Document:

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EXHIBIT 4.2

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

Original Issue Date: June 17, 2005

Original Conversion Price (subject to adjustment herein): $0.572

$770,000

CONVERTIBLE DEBENTURE

     THIS CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued Convertible
Debentures of US Dataworks, Inc., a Nevada corporation, having a principal place of business at
5301 Hollister Road, Suite 250, Houston, Texas 77040 (the “Company”), designated as its
Convertible Debenture (the “Debenture(s)”).

     FOR VALUE RECEIVED, the Company promises to pay to Crescent International, Ltd. or its
registered assigns (the “Holder”), or shall have been paid pursuant to the terms hereunder,
the principal sum of $770,000 by June 17, 2007, or such earlier date as this Debenture is required
or permitted to be repaid as provided hereunder (the “Maturity Date”). This Debenture is
subject to the following additional provisions:

     Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined herein have the
meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the
following meanings:

“Alternate Consideration” shall have the meaning set forth in Section 5(d).

“Base Conversion Price” shall have the meaning set forth in Section 5(b).

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     “Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States or a day on which banking institutions in the
State of New York are authorized or required by law or other government action to close.

     “Buy-In” shall have the meaning set forth in Section 4(d)(v).

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

     “Closing Price” means on any particular date (a) the last reported closing bid
price per share of Common Stock on such date on the Trading Market (as reported by Bloomberg
L.P. at 4:15 PM (New York time), or (b) if there is no such price on such date, then the
closing bid price on the Trading Market on the date nearest preceding such date (as reported
by Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for regular session
trading on such day), or (c) if the Common Stock is not then listed or quoted on a Trading
Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the
closing bid price of the Common Stock for such date (or the nearest preceding date) on the
OTC Bulletin Board (as reported by Bloomberg L.P. at 4:15 PM (New York time), (d) if the
Common Stock is not then listed or quoted on the Trading Market and if prices for the Common
Stock are then reported in the “pink sheets” published by the Pink Sheets LLC (formerly the
National Quotation Bureau Incorporated (or a similar organization or agency succeeding to
its functions of reporting prices), the most recent bid price per share of the Common Stock
so reported, or (e) if the shares of Common Stock are not then publicly traded the fair
market value of a share of Common Stock as determined by a qualified independent appraiser
selected in good faith

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by the Holders of a majority in interest of the principal amount of
Debentures then outstanding.

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

     “Conversion Date” shall have the meaning set forth in Section 4(a).

     “Conversion Price” shall have the meaning set forth in Section 4(b).

     “Conversion Shares” means the shares of Common Stock issuable upon conversion
of Debentures.

     “Debenture Register” shall have the meaning set forth in Section 2(c).

     “Dilutive Issuance” shall have the meaning set forth in Section 5(b).

     “Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).

     “Effectiveness Period” shall have the meaning given to such term in the
Registration Rights Agreement.

     “Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notice of Conversions of the Holder, if any, (ii) all liquidated
damages and other amounts owing to the Holder in respect of this Debenture shall have been
paid; (iii) there is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares issuable pursuant
to the Transaction Documents (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (iv) the Common Stock
is trading on the Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company believes, in good
faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for
the foreseeable future), (v) there is a sufficient number of authorized but unissued and
otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable
pursuant to the Transaction Documents, (vi) there is then existing no Event of Default or
event which, with the passage of time or the giving of notice, would constitute an Event of
Default, (vii) the issuance of the shares in question to the Holder would not violate the
limitations set forth in Section 4(c)(i) and Section 4(c)(ii) and (viii) no public
announcement of a pending or proposed Fundamental Transaction, Change of Control Transaction
or acquisition transaction has occurred that has not been consummated.

     “Event of Default” shall have the meaning set forth in Section 8.

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

     “Fundamental Transaction” shall have the meaning set forth in Section 5(d).

     “Mandatory Prepayment Amount” for any Debentures shall equal the sum of (i) the
greater of: (A) 130% of the principal amount of Debentures to be prepaid, or (B) the
principal amount of Debentures to be prepaid, divided by the Conversion Price on (x) the
date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the VWAP on
(x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date
the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such Debentures.

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

     “Monthly Redemption” shall mean the redemption of the Debenture pursuant to
Section 6(a) hereof.

     “Monthly Redemption Amount” shall mean, as to a Monthly Redemption, $51,333.33.

     “Monthly Redemption Date” means the 17th day of each month,
commencing on April 17, 2006 and ending upon the full redemption of this Debenture.

     “Monthly Redemption Period” shall have the meaning set forth in Section 6(a)
hereof.

     “Monthly Redemption Share Amount” shall have the meaning set forth in Section
6(a) hereof.

     “New York Courts” shall have the meaning set forth in Section 9(d).

     “Notice of Conversion” shall have the meaning set forth in Section 4(a).

     “Original Issue Date” shall mean the date of the first issuance of the
Debentures regardless of the number of transfers of any Debenture and regardless of the
number of instruments which may be issued to evidence such Debenture.

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

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     “Pre-Redemption Conversion Shares” shall have the meaning set forth in Section
6(a) hereof.

     “Purchase Agreement” means the Securities Purchase Agreement, dated as of June
16, 2005, to which the Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.

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

     “Registration Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering among other things the
resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.

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

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

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

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

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

     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to
4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading
Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the
volume weighted average price of the Common Stock for such date (or the nearest preceding
date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the
OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets”
published by the Pink Sheets, LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the

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most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the Holders and reasonably acceptable to the
Company.

Section 2. Interest.

     a) No Payment of Interest. This Debenture was issued for an Original Issue
Discount. No interest payments shall be due and payable to the Holder hereunder.

     b) Prepayment. Except as otherwise set forth in this Debenture, the Company
may not prepay any portion of the principal amount of this Debenture without the prior
written consent of the Holder; provided, that the Company may prepay this Debenture in whole
provided the Equity Conditions are then met, upon 30 Trading Days’ prior written notice to
the Holder, at the Mandatory Prepayment Amount.

Section 3. Registration of Transfers and Exchanges.

     a) Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations, as requested
by the Holder surrendering the same. No service charge will be made for such registration
of transfer or exchange.

     b) Investment Representations. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations.

     c) Reliance on Debenture Register. Prior to due presentment to the Company for
transfer of this Debenture, the Company and any agent of the Company may treat the Person in
whose name this Debenture is duly registered on the Debenture Register as the owner hereof
for the purpose of receiving payment as herein provided and for all other purposes, whether
or not this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

Section 4. Conversion.

     a) Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, this Debenture shall be convertible into shares of
Common Stock at the option of the Holder, in whole or in part at any time and from time to
time (subject to the limitations on conversion set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company the form of Notice of
Conversion attached hereto as Annex A (a “Notice of Conversion”), specifying
therein the principal amount of Debentures to be converted and the date on which such
conversion is to be effected (a “Conversion Date”). If no Conversion Date is
specified in

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a Notice of Conversion, the Conversion Date shall be the date that such Notice
of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not
be required to physically surrender Debentures to the Company unless the entire
principal amount of this Debenture has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Debenture in an amount equal
to the applicable conversion. The Holder and the Company shall maintain records showing the
principal amount converted and the date of such conversions. The Company shall deliver any
objection to any Notice of Conversion within 1 Business Day of receipt of such notice. In
the event of any dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder and any assignee, by acceptance
of this Debenture, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount stated on the face hereof.

     b) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $0.572 (subject to adjustment herein)(the “Conversion Price”).

     c) Conversion Limitations.

     i. Trading Market Limitations. Notwithstanding anything herein to the
contrary, if the Company has not obtained Shareholder Approval (as defined below),
if required by the applicable rules and regulations of the Trading Market (or any
successor entity), then the Company may not issue, upon conversion of this
Debenture, a number of shares of Common Stock which, when aggregated with any shares
of Common Stock issued prior to such Conversion Date (A) pursuant to any Debentures
issued pursuant to the Purchase Agreement and (B) pursuant to any Warrants issued
pursuant to the Purchase Agreement, would exceed 19.999% of the number of shares of
Common Stock outstanding on the Trading Day immediately preceding the Original Issue
Date (such number of shares, the “Issuable Maximum”). Each Holder shall be
entitled to a portion of the Issuable Maximum equal to the quotient obtained by
dividing (x) the aggregate principal amount of the Debenture(s) issued and sold to
such Holder on the Original Issue Date by (y) the aggregate principal amount of all
Debentures issued and sold by the Company on the Original Issue Date. If any Holder
shall no longer hold the Debenture(s), then such Holder’s remaining portion of the
Issuable Maximum shall be allocated pro-rata among the remaining Holders. If on any
Conversion Date: (1) the applicable Conversion Price then in effect is such that the shares issuable under this Debenture on any Conversion Date together with the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding Debentures would exceed the Issuable
Maximum, and (2) the Company’s shareholders shall not have previously approved the
transactions contemplated by the Transaction Documents, as may be required by the
applicable rules and regulations of the American Stock Exchange, if any (the
“Shareholder Approval”), then the Company shall issue to the Holder
requesting a conversion a number of shares of

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Common Stock equal to such Holder’s
pro-rata portion (which shall be calculated pursuant to the terms hereof) of the
Issuable Maximum and, with respect to the
remainder of the aggregate principal amount of the Debentures then held by such
Holder for which a conversion in accordance with the applicable conversion price
would result in an issuance of shares of Common Stock in excess of such Holder’s
pro-rata portion (which shall be calculated pursuant to the terms hereof) of the
Issuable Maximum (the “Excess Principal”), the Company shall be prohibited
from converting such Excess Principal, and shall notify the Holder of the reason
therefor. This Debenture shall thereafter be unconvertible to such extent until and
unless Shareholder Approval is subsequently obtained or is otherwise not required,
but this Debenture shall otherwise remain in full force and effect.

     ii. Holder’s Restriction on Conversion. The Company shall not effect
any conversion of this Debenture, and the Holder shall not have the right to convert
any portion of this Debenture, pursuant to Section 4(a) or otherwise, to the extent
that after giving effect to such conversion, the Holder (together with the Holder’s
affiliates), as set forth on the applicable Notice of Conversion, would beneficially
own in excess of 4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by 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
or conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other Debentures or the 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 4(c)(ii),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act. To the extent that the limitation contained in this section applies,
the determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder) and of which a portion of this Debenture is
convertible shall be in the sole discretion of such Holder. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company each
time it delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such determination. For purposes of
this Section 4(c)(ii), 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-QSB or Form 10-KSB, as the case
may be, (y) a more recent public announcement by the Company or (z) any other notice
by the Company or the Company’s Transfer Agent setting forth the number

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of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the
Company shall within two Trading 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. The provisions of
this Section 4(c) may be waived by the Holder, at the election of the Holder, upon
not less than 61 days’ prior notice to the Company, and the provisions of this
Section 4(c) shall continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of waiver).

d) Mechanics of Conversion

     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal amount
of this Debenture to be converted by (y) the Conversion Price.

     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after any Conversion Date, the Company will deliver or cause to be
delivered to the Holder a certificate or certificates representing the Conversion
Shares which shall be free of restrictive legends and trading restrictions (other
than those required by the Purchase Agreement) representing the number of shares of
Common Stock being acquired upon the conversion of Debentures. The Company shall,
if available and if allowed under applicable securities laws, use its best efforts
to deliver any certificate or certificates required to be delivered by the Company
under this Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions.

     iii. Failure to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion,
in which event the Company shall immediately return the certificates representing
the principal amount of Debentures tendered for conversion.

     iv. Obligation Absolute; Partial Liquidated Damages. If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1000 of principal amount being converted, $10 per Trading

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Day (increasing to $20 per Trading Day after 5 Trading Days after such damages begin to
accrue) for each Trading Day after such third Trading Day until such certificates
are delivered. The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in accordance with the
terms hereof are absolute and unconditional, irrespective of any action or inaction
by the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action to
enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person of
any obligation to the Company or any violation or alleged violation of law by the
Holder or any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Company to the Holder in connection with the
issuance of such Conversion Shares; provided, however, such delivery
shall not operate as a waiver by the Company of any such action the Company may have
against the Holder. In the event a Holder of this Debenture shall elect to convert
any or all of the outstanding principal amount hereof, the Company may not refuse
conversion based on any claim that the Holder or any one associated or affiliated
with the Holder has been engaged in any violation of law, agreement or for any other
reason, unless, an injunction from a court, on notice, restraining and or enjoining
conversion of all or part of this Debenture shall have been sought and obtained and
the Company posts a surety bond for the benefit of the Holder in the amount of 150%
of the principal amount of this Debenture outstanding, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable to
such Holder to the extent it obtains judgment. In the absence of an injunction
precluding the same, the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. Nothing herein shall limit a Holder’s
right to pursue actual damages or declare an Event of Default pursuant to Section 8
herein for the Company’s failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any such rights
shall not prohibit the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.

     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the third Trading Day after the
Conversion Date, and if after such third Trading Day the Holder is required by its
brokerage firm to purchase (in an open market transaction or otherwise) Common Stock
to deliver in satisfaction of a sale by such Holder of the Conversion Shares which
the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any remedies available
to or elected by the Holder) the amount by which (x) the Holder’s total

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purchase price (including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock that
such Holder anticipated receiving from the conversion at
issue multiplied by (2) the actual sale price of the Common Stock at the time
of the sale (including brokerage commissions, if any) giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue Debentures in
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its delivery requirements under Section
4(d)(ii). For example, if the Holder purchases Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an attempted conversion of
Debentures with respect to which the actual sale price of the Conversion Shares at
the time of the sale (including brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of the immediately
preceding sentence, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In. Notwithstanding anything contained herein to
the contrary, if a Holder requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay such
Holder liquidated damages under Section 4(d)(iv) in respect of the certificates
resulting in such Buy-In.

     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its authorized
and unissued shares of Common Stock solely for the purpose of issuance upon
conversion of this Debenture, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (and the other Holders
of the Debentures), not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
            shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion of the outstanding
principal amount of this Debenture hereunder. The Company covenants that all shares
of Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Registration Statement
is then effective under the Securities Act, registered for public sale in accordance
with such Registration Statement.

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

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

     (e) Forced Conversion. Notwithstanding anything herein to the contrary, if after
the Effective Date, each of the VWAPs for any 30 consecutive Trading Days (such period
commencing only after the Effective Date, such period the “Threshold Period”)) exceeds
175% of the initial Conversion Price (subject to adjustment for reverse and forward stock
splits, stock dividends, stock combinations and other similar transactions of the Common Stock
that occur after the Original Issue Date), the Company may, within 1 Trading Day of the end of
any such period, deliver a notice to the Holder (a “Forced Conversion Notice” and the
date such notice is received by the Holder, the “Forced Conversion Notice Date”) to
cause the Holder to immediately convert all or part of the then outstanding principal amount of
Debentures pursuant to Section 4. The Company may only effect a Forced Conversion Notice if
all of the Equity Conditions are met through the applicable Threshold Period until the date of
the applicable Forced Conversion and through and including the date such shares of Common Stock
are issued to the Holder. Any Forced Conversion shall be applied ratably to all Holders based
on their initial purchases of Debentures pursuant to the Purchase Agreement. For purposes of
clarification, a Forced Conversion shall be subject to all of the provisions of this Section 4,
including, without limitation, the provision requiring payment of liquidated damages and
limitations on conversions.

Section 5. Certain Adjustments.

     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (A) pays a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company pursuant to this Debenture), (B)
subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines
(including by way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issues by reclassification of shares of the Common Stock any shares
of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such

12

 

event and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such event. Any
adjustment made pursuant to this Section shall become effective immediately after the record
date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision, combination or
re-classification.

     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Debenture is outstanding, shall offer, sell, grant any
option to purchase or offer, sell or grant any right to reprice its securities, or otherwise
dispose of or issue (or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Conversion Price
(such lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”), as adjusted hereunder (if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices or
otherwise, or due to warrants, options or rights per share which is issued in connection
with such issuance, be entitled to receive shares of Common Stock at an effective price per
share which is less than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the
Conversion Price shall be reduced to equal the Base Conversion Price, but in no event less
than $0.23 (subject to adjustment for reverse and forward stock splits, stock dividends,
stock combinations and other similar transactions of the Common Stock that occur after the
Original Issue Date). Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made
under this Section 5(b) in respect of an Exempt Issuance. The Company shall notify the
Holder in writing, no later than the Business Day following the issuance of any Common Stock
or Common Stock Equivalents subject to this section, indicating therein the applicable
issuance price, or of applicable reset price, exchange price, conversion price and other
pricing terms (such notice the “Dilutive Issuance Notice”). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to
this Section 5(b), upon the occurrence of any Dilutive Issuance, after the date of such
Dilutive Issuance the Holder is entitled to receive a number of Conversion Shares based upon
the Base Conversion Price regardless of whether the Holder accurately refers to the Base
Conversion Price in the Notice of Conversion.

     c) Pro Rata Distributions. If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences
of its indebtedness or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion Price shall be
adjusted by multiplying such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the VWAP determined as of

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the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of
the Common Stock as determined by the Board of Directors in good faith, but in no event
shall such adjustment result in a Conversion Price below $0.23 (subject to adjustment for
reverse and forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the Original Issue Date. In either case
the adjustments shall be described in a statement provided to the Holder of the portion of
assets or evidences of indebtedness so distributed or such subscription rights applicable to
one share of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned above.

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

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and insuring that this Debenture (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental Transaction.

     e) Calculations. All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of
this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as
of a given date shall be the sum of the number of shares of Common
Stock (excluding treasury shares, if any) issued and outstanding.

     f) Notice to the Holder.

     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 5, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. If the Company
issues a variable rate security, despite the prohibition thereon in the Purchase
Agreement, the Company shall be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion or exercise price at which such
securities may be converted or exercised in the case of a Variable Rate Transaction
(as defined in the Purchase Agreement).

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

15

 

of the Common Stock for securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to convert this Debenture during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.

Section 6. Monthly Redemption.

     a) Monthly Redemption. On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount plus the sum of all liquidated damages and any other
amounts then owing to such Holder in respect of this Debenture (the “Monthly
Redemption”). The Monthly Redemption Amount due on each Monthly Redemption Date shall
be paid in cash; provided, however, as to any Monthly Redemption and upon 30
Trading Days’ prior written irrevocable notice (the “Monthly Redemption Notice” and
the 30 Trading Day period immediately following the Monthly Redemption Notice, the
“Monthly Redemption Period”), in lieu of a cash redemption payment the Company may
elect to pay all or part of a Monthly Redemption in Conversion Shares (such dollar amount to
be paid on a Monthly Redemption Date in Conversion Shares, the “Monthly Redemption Share
Amount”) based on a conversion price equal to the lesser of (i) the then Conversion
Price and (ii) 90% of the average of the 10 VWAPs immediately prior to the applicable
Monthly Redemption Date, provided that such price must be at least $0.23 (subject to
adjustment for any stock dividend, stock split, stock combination or other similar event
affecting the Common Stock during such 10 Trading Day period)(the price calculated during
the 10 Trading Day period immediately prior to the Monthly Redemption Date, the “Monthly
Conversion Price”) or else such Monthly Redemption must be paid in cash;
provided, further, that the Company may not pay the Monthly Redemption
Amount in Conversion Shares unless, (y) from the date the Holder receives the duly delivered
Monthly Redemption Notice through and until the date such Monthly Redemption is paid in
full, the Equity Conditions, unless waived in writing by the Holder, have been satisfied and
(z) as to such Monthly Redemption, prior to such Monthly Redemption Period (but not more 5
Trading Days prior to the commencement of the Monthly Redemption Period), the Company shall
have delivered to the Holder’s account with The Depository Trust Company a number of
Conversion Shares to be applied against such Monthly Redemption Share Amount equal to the
quotient of (x) the applicable Monthly Redemption Share Amount divided by (y) the then
Conversion Price (the “Pre-Redemption Conversion Shares”). The Holder may convert,
pursuant to Section 4(a), any principal amount of the Debenture subject to a Monthly
Redemption at any time prior to the date that the Monthly Redemption Amount and all amounts
owing thereon are due and paid in full. Unless otherwise indicated by the Holder in the
applicable Notice of Conversion, any principal amount of Debenture converted during the
Monthly Redemption Period until the date the Monthly Redemption Amount is paid shall be
first applied to the cash portion of the principal amount subject to the Monthly Redemption
and then to the Monthly Redemption Share Amount. Any

16

 

principal amount of this Debenture
converted during the applicable Monthly Redemption Period in excess of the Monthly
Redemption Amount shall be applied against the last principal amount of this Debenture
scheduled to be redeemed hereunder, in reverse time
order from the Maturity Date; provided, however, if any such conversion
is applied to such Monthly Redemption Amount, the Pre-Redemption Conversion Shares, if any
were issued in connection with such Monthly Redemption or were not already applied to such
conversions, shall be first applied against such conversion. The Company covenants and
agrees that it will honor all Notice of Conversions tendered up until such amounts are paid
in full. The Company’s determination to pay a Monthly Redemption in cash or shares of
Common Stock shall be applied ratably to all Holders based on their initial purchases of
Debentures pursuant to the Purchase Agreement. At any time the Company delivers a notice to
the Holder of its election to pay the Monthly Redemption Amount in shares of Common Stock,
the Company shall file a prospectus supplement pursuant to Rule 424 disclosing such
election.

     b) Redemption Procedure. The payment of cash and/or issuance of Common Stock
(other than the Pre-Redemption Conversion Shares), as the case may be, pursuant to a Monthly
Redemption shall be made on the Monthly Redemption Date. The aggregate number of Conversion
Shares otherwise issuable to the Holder pursuant to a Monthly Redemption on a Monthly
Redemption Date shall be reduced by the number of Pre-Redemption Conversion Shares issued to
the Holder in connection with such Monthly Redemption (adjusted appropriately for any such
 shares applied to conversion during the Monthly Redemption Period). If any portion of the
cash payment for a Monthly Redemption shall not be paid by the Company by the respective due
date, interest shall accrue thereon at the rate of 18% per annum (or the maximum rate
permitted by applicable law, whichever is less) until the payment of the Monthly Redemption
Amount, plus all amounts owing thereon, is paid in full. Alternatively, if any portion of
the Monthly Redemption Amount remains unpaid after such date, the Holder may elect, by
written notice to the Company given at any time thereafter, to invalidate ab
initio such redemption, notwithstanding anything herein contained to the contrary.
If any Pre-Redemption Conversion Shares are issued to the Holder in connection with a
Monthly Redemption and are not applied against either the Monthly Redemption Amount or
against voluntary conversions during the Monthly Redemption, then the Holder shall promptly
return such excess shares to the Company.

       Section 7. Negative Covenants. So long as any portion of this Debenture is
outstanding, the Company will not and will not permit any of its Subsidiaries to directly or
indirectly:

     a) enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, except as in existence as of the date hereof including but not
limited to, a guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

17

 

     b) enter into, create, incur, assume or suffer to exist any liens of any kind, except
as in existence as of the date hereof, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits therefrom;

     c) amend its certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of the Holder;

     d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or Common Stock Equivalents other
than as to the Conversion Shares to the extent permitted or required under the Transaction
Documents or as otherwise permitted by the Transaction Documents;

     e) enter into any agreement with respect to any of the foregoing; or

     f) pay cash dividends on any equity securities of the Company.

Section 8. Events of Default.

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

     i. any default in the payment of (A) the principal amount of any Debenture, or
(B) liquidated damages in respect of, any Debenture, as and when the same shall
become due and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default under clause (B) above, is not cured,
within 3 Trading Days;

     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in this Debenture (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion which
breach is addressed in clause (xi) below) which failure is not cured, if possible to
cure, within the earlier to occur of (A) 5 Trading Days after notice of such default
sent by the Holder or by any other Holder and (B)10 Trading Days after the Company
shall become or should have become aware of such failure;

     iii. a default or event of default (subject to any grace or cure period
provided for in the applicable agreement, document or instrument) shall occur under
(A) any of the Transaction Documents other than this Debenture, or (B) any other
material agreement, lease, document or instrument to which the Company or any
Subsidiary is bound;

18

 

     iv. any representation or warranty made herein, in any other Transaction
Documents, in any written statement pursuant hereto or thereto, or in any other
report, financial statement or certificate made or delivered to the Holder or any
other holder of Debentures shall be untrue or incorrect in any material respect as
of the date when made or deemed made;

     v. (i) the Company or any of its Subsidiaries shall commence, or there shall be
commenced against the Company or any such Subsidiary, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Subsidiary commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Company or any Subsidiary thereof or (ii) there
is commenced against the Company or any Subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of 60 days; or
(iii) the Company or any Subsidiary thereof is adjudicated by a court of competent
jurisdiction insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for it or any
substantial part of its property which continues undischarged or unstayed for a
period of 60 days; or (v) the Company or any Subsidiary thereof makes a general
assignment for the benefit of creditors; or (vi) the Company shall fail to pay, or
shall state that it is unable to pay, or shall be unable to pay, its debts generally
as they become due; or (vii) the Company or any Subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary thereof shall by
any act or failure to act expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or (ix) any corporate or other action is taken
by the Company or any Subsidiary thereof for the purpose of effecting any of the
foregoing;

     vi. the Company or any Subsidiary shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there may
be secured or evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Company in an amount exceeding
$150,000, whether such indebtedness now exists or shall hereafter be created and
such default shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable;

     vii. the Common Stock shall not be eligible for quotation on or quoted for
trading on a Trading Market and shall not again be eligible for and quoted or listed
for trading thereon within five Trading Days;

19

 

     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of 33%
of its assets in one or more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or
other equity securities of the Company (other than redemptions of Conversion
Shares and repurchases of shares of Common Stock or other equity securities of
departing officers and directors of the Company; provided such repurchases shall not
exceed $100,000, in the aggregate, for all officers and directors during the term of
this Debenture);

     ix. a Registration Statement shall not have been declared effective by the
Commission on or prior to the 180th calendar day after the Closing Date;

     x. if, during the Effectiveness Period (as defined in the Registration Rights
Agreement), the effectiveness of the Registration Statement lapses for any reason or
the Holder shall not be permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Registration Statement, in either case,
for more than 10 consecutive Trading Days or 15 non-consecutive Trading Days during
any 12 month period; provided, however, that in the event that the
Company is negotiating a merger, consolidation, acquisition or sale of all or
substantially all of its assets or a similar transaction and in the written opinion
of counsel to the Company, the Registration Statement, would be required to be
amended to include information concerning such transactions or the parties thereto
that is not available or may not be publicly disclosed at the time, the Company
shall be permitted an additional 10 consecutive Trading Days during any 12 month
period relating to such an event;

     xi. the Company shall fail for any reason to deliver certificates to a Holder
prior to the third Trading Day after a Conversion Date pursuant to and in accordance
with Section 4(d) or the Company shall provide notice to the Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversions of any Debentures in accordance with the terms hereof;

     xii. any Person shall breach the agreements delivered to the initial Holders
pursuant to Section 2.2(a)(vi) of the Purchase Agreement and the Company does not
obtain Shareholder Approval.

       b) Remedies Upon Event of Default. If any Event of Default occurs, the full
principal amount of this Debenture, together with other amounts owing in respect thereof, to
the date of acceleration shall become, at the Holder’s election, immediately due and payable
in cash. The aggregate amount payable upon an Event of Default shall be equal to the
Mandatory Prepayment Amount. Commencing 5 days after the occurrence of any Event of Default
that results in the eventual acceleration of this Debenture, the interest

20

 

rate on this
Debenture shall accrue at the rate of 18% per annum, or such lower maximum amount of
interest permitted to be charged under applicable law. All Debentures for which the full
Mandatory Prepayment Amount hereunder shall have been paid in accordance herewith shall
promptly be surrendered to or as directed by the Company. The Holder need not provide and
the Company hereby waives any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be rescinded
and annulled by Holder at any time prior to payment hereunder and the Holder shall have all
rights as a Debenture holder until such time, if any, as the full payment under this Section
shall have been received by it. No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereon.

Section 9. Miscellaneous.

     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth above,
facsimile number 713-690-1426, Attn: John Reiland, Chief Financial Officer or such other
address or facsimile number as the Company may specify for such purposes by notice to the
Holder delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this Section later
than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by the party to
whom such notice is required to be given.

     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of and liquidated damages (if any) on, this Debenture at
the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture
is a direct debt obligation of the Company. This Debenture ranks pari passu
with all other Debentures now or hereafter issued under the terms set forth herein.

21

 

     c) Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for
and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of
such loss, theft or destruction of such Debenture, and of the ownership hereof, and
indemnity, if requested, all reasonably satisfactory to the Company.

     d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the transactions contemplated by
any of the Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be commenced in
the state and federal courts sitting in the City of New York, Borough of Manhattan (the
“New York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such New York
Courts are improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to this
Debenture or the transactions contemplated hereby. If either party shall commence an action
or proceeding to enforce any provisions of this Debenture, then the prevailing party in such
action or proceeding shall be reimbursed by the other party for its attorneys fees and other
costs and expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.

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

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     f) Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain applicable to all
other persons and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates applicable laws governing usury, the applicable
rate of interest due hereunder shall automatically be lowered to equal the maximum
permitted rate of interest. The Company covenants (to the extent that it may lawfully do so)
that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which would
prohibit or forgive the Company from paying all or any portion of the principal of or
interest on this Debenture as contemplated herein, wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the performance of this indenture,
and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits
or advantage of any such law, and covenants that it will not, by resort to any such law,
hinder, delay or impeded the execution of any power herein granted to the Holder, but will
suffer and permit the execution of every such as though no such law has been enacted.

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

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

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

23

 

     IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.

	 	 	 	 	 
	 	US DATAWORKS, INC.

 	 
	 	By:  	/s/ John S. Reiland	 
	 	 	Name:  	John S. Reiland	 
	 	 	Title:  	CFO	 

24

 

	 	 	 	 	 

ANNEX A

NOTICE OF CONVERSION

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

     By the delivery of this Notice of Conversion the undersigned represents and warrants to the
Company that its ownership of the Common Stock does not exceed the amounts determined in accordance
with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.

     The undersigned agrees to comply with the prospectus delivery requirements under the
applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.

	 	 	 
	Conversion calculations:

	 	Date to Effect Conversion:
	 
	 	 
	 

	 	Principal Amount of Debentures to be Converted:
	 
	 	 
	 

	 	Number of shares of Common Stock to be issued:
	 
	 	 
	 

	 	Signature:
	 
	 	 
	 

	 	Name:
	 
	 	 
	 

	 	Address:

25

 

Schedule 1

CONVERSION SCHEDULE

The Convertible Debentures in the aggregate principal amount of $770,000 issued by US Dataworks,
Inc., a Nevada corporation. This Conversion Schedule reflects conversions made under Section 4 of
the above referenced Debenture.

Dated:

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	Aggregate	 	 	 	 
	 	 	 	 	 	 	 	Principal	 	 	 	 
	 	 	 	 	 	 	 	Amount	 	 	 	 
	 	 	 	 	 	 	 	Remaining	 	 	 	 
	 	 	 	 	 	 	 	Subsequent to	 	 	 	 
	 	 	 	 	 	 	 	Conversion	 	 	 	 
	 	Date of Conversion	 	 	 	 	 	(or original	 	 	 	 
	 	(or for first entry,	 	 	Amount of	 	 	Principal	 	 	 	 
	 	Original Issue Date)	 	 	Conversion	 	 	Amount)	 	 	Company Attest	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 
	 

26exv4w3

 

EXHIBIT 4.3

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

SHORT TERM COMMON STOCK PURCHASE WARRANT

To Purchase 407,926 Shares of Common Stock of

US DATAWORKS, INC.

          THIS SHORT TERM COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for
value received, Crescent International, Ltd. (the “Holder”), is entitled, upon the terms
and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on
or after the later of (a) the Effective Date (as defined in the Purchase Agreement) and (b) the
date that is six months after the date hereof (the “Initial Exercise Date”) and on or prior
to the close of business on the 180 day anniversary of the Initial Exercise Date (the
“Termination Date”) but not thereafter, to subscribe for and purchase from US Dataworks,
Inc., a Nevada corporation (the “Company”), up to 407,926 shares (the “Warrant
Shares”) of Common Stock, par value $0.0001 per share, of the Company (the “Common
Stock”). The purchase price of one share of Common Stock under this Warrant shall be equal to
the Exercise Price, as defined in Section 2(b).

     Section 1. Definitions. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in that certain Securities Purchase Agreement (the
“Purchase Agreement”), dated June 16, 2005, among the Company and the purchasers signatory
thereto.

     Section 2. Exercise.

          a) Exercise of Warrant. Exercise of the purchase rights represented by this
Warrant may be made, in whole or in part, at any time or times on or after the Initial
Exercise Date and on or before the Termination Date by delivery to the Company of a duly
executed facsimile copy of the Notice of Exercise Form annexed hereto (or such

1

 

other office or agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the Company);
provided, however, within 5 Trading Days of the date said Notice of Exercise
is delivered to the Company, the Holder shall have surrendered this Warrant to the Company
and the Company shall have received payment of the aggregate Exercise Price of the shares
thereby purchased by wire transfer or cashier’s check drawn on a United States bank.

          b) Exercise Price. The exercise price of the Common Stock under this Warrant
shall be $0.572, subject to adjustment hereunder (the “Exercise Price”).

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

	 	(A)	 	= the VWAP on the Trading Day immediately preceding the date
of such election;
	 
	 	(B)	 	= the Exercise Price of this Warrant, as adjusted; and
	 
	 	(X)	 	= the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means of a cash
exercise rather than a cashless exercise.

          Notwithstanding anything herein to the contrary, on the Termination Date, provided that
there is no effective Registration Statement registering, or no current prospectus available
for, the resale of the Warrant Shares by the Holder, this Warrant shall be automatically
exercised via cashless exercise pursuant to this Section 2(c).

          d) Exercise Limitations.

                    i. Holder’s Restrictions. A Holder shall not have the right to
exercise any portion of this Warrant, pursuant to Section 2(c) or otherwise,
to the extent that after giving effect to such issuance after exercise, such
Holder (together with such Holder’s affiliates), as set forth on the
applicable Notice of Exercise, would beneficially own in excess of 4.99% of
the number of shares of the Common Stock outstanding immediately after
giving effect to such issuance. For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by such Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (A) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by such Holder or
any of its affiliates and (B) exercise

2

 

or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any other shares
of Debentures or Warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by such
Holder or any of its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 2(d)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Exchange Act, it being
acknowledged by a Holder that the Company is not representing to such Holder
that such calculation is in compliance with Section 13(d) of the Exchange
Act and such Holder is solely responsible for any schedules required to be
filed in accordance therewith. To the extent that the limitation contained
in this Section 2(d) applies, the determination of whether this Warrant is
exercisable (in relation to other securities owned by such Holder) and of
which a portion of this Warrant is exercisable shall be in the sole
discretion of a Holder, and the submission of a Notice of Exercise shall be
deemed to be each Holder’s determination of whether this Warrant is
exercisable (in relation to other securities owned by such Holder) and of
which portion of this Warrant is exercisable, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. For purposes of this
Section 2(d), in determining the number of outstanding shares of Common
Stock, a Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as
the case may be, (y) a more recent public announcement by the Company or (z)
any other notice by the Company or the Company’s Transfer Agent setting
forth the number of shares of Common Stock outstanding. Upon the written or
oral request of a Holder, the Company shall within two Trading Days confirm
orally and in writing to such Holder the number of shares of Common Stock
then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise
of securities of the Company, including this Warrant, by such Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The provisions of this Section 2(d) may be
waived by such Holder, at the election of such Holder, upon not less than 61
days’ prior notice to the Company, and the provisions of this Section 2(d)
shall continue to apply until such 61st day (or such later date,
as determined by such Holder, as may be specified in such notice of waiver).

                    ii. Trading Market Restrictions. If the Company has not
obtained Shareholder Approval (as defined below) if required by the
applicable rules and regulations of the Trading Market (or any successor
entity), then the Company may not issue upon exercise of this Warrant, a
number of shares of Common Stock, which, when aggregated with any shares of
Common Stock issued (A) upon conversion of the Debentures issued pursuant to
the Purchase Agreement and (B) upon prior exercise of this or

3

 

any other Warrant issued pursuant to the Purchase Agreement, would
exceed 19.999% of the number of shares of Common Stock outstanding on the
Trading Day immediately preceding the Closing Date (such number of shares,
the “Issuable Maximum”). If on any attempted exercise of this
Warrant, the issuance of Warrant Shares would exceed the Issuable Maximum
and the Company shall not have previously obtained the vote of shareholders
(the “Shareholder Approval”), if any, as may be required by the
applicable rules and regulations of the Trading Market (or any successor
entity) to approve the issuance of shares of Common Stock in excess of the
Issuable Maximum pursuant to the terms hereof, then the Company shall issue
to the Holder requesting a Warrant exercise such number of Warrant Shares as
may be issued below the Issuable Maximum and, with respect to the remainder
of the aggregate number of Warrant Shares, this Warrant shall not be
exercisable until and unless Shareholder Approval has been obtained.

          e) Mechanics of Exercise.

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

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

                    iii. Delivery of New Warrants Upon Exercise. If this Warrant
shall have been exercised in part, the Company shall, at the time of

4

 

delivery of the certificate or certificates representing Warrant
Shares, deliver to Holder a new Warrant evidencing the rights of Holder to
purchase the unpurchased Warrant Shares called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant.

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

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

5

 

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

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

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

          Section 3. Certain Adjustments.

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

          b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Warrant is outstanding, shall offer, sell, grant any

6

 

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

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

          d) Fundamental Transaction. If, at any time while this Warrant is outstanding,
(A) the Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of its

7

 

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

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

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

          g) Notice to Holders.

8

 

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

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

          Section 4. Transfer of Warrant.

9

 

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

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

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

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

          Section 5. Miscellaneous.

          a) Title to Warrant. Prior to the Termination Date and subject to compliance
with applicable laws and Section 4 of this Warrant, this Warrant and all rights hereunder

10

 

are transferable, in whole or in part, at the office or agency of the Company by the
Holder in person or by duly authorized attorney, upon surrender of this Warrant together
with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an
investment letter in form and substance reasonably satisfactory to the Company.

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

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

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

          e) Authorized Shares.

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

               Except and to the extent as waived or consented to by the Holder, the Company
shall not by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of

11

 

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

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

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

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

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

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

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

12

 

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

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

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

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

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

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

13

 

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

Dated: June 16, 2005

	 	 	 	 	 
	 	 	US DATAWORKS, INC.
	 
	 	 	 	 
	 

	 	By:	 	/s/ John S. Reiland
	 	 	 	 	 
	 

	 	 	 	Name:  John S. Reiland
	 

	 	 	 	Title:    CFO

14

 

NOTICE OF EXERCISE

TO: US DATAWORKS, INC.

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

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

[ ] in lawful money of the United States; or

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

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

	 	 	 	 	 
	 

	 	 	 	 
	 	 	 	 	 

The Warrant Shares shall be delivered to the following:

	 	 	 	 	 
	 

	 	 	 	 
	 	 	 	 	 

	 	 	 	 	 
	 

	 	 	 	 
	 	 	 	 	 

	 	 	 	 	 
	 

	 	 	 	 
	 	 	 	 	 

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

[SIGNATURE OF HOLDER]

	 	 	 	 	 	 	 
	Name of Investing Entity:	 	 	 	 
	 	 	 	 	 
	Signature of Authorized Signatory of Investing Entity:	 	 
	 	 	 	 	 	 	 
	Name of Authorized Signatory:	 	 
	 	 	 	 	 
	Title of Authorized Signatory:	 	 
	 	 	 	 	 
	Date:
	 	 	 	 	 	 
	 	 	 

 

 

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

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

	 	 	 	 	 	 	 
	 

	 	whose address is
	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	. 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 

	 	 	 	 	 	 	 	 	 
	 

	 	Dated:
	 	 
	 	,
	 	 
	 	 	 	 	 	 	 	 	 

	 	 	 	 	 
	 

	 	Holder’s Signature:	 	 
	 	 	 	 	 
	 
	 	 	 	 
	 

	 	Holder’s Address:	 	 
	 	 	 	 	 
	 
	 	 	 	 
	Signature Guaranteed:
	 	 	 	 
	 	 	 

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

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