

(o)           “Semi-Annual Period” means
each of: the period beginning on

 

28

 

and including January 1 and ending on and including June 30; and the
period beginning on and including July 1 and ending on and including December
31.

 

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

 

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

 

(r)            “Weighted Average Price” means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such other time as the Principal
Market publicly announces is the official close of trading) as reported by
Bloomberg through its “Volume at Price” functions, or, if the foregoing does
not apply, the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.).  If the Weighted Average Price
cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall
be the fair market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 24.  All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.

 

[Signature Page Follows]

 

29

 

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

 

	
   

  	
  24/7 REAL
  MEDIA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  David J. Moore

  
	
   

  	
   

  	
  Chief Executive Officer

  

 

 

EXHIBIT I

 

24/7 REAL MEDIA, INC.

CONVERSION NOTICE

 

Reference is made to the Convertible
Debenture (the “Debenture”) issued
to the undersigned by 24/7 Real Media, Inc. (the “Company”).  In
accordance with and pursuant to the Debenture, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Debenture) of the Debenture
indicated below into shares of Common Stock, par value $0.01 per share (the “Common Stock”), of the Company as of the
date specified below.

 

After giving effect to the conversion of the
Aggregate Conversion Amount of Debentures requested to be converted pursuant
hereto, the undersigned will not be the beneficial owner of 10% or more of the
outstanding Common Stock (determined as set forth in Section 3(d)(i) of the
Debenture).

 

	
   

  	
  Date of Conversion:

  
	
   

  	
   

  
	
   

  	
  Aggregate Conversion
  Amount to be converted:

  
	
   

  	
   

  
	
  Please confirm the
  following information:

  
	
   

  	
   

  
	
   

  	
  Conversion Price:

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common
  Stock to be issued:

  
	
   

  	
   

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

  
	
   

  	
   

  
	
   

  	
  Issue to:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile Number:

  
	
   

  	
   

  
	
   

  	
  Authorization:

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Account Number:

  
	
   

  	
    (if electronic book entry transfer)

  
	
   

  	
   

  
	
   

  	
  Transaction Code Number:

  
	
   

  	
    (if electronic book entry transfer)

  
							

 

 

ACKNOWLEDGMENT

 

The Company hereby
acknowledges this Conversion Notice and hereby directs The Bank of New York to
issue the above indicated number of shares of Common Stock in accordance with
the Transfer Agent Instructions dated September 26, 2003 from the Company and
acknowledged and agreed to by The Bank of New York.

 

	
   

  	
  24/7 REAL
  MEDIA, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  David J. Moore

  
	
   

  	
   

  	
  Chief Executive Officer

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