sc13dza

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ke80cunrabYeNm6c2QbWFp+rwAtg6R1P75uax7o/u0ZYXKJcMDRi+1nSNoBg8eT0 ttM4ntHSSN1zspTQ4Wdqcw== 0000950133-08-001331.txt : 20080328 0000950133-08-001331.hdr.sgml : 20080328 20080328161703 ACCESSION NUMBER: 0000950133-08-001331 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20080328 DATE AS OF CHANGE: 20080328 GROUP MEMBERS: FRANK H. PEARL SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DISTRIBUTED ENERGY SYSTEMS CORP CENTRAL INDEX KEY: 0001261482 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 200177690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-79414 FILM NUMBER: 08719595 BUSINESS ADDRESS: STREET 1: 10 TECHNOLOGY DR CITY: WALLINGFORD STATE: CT ZIP: 06492 BUSINESS PHONE: 2036782000 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PERSEUS PARTNERS VII L P CENTRAL INDEX KEY: 0001362295 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 2099 PENNSYLVANIA AVE N W STREET 2: SUITE 900 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 202-452-0101 MAIL ADDRESS: STREET 1: 2099 PENNSYLVANIA AVE N W STREET 2: SUITE 900 CITY: WASHINGTON STATE: DC ZIP: 20006 SC 13D/A 1 w52553sc13dza.htm SC 13D/A sc13dza

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

SCHEDULE 13D/A

Under the Securities Exchange Act of 1934
(Amendment No. 3)

Distributed Energy Systems Corp.

(Name of Issuer)

Common Stock, Par Value $0.01 per Share

(Title of Class of Securities)

25475V104

(CUSIP Number)

Perseus Partners VII, L.P.
c/o Perseus, L.L.C.
2099 Pennsylvania Avenue, N.W., 9th Floor
Washington, D.C. 20006
(202) 452-0101

(Name, Address and Telephone Number of Person

Authorized to Receive Notices and Communications)

March 28, 2008

Date of Event Which Requires Filing of This Statement

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Section 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box.

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Section 240.13d-7 for other parties to whom copies are to be sent.

*The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)

Perseus Partners VII, L.P.

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP

(a) o

(b) o

SEC USE ONLY

SOURCE OF FUNDS

CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)

CITIZENSHIP OR PLACE OF ORGANIZATION

Delaware

SOLE VOTING POWER

NUMBER OF

75,092,436¹

SHARED VOTING POWER

BENEFICIALLY

OWNED BY

EACH

SOLE DISPOSITIVE POWER

REPORTING

PERSON

75,092,436¹

WITH

SHARED DISPOSITIVE POWER

AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON SHARES

75,092,436¹

CHECK BOX IF AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

65.25%²

TYPE OF REPORTING PERSON

¹ This number represents the maximum number of shares of common stock of Distributed Energy Systems Corp. (the “Issuer ”) that could be issued to Perseus Partners VII, L.P. (“Perseus VII ”) in connection with: (1) the exercise of a warrant that was issued on June 1, 2007, (2) the exercise of a warrant that was issued on August 24, 2007, (3) the conversion of a senior secured convertible promissory note that was issued on August 24, 2007 (the “Original Note ”), (4) the conversion of a senior secured convertible promissory note that was issued on March 13, 2008, (5) the conversion of senior secured convertible promissory notes that were issued as payment for interest due on the Original Note, and (6) the vested restricted shares of the Issuer’s common stock and the vested non-qualified stock options issued to John C. Fox and Michael L. Miller as directors of the Issuer. For additional information, see the narrative portion of the cover page and Item 4 of this Amendment No. 3 to the Schedule 13D filed on June 11, 2007 (this “Amendment ”).

² This number represents the percentage obtained by: (a) dividing the total number of shares of the Issuer’s common stock being reported in this Amendment (75,092,436 shares) by (b) the sum of (i) the number of shares of the Issuer’s common stock outstanding as of December 31, 2007, as reported by the Issuer in its Form 10-K that was filed on March 17, 2008 (39,993,822 shares) and (ii) the total number of shares of the Issuer’s common stock being reported in this Amendment (75,092,436 shares).

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NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)

Frank H. Pearl ³

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP

(a) o

(b) o

SEC USE ONLY

SOURCE OF FUNDS

CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e)

CITIZENSHIP OR PLACE OF ORGANIZATION

United States

SOLE VOTING POWER

NUMBER OF

SHARED VOTING POWER

BENEFICIALLY

OWNED BY

75,092,436 ⁴

EACH

SOLE DISPOSITIVE POWER

REPORTING

PERSON

WITH

SHARED DISPOSITIVE POWER

75,092,436⁴

AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON SHARES

75,092,436⁴

CHECK BOX IF AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

65.25%⁵

TYPE OF REPORTING PERSON

³ All of the securities reported herein are held directly for the account of Perseus VII or by a director nominee of Perseus VII. Frank H. Pearl has been included in this Amendment solely because of the indirect control he exercises over Perseus VII. By virtue of such control, he may be deemed to have beneficial ownership of the securities being reported in this Amendment.

⁴ See Footnote #1.

⁵ See Footnote #2.

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The original statement on Schedule 13D as filed on June 11, 2007 (the “Schedule 13D”) and amended on August 30, 2007 (“Amendment No. 1”) and February 6, 2008 (“Amendment No. 2”), relating to the common stock, par value $0.01 per share (the “Common Stock”), of Distributed Energy Systems Corp., a Delaware corporation (“DESC” or the “Issuer”), is hereby amended as set forth in this Amendment No. 3 (this “Amendment”, and together with the Schedule 13D, Amendment No. 1 and Amendment No. 2, this “Statement”).

This Amendment is being filed jointly by Perseus Partners VII, L.P. (“Perseus VII”) and Frank H. Pearl (“Mr. Pearl,” and together with Perseus VII, the “Reporting Persons,” and each a, “Reporting Person”) to report the acquisition of the following additional securities of the Issuer by the Reporting Persons since the date of the filing of Amendment No. 2, which upon full conversion and exercise would, in the aggregate, constitute a change equal to or greater than one percent of the outstanding shares of Common Stock of the Issuer:

	(1)		As previously reported on a Form 4 filed on February 12, 2008 for John C. Fox, on February 1, 2008, the Issuer granted to Mr. Fox, in his capacity as a director of the Issuer, and other members of its board of directors, non-qualified stock options to buy 100,000 shares of the Issuer’s Common Stock with an exercise price per share of $0.57 (the “February Options”). These options vested at the time of their grant. Additionally, 2,228 shares of restricted stock of the Issuer (the “Additional Vested Restricted Stock”), granted on August 24, 2007 to Mr. Fox in his capacity as a director of the Issuer, have vested since the date of Amendment No. 2. Mr. Fox holds any options or shares of restricted common stock issued to him as a nominee for Perseus VII and disclaims beneficial ownership thereof, except to the extent he may have any pecuniary interest therein. All of the restricted stock and option grants described in this Amendment were granted pursuant to the Issuer’s Board of Directors Compensation program.

	(2)		As previously reported on a Form 4 filed on March 17, 2008 for the Reporting Persons, on March 13, 2008, Perseus VII purchased a senior secured convertible promissory note with a principal amount of $1,500,000 (the “Additional Note”) under the First Amendment to the Purchase Agreement, the DESC Security and Pledge Agreement, the Subsidiary Security and Pledge Agreement and the Registration Rights Agreement, dated March 13, 2008, by and between Perseus VII and the Issuer (the “First Amendment”). The Additional Note is convertible at any time into a maximum of 4,545,454 shares of Common Stock of the Issuer at a price equal to $0.33 per share. The Additional Note bears interest at a rate of 12.5% per annum, which interest is payable, in the Issuer’s discretion, in cash or in kind by the issuance of additional senior secured convertible promissory notes (the “Additional Convertible Notes”, and together with the Existing Notes (as defined in Amendment No. 2) and the Additional Note, the “Perseus Notes”). The Additional Convertible Notes will also be convertible at any time into shares of Common Stock at a price equal to $0.33 per share. Payment of all outstanding principal of and accrued but unpaid interest on the Additional Note and any Additional Convertible Notes is due in full on November 30, 2008.

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This Amendment should be read in conjunction with, and is qualified in its entirety by reference to, the Schedule 13D and all previous amendments thereto. Except as disclosed in and expressly amended by this Amendment, all information set forth in the Schedule 13D and all previous amendments thereto is unchanged by this Amendment.

Items 2, 3, 4, 5, 6 and 7 of the Schedule 13D are hereby amended as follows:

Item 2. Identity and Background

Item 2 is amended to delete footnote 6 in its entirety and replace it with the following new footnote 6.

⁶Perseus Partners VII GP, L.P., a Delaware limited partnership, is the general partner of Perseus VII. Perseus Partners VII GP, L.L.C., a Delaware limited liability company, is the general partner of Perseus Partners VII GP, L.P. The sole member of Perseus Partners VII GP, L.L.C. is Perseus, L.L.C. Perseuspur, L.L.C., a Delaware limited liability company, is the managing member of Perseus, L.L.C. Mr. Pearl, individually, owns 72.9% of Perseuspur, L.L.C. Mr. Pearl also is the sole director and sole shareholder of Rappahannock Investment Company, a Delaware corporation, which in turn owns the remaining 27.1% of Perseuspur, L.L.C.

Item 3. Source and Amount of Funds or Other Consideration

Item 3 is amended to add the following information:

The Additional Note was issued to Perseus VII in a financing transaction that closed on March 13, 2008. Perseus VII paid $1,500,000 for the Additional Note. The source of such funds was capital available for Perseus VII’s investment. The Additional Vested Restricted Stock and the February Options were issued as compensation for service by Mr. Fox as a director of the Issuer, nominated by Perseus VII. Perseus VII paid no additional consideration for any of the Additional Vested Restricted Stock or the February Options.

Item 4. Purpose of Transaction

Item 4 is amended to add the following information to item (a):

(a) The acquisition by any person of additional securities of the Issuer.

The Reporting Persons may, from time to time, depending upon market conditions and other factors deemed relevant by the Reporting Persons, acquire other promissory notes, warrants, shares of Common Stock or other securities of the Issuer, outside of those contemplated by the First Amendment.

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During the period covered by this Statement, the Issuer (i) issued the Additional Note to Perseus VII in a financing transaction that closed on March 13, 2008, (ii) granted the February Options to Perseus VII’s nominee on the Issuer’s Board of Directors, Mr. Fox, and (iii) additional shares of restricted stock of the Issuer granted to Mr. Fox vested.

On August 24, 2007, the Issuer granted to Mr. Fox, in his capacity as a director of the Issuer, 13,373 shares of restricted stock of the Issuer. 5,575 of those shares have not yet vested (the “Unvested Restricted Stock”). Mr. Fox holds any options or shares of restricted common stock issued to him as a nominee for Perseus VII and disclaims beneficial ownership thereof, except to the extent he may have any pecuniary interest therein. All of the grants of Unvested Restricted Stock described in this Amendment were granted pursuant to the Issuer’s Board of Directors Compensation program.

The First Amendment includes a provision that would require the Issuer to issue to Perseus VII, for no additional consideration, a warrant to purchase, at an exercise price of $0.33 per share, 909,090 shares of the Issuer’s common stock in the event that an investor or group of investors approved by Perseus VII makes a direct investment in the Issuer for the purpose of developing the Issuer’s wind turbine products.

The Additional Note was acquired to provide the Issuer with funds for working capital and general corporate purposes. All other securities reported in this Amendment were acquired for investment purposes only.

Item 5. Interest in Securities of the Issuer

Item 5 is amended and restated in its entirety to read as follows:

(a) Each of the Reporting Persons may be deemed to beneficially own an aggregate of 75,092,436 shares of Common Stock. This number represents the maximum number of shares of Common Stock that the Reporting Persons could beneficially own, assuming full exercise of the Warrants and the Options and full conversion of the Perseus Notes as of the date of this Statement.

In its Form 10-K filed with the SEC on March 17, 2008, the Issuer disclosed that there were 39,993,822 shares of Common Stock outstanding on December 31, 2007. Therefore, the shares of Common Stock beneficially owned by the Reporting Persons represent approximately 65.25% of the Issuer’s outstanding Common Stock.⁶

(b) Perseus VII will have sole voting and dispositive power with respect to the 75,092,436 shares of Common Stock beneficially owned by Perseus VII.


⁶		See footnote No. 2.

-6-

By virtue of the relationships between and among the Reporting Persons described in Item 2 of Amendment No. 1, Mr. Pearl may be deemed to have the power to direct the voting and disposition of the 75,092,436 shares of Common Stock beneficially owned by Perseus VII.

(d) Not applicable.

(e) Not applicable.

Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.

Item 6 is amended to add the following information:

As already described in the other Items of this Statement, the Common Stock related to the conversion of the Additional Note was acquired on March 13, 2008 pursuant to the First Amendment. The terms of the Additional Note and the Additional Convertible Notes are described in the narrative portion of the cover page of this Amendment. The obligations of the Issuer pursuant to the Additional Note and the Additional Convertible Notes are secured by a security interest in all of the Issuer’s assets and guaranteed by, and secured by all of the assets of, three of the Issuer’s subsidiaries: Proton Energy Systems, Inc. (“Proton”), Northern Power Systems, Inc. and Technology Drive, LLC. Assuming that all interest payable on the Additional Note through its scheduled maturity is paid by the issuance of Additional Convertible Notes, that all Additional Convertible Notes are fully converted, and that neither the Additional Note nor any Additional Convertible Note is prepaid, Perseus VII would receive an additional 420,759 shares of the Issuer’s common stock upon the conversion of all such Additional Convertible Notes.

In addition to the covenants and events of default contained in the Convertible Note, events of default under the Additional Note include (i) financial covenants requiring minimum net working capital of $3,500,000 and unrestricted cash and cash equivalents of $1,000,000, excluding proceeds from any sale of assets outside the ordinary course of business, and (ii) a requirement that the Issuer’s Common Stock be listed on a national securities exchange, bulletin board or quotation service acceptable to Perseus VII.

The First Amendment provides that in the event of an investment by an investor approved by Perseus VII in a project, joint venture, partnership or other transaction for the purpose of developing DESC’s wind turbine products, DESC would:

	•		if the project uses an entity other than DESC, issue to Perseus VII, for no additional consideration, a 5% fully-diluted interest in such entity; or

	•		if the investor makes an investment directly in DESC, issue to Perseus VII, for no additional consideration, a warrant to purchase, at an exercise price of $0.33 per share, 909,090 shares of DESC’s Common Stock.

-7-

Further, in the event of a sale of assets by DESC or any of its affiliates (other than sales in the ordinary course of business), DESC agreed to:

	•		use all or part of the net proceeds to repay some or all of its obligations to Perseus VII;

	•		deliver an irrevocable letter of credit to Perseus VII in the amount of the net proceeds less any repayment of obligations owed to Perseus VII;

	•		place the net proceeds less any repayment of obligations owed to Perseus VII in a restricted cash account; or

	•		otherwise secure the obligations owed to Perseus VII or make such other arrangements with respect to the net proceeds as requested by Perseus VII, in each case as directed by Perseus VII.

Under the Securities Purchase Agreement, DESC had undertaken to use commercially reasonable efforts to sell Proton. The First Amendment permits DESC to suspend active efforts to sell Proton, but Perseus VII retains the right to reinstate the requirement at any time.

Item 7. Material to be Filed as Exhibits.

Item 7 is amended to include the following exhibits:

Exhibit 1 — Joint Filing Agreement, dated June 11, 2007, by and between Perseus Partners VII, L.P. and Frank H. Pearl, filed with the Schedule 13D, dated June 11, 2007.

Exhibit 2 — Securities Purchase Agreement, dated May 10, 2007, by and between Perseus Partners VII, L.P. and Distributed Energy Systems Corp., filed with the Schedule 13D, dated June 11, 2007.

Exhibit 3 — Registration Rights Agreement, dated June 1, 2007, by and between Perseus Partners VII, L.P. and Distributed Energy Systems Corp., filed with the Schedule 13D, dated June 11, 2007.

Exhibit 4 — Senior Secured Promissory Note, dated June 1, 2007, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed with the Schedule 13D, dated June 11, 2007.

Exhibit 5 — Initial Investment Warrant, dated June 1, 2007, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed with the Schedule 13D, dated June 11, 2007.

Exhibit 7 — Senior Secured Convertible Promissory Note, dated August 24, 2007, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed with Amendment No. 1, dated August 30, 2007.

-8-

Exhibit 8 — Subsequent Investment Warrant, dated August 24, 2007, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed with Amendment No. 1, dated August 30, 2007.

Exhibit 9 — First Amendment to the Securities Purchase Agreement, DESC Security and Pledge Agreement, Subsidiary Security and Pledge Agreement and Registration Rights Agreement, dated March 13, 2008, by and between Perseus Partners VII, L.P. and Distributed Energy Systems Corp., filed herewith.

Exhibit 10 — Additional Investment Note, dated March 13, 2008, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed herewith.

Exhibit 24 — Power of Attorney, dated December 6, 2007, appointing Kenneth M. Socha and Teresa Y. Bernstein as Attorney-in-Fact for Frank H. Pearl, filed with Amendment No. 2, dated February 6, 2008.

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SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct.


Dated: March 28, 2008.	PERSEUS PARTNERS VII, L.P.

	By:	Perseus Partners VII GP, L.P.,
		its general partner

	By:	Perseus Partners VII GP, L.L.C.,
		its general partner

	/s/ Kenneth M. Socha

	Its: Senior Managing Director

	FRANK H. PEARL

	/s/ Kenneth M. Socha

	Kenneth M. Socha, Attorney-In-Fact

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EX-9 2 w52553exv9.htm EX-9 exv9

EXHIBIT 9

FIRST AMENDMENT TO PURCHASE AGREEMENT, COMPANY SECURITY AND
PLEDGE AGREEMENT, SUBSIDIARY SECURITY AND PLEDGE AGREEMENT
AND REGISTRATION RIGHTS AGREEMENT

FIRST AMENDMENT TO PURCHASE AGREEMENT, COMPANY SECURITY AND PLEDGE AGREEMENT, SUBSIDIARY SECURITY AND PLEDGE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT (this “First Amendment”), dated as of March 13, 2008, by and between Distributed Energy Systems Corp., a Delaware corporation (the “Company”), Northern Power Systems, Inc., a Delaware corporation (“Northern”), Proton Energy Systems, Inc., a Delaware corporation (“Proton”), Technology Drive, L.L.C., a Connecticut limited liability company (“Tech LLC”) and Perseus Partners VII, L.P., a Delaware limited partnership (the “Purchaser”). Unless otherwise indicated, all capitalized terms used herein and not otherwise defined have the respective meanings provided such terms in the Purchase Agreement referred to below.

WITNESSETH:

WHEREAS, the Company and the Purchaser are parties to a Securities Purchase Agreement, dated as of May 10, 2007 (as amended, modified and/or supplemented to, but not including, the date hereof, the “Purchase Agreement”);

WHEREAS, the Company and the Purchaser are parties to a Security and Pledge Agreement, dated as of June 1, 2007 (the “Company Security and Pledge Agreement”);

WHEREAS, each of Northern, Proton and Tech LLC (collectively, the “Subsidiary Guarantors”, and individually, a “Subsidiary Guarantor”) and the Purchaser are parties to a Security and Pledge Agreement, dated as of June 1, 2007 (the “Subsidiary Security and Pledge Agreement”);

WHEREAS, the Company and the Purchaser are parties to a Registration Rights Agreement, dated as of June 1, 2007 (the “Registration Rights Agreement”, and together with the Purchase Agreement, the Company Security and Pledge Agreement, the Subsidiary Security and Pledge Agreement, the “Investment Agreements”); and

WHEREAS, subject to the terms and conditions of this First Amendment, the Company, the Subsidiary Guarantors and the Purchaser (collectively, the “Parties”) hereto wish to amend certain provisions of, and enter into certain agreements with respect to, the Investment Agreements as herein provided;

NOW, THEREFORE, it is agreed:

I. Amendments and Agreements With Respect To Purchase Agreement.

1. Section 1.1 of the Purchase Agreement is hereby amended by inserting the following new clause (c) at the end of said Section:

“(c) Additional Investment Note. In reliance upon the respective representations, warranties and covenants of the Parties contained in this Agreement, and subject to satisfaction of the applicable conditions set forth in Article II of this Agreement, at a closing date to be mutually agreed by the Parties, the Company shall issue, sell and deliver to the Purchaser, and the Purchaser shall purchase from the Company, a senior secured convertible promissory note, substantially in the form attached hereto as Exhibit K (the “Additional Investment Note”), that has an aggregate purchase price of $1,500,000, a maturity date of November 30, 2008 and is convertible into Common Shares. The proceeds from the issuance of the Additional Investment Note shall be used for general corporate purposes consistent with the Company’s Revised Business Plan (as defined below).”

2. Section 1.2(b) of the Purchase Agreement is hereby amended by deleting the text “and together with the Initial Investment Warrant, the ‘Warrants’” in the parenthetical at the end of said clause.

3. Section 1.3(a) of the Purchase Agreement is hereby amended by:

(i) substituting the following text “Each of the Initial Investment Closing, the Subsequent Investment Closing and the Additional Investment Closing” for the text “Each of the Initial Investment Closing and the Subsequent Investment Closing.”;

(ii) substituting the following text “on the Initial Investment Closing Date, the Subsequent Investment Closing Date and the Additional Investment Closing Date” for the text “on the Initial Investment Closing Date and the Subsequent Investment Closing Date”;

(iii) inserting the following new subclause (d) at the end of said Section:

“(d) At the Additional Investment Closing, (i) the Company shall issue and deliver to the Purchaser the Additional Investment Note, (ii) the Purchaser shall pay the purchase price for the Additional Investment Note by wire transfer of immediately available funds to the account designated by the Company on Schedule 1.3 hereto, (iii) the Company shall pay all Additional Investment Transaction Expenses owed to the Purchaser and (iv) the Parties (and, as applicable, their Affiliates) shall execute and deliver all other documentation contemplated hereby to be executed and delivered at such Closing.”

4. Section 1.4 of the Purchase Agreement is hereby amended by inserting the following sentence at the end of said Section:

“The net proceeds to the Company from the issuance and sale of the Additional Investment Note shall be used for general corporate purposes consistent with the Company’s Revised Business Plan.”

5. Article II of the Purchase Agreement is hereby amended by inserting the following new Sections 2.6 and 2.7 immediately after Section 2.5 appearing in said Section:

“2.6 Conditions to the Obligations of the Purchaser at the Additional Investment Closing. The obligations of the Purchaser to consummate the transactions described in this Agreement at the Additional Investment Closing are subject to the satisfaction (or waiver by the Purchaser), at or before the Additional Investment Closing, of the following conditions:

(a) Representations and Warranties Correct. The representations and warranties of the Company contained in this Agreement or in any other Transaction Document that are qualified as to materiality are true and correct, and all other representations and warranties of the Company contained in this Agreement or in any other Transaction Document that are not so qualified are true and correct in all material respects, in each case with the same effect as though made as of the date of this Agreement and as of the Additional Investment Closing, (i) except that the accuracy of representations and warranties that by their terms speak as of a specified date are determined as of such date and (ii) except for matters arising after the date of this Agreement that, (A) when viewed in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect or (B) have been disclosed in writing or electronically to the Purchaser or its representatives.”

(b) Performance of Obligations. The Company has performed or complied with in all material respects all agreements and covenants required to be performed or complied with by it under this Agreement or any other Transaction Document, as amended, at or prior to the Additional Investment Closing.

(c) Compliance Certificate. The Purchaser has received a certificate dated as of the Additional Investment Closing Date and signed by the Chief Executive Officer of the Company on behalf of the Company stating that the conditions specified in Sections 2.6 (a), (b), (e), (f) and (g) have been satisfied.

(d) Definitive Transaction Documents. The Additional Investment Note has been issued and delivered by the Company to the Purchaser.

(e) Consents and Waivers. The Company has all material consents, approvals, authorizations, permits and waivers of, and delivered

all notices to, third parties necessary for the Company to consummate the transactions contemplated by this Agreement and by the Transaction Documents, and all such consents, approvals, authorizations, permits and waivers are in full force and effect.

(f) Effectiveness of Other Transaction Documents; No Default. Each of the Transaction Documents executed and delivered at each of the Initial Investment Closing (except for the Senior Secured Note which was paid in full and terminated in accordance with its terms as of the Subsequent Investment Closing Date) and the Subsequent Investment Closing is in full force and effect and no Event of Default (or event or circumstance that with notice or the lapse of time would constitute an Event of Default) under the Senior Secured Convertible Note or any Additional Secured Notes that have been issued by the Company has occurred and is continuing as of the Additional Investment Closing.

(g) Material Adverse Effect. Since May 10, 2007, no event has occurred or is reasonably likely to occur that would reasonably be expected to have a Material Adverse Effect, other than as disclosed in the Disclosure Schedule where it is clear from a reading of the disclosure that such disclosure is applicable to this clause (g), or reflected in the Company’s filings with the SEC, or as disclosed in writing or electronically to the Purchaser or its representatives prior to the Additional Investment Closing Date.

(h) Reimbursement for Expenses. The Company has tendered payment for reimbursement of all expenses then owed to the Purchaser or Perseus, L.L.C. in accordance with Section 1.3(d) or Section 8.6(a).

(i) Approval of the Revised Business Plan. The Board has approved a revised business plan for the Company that is reasonably acceptable to the Purchaser, a copy of which is attached hereto as Exhibit L (the “Revised Business Plan”).

(j) Other Documents. The Purchaser has received from the Company such other documents as they may reasonably request.

Section 2.7 Conditions to Obligations of the Company at the Additional Investment Closing. The obligations of the Company to consummate the transactions described in this Agreement at the Additional Investment Closing are subject to the satisfaction (or waiver by the Company), at or before the Additional Investment Closing, of the following conditions:

(a) Representations and Warranties Correct. The representations and warranties of the Purchaser contained in this Agreement or in any other Transaction Document that are qualified as to

materiality are true and correct, and all other representations and warranties of the Purchaser contained in this Agreement or in any other Transaction Document that are not so qualified are true and correct in all material respects, in each case as of the date of this Agreement and as of the Additional Investment Closing Date, with the same effect as though made as of each such date, except that the accuracy of representations and warranties that by their terms speak as of a specified date will be determined as of such date.

(b) Performance of Obligations. The Purchaser has performed or complied with in all material respects all agreements and covenants required to be performed or complied with by it under this Agreement and each other Transaction Document at or prior to the Additional Investment Closing.

(c) Payment. The Purchaser has tendered payment for its Additional Investment Note in accordance with Section 1.1(c) and Section 1.3 of this Agreement.”

6. The first sentence of the preamble to Article III of the Purchase Agreement is hereby deleted in its entirety and replaced by the following new text:

“The Company represents and warrants to the Purchaser that, except as (i) set forth in the Company’s Disclosure Schedule delivered to the Purchaser prior to May 10, 2007 (the “Disclosure Schedule”), (ii) expressly disclosed in the Company’s last annual report on Form 10-K as filed with the SEC, excluding any exhibits thereto, or the Company’s reports on Form 10-Q as filed with the SEC subsequent to such annual report on Form 10-K, excluding any exhibits thereto, or (iii) disclosed in writing or electronically to the Purchaser or its representatives prior to the Additional Investment Closing Date, the statements contained in the following paragraphs of this Article III are all true and correct.”

7. The definition of the defined term “Company Reports” in Section 3.8 of the Purchase Agreement is hereby amended by replacing it with the following new text:

“(i) each Form 10-K report under the Exchange Act beginning with the fiscal year ended December 31, 2005 through the Effective Date, (ii) each Form 8-K report filed by the Company beginning with the fiscal year 2005 through the Effective Date, and (iii) each Form 10-Q report under the Exchange Act filed by the Company beginning with the fiscal year 2005 through the Effective Date, with the Effective Date in each case to include the effective date of the latest amendment to this Agreement”.

8. The definition of the defined term “Latest Balance Sheet” in Section 3.10 is hereby amended by deleting the date “March 31, 2007” and replacing it with the following new text “Company’s most recent set of financial statements filed with the SEC”.

9. Article V of the Purchase Agreement is hereby amended by inserting the following new Sections 5.20 and 5.21 immediately after Section 5.19:

“Section 5.20 Wind Opportunity Investment. Effective after the Additional Investment Closing, in the event that:

(a) one or more capital investors satisfactory to the Purchaser (the “Wind Investors”) invest with the Company in a project, joint venture, partnership or other transaction to be conducted with an entity other than the Company for the purpose of developing the Company’s wind turbine products (the “Wind Opportunity”), the Purchaser shall be issued, for no additional consideration, a five-percent fully diluted interest in such Wind Opportunity at the time of the Wind Investors’ (and any other person receiving interests in the Wind Opportunity contemporaneously with the investment by the Wind Investors) initial investment in the Wind Opportunity (the “Wind Stake”), with the interests issued to the Purchaser to have the same rights, powers and privileges as the interests received by the Company; provided that, the parties hereto agree that the term “initial investment” as used herein shall mean the aggregate initial investment made by all investors in the Wind Opportunity, whether or not completed in one or more tranches; or

(b) the Wind Investors pursue the Wind Opportunity by investing directly in the Company, the Company shall issue and deliver to the Purchaser for no additional consideration, a warrant, substantially in the form attached hereto as Exhibit M (the “Additional Investment Warrant”).”

Section 5.21 Asset Sales. Following the consummation of any sale of assets of the Company or any of its Affiliates other than sales in the ordinary course of business in accordance with the terms of the Promissory Notes and this Agreement (each, an “Asset Sale”) by the Company or any of its Affiliates, the Company shall, at the option of the Purchaser in its sole discretion,

(a) deliver an irrevocable letter of credit for the benefit of the Purchaser issued on terms and conditions acceptable to the Purchaser by a bank reasonably acceptable to the Purchaser in the amount of the Adjusted Net Proceeds (as defined below);

(b) open a restricted cash account at a bank reasonably acceptable to the Purchaser subject to an account control agreement in form and substance

reasonably acceptable to the Purchaser and deposit the Adjusted Net Proceeds in such account;

(c) use all or part of the Net Proceeds to repay some or all of any monetary Obligations owed by the Company or any of its Affiliates to the Purchaser or any of its Affiliates, including but not limited to the Promissory Notes; or

(d) otherwise secure the Obligations or make such other arrangements with the Adjusted Net Proceeds as requested by the Purchaser in its sole discretion.

For purposes of this Section 5.21, “Net Proceeds” means the actual proceeds available to the Company after deduction of related transaction costs as agreed to by the Parties and “Adjusted Net Proceeds” means the Net Proceeds not used to repay monetary Obligations owed to the Purchaser pursuant to clause (c) above.”

10. Section 8.6 of the Purchase Agreement is hereby amended by inserting the following new clauses (c) and (d) at the end of such Section:

“(c) Wind Opportunity Expenses. The Company shall pay all reasonable out-of-pocket expenses and fees and disbursements, including without limitation attorneys’ fees, incurred by the Purchaser or on behalf of the Purchaser in connection with the evaluation, negotiation or consummation of any of the Wind Stake, the Wind Opportunity, the Additional Investment Warrant or any other transactions related to the Wind Opportunity, regardless of whether such transaction is consummated.

(d) Asset Sale Related Expenses. The Company shall pay all reasonable out-of-pocket expenses and fees and disbursements, including without limitation attorneys’ fees, incurred by the Purchaser or on behalf of the Purchaser in connection with the evaluation, negotiation or consummation of any Asset Sale, regardless of whether such Asset Sale is consummated, or any of the actions set forth in Section 5.21 of this Agreement.

11. Schedule I of the Purchase Agreement is hereby amended by replacing the definition of the term “Promissory Note” and “Promissory Notes” with the following new text:

“‘Promissory Note’ and ‘Promissory Notes’ means (i) the Senior Secured Note and any Additional Secured Notes thereunder, (ii) the Senior Secured Convertible Note and any promissory notes issued thereunder as paid in kind interest, and (iii) the Additional Investment Note and any promissory notes issued thereunder as paid in kind interest.”

12. Schedule I of the Purchase Agreement is hereby amended by replacing the definition of the term “Transaction Documents” with the following new text:

“Transaction Documents” means this Agreement, the Promissory Notes, the Warrants, the Security and Pledge Agreement, the Subsidiary Security and Pledge Agreements, the Guaranties, the Registration Rights Agreement, the Intercreditor Agreement, the Management Rights Letter and any other instrument or agreement at any time delivered in connection with the foregoing or to secure the Obligations, in each case as the same may be amended or restated from time to time, including but not limited to the First Amendment.

13. Schedule I of the Purchase Agreement is hereby amended by replacing the definition of the term “Warrant” with the following new text:

“‘Warrants’ means the Initial Investment Warrant, the Subsequent Investment Warrant, the the Additional Investment Warrant and any other warrant issued and delivered to the Purchaser under the terms of this Agreement.”

14. Schedule I of the Purchase Agreement is hereby further amended by inserting in the appropriate alphabetical order the following new definitions:

“Additional Investment Closing” means the closing at which the Additional Investment Note is sold to the Purchaser.

“Additional Investment Closing Date” means the Business Day on which all conditions for the Additional Investment Closing have been satisfied or are capable of being satisfied, or such other date as agreed to by the Parties.

“Additional Investment Note” has the meaning set forth in Section 1.1(c).

“Additional Investment Transaction Expenses” means all out-of-pocket costs and expenses, including attorneys and accountants fees, incurred in connection with the Purchaser’s consideration of the transactions contemplated in connection with the purchase of the Additional Investment Note and this First Amendment, the preparation of the Revised Business Plan, the drafting and negotiation of definitive agreements, the execution of the First Amendment and the consummation of the transaction contemplated under the First Amendment, including but not limited to the purchase of the Additional Investment Note.

“Additional Investment Warrant” has the meaning set forth in Section 5.20.

“Additional Secured Convertible Notes” has the meaning set forth in the Senior Secured Convertible Note and the Additional Investment Note.

“Adjusted Net Proceeds” has the meaning set forth in Section 5.21.

“Asset Sales” has the meaning set forth in Section 5.21.

“First Amendment” means the First Amendment to Purchase Agreement, Company Security and Pledge Agreement, Subsidiary Security and Pledge Agreement and Registration Rights Agreement, dated as of March 13, 2008.

“Investment Agreements” has the meaning set forth in the recitals to the First Amendment.

“Net Proceeds” has the meaning set forth in Section 5.21.

“Revised Business Plan” has the meaning set forth in Section 2.6(i).

“Wind Investors” has the meaning set forth in Section 5.20.

“Wind Opportunity” has the meaning set forth in Section 5.20.

“Wind Stake” has the meaning set forth in Section 5.20.

15. The Purchaser acknowledges that, as of the date of this First Amendment, the Company is in full compliance with the provisions of Section 5.16 of the Purchase Agreement (the “Covenant”). The Purchaser reserves its right to require the Company to implement the provisions of the Covenant as promptly as practicable, and in any event within sixty days, following receipt of the Purchaser’s request.

II. Amendments to the Company Security and Pledge Agreement.

1. Section A of the Recitals to the Company Security and Pledge Agreement is hereby deleted in its entirety and replaced by the following new text:

“Grantor and the Secured Party have entered into a Securities Purchase Agreement dated as of May 10, 2007 (as the same may be amended and restated from time to time, the “Purchase Agreement”) pursuant to which the Secured Party has agreed to purchase from the Grantor a senior secured promissory note that has an aggregate principal amount of $12,500,000 (the “Senior Secured Note”) and, in the event that Grantor obtains the Stockholder Approval as required in the Purchase Agreement, a senior secured convertible promissory note that has an aggregate principal amount of $15,000,000 (the “Senior Secured Convertible Note”), a portion of the proceeds of which shall be used to repay the Senior Secured Note, and a senior secured convertible promissory note that has an aggregate principal amount of $1,500,000 (the “Additional Investment Note”, and together with the Senior Secured Note, the Senior Secured Convertible Note and such other promissory notes as

may be purchased by the Secured Party from time to time under the terms of the Purchase Agreement, the “Principal Notes”). Each of the Senior Secured Note, the Senior Secured Convertible Note and the Additional Investment Note provide, and any other Principal Notes purchased by the Secured Party may provide, for interest to be paid in kind in the form of additional secured promissory notes (the “Additional Promissory Notes”, and together with the Principal Notes, the “Promissory Notes”). The purchase and sale of the Promissory Notes is governed by the Purchase Agreement.”

2. Section B of the Recitals of the Company Security and Pledge Agreement is hereby amended by inserting the text “or the Additional Investment Note” at the end of said Section.

III. Amendments to the Subsidiary Security and Pledge Agreement.

1. Section A of the Recitals to the Subsidiary Security and Pledge Agreement is hereby deleted in its entirety and replaced by the following new text:

“Distributed Energy Systems, Corp. (the “Company”) and the Secured Party have entered into a Securities Purchase Agreement dated as of May 10, 2007 (the “Purchase Agreement”) pursuant to which the Secured Party has agreed to purchase from the Company a senior secured promissory note that has an aggregate principal amount of $12,500,000 (the “Senior Secured Note”) and, in the event that the Company obtains the Stockholder Approval as required in the Purchase Agreement, a senior secured convertible promissory note that has an aggregate principal amount of $15,000,000 (the “Senior Secured Convertible Note”), a portion of the proceeds of which shall be used to repay the Senior Secured Note, and a senior secured convertible promissory note that has an aggregate principal amount of $1,500,000 (the “Additional Investment Note”, and together with the Senior Secured Note, the Senior Secured Convertible Note and such other promissory notes as may be purchased by the Secured Party from time to time under the terms of the Purchase Agreement, the “Principal Notes”). Each of the Senior Secured Note, the Senior Secured Convertible Note and the Additional Investment Note provide, and any other Principal Notes purchased by the Secured Party may provide, for interest to be paid in kind in the form of additional secured promissory notes (the “Additional Promissory Notes”, and together with the Principal Notes, the “Promissory Notes”). The purchase and sale of the Promissory Notes is governed by the Purchase Agreement.”

2. Section B of the Recitals of the Subsidiary Security and Pledge Agreement is hereby amended by inserting the text “or the Additional Investment Note” at the end of said Section.

IV. Amendments to the Registration Rights Agreement.

1. Recital A of the Registration Rights Agreement is hereby amended by inserting the following new text “, and may make additional investments in the Company or one of its Affiliates from time to time,” immediately following the text “an investment in the Company” therein.

2. The definition of “Registrable Securities” is hereby amended by inserting the following new text before the period at the end of the definition “; for the avoidance of doubt, Registrable Securities includes any shares of Common Stock acquired by any Holder upon the conversion of any of the Senior Secured Convertible Note, the Additional Investment Note or any Additional Secured Convertible Notes (in each case as defined in the Purchase Agreement), or the exercise of any of the Initial Investment Warrant, the Subsequent Investment Warrant or the Additional Investment Warrant (in each case as defined in the Purchase Agreement).

V. Miscellaneous Provisions.

1. This First Amendment may be executed in any number of counterparts. Signatures on this First Amendment may be communicated by facsimile or electronic transmission and shall be binding upon the Parties so transmitting their signatures. Counterparts with original signatures shall be provided to the other Party following the applicable facsimile or electronic transmission, provided that the failure to provide the original counterpart shall have no effect on the validity or the binding nature of this Agreement. No Party shall raise facsimile or electronic delivery of a signature or the fact that any signature or agreement or instrument was transmitted or communicated by a facsimile or e-mail as a defense to the formation nor enforceability of a contract and each such Party forever waives any such defense.

2. THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.

3. This First Amendment is effective as of the Additional Investment Closing Date.

4. By executing and delivering a copy hereof, the Company and each Subsidiary Guarantor hereby agrees that all obligations owed to the Purchaser under the Promissory Notes and the other Transaction Documents shall be guaranteed pursuant to the Guaranties in accordance with the terms and provisions thereof and shall be secured pursuant to the Security Documents in accordance with the terms and provisions thereof.

5. The Company and each Subsidiary Guarantor, by signing below, hereby waives and releases the Purchaser, its respective affiliates and its and its affiliates’ respective directors, officers, employees, attorneys from any and all claims, offsets, defenses and counterclaims of the Company and any Subsidiary Guarantor arising on or prior to the date hereof in connection with any action or inaction taken by any such Person pursuant to this First

Amendment, such waiver and release being with full knowledge and understanding of the circumstances and effect thereof and after having consulted legal counsel with respect thereto.

6. From and after the Additional Investment Closing Date, all references in the Purchase Agreement and each of the other Transaction Documents to any of the Investment Agreements, shall be deemed to be references to the Purchase Agreement, the Company Security Pledge Agreement, the Subsidiary Security and Pledge Agreement and the Registration Rights Agreement, as the case may be, as amended, modified and/or restated hereby.

* * *

[Signature Pages follow]

IN WITNESS WHEREOF, the Parties hereto have caused their duly authorized officers to execute and deliver this First Amendment as of the date first above written.


		DISTRIBUTED ENERGY SYSTEMS CORP.

		By:		/s/ Peter J. Tallian

				Name: Peter J. Tallian
				Title: CFO

		NORTHERN POWER SYSTEMS, INC.
		PROTON ENERGY SYSTEMS, INC.
		TECHNOLOGY DRIVE, L.L.C.

		By:		/s/ Peter J. Tallian

				Name: Peter J. Tallian
				Title: CFO

		PERSEUS PARTNERS VII, L.P.

		By:		Perseus Partners VII GP, L.P.
				its general partner

		By:		Perseus Partners VII GP, L.L.C.
				its general partner

		By:		/s/ Johns C. Fox

				Name: John C. Fox
				Title: Senior Managing Director

EX-10 3 w52553exv10.htm EX-10 exv10

EXHIBIT 10

ADDITIONAL INVESTMENT SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

THE SECURITIES REPRESENTED BY THIS NOTE HAVE BEEN ACQUIRED BY THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE DISTRIBUTION OF SUCH SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED.



$1,500,000 (the “Principal Amount”)		March 13, 2008
		Wallingford, Connecticut

FOR VALUE RECEIVED, DISTRIBUTED ENERGY SYSTEMS CORP., a corporation incorporated under the Laws of the State of Delaware (the “Company”), promises to pay to the order of Perseus Partners VII, L.P., or its registered assigns (the “Holder”), the Principal Amount, or such lesser amount as shall then equal the outstanding Principal Amount, together with interest thereon at a rate equal to 12.5% per annum, and computed on the basis of a year consisting of 365 days in accordance with the terms set forth in Section 2 of this senior secured convertible promissory note (this “Note”).

This Note is issued pursuant to the Securities Purchase Agreement (the “Purchase Agreement”) dated as of May 10, 2007, as amended on March 13, 2008, by and between Perseus Partners VII, L.P. and the Company.

The following is a statement of the rights of the Holder and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. Definitions. Capitalized terms defined in the Purchase Agreement and used herein without definition have the same meaning herein as in the Purchase Agreement. In addition, as used in this Note, the following capitalized terms have the following meanings.

(a) “Additional Secured Convertible Note” has the meaning set forth in Section 2(a).

(b) “Change of Control” means any of the following:

(i) any merger, consolidation, reorganization, recapitalization, or other business combination involving the Company or any Material Subsidiary, in which the shareholders of the Company immediately prior thereto do not own, directly or indirectly, outstanding voting securities representing more than 50% of the combined outstanding voting power of the surviving entity in such merger, consolidation, reorganization, recapitalization or

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other business combination, other than a transaction expressly contemplated and permitted by Section 5.16 of the Purchase Agreement;

(ii) the sale of all, or substantially all, of the assets of the Company or any Material Subsidiary to a third party not wholly owned, directly or indirectly, by the Company, other than a transaction expressly contemplated and permitted by Section 5.16 of the Purchase Agreement;

(iii) the sale of voting securities of the Company in a transaction or a series of related transactions to any Person (or group of Persons acting in concert), other than any Affiliates of the Holder or any Person who is or has been a Holder, that results in such Person (or group of Persons) (together with their Affiliates) owning more than 50% of the outstanding voting securities of the Company or any Material Subsidiary; or

(iv) the termination or removal of either Ambrose L. Schwallie from his position as Chief Executive Officer or Peter Tallian from his position as Chief Financial Officer with the Company without cause prior to such time that a Perseus Director has been appointed or elected to the Board, unless such removal has been approved by holders of a majority of the outstanding principal amount of the Note and the Additional Secured Convertible Notes(s). For purposes of clause 1(b)(iv), “cause” shall mean any (i) willful failure, which failure is not cured within 30 days of written notice to Ambrose L. Schwallie or Peter Tallian, as applicable, to perform his material responsibilities to the Company or (ii) willful misconduct which materially and adversely affects the business reputation of the Company.

(d) “Common Shares” means shares of the common stock, par value $0.01 per share, of the Company.

(e) “Date of Issuance” means the date of issuance of this Note by the Company under the Purchase Agreement.

(f) “Default Interest Rate” means the lesser of 20% or the maximum rate allowed by applicable Law.

(g) “Lien” means any lien, security interest, mortgage, pledge, charge, license, adverse claim, reversion or encumbrance of any kind, and includes conditional sales contracts, title retention agreements and capital leases.

(h) “Maturity Date” means November 30, 2008.

(i) “Normal Course Liens” means:

(i) any builder’s, mechanic’s, materialman’s, worker’s, repairman’s or other similar statutory Lien incurred in the ordinary course of business, that has not at the time been filed pursuant to applicable Laws and any such Lien that, although filed, relates solely to an

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obligation not overdue or, if overdue, is being contested in good faith or is bonded or in respect of which the appropriate amount has been withheld in accordance with applicable Laws;

(ii) any right reserved to, or vested in, any applicable Governmental Entity by the terms of any applicable Laws, any applicable authorization by a Governmental Entity, or any property interest, easement, right-of-way or servitude issued or granted by applicable Laws or by any applicable authorization by a Governmental Entity, to terminate any such authorization, easement, right-of-way or servitude or to purchase, expropriate, appropriate or recapture or designate a purchaser of any property;

(iii) any Lien for Taxes, assessment, water or sewer, or other rents or charges not at the time overdue or, if overdue, being contested in good faith;

(iv) any Lien arising in connection with workers’ compensation, unemployment or employment insurance or other social benefits required by applicable Laws not at the time overdue or, if overdue, being contested in good faith;

(v) Liens, deposits or pledges to secure statutory obligations or performance of bids, tenders, contracts (other than for the repayment of money) or leases, in an aggregate amount not to exceed $50,000;

(vi) involuntary Liens (including the Lien of an attachment, judgment or execution) in an aggregate amount not to exceed $10,000 and not at the time overdue or, if overdue, contested in good faith;

(vii) Purchase Money Liens;

(viii) Liens granted or created by the Transaction Documents; and

(ix) any other Liens consented to by the Holder or approved pursuant to Section 6(b);

provided that in each case where it is in good faith contesting any obligations, Taxes or assessments as contemplated herein, (A) it shall have established to the satisfaction of the Holder (acting reasonably) a reserve in accordance with GAAP unless there is a reasonable likelihood that the amount will be required to be paid, in which case it shall establish sufficient reserve for or deposit with a court of competent jurisdiction or the assessing authority, or to such other Person as is acceptable to the Holder, acting reasonably, sufficient funds or a surety bond, for the total amount claimed to be secured by such Liens, where the application of such reserve, funds or bond would result in their discharge, and (B) such Lien shall only be a Permitted Lien for so long as such contestation effectively postpones or stays the enforcement of the rights of the holder thereof.

(j) “Obligations” means the principal, interest and other amounts payable under this Note.

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(k) “Permitted Indebtedness” means (i) the amount permitted by (A) the Permitted Existing Secured Indebtedness and (ii) indebtedness permitted to be incurred under the terms of the Purchase Agreement.

(l) “Permitted Liens” means Liens granted pursuant to the Permitted Existing Secured Indebtedness or a Normal Course Lien.

(m) “Purchase Money Lien” means a Lien incurred in the ordinary course of business only to secure the purchase price of an asset, or to secure debt used only to finance or refinance the purchase of an asset, in the aggregate amount not to exceed $50,000.

(n) “Secured Note” means this Note, any Additional Secured Convertible Notes issued or any notes issued in replacement of the foregoing.

(o) “Trading Day” means any day on which Nasdaq is open for trading.

(p) “Transaction Documents” means each of the Promissory Notes, the Purchase Agreement, the Warrants, the Security and Pledge Agreement, the Subsidiary Security and Pledge Agreements, the Guaranties, the Registration Rights Agreement, the Intercreditor Agreement, the Management Rights Letter and any other instrument or agreement at any time delivered in connection with the foregoing to secure the Obligations, in each case as it may be amended from time to time.

(q) “Warrants” means warrants to purchase Common Shares issued pursuant to the Purchase Agreement.

2. Interest.

(a) All unpaid principal, together with any accrued but unpaid interest and other amounts payable under this Note, shall be due and payable on (i) the Maturity Date, or (ii) when such amounts are declared due and payable by the Holder or made automatically due and payable upon or after (A) the occurrence of an Event of Default (as defined below), (B) the liquidation or dissolution of the Company, or (C) any Change of Control. Interest on this Note shall be payable (and if not paid when due, shall be compounded) quarterly in arrears on each March 31, June 30, September 30 and December 31 after the date of issuance of this Note and shall be payable at the option of the Company either (i) in lawful money of the United States of America, or (ii) by the issuance of an additional senior secured convertible promissory note identical in all respects to this Note except that it shall have a principal amount equal to such interest payment and a different date of issuance (each, an “Additional Secured Convertible Note”).

(b) If the Company elects to pay interest by issuing an Additional Secured Convertible Note, it shall give notice to the Holder on the day such payment is due and deliver such Additional Secured Convertible Note to the Holder within five Business Days.

(c) Interest shall be calculated based on the weighted average principal outstanding for such period and for certainty shall exclude any interest converted pursuant to

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Section 8 of this Note. The first payment of interest shall be on March 31, 2008 and shall be calculated from the Date of Issuance to March 31, 2008.

3. Secured Obligations; Collateral. In order to secure the Company’s payment and performance of the Obligations and to secure the Company’s prompt, full and faithful performance and observance of all of the provisions under this Note and the other Transaction Documents, the Company has delivered to the Holder, the Security and Pledge Agreement, pursuant to which the Company has granted to the Holder as security and collateral for the payment and performance of the Obligations, a security interest in all of the property and assets of the Company, whether now existing or hereafter arising, and all as more specifically described, and on the terms and conditions set forth in, the Security and Pledge Agreement. The Company’s Material Subsidiaries have also entered into and delivered to the Holder, as further protection, the Guaranty and the Subsidiary Security and Pledge Agreements. The security interest granted by the Company under the Security and Pledge Agreement, and by the Company’s Material Subsidiaries under the Subsidiary Security and Pledge Agreement, securing the indebtedness evidenced by this Note, including all Obligations, is senior to all other liens, security interests or encumbrances securing any other indebtedness of each of the Company and its Material Subsidiaries other than the Permitted Existing Secured Indebtedness (pursuant to the Intercreditor Agreement).

4. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note:

(a) Failure to Pay. The Company shall fail to pay when due any principal payment on this Note, or any interest or other payment required under the terms of this Note, and such failure continues for three Business Days thereafter;

(b) Breaches of Representations and Warranties. Any representation or warranty made by the Company in this Note or in any of the other Transaction Documents shall not have been true in any material respect when made; provided, that if the facts or events making such representation or warranty untrue are capable of correction or cure, then the Company shall have ten Business Days after notice of the breach is delivered to the Company to correct or cure such breach;

(c) Breaches of Other Covenants. The Company shall fail to observe or to perform any other covenant, obligation, condition or agreement in any material respect contained in this Note or the other Transaction Documents, other than those specified in Section 4(a) of this Note, and such failure continues for ten Business Days after notice of the breach is delivered to the Company;

(d) Cross-Default. (i) The Company shall default under (A) any Secured Note, or (B) its payment obligations pursuant to any Transaction Document, and such failure continues for five Business Days thereafter, or (ii) the Company or any of its Subsidiaries shall default under any other agreement, bond, debenture, note or other evidence of indebtedness for money borrowed, under any guaranty or under any mortgage, or indenture pursuant to which there shall be issued or by which there shall be secured or evidenced any indebtedness for money borrowed by the Company or any of its Subsidiaries, whether such indebtedness now exists or

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shall hereafter be created, including but not limited to, default under the Permitted Existing Secured Indebtedness, which default (other than a default under a Secured Note) pursuant to clause (ii) shall have resulted in indebtedness of at least $250,000 being due and payable prior to the date on which it would otherwise become due and payable;

(e) Undischarged Judgment. One or more judgments for the payment of money in an amount in excess of $250,000 in the aggregate shall be rendered against the Company or any of its Material Subsidiaries (or any combination thereof) and shall remain undischarged for a period of ten consecutive Business Days during which execution shall not be effectively stayed, or any action is legally taken by a judgment creditor to levy upon any such judgment;

(f) Voluntary Bankruptcy or Insolvency Proceedings. The Company (or any Subsidiary thereof) shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other Proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other Proceeding commenced against it or (vii) take any action for the purpose of effecting any of the foregoing;

(g) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company (or any Subsidiary thereof) or of all or a substantial part of the property thereof, or an involuntary case or other Proceeding seeking liquidation, reorganization or other relief with respect to the Company (or any Subsidiary thereof) or the debts thereof under any bankruptcy, insolvency or other similar Law now or hereafter in effect shall be commenced and an order for relief entered, or such case or Proceeding shall not be dismissed or discharged within 30 days of commencement; or

(h) Board Observer; Protective Provisions. Any of the following conditions exist: (i) the Company shall have failed to allow the Perseus Observer to attend and observe any meeting of the Board, pursuant to and subject to the limitations set forth in Section 5.6(a) of the Purchase Agreement, (ii) the number of Perseus Directors is less than the Requisite Number and such condition continues after the Purchaser has given written notice to the Company that it has selected a nominee for any such vacant position for the lesser of (x) a five Business Day period and (y) a period ending immediately prior to the time the Board takes any action or vote (whether at a meeting or by written consent in lieu of a meeting) or (iii) the Company breaches any of its obligations under Section 5.6 or 5.14 of the Purchase Agreement, and, in the case of any such breach described in this clause (iii) that is reasonably susceptible to cure, such breach continues uncured for ten Business Days after notice of such breach is delivered to such Company.

(i) Certain Financial Benchmarks. At any time the Company’s (i) Net Working Capital (as defined below) falls below $3,500,000, or (ii) unrestricted cash and cash

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equivalents is less than $1,000,000, excluding any proceeds from any sale of assets of the Company or of its Affiliates other than sales in the ordinary course of business in accordance with the terms of this Note and the Purchase Agreement (each of such non-ordinary course sales, an “Asset Sale”). “Net Working Capital” shall mean (A) accounts receivable less allowances for doubtful accounts plus costs for unbilled work in progress less (B) accounts payable plus (C) unrestricted cash and cash equivalents, in each case as such items appear in the Company’s accounting records prepared consistent with past practice and in accordance with GAAP and calculated in the same manner used to derive the applicable balance sheet items reported in the Company’s audited and unaudited financial statements filed with the SEC in 2007.

(j) The Company’s Common Stock is not listed on any national securities exchange or quoted on the OTC Bulletin Board for over-the-counter securities or on the “pink sheets” published by the National Quotation Bureau or another bulletin board or quotation service acceptable to the Holder.

5. Rights of Holder upon Default

(a) Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in Section 4(f) or 4(g) of this Note) and at any time thereafter during the continuance of such Event of Default, holders of a majority of the outstanding principal amount of the Senior Secured Convertible Note(s) may declare all outstanding Obligations payable by the Company under this Note to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained in this Note or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Sections 4(f) or 4(g) of this Note, immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained in this Note or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, the Holder may exercise any other right, power or remedy granted to it by the Transaction Documents or otherwise permitted to it by Law, either by suit in equity or by action at Law, or both.

(b) Notwithstanding anything to the contrary contained in this Note, in addition to the rights of the Holder specified in subsection (a) of this Section 5, on the date an Event of Default under this Note occurs, the interest rate on this Note shall increase, from that date forward, to the Default Interest Rate, which interest shall be compounded quarterly and payable solely in lawful money of the United States of America.

6. Covenants.

(a) Affirmative Covenants. The Company covenants that, so long as any Obligations remain outstanding, the Company shall:

(i) Security and Pledge Agreement. Grant to the Holder, and maintain for the benefit of the Holder, a lien on and security interest in all of its assets and properties,

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whether now or hereafter existing, owned or acquired, which the Company shall perfect by filing UCC-1 financing statements in the appropriate jurisdictions and taking other actions to perfect the security interest as the Holder may reasonably request, all in accordance with the terms of the Security and Pledge Agreement, and cause its Material Subsidiaries to do the same.

(ii) Preservation of Corporate Existence. Preserve and maintain its and its Material Subsidiaries’ corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required, unless the failure to so preserve, maintain or qualify does not and will not have a Material Adverse Effect, and preserve and maintain all of its Proprietary Assets that are material to it and its Subsidiaries’ business.

(iii) Compliance with Laws. Comply with all applicable Laws of any Governmental Entity, except non-compliance being contested in good faith through appropriate Proceedings so long as the Company shall have set up and funded sufficient reserves, if any, required under GAAP with respect to such items.

(iv) Performance Under the Note. Pay, observe or perform any other covenant, obligation, condition or agreement contained in this Note.

(v) Delivery of Weekly Statement. Deliver to the Holder a weekly statement showing the Company’s Net Working Capital and unrestricted cash and cash equivalents for the previous week, in each case calculated in a manner consistent with past practice and the Company’s audited and unaudited financial statements filed with the SEC in 2007.

(b) Negative Covenants. The Company covenants that so long as any Obligations remain outstanding, neither the Company nor any Subsidiary shall directly or indirectly take any of the following actions without the prior written consent of the Holder:

(i) Create, incur, assume, guarantee or be or remain liable for, contingently or otherwise, or suffer to exist any indebtedness for borrowed money, except Indebtedness incurred pursuant to the Transaction Documents or Permitted Indebtedness;

(ii) Create, incur, assume or suffer to exist any Lien of any kind on any of its assets, except for Liens created in connection with the Transaction Documents or Permitted Liens;

(iii) Enter into any transaction, or a series of related transactions, which would result in a Change of Control;

(iv) Amend the Permitted Existing Secured Indebtedness, except as otherwise permitted pursuant to the terms of this Note; or

(v) Alter the Business Plan or the Revised Business Plan in a manner that is material and adverse to the Company.

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7. Prepayment and Effect on Conversion Rights. The Company shall have no right to prepay this Note or any interest or fees accruing or incurred with respect to this Note, without the prior written consent of the Holder.

8. Conversion.

(a) Conversion into Common Shares. The Holder shall have the option to convert, as a whole or in part, up to the entire amount outstanding under this Note (including the accrued but unpaid interest) into Common Shares at any time or from time to time at a conversion price equal to $0.33 (the “Conversion Price”), subject to adjustments in the event of any stock splits, reverse stock splits, stock dividends or other similar recapitalization or reorganization transactions that affect all shareholders equally as set forth in Section 9.

(b) Mechanics and Effect of Conversion. No fractional Common Shares shall be issued upon conversion of this Note. Upon the conversion of all of the principal and accrued interest outstanding under this Note, in lieu of the Company issuing any fractional shares to the Holder, the Company shall pay to the Holder the amount of outstanding principal that is not so converted. On partial conversion of this Note, the Company shall issue to the Holder (i) the Common Shares into which a portion of this Note is converted and (ii) a new Secured Note having identical terms to this Note, except that the principal amount thereof shall equal the difference between (A) the principal amount of this Note immediately prior to such conversion minus (B) the portion of such principal amount converted into Common Shares. Upon any conversion of this Note pursuant to this Section 8, the Holder shall surrender this Note, duly endorsed, at the principal office of the Company. At its expense, the Company shall, as soon as practicable thereafter, and in any event within three Business Days of such surrender, issue and deliver to the Holder at such principal office a certificate or certificates for the number of shares of such Common Shares to which the Holder shall be entitled upon such conversion (bearing such legends as are required by the Purchase Agreement and applicable securities Laws and stock exchange regulations or policies, as required in the opinion of counsel to the Company), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note. Issuance of this Note shall constitute full authority to the Company’s officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Common Shares issuable upon the conversion of this Note.

(c) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of effecting the conversion of this Note and the other Secured Notes, such number of its Common Shares as shall from time to time be sufficient to effect the conversion of this Note and all other Secured Notes; and if at any time the number of authorized but unissued Common Shares shall not be sufficient to effect the conversion of this Note and all other Secured Notes, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purpose.

(d) Payment of Taxes. The Company will pay all transfer taxes or charges that may be imposed with respect to the issue or delivery of Common Shares upon conversion of

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this Note, except for any tax or other charge imposed in connection with any transfer involved in the issue and delivery of Common Shares in a name other than that in which this Note was registered.

(e) Withholding Taxes. Notwithstanding any other provision of this Note, the Company shall:

(i) not be obliged to reimburse, indemnify, make whole or otherwise pay to the Holder, and

(ii) be entitled to deduct and withhold from all amounts payable pursuant to this Note,

any amounts required by applicable Law to be deducted or withheld for any and all Taxes, so long as the Company promptly pays the full amount deducted or withheld to the applicable Governmental Entity in accordance with applicable Law. Any such amounts deducted and not owed or paid to the applicable Governmental Entity in accordance with applicable Law shall be returned to the Holder promptly. The Holder shall provide any information reasonably requested by the Company to enable it to determine whether Taxes must be withheld or deducted and the amount of such withholding or deduction.

9. Conversion Price Adjustments.

(a) Adjustment for Splits and Combinations. If the Company shall at any time or from time to time after the Date of Issuance effect a stock split of the outstanding Common Shares, the Conversion Price in effect immediately before that stock split shall be proportionately decreased, and, conversely, if the Company shall at any time or from time to time after the Date of Issuance combine the outstanding Common Shares into a smaller number of shares, the Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 9(a) shall become effective at the close of business on the date the stock split or combination becomes effective.

(b) Adjustment for Common Shares Dividends and Distributions. If the Company at any time or from time to time after the Date of Issuance issues, or fixes a record date for the determination of holders of Common Shares entitled to receive, a dividend or other distribution payable solely in additional Common Shares, in each such event the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (i) the numerator of which is the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the sum of the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Common Shares issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefore, the Conversion Price shall be recomputed accordingly as of the close of business

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on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 9(b) to reflect the actual payment of such dividend or distribution.

(c) Adjustments for Other Dividends and Distributions. If the Company at any time or from time to time after the Date of Issuance issues, or fixes a record date for the determination of holders of Common Shares entitled to receive, a dividend or other distribution payable in securities of the Company other than Common Shares or other property, in each such event provision shall be made so that the Holder of this Note shall receive upon conversion of this Note, in addition to the number of Common Shares receivable hereupon, the amount of securities of the Company or other property which such Holder would have received had this Note been converted into Common Shares on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities or other property receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 9 with respect to the rights of the Holder or with respect to such other securities or other property by their terms. As used herein, the term “other property” does not include cash.

(d) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Date of Issuance, the Common Shares issuable upon the conversion of this Note is changed into the same or a different number of shares of any class or series of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 9), then in any such event the Holder shall have the right thereafter to convert this Note into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the number of Common Shares into which this Note could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided in this Note or with respect to such other securities or property by the terms thereof.

(e) Reorganizations. If at any time or from time to time after the Date of Issuance there is a capital reorganization of the Common Shares (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 9), as a part of such capital reorganization provision shall be made so that the Holder shall thereafter be entitled to receive upon conversion of this Note the number of shares or other securities or property of the Company to which a holder of the number of Common Shares deliverable upon such conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such securities by their terms. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 9 with respect to the rights of the Holder after such capital reorganization to the end that the provisions of this Section 9 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of this Note) shall be applicable after that event and be as nearly equivalent as practicable.

(f) Certificate of Adjustment. In each case of an adjustment or readjustment of any Conversion Price for the number of Common Shares or other securities issuable upon conversion of this Note, the Company, at its own expense, shall cause its Chief Financial Officer

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to compute such adjustment or readjustment in accordance with the provisions of this Note and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to the Holder at the Holder’s address as shown in the Company’s books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. No adjustment in the Conversion Price shall be required to be made unless it would result in an increase or decrease of at least one cent, but any adjustments not made because of this sentence shall be carried forward and taken into account in any subsequent adjustment otherwise required hereunder.

(g) Notices of Record Date. Upon (i) the establishment by the Company of a record of the holders of any class of securities for the purpose of determining the holders of such securities who are entitled to receive any dividend or other distribution, or (ii) any capital reorganization of the Company, any reclassification or recapitalization of the shares of the Company, any merger or consolidation of the Company with or into any other Company, or any transfer of all or substantially all the assets of the Company to any other Person or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to the Holder at least twenty Business Days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Shares (or other securities) shall be entitled to exchange their Common Shares (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up.

(h) No Impairment. The Company shall not amend its Certificate of Incorporation or Bylaws or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the Holder of this Note against dilution or other impairment as provided herein. If the Company takes any action in breach of this Note, the Holder shall be entitled to any and all remedies available at law or in equity.

(i) Fractional Share. No fractional share shall be issuable upon conversion of this Note and the number of shares to be issued shall be rounded down to the nearest whole share. If the conversion of this Note shall result in the issuance of any fractional share, the Company shall eliminate such fractional share by paying the Holder an amount computed by multiplying such fraction by the fair market value of a full share.

(j) Other Adjustments. If and whenever the Company shall take any action affecting or relating to the Common Shares, other than any action described in this Section 9, which in the opinion of the Board would prejudicially affect the rights of the Holder, the Conversion Price and, if required, the number of Common Shares to be issued upon exercise of the Note will be adjusted by the Board in such manner, if any, and at such time, as the Board

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may, subject to the approval of any stock exchange(s) on which the Common Shares are listed and posted for trading, reasonably determine to be equitable in the circumstances to such Holder.

10. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of both the Company and the holders of a majority of the outstanding principal amount of the Senior Secured Convertible Note(s). Additionally, the holders of a majority of the outstanding principal amount of the Senior Secured Convertible Note(s) shall be deemed to have waived any breach of any covenant set forth in Section 6(b) hereof in the event that each Perseus Director votes in favor of the action that causes such breach, provided that all material terms related to the cause thereof were disclosed to such Board members.

11. Transfer of this Note or Securities Issuable on Conversion or Payment Hereunder. This Note may not be transferred in violation of any restrictive legend set forth hereon. Each new Note issued upon transfer of this Note or securities issuable on conversion of this Note shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary.

12. Assignment. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, as a whole or in part, by the Company without the prior written consent of the Holder. The Holder may assign the rights, interests or obligations under this Note, as a whole or in part, at any time, subject to compliance with Section 11 of this Note, upon written notice to the Company of such assignment. Notwithstanding the foregoing, until the Company receives notice in accordance with this Section 12, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest on this Note and for all other purposes whatsoever, whether or not this Note shall be overdue.

13. Treatment of Note. To the extent permitted by GAAP, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities.

14. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier, personal delivery or facsimile transmission at the respective addresses or facsimile number of the parties as set forth in or otherwise designated by either party pursuant to the Purchase Agreement or on the register maintained by the Company. Any party hereto may by notice so given change its address or facsimile number for future notice hereunder. Notice shall conclusively be deemed

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to have been given when received if received prior to 4:00 p.m. (local time) otherwise it shall be deemed to have been received the following Business Day.

15. Interaction with other Secured Notes. The Company and the Holder agree that all Secured Notes shall rank pari passu notwithstanding date of issue.

16. Expenses; Waivers. If action is instituted to collect this Note, the Company shall pay all costs and expenses, including, without limitation, reasonable attorneys’ fees and costs, incurred in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

17. Successors and Assigns. Subject to the restrictions on transfer described in Sections 11 and 12 of this Note, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

18. Governing Law; Jury Waiver. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the Laws of the State of New York, without regard to conflict of laws provisions of the State of New York or of any other state. IN THE EVENT OF ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING OUT OF THE TERMS OF THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 14. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE.

[signatures appear on following page]

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IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above.


DISTRIBUTED ENERGY SYSTEMS CORP.
By:	/s/ Peter J. Tallian
	Name:	Peter J. Tallian
	Title:	CFO

[Signature Page for Additional Investment Note]

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