Workstream Inc. Senior Secured Note

NOTWITHSTANDING ANYTHING CONTAINED IN THIS NOTE TO THE CONTRARY, THIS NOTE MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THIS NOTE. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTION 13(a) HEREOF.

FOR VALUE RECEIVED, Workstream Inc., a corporation existing pursuant to the Canada Business Corporations Act (the “ Company ”), hereby promises to pay to the order of __________________________ or its registered assigns (“ Holder ”) the amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the “ Principal ”) when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“ Interest ”) on any outstanding Principal at the applicable Interest Rate from the date set out above as the Issuance Date (the “ Issuance   Date ”) until the same becomes due and payable, whether upon the Maturity Date or acceleration, redemption or otherwise (in each case in accordance with the terms hereof). This Senior Secured Note (including all Senior Secured Notes issued in exchange, transfer or replacement hereof, is referred to herein as the “ Note ”) is being issued pursuant to the Exchange Agreement (as defined below) on the Closing Date (as defined below). Certain capitalized terms used herein are defined in Section 23.

1.   MATURITY . On the Maturity Date, the Company shall pay to the Holder an amount in cash representing all then-outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if any. Other than as specifically permitted by this Note, the Company may not prepay any portion of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid Late Charges on Principal and Interest, if any. The Holder and the Company shall maintain records showing the Principal, Interest and Late Charges redeemed and/or paid (as the case may be) and the dates of such redemption and/or payments (as the case may be) or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon partial redemption or payment.

2.   INTEREST; INTEREST RATE . Interest on this Note shall commence accruing on the Issuance Date, shall accrue daily at the Interest Rate on the outstanding Principal amount from time to time, shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30) day months and shall be paid on the Maturity Date to the record holder of this Note in cash. From and after the occurrence and during the continuance of any Event of Default, the Interest Rate then in effect shall be increased by five percent (5%). In the event that such Event of Default is subsequently cured, the increase referred to in the preceding sentence shall cease to be effective as of the date of such cure; provided that the Interest as calculated and unpaid at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of such cure of such Event of Default.

3.   RIGHTS UPON EVENT OF DEFAULT .

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

(i)   the suspension from trading or failure of the Common Shares to be listed on an Eligible Market for a period of five (5) consecutive Trading Days or for more than an aggregate of ten (10) days in any 365-day period;

(ii)   the delisting or suspension of the Common Shares from an Eligible Market, provided that immediately following such delisting or suspension the Common Shares would not be listed on a designated exchange for purposes of the Income Tax Act (Canada);

(iii)   the Company’s failure to deliver the required number of Common Shares within seven (7) Trading Days after the applicable exercise date under the Holder’s 2008 Warrant or (B) notice, written or oral, to the Holder, including, without limitation, by way of public announcement or through any of its agents, at any time, of its intention not to comply, as required, with a request for an exercise of any portion of the Holder’s 2008 Warrant that is requested in accordance with the provisions thereof;

(iv)   the Company’s or any Subsidiary’s (as defined below) failure to pay to the Holder any amount of Principal, Interest, Late Charges or other amounts when and as due under this Note (including, without limitation, the Company’s or any Subsidiary’s failure to pay any redemption payments or amounts hereunder) or any other Transaction Document, except, in the case of a failure to pay Interest and Late Charges when and as due, in which case only if such failure remains uncured for a period of at least seven (7) days;

(v)   the Company fails to remove any restrictive legend on any certificate or any Common Shares issued to the Holder upon exercise of any Securities acquired by the Holder under the Exchange Agreement as and when required by such Securities, the Transaction Agreement, the Exchange Agreement or the Amended Registration Rights Agreement (as the case may be), and any such failure continues uncured for at least ten (10) days;

(vi)   any Event of Default (as defined in the Other Notes) occurs with respect to any Other Note;

(vii)   the Company or any Subsidiary materially breaches any representation, warranty, covenant or other term or condition of any Transaction Document, except, in the case of a breach of a covenant which is curable, only if such breach remains uncured for a period of at least ten (10) days;

(viii)   any breach or failure in any respect by the Company or any Subsidiary to comply with any provision of Section 9 of this Note;

(ix)   the occurrence of any default under, redemption of or acceleration prior to maturity of any Indebtedness (as defined in the Exchange Agreement) of the Company or any of its Subsidiaries, other than with respect to any Other Notes;

(x)   any Material Adverse Effect (as defined in the Exchange Agreement) occurs;

(xi)   the entry by a court of (i) a decree, order, judgment or other similar document in respect of the Company or any Subsidiary of a voluntary or involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or (ii) a decree, order, judgment or other similar document adjudging the Company or any Subsidiary as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation, reorganization, arrangement, adjustment or composition of or in respect of the Company or any Subsidiary under any applicable federal, state or foreign law or (iii) a decree, order, judgment or other similar document appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree, order, judgment or other similar document or any such other decree, order, judgment or other similar document unstayed and in effect for a period of thirty (30) consecutive days;

(xii)   bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Company or any Subsidiary and, if instituted against the Company or any Subsidiary by a third party, shall not be dismissed within thirty (30) days of their initiation; 

(xiii)   the commencement by the Company or any Subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree, order, judgment or other similar document in respect of the Company or any Subsidiary in an involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal, state or foreign law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the execution of a composition of debts, or the occurrence of any other similar federal, state or foreign proceeding, or the admission by it in writing of its inability to pay its debts generally as they become due, the taking of corporate action by the Company or any Subsidiary in furtherance of any such action or the taking of any action by any Person to commence a UCC foreclosure sale or any other similar action under federal, state or foreign law;

(xiv)   a final judgment or judgments for the payment of money aggregating in excess of $2,000,000 are rendered against the Company or any of its Subsidiaries, which judgments are not, within thirty (30) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within thirty (30) days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $2,000,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company or such Subsidiary (as the case may be) will receive the proceeds of such insurance or indemnity within 30 days of the issuance of such judgment; or

(xv)   the Company or any Subsidiary either (i) fails to pay, when due, or within any applicable grace period, any payment with respect to any Indebtedness in excess of $250,000 due to any third party, other than, with respect to unsecured Indebtedness only, payments contested by the Company or such Subsidiary (as the case may be) in good faith by proper proceedings and with respect to which adequate reserves have been set aside for the payment thereof in accordance with GAAP (as defined below), or otherwise be in breach or violation of any agreement for monies owed or owing in an amount in excess of $250,000, which breach or violation permits the other party thereto to declare a default or otherwise accelerate amounts due thereunder, or (ii) suffer to exist any other circumstance or event that would, with or without the passage of time or the giving of notice, result in a default or event of default under any agreement binding the Company or any Subsidiary, which default or event of default would or is likely to have a material adverse effect on the business, assets, operations (including results thereof), liabilities, properties, condition (including financial condition) or prospects of the Company or any of its Subsidiaries, individually or in the aggregate.

(b)   Redemption Right . Upon the occurrence of an Event of Default under this Note or any Other Note, the Company shall within one (1) Business Day deliver written notice thereof via facsimile and overnight courier (with next day delivery specified) (an “ Event of Default Notice ”) to the Holder. At any time after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company (regardless of whether such Event of Default has been cured) to redeem all or any portion of this Note by delivering written notice thereof (the “ Event of Default Redemption Notice ”) to the Company, which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is electing to redeem. Each portion of this Note subject to redemption by the Company pursuant to this Section 3(b) shall be redeemed by the Company at a price equal to the product of (i) the sum of the portion of the Principal amount of this Note so elected by the Holder to be redeemed together with accrued and unpaid Interest with respect to such portion and accrued and unpaid Late Charges with respect to such portion and Interest as of such time as the Holder delivers an Event of Default Redemption Notice multiplied by (ii) the Redemption Premium (the “ Event of Default   Redemption Price ”). Redemptions required by this Section 3(b) shall be made in accordance with the provisions of Section 7. To the extent redemptions required by this Section 3(b) are deemed or determined by a court of competent jurisdiction to be prepayments of this Note by the Company, such redemptions shall be deemed to be voluntary prepayments. The Company agrees that in the event of the Company’s redemption of any portion of this Note under this Section 3(b), the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any redemption premium due under this Section 3(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its investment opportunity and not as a penalty.

4.   RIGHTS UPON FUNDAMENTAL TRANSACTION . The Company shall not enter into or be party to a Fundamental Transaction unless the Successor Entity assumes in writing all of the obligations of the Company under this Note and the other Transaction Documents in accordance with the provisions of this Section 4 pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder prior to such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts then outstanding and the interest rates of the Notes held by such holder and having similar ranking to the Notes, and reasonably satisfactory to the Holder. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein. The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions. No sooner than twenty (20) Trading Days nor later than ten (10) Trading Days prior to the consummation of a Fundamental Transaction, but not prior to the public announcement of such Fundamental Transaction, the Company shall deliver written notice thereof via facsimile and overnight courier to the Holder (a “ Fundamental Transaction   Notice ”).

5.   NONCIRCUMVENTION . The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation (as defined in the Exchange Agreement), Bylaws (as defined in the Exchange Agreement) or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note.

6.   MANDATORY REDEMPTIONS .

(a)   For so long as any of the Notes shall remain outstanding, upon the occurrence of each Disposition, the Company shall use 75% of the Gross Proceeds (as defined below) received (directly or indirectly) by the Company and/or any of its Subsidiaries in connection with such Disposition (the “ Applicable Gross Proceeds ”) to redeem this Note as set forth herein (each being a “ Mandatory Disposition Redemption ”) (the remaining 25% of the Gross Proceeds with respect to each applicable Disposition that is retained by the Company or any Subsidiary is referred to herein as the “ Gross Proceeds Retained Amount ”; provided that if the Gross Proceeds Retained Amount as specified above with respect to a Disposition exceeds $2,500,000, then all amounts of the Gross Proceeds Retained Amount that so exceeds $2,500,000 shall not be retained by the Company or any Subsidiary and shall instead be added to Applicable Gross Proceeds with respect to such Disposition and constitute part of the applicable Mandatory Disposition Redemption Price). With respect to each Disposition, the Company shall deliver a written notice by confirmed facsimile and overnight courier (with next day delivery specified) to all, but not less than all, of the holders of Notes (the “ Mandatory Disposition Redemption Notice ” and the date such notice is delivered to all such holders is referred to as the “ Mandatory Disposition Redemption Notice Date ”) stating (a) the date on which the applicable Mandatory Disposition   Redemption shall occur (the “ Mandatory Disposition Redemption Date ”), which date shall be the date such Disposition is consummated, (b) the amount of Applicable Gross Proceeds (as may be increased by the proviso above in this Section 6(a)) with respect to such Disposition and (c) the Mandatory Disposition   Redemption Price (as defined below) with respect to such Disposition. The applicable Mandatory Disposition   Redemption Notice shall be delivered as soon as practicable prior to the consummation of the applicable Disposition, and the Company shall make a public announcement containing the information set forth in such Mandatory Disposition   Redemption Notice on or before the applicable Mandatory Disposition   Redemption Notice Date to the extent that the notices contains any, or constitutes, material, non-public information. Redemptions required by this Section 6(a) shall be made in accordance with the provisions of Section 7. To the extent redemptions required by this Section 6(a) are deemed or determined by a court of competent jurisdiction to be prepayments of this Note by the Company, such redemptions shall be deemed to be voluntary prepayments. The Company agrees that in the event of the Company’s redemption of any portion of this Note under this Section 6(a), the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. “ Mandatory Disposition Redemption Price ” means, with respect to a particular Disposition, an amount in cash equal to the product of (i) the Applicable Gross Proceeds (as may be increased by the proviso above in this Section 6(a)) with respect to such Disposition multiplied by (ii) the quotient of (1) the sum of (A) the Principal of this Note outstanding as of the date of redemption, (B) the amount of any accrued and unpaid Interest on this Note through the date of redemption and (C) the amount of any accrued and unpaid Late Charges on such Principal and such Interest specified in clauses (A) and (B) through the date of redemption divided by (2) the sum of (X) the principal amount of all Notes outstanding as of the date of redemption, (Y) the amount of any accrued and unpaid Interest on all Notes through the date of redemption and (Z) the amount of any accrued and unpaid Late Charges on such principal and such Interest specified in clauses (X) and (Y) through the date of redemption. To the extent the Company effects a Mandatory Disposition   Redemption under this Note, then the Company must simultaneously take the same action with respect to all the Other Notes.

(b)   For so long as any of the Notes shall remain outstanding, upon the receipt (directly or indirectly) by the Company and/or any of its Subsidiaries of any amount of cash, cash equivalents or publicly-traded securities in connection with, arising out of or related to the Merger Agreement (as defined below) (including, without limitation, under Section 7.02(b) of the Merger Agreement) or the termination thereof (in each case, including, without limitation, all judgment and/or settlement (as the case may be) proceeds in connection with, arising out of or related thereto) (all such amounts are referred to herein as “ Merger Agreement Amounts ”) which in the aggregate exceed $2,000,000 (all such excess Merger Amounts are referred to herein as the “ Excess   Amounts ”), the Company shall use 75% of all Excess Amounts to redeem this Note as set forth herein (each being a “ Mandatory Excess Redemption ”) (the remaining 25% of the Excess Amounts that are retained by the Company is referred to herein as the “ Excess Retained Amount ”). With respect to the receipt of Excess Amounts, the Company shall deliver a written notice by confirmed facsimile and overnight courier (with next day delivery specified) to all, but not less than all, of the holders of Notes (the “ Mandatory Excess Redemption Notice ” and the date such notice is delivered to all such holders is referred to as the “ Mandatory Excess Redemption Notice Date ”) stating (a) the date on which the applicable Excess Amounts are to be received (the “ Mandatory Excess Redemption Date ”), which date shall be the date of such receipt, (b) the applicable Excess Amounts to be received and (c) the Mandatory Excess Redemption Price (as defined below) with respect to such applicable Excess Amounts to be received. The applicable Mandatory Excess Redemption Notice shall be delivered as soon as practicable prior to receipt of the applicable Excess Amounts, and the Company shall make a public announcement containing the information set forth in such Mandatory Excess Redemption Notice on or before the applicable Mandatory Excess Redemption Notice Date to the extent that the notices contains any, or constitutes, material, non-public information. Redemptions required by this Section 6(b) shall be made in accordance with the provisions of Section 7. To the extent redemptions required by this Section 6(b) are deemed or determined by a court of competent jurisdiction to be prepayments of this Note by the Company, such redemptions shall be deemed to be voluntary prepayments. The Company agrees that in the event of the Company’s redemption of any portion of this Note under this Section 6(b), the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. “ Mandatory Excess   Redemption Price ” means, with respect to each receipt of the applicable Excess Amounts, an amount in cash equal to the product of (i) the Excess Amounts to be so received multiplied by (ii) the quotient of (1) the sum of (A) the Principal of this Note outstanding as of the date of redemption, (B) the amount of any accrued and unpaid Interest on this Note through the date of redemption and (C) the amount of any accrued and unpaid Late Charges on such Principal and such Interest specified in clauses (A) and (B) through the date of redemption divided by (2) the sum of (X) the principal amount of all Notes outstanding as of the date of redemption, (Y) the amount of any accrued and unpaid Interest on all Notes through the date of redemption and (Z) the amount of any accrued and unpaid Late Charges on such principal and such Interest specified in clauses (X)