Exhibit 10.2
 
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND IS
BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THIS SECURITY MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS.
 
6 % CONVERTIBLE DEBENTURE
 
Company: CSMG Technologies, Inc.
Company Address: 500 North Shoreline Drive, Suite 1005 North, Corpus Christi,
Texas 78471
Closing Date: November 17, 2008
Maturity Date: November 30, 2011
Principal Amount: $1,500,000
 
CSMG Technologies, Inc., a Texas corporation, and any successor or resulting
corporation by way of merger, consolidation, sale or exchange of all or
substantially all of the assets or otherwise (the “Company”), for value
received, hereby promises to pay to the Holder (as such term is hereinafter
defined), or such other Person (as such term is hereinafter defined) upon order
of the Holder, on the Maturity Date (as such term is hereinafter defined), the
Principal Amount (as such term is hereinafter defined), as such sum may be
adjusted pursuant to Article 3, and to pay interest thereon with such interest
commencing to accrue as of the date hereof and payable on a monthly basis,
commencing on the 15th day of the month following the month of issuance of this
Debenture, and on the Maturity Date (except that, if any such date is not a
Business Day, then such payment shall be due on the next succeeding Business
Day), at the rate of six percent (6 %) per annum subject to adjustment as set
forth in Section 7 hereof (the “Interest Rate”). All interest payable on the
Principal Amount of this Debenture shall be calculated on the basis of a year of
365 or 366 days, as the case may be, for the actual number of days (including
the first day but excluding the last day) occurring in the period for which such
interest is payable. Payment of interest on this Debenture shall be in cash or,
at the option of the Holder, in shares of Common Stock of the Company valued at
the then applicable Conversion Price (as defined herein). This Debenture may not
be prepaid without the written consent of the Holder.
 
ARTICLE 1
DEFINITIONS
 
SECTION 1.1  Definitions.  The terms defined in this Article whenever used in
this Debenture have the following respective meanings:
 
(i)  “Affiliate” has the meaning ascribed to such term in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended.
 

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(ii)  “Bankruptcy Code” means the United States Bankruptcy Code of 1986, as
amended (11 U.S.C. §§ 101 et. seq.).
 
(iii)  “Business Day” means a day other than Saturday, Sunday or any day on
which banks located in the State of California are authorized or obligated to
close.
 
(iv)  “Capital Shares” means the Common Stock and any other shares of any other
class or series of capital stock, whether now or hereafter authorized and
however designated, which have the right to participate in the distribution of
earnings and assets (upon dissolution, liquidation or winding-up) of the
Company.
 
(v)        “Closing Date” means the closing date set forth in the first
paragraph of this Debenture.
 
(vi)  “Common Shares” or “Common Stock” means shares of the Company’s Common
Stock.
 
(vii)      “Common Stock Issued at Conversion”, when used with reference to the
securities deliverable upon conversion of this Debenture, means all Common
Shares now or hereafter Outstanding and securities of any other class or series
into which this Debenture hereafter shall have been changed or substituted,
whether now or hereafter created and however designated.
 
(viii)      “Conversion” or“conversion” means the repayment by the Company of
the Principal Amount of this Debenture (and, to the extent the Holder elects as
permitted by Section 3.1, accrued and unpaid interest thereon) by the delivery
of Common Stock on the terms provided in Section 3.2, and
“convert,” “converted,” “convertible” and like words shall have a corresponding
meaning.
 
(ix)         “Conversion Date” means any day on which all or any portion of the
Principal Amount of this Debenture is converted in accordance with the
provisions hereof.
 
(x)          “Conversion Notice” means a written notice of conversion
substantially in the form annexed hereto as Exhibit A.
 
(xi)         “Conversion Price” on any date of determination means the
applicable price for the conversion of this Debenture into Common Shares on such
day as set forth in Section 3.1(a).
 
(xii)  “Current Market Price” on any date of determination means the closing
price of a Common Share on such day as reported in the “pink sheets” through the
Interdealer Trading Quotation System; provided, if such security is not traded
on the over the counter market via the pink sheets, then the closing price on
the OTC Bulletin Board (the “OTCBB”); provided further, that, if such security
is not listed or admitted to trading on the OTCBB, as reported on the principal
national security exchange or quotation system on which such security is quoted
or listed or admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the closing bid
price of such security on the over-the-counter market on the day in question as
reported by Bloomberg LP or a similar generally accepted reporting service, as
the case may be.
 

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(xiii)       “Debenture” or “Debentures” means this Convertible Debenture of the
Company or such other convertible debenture(s) exchanged therefor as provided in
Section 2.1.
 
(xiv)  “Discount Multiplier” has the meaning set forth in Section 3.1(a).
 
(xv)        “Event of Default” has the meaning set forth in Section 6.1.
 
(xvi)  “Excluded Securities” means, (a) shares issued or deemed to have been
issued by the Company pursuant to a stock compensation plan that has been
approved by a majority of independent members of the Board of Directors of the
Company or by a committee, the majority of whose members are independent,
pursuant to which the Company’s securities may be issued only to any employee,
officer, or director for services provided to the Company (an “Approved Stock
Plan”) (b) shares of Common Stock issued or deemed to be issued by the Company
upon the conversion, exchange or exercise of any right, option, obligation or
security outstanding on the date prior to date of the Securities Purchase
Agreement, (c) shares or convertible securities issued in connection with any
acquisition by the Company from a non-affiliated third party, whether through an
acquisition of stock or a merger of any business, assets or technologies,
leasing arrangement or any other transaction the primary purpose of which is not
to raise equity capital, (d) shares or convertible securities issued to banks or
equipment lessors in connection with a financing arrangement, (e) the shares of
Common Stock issued or deemed to be issued by the Company upon conversion of
this Debenture, (f) shares of Common Stock issued upon conversion of convertible
debt where the conversion price of such debt is fixed at a value above the
Current Market Price immediately prior to its issuance, (g) shares of common
stock and preferred stock issued by the Company’s subsidiary, Live Tissue
Connect, Inc., in connection with an initial public offering that is registered
with the SEC and financing involving Jesup & Lamont Securities Corporation as
underwriter and placement agent.
 
(xvii)  “Holder” means La Jolla Cove Investors, Inc., any successor thereto, or
any Person to whom this Debenture is subsequently transferred in accordance with
the provisions hereof.
 
(xviii)      “Interest Payment Due Date” means any date upon which interest is
due to be paid by the Company to the Holder, as set forth in the opening
paragraph of this Debenture.
 
(xix)        “Market Disruption Event” means any event that results in a
material suspension or limitation of trading of the Common Shares.
 
(xx)         “Maturity Date” means the maturity date set forth in the first
paragraph of this Debenture.
 
(xxi)        “Maximum Rate” has the meaning set forth in Section 6.4.
 

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(xxii)  “Outstanding” when used with reference to Common Shares or Capital
Shares (collectively, “Shares”) means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that any such Shares directly or indirectly owned or
held by or for the account of the Company or any Subsidiary of the Company shall
not be deemed “Outstanding” for purposes hereof.
 
(xxiii)  “Person” means an individual, a corporation, a partnership, an
association, a limited liability company, an unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
 
(xxiv)  “Principal Amount” means, for any date of calculation, the principal sum
set forth in the first paragraph of this Debenture (including all amounts
represented by (a) any cash advances made by Holder to the Company and (b) the
principal amount of the Promissory Note delivered to the Company by the Holder)
and for which Holder has not theretofore furnished a Conversion Notice in
compliance with Section 3.2.
 
(xxv)        “Promissory Note” means that certain Secured Promissory Note in the
principal amount of $1,375,000 of even date herewith issued by La Jolla Cove
Investors, Inc. to CSMG Technologies, Inc., as the same may be amended from time
to time.
 
(xxvi)        “SEC” means the United States Securities and Exchange Commission.
 
(xxvii)  “Securities Act” means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder, all as in effect at the time.
 
(xxviii)  “Securities Purchase Agreement” means that certain Securities Purchase
Agreement of even date herewith by and among the Company and Holder, as the same
may be amended from time to time.
 
(xxix)         “Subsidiary” means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Company.
 
(xxx)          “Trading Day” means a day on which the Common Stock is traded on
a Trading Market.
 
(xxxi)         “Trading Market” means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in question:
the Nasdaq Capital Market, the American Stock Exchange, the New York Stock
Exchange, the Nasdaq Global Market or the OTC Bulletin Board.
 
(xxxii)         “Volume Weighted Average Price” means, for any date, the price
determined by the first of the following clauses that applies: (a) if the Common
Stock is then listed or quoted on a Trading Market, the daily volume weighted
average price of the Common Stock for such date (or the nearest preceding date)
on the primary Trading Market on which the Common Stock is then listed or quoted
as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m.
EST to 4:02 p.m. Eastern Time) using the VAP function; (b) if the Common Stock
is not then listed or quoted on the Trading Market and if prices for the Common
Stock are then reported in the “Pink Sheets” published by the Pink Sheets, LLC
(or a similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported; or
(c) in all other cases, the fair market value of a share of Common Stock as
determined by a nationally recognized-independent appraiser selected in good
faith by Holder.
 

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All references to “cash” or “$” herein means currency of the United States of
America.
 
ARTICLE 2
EXCHANGES, TRANSFER AND REPAYMENT
 
SECTION 2.1  Registration of Transfer of Debentures.  This Debenture, when
presented for registration of transfer, shall (if so required by the Company) be
duly endorsed, or be accompanied by a written instrument of transfer in form
reasonably satisfactory to the Company duly executed, by the Holder duly
authorized in writing.
 
SECTION 2.2  Loss, Theft, Destruction of Debenture.  Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Debenture and, in the case of any such loss, theft or destruction, upon
receipt of indemnity or security reasonably satisfactory to the Company, or, in
the case of any such mutilation, upon surrender and cancellation of this
Debenture, the Company shall make, issue and deliver, in lieu of such lost,
stolen, destroyed or mutilated Debenture, a new Debenture of like tenor and
unpaid Principal Amount dated as of the date hereof (which shall accrue interest
from the most recent Interest Payment Due Date on which an interest payment was
made in full). This Debenture shall be held and owned upon the express condition
that the provisions of this Section 2.2 are exclusive with respect to the
replacement of a mutilated, destroyed, lost or stolen Debenture and shall
preclude any and all other rights and remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the surrender
thereof.
 
SECTION 2.3  Who Deemed Absolute Owner.  The Company may deem the Person in
whose name this Debenture shall be registered upon the registry books of the
Company to be, and may treat it as, the absolute owner of this Debenture
(whether or not this Debenture shall be overdue) for the purpose of receiving
payment of or on account of the Principal Amount of this Debenture, for the
conversion of this Debenture and for all other purposes, and the Company shall
not be affected by any notice to the contrary. All such payments and such
conversions shall be valid and effectual to satisfy and discharge the liability
upon this Debenture to the extent of the sum or sums so paid or the conversion
or conversions so made.
 
SECTION 2.4  Repayment at Maturity.  At the Maturity Date, the Company shall
repay the outstanding Principal Amount of this Debenture in whole in cash,
together with all accrued and unpaid interest thereon, in cash, to the Maturity
Date.
 

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ARTICLE 3
CONVERSION OF DEBENTURE
 
SECTION 3.1  Conversion; Conversion Price.
 
At the option of the Holder, this Debenture may be converted, either in whole or
in part, up to the full Principal Amount hereof into Common Shares (calculated
as to each such conversion to the nearest 1/100th of a share), at any time and
from time to time on any Business Day, subject to compliance with Section 3.2.
The number of Common Shares into which this Debenture may be converted is equal
to the dollar amount of the Debenture being converted divided by the Conversion
Price. The “Conversion Price” shall be equal to the lesser of (i) $2.10, or (ii)
80% of the average of the 3 lowest Volume Weighted Average Prices during the 18
Trading Days prior to Holder’s election to convert (the percentage figure being
a “Discount Multiplier”). The Company reserves the right to increase the number
of Trading Days in clause (ii) above, as it deems appropriate.
 
If the Holder elects to convert a portion of the Debenture and, on the day that
the election is made, the Volume Weighted Average Price per share of the
Company’s Common Stock is below $0.38 (the “Floor Price”), subject to adjustment
as set forth in Section 3.7, the Company shall have the right, within two (2)
Business Days after the Company’s receipt of such Conversion Notice, to prepay
that portion of the Debenture that Holder elected to convert, plus any accrued
and unpaid interest, at 118% of such amount. In the event that the Company fails
to prepay such portion of the Debenture by the delivery of such cash prepayment
amount to Holder within two (2) Business Days after the Company’s receipt of
such Conversion Notice, the Company shall no longer have the right to prepay
such portion of the Debenture in lieu of honoring the Conversion Notice and
shall issue to Holder the applicable Common Stock Issued at Conversion set forth
in the Conversion Notice under the terms of this Debenture. In the event that
the Company elects to prepay that portion of the Debenture, Holder shall have
the right to withdraw its Conversion Notice.
 
SECTION 3.2  Exercise of Conversion Privilege.  (i) Conversion of this Debenture
may be exercised on any Business Day by the Holder by telecopying an executed
and completed Conversion Notice to the Company. Each date on which a Conversion
Notice is telecopied to the Company in accordance with the provisions of this
Section 3.2 shall constitute a Conversion Date. The Company shall convert this
Debenture and issue the Common Stock Issued at Conversion in the manner provided
below in this Section 3.2, and all voting and other rights associated with the
beneficial ownership of the Common Stock Issued at Conversion shall vest with
the Holder, effective as of the Conversion Date at the time specified in the
Conversion Notice. The Conversion Notice also shall state the name or names
(with addresses) of the persons who are to become the holders of the Common
Stock Issued at Conversion in connection with such conversion. As promptly as
practicable after the receipt of the Conversion Notice as aforesaid, but in any
event not more than two (2) Business Days after the Company’s receipt of such
Conversion Notice, the Company shall (a) issue the Common Stock Issued at
Conversion in accordance with the provisions of this Article 3 and (b) cause to
be mailed for delivery by overnight courier (x) a certificate or certificate(s)
representing the number of Common Shares to which the Holder is entitled by
virtue of such conversion and (y) cash, as provided in Section 3.3, in respect
of any fraction of a Common Share deliverable upon such conversion. Such
conversion shall be deemed to have been effected at the time at which the
Conversion Notice indicates, and at such time the rights of the Holder of this
Debenture, as such (except if and to the extent that any Principal Amount
thereof remains unconverted), shall cease and the Person and Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby, and all voting and other rights associated with the
beneficial ownership of such Common Shares shall at such time vest with such
Person or Persons. The Conversion Notice shall constitute a contract between the
Holder and the Company, whereby the Holder shall be deemed to subscribe for the
number of Common Shares which it will be entitled to receive upon such
conversion and, in payment and satisfaction of such subscription (and for any
cash adjustment to which it is entitled pursuant to Section 3.4), to surrender
this Debenture and to release the Company from all liability thereon (except if
and to the extent that any Principal Amount thereof remains unconverted). No
cash payment aggregating less than $1.00 shall be required to be given unless
specifically requested by the Holder.
 

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(ii)  If, at any time after the date of this Debenture, (a) the Company
challenges, disputes or denies the right of the Holder hereof to effect the
conversion of this Debenture into Common Shares or otherwise dishonors or
rejects any Conversion Notice delivered in accordance with this Section 3.2 or
(b) any third party who is not and has never been an Affiliate of the Holder
commences any lawsuit or legal proceeding or otherwise asserts any claim before
any court or public or governmental authority which seeks to challenge, deny,
enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect
the conversion of this Debenture into Common Shares, then the Holder shall have
the right, but not the obligation, by written notice to the Company, to require
the Company to promptly redeem this Debenture for cash at one hundred eighteen
percent (118%) of the Principal Amount thereof, together with all accrued and
unpaid interest thereon to the date of redemption. Under any of the
circumstances set forth above, the Company shall be responsible for the payment
of all costs and expenses of the Holder, including reasonable legal fees and
expenses, as and when incurred in defending itself in any such action or
pursuing its rights hereunder (in addition to any other rights of the Holder).
 
(iii)  The Holder shall be entitled to exercise its conversion privilege
notwithstanding the commencement of any case under the Bankruptcy Code. In the
event the Company is a debtor under the Bankruptcy Code, the Company hereby
waives to the fullest extent permitted any rights to relief it may have under 11
U.S.C. § 362 in respect of the Holder’s conversion privilege. The Company hereby
waives to the fullest extent permitted any rights to relief it may have under 11
U.S.C. § 362 in respect of the conversion of this Debenture. The Company agrees,
without cost or expense to the Holder, to take or consent to any and all action
necessary to effectuate relief under 11 U.S.C. § 362.
 
SECTION 3.3  Fractional Shares.  No fractional Common Shares or scrip
representing fractional Common Shares shall be delivered upon conversion of this
Debenture. Instead of any fractional Common Shares which otherwise would be
delivered upon conversion of this Debenture, the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
multiplied by the Current Market Price on the Conversion Date. No cash payment
of less than $1.00 shall be required to be given unless specifically requested
by the Holder.
 

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SECTION 3.4  Adjustments.  The Conversion Price and the number of shares
deliverable upon conversion of this Debenture are subject to adjustment from
time to time as follows:
 
(i)  Reclassification, Etc.  In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another Person
(where the Company is not the survivor or where there is a change in or
distribution with respect to the Common Stock of the Company), sell, convey,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another Person, or effectuate a transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of (each, a “Fundamental Corporate Change”) and, pursuant to
the terms of such Fundamental Corporate Change, shares of common stock of the
successor or acquiring corporation, or any cash, shares of stock or other
securities or property of any nature whatsoever (including warrants or other
subscription or purchase rights) in addition to or in lieu of common stock of
the successor or acquiring corporation (“Other Property”) are to be received by
or distributed to the holders of Common Stock of the Company, then the Holder of
this Debenture shall have the right thereafter, at its sole option, to (x)
require the Company to prepay this Debenture for cash at one hundred eighteen
percent (118%) of the Principal Amount thereof, together with all accrued and
unpaid interest thereon to the date of prepayment, (y) receive the number of
shares of common stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Other Property as is receivable
upon or as a result of such Fundamental Corporate Change by a holder of the
number of shares of Common Stock into which the outstanding portion of this
Debenture may be converted at the Conversion Price applicable immediately prior
to such Fundamental Corporate Change, or (z) require the Company, or such
successor, resulting or purchasing corporation, as the case may be, to, without
benefit of any additional consideration therefor, execute and deliver to the
Holder a debenture with substantial identical rights, privileges, powers,
restrictions and other terms as this Debenture in an amount equal to the amount
outstanding under this Debenture immediately prior to such Fundamental Corporate
Change. For purposes hereof, “common stock of the successor or acquiring
corporation” shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to prepayment and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions shall similarly apply to successive Fundamental Corporate
Changes.
 

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SECTION 3.5  Certain Conversion Limits.
 
The Company shall not effect any conversion of this Debenture, and a Holder
shall not have the right to convert any portion of this Debenture, to the extent
that after giving effect to the conversion, as set forth on the applicable
Conversion Notice, such Holder (together with such Holder’s Affiliates, and any
other person or entity acting as a group together with such Holder or any of
such Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below). For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by such Holder and its
Affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which such determination is being
made, but shall exclude the number of shares of Common Stock which are issuable
upon (A) conversion of the remaining, unconverted principal amount of this
Debenture beneficially owned by such Holder or any of its Affiliates and (B)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company subject to a limitation on conversion or exercise
analogous to the limitation contained herein (including, without limitation, any
other Debentures or warrants to purchase shares of the Company’s Common Stock)
beneficially owned by such Holder or any of its Affiliates. Except as set forth
in the preceding sentence, for purposes of this Section 3.5, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. To the extent that the
limitation contained in this Section 3.5 applies, the determination of whether
this Debenture is convertible (in relation to other securities owned by such
Holder together with any Affiliates) and of which principal amount of this
Debenture is convertible shall be in the sole discretion of such Holder, and the
submission of a Conversion Notice shall be deemed to be such Holder’s
determination of whether this Debenture may be converted (in relation to other
securities owned by such Holder together with any Affiliates) and which
principal amount of this Debenture is convertible, in each case subject to such
aggregate percentage limitations. To ensure compliance with this restriction,
each Holder will be deemed to represent to the Company each time it delivers a
Conversion Notice that such Conversion Notice has not violated the restrictions
set forth in this paragraph and the Company shall have no obligation to verify
or confirm the accuracy of such determination. In addition, a determination as
to any group status as contemplated above shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 3.5, in determining the number of
outstanding shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock provided to the Holder in writing by the
Company after Holder makes such request or in the event that the Company files,
any of the following with the Securities and Exchange Commission, the most
recent of the following: (A) the Company's most recent Form 10-Q or Form 10-K,
as the case may be, (B) a more recent public announcement by the Company; or (C)
a more recent notice by the Company or the Company’s transfer agent setting
forth the number of shares of Common Stock outstanding. Upon the written or oral
request of a Holder, the Company shall within two Trading Days confirm orally
and in writing to such Holder the number of shares of Common Stock then
outstanding on the records of the Company as of the date of the request. In any
case, the number of outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of the Company,
including this Debenture, by such Holder or its Affiliates since the date as of
which such number of outstanding shares of Common Stock was reported. The
“Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock issuable upon conversion of this Debenture held by the
Holder. The Beneficial Ownership Limitation provisions of this Section 3.5 may
be waived by such Holder, at the election of such Holder, upon not less than 61
days’ prior notice to the Company, to, at the sole discretion of the Holder,
either change the Beneficial Ownership Limitation to (i) 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of the Debenture held by the
Holder and the provisions of this Section 3.5 shall continue to apply, or (ii)
remove any Beneficial Ownership Limitation under this Debenture. The provisions
of this paragraph shall be construed and implemented in a manner otherwise than
in strict conformity with the terms of this Section 3.5 to correct this
paragraph (or any portion hereof) which may be defective or inconsistent with
the intended Beneficial Ownership Limitation herein contained or to make changes
or supplements necessary or desirable to properly give effect to such
limitation. If any court of competent jurisdiction shall determine that the
foregoing limitation is ineffective to prevent a Holder from being deemed the
beneficial owner of more than 9.99% of the then outstanding shares of Common
Stock, then the Company shall prepay such portion of this Debenture as shall
cause such Holder not to be deemed the beneficial owner of more than 9.99% of
the then outstanding shares of Common Stock. Upon such determination by a court
of competent jurisdiction, the Holder shall have no interest in or rights under
such portion of the Debenture. Any and all interest paid on or prior to the date
of such determination shall be deemed interest paid on the remaining portion of
this Debenture held by the Holder. Such prepayment shall be for cash at a
prepayment price of one hundred eighteen percent (118%) of the Principal Amount
thereof, together with all accrued and unpaid interest thereon to the date of
prepayment. The limitations contained in this paragraph shall apply to a
successor holder of this Debenture.
 

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SECTION 3.6  Surrender of Debentures.  Upon any redemption of this Debenture
pursuant to Sections 3.2, 3.5 or 6.2, or upon maturity pursuant to Section 2.4,
the Holder shall either deliver this Debenture by hand to the Company at its
principal executive offices or surrender the same to the Company at such address
by nationally recognized overnight courier. Payment of the redemption price or
the amount due on maturity specified in Section 2.4, shall be made by the
Company to the Holder against receipt of this Debenture (as provided in this
Section 3.5) by wire transfer of immediately available funds to such account(s)
as the Holder shall specify by written notice to the Company. If payment of such
redemption price is not made in full by the redemption date, or the amount due
on maturity is not paid in full by the Maturity Date, the Holder shall again
have the right to convert this Debenture as provided in Article 3 hereof or to
declare an Event of Default.
 
SECTION 3.7  Adjustments to Floor Price
 
(i)  Adjustment of Floor Price upon Issuance of Common Stock.  If the Company,
at any time while this Debenture is outstanding, issues or sells, or in
accordance with this Section 3.7(i) is deemed to have issued or sold, any shares
of Common Stock, excluding shares of Common Stock deemed to have been issued or
sold by the Company in connection with any Excluded Securities, for a
consideration per share (the “New Issuance Price”) less than a price equal to
the Floor Price in effect immediately prior to such issue or sale (such price
the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately
after such Dilutive Issuance the Floor Price then in effect shall be reduced to
an amount equal to 95% of the New Issuance Price. For purposes of determining
the adjusted Floor Price under this Section 3.7(i), the following shall be
applicable:
 
(A)  Issuance of Options.  If the Company in any manner grants or sells any
rights, warrants or options to subscribe for or purchase shares of Common Stock
or any stock or securities (other than Options) directly or indirectly
convertible into or exercisable or exchangeable for Common Stock (“Convertible
Securities”) (“Options”) and the lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon conversion
or exchange or exercise of any Convertible Securities issuable upon exercise of
such Option is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section, the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion or exchange or exercise of any Convertible
Security issuable upon exercise of such Option. No further adjustment of the
Floor Price shall be made upon the actual issuance of such share of Common Stock
or of such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange or exercise of
such Convertible Securities.
 

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(B)  Issuance of Convertible Securities.  If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section, the “lowest price per share for
which one share of Common Stock is issuable upon such conversion or exchange or
exercise” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No further
adjustment of the Floor Price shall be made upon the actual issuance of such
share of Common Stock upon conversion or exchange or exercise of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the
Floor Price had been or are to be made pursuant to other provisions of this
Section, no further adjustment of the Floor Price shall be made by reason of
such issue or sale.
 
(C)  Change in Option Price or Rate of Conversion.  If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock changes at any time, the Floor
Price in effect at the time of such change shall be adjusted to the Floor Price
which would have been in effect at such time had such Options or Convertible
Securities provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold. For purposes of this Section, if the terms of any Option or
Convertible Security that was outstanding as of the Closing Date are changed in
the manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment shall be made if such adjustment would result
in an increase of the Floor Price then in effect.
 

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(D)  Calculation of Consideration Received.  In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for the difference of (x) the aggregate fair market value of
such Options and other securities issued or sold in such integrated transaction,
less (y) the fair market value of the securities other than such Option, issued
or sold in such transaction and the other securities issued or sold in such
integrated transaction will be deemed to have been issued or sold for the
balance of the consideration received by the Company. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the gross amount raised by the Company; provided, however, that such gross
amount is not greater than 110% of the net amount received by the Company
therefor. If any Common Stock, Options or Convertible Securities are issued or
sold for a consideration other than cash, the amount of the consideration other
than cash received by the Company will be the fair value of such consideration,
except where such consideration consists of securities, in which case the amount
of consideration received by the Company will be the price per share in the last
reported trade of the Common Stock on Trading Market (the “Closing Bid Price”)
of such securities on the date of receipt. If any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined jointly by the Company and the Holder. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Business Days after the tenth
(10 th ) day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Holder. The determination of
such appraiser shall be deemed binding upon all parties absent manifest error
and the fees and expenses of such appraiser shall be borne by the Company.
 
(E)  Record Date.  If the Company takes a record of the holders of Common Stock
for the purpose of entitling them (x) to receive a dividend or other
distribution payable in Common Stock, Options or in Convertible Securities or
(y) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
 
(ii)  Adjustment of Floor Price upon Subdivision or Combination of Common
Stock.  If the Company, at any time while this Debenture is outstanding, shall
(a) pay a stock dividend or otherwise make a distribution or distributions on
shares of its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Floor Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
 

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(iii)  Other Events.  If any event occurs of the type contemplated by the
provisions of this Section 3.7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Floor Price so as
to protect the rights of the Holder under this Debenture; provided that no such
adjustment will increase the Floor Price as otherwise determined pursuant to
this Section 3.7.
 
(iv)  Whenever the Floor Price is adjusted pursuant to this Section 3.7 hereof,
the Company shall promptly mail to the Holder a notice setting forth the Floor
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
 
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
 
SECTION 4.1  Status of Debenture.  This Debenture constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its terms
subject, as to enforceability, to general principles of equity and to principles
of bankruptcy, insolvency, reorganization and other similar laws of general
applicability relating to or affecting creditors’ rights and remedies generally.
 
SECTION 4.2  Restrictions on Transfer.  This Debenture, and any Common Shares
deliverable upon the conversion hereof, have not been registered under the
Securities Act. The Holder by accepting this Debenture agrees that this
Debenture and the shares of Common Stock to be acquired as interest on and upon
conversion of this Debenture may not be assigned or otherwise transferred unless
and until (i) the Company has received the opinion of counsel for the Holder
that this Debenture or such shares may be sold pursuant to an exemption from
registration under the Securities Act, provided that the Company will not
require opinions of counsel for transactions involving transfers to Affiliates
of the Holder or pursuant to Rule 144 promulgated by the SEC under the
Securities Act, except in unusual circumstances, or (ii) a registration
statement relating to this Debenture or such shares has been filed by the
Company and declared effective by the SEC.
 
Each certificate for shares of Common Stock deliverable hereunder shall bear a
legend as follows unless and until such securities have been sold pursuant to an
effective registration statement under the Securities Act:
 
“The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended (the “Securities Act”). The securities
may not be offered for sale, sold or otherwise transferred except (i) pursuant
to an effective registration statement under the Securities Act or (ii) pursuant
to an exemption from registration under the Securities Act in respect of which
the issuer of this certificate has received an opinion of counsel reasonably
satisfactory to the issuer of this certificate to such effect unless sold
pursuant to Rule 144 under the Securities Act. Copies of the agreement covering
both the purchase of the securities and restrictions on their transfer may be
obtained at no cost by written request made by the holder of record of this
certificate to the Secretary of the issuer of this certificate at the principal
executive offices of the issuer of this certificate.”
 

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ARTICLE 5
COVENANTS
 
SECTION 5.1  Conversion.  The Company shall cause the transfer agent, not later
than two (2) Business Days after the Company’s receipt of a Conversion Notice,
to issue and deliver to the Holder the requisite shares of Common Stock Issued
at Conversion.
 
SECTION 5.2  Notice of Default.  If any one or more events occur which
constitute or which, with notice, lapse of time, or both, would constitute an
Event of Default, the Company shall forthwith give notice to the Holder,
specifying the nature and status of the Event of Default or such other event(s),
as the case may be.
 
SECTION 5.3  Payment of Obligations.  So long as this Debenture shall be
outstanding, the Company shall pay, extend, or discharge at or before maturity,
all its respective material obligations and liabilities, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
 
SECTION 5.4  Compliance with Laws.  So long as this Debenture shall be
outstanding, the Company shall comply with all applicable laws, ordinances,
rules, regulations and requirements of governmental authorities, except for such
noncompliance which would not have a material adverse effect on the business,
properties, prospects, condition (financial or otherwise) or results of
operations of the Company and the Subsidiaries.
 
SECTION 5.5  Inspection of Property, Books and Records.  So long as this
Debenture shall be outstanding, the Company shall keep proper books of record
and account in which full, true and correct entries shall be made of all
material dealings and transactions in relation to its business and activities
and shall permit representatives of the Holder at the Holder’s expense to visit
and inspect any of its respective properties, to examine and make abstracts from
any of its respective books and records, not reasonably deemed confidential by
the Company, and to discuss its respective affairs, finances and accounts with
its respective officers and independent public accountants, all with at least
two business days’ notice and at such reasonable times, within the normal
business hours of the Company and as often as may reasonably be desired.
 
SECTION 5.6  Reservation of Stock Issuable Upon Conversion.  The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
this Debenture and payment of interest by issuance of shares of Common Stock,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of this Debenture and payment of interest by
issuance of shares of Common Stock; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of this Debenture and payment of interest by issuance of shares of
Common Stock, in addition to such other remedies as shall be available to the
holder of this Debenture, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite shareholder approval to file an amendment to the charter of the
Company.
 

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SECTION 5    No Impairment.  Except and to the extent waived or consented to by
the Holder or as otherwise permitted under the terms hereof, the Company will
not, by amendment of its Certificate of Incorporation or similar corporate
charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Debenture and in
the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder against impairment.
 
SECTION 5.8  Negative Covenants.  So long as any portion of this Debenture is
outstanding, the Company will not and will not permit any of its Subsidiaries to
directly or indirectly:
 
 
(i)  enter into, create, incur, assume or suffer to exist any indebtedness or
liens of any kind, on or with respect to any of its property or assets now owned
or hereafter acquired or any interest therein or any income or profits therefrom
that is senior to or pari passu with, in any respect or subordinated to (unless
on terms satisfactory in all respects to the Holder), the Company’s obligations
under the Debenture;
 
(ii)  amend its certificate of incorporation, bylaws or its charter documents so
as to adversely affect any rights of Holder;
 
(iii)  repay, repurchase or offer to repay, repurchase or otherwise acquire or
make any dividend or distribution in respect of any of its Common Stock,
Preferred Stock, or other equity securities other than as to the Conversion
Shares to the extent permitted or required under the Documents (as defined in
the Securities Purchase Agreement);
 
(iv)  dispose, in a single transaction, or in a series of transactions all or
any part of its assets unless such disposal is (A) in the ordinary course of
business, (B) for fair market value, (C) for cash and (D) approved by the board
of directors of the Company; or
 
(v)  enter into any agreement with respect to any of the foregoing.
 

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ARTICLE 6 
EVENTS OF DEFAULT; REMEDIES
 
SECTION 6.1  Events of Default.  “Event of Default” wherever used herein means
any one of the following events:
 
(i)  (A) the Company shall default in the payment of principal of or interest on
this Debenture as and when the same shall be due and payable and, in the case of
an interest payment default, such default shall continue for five (5) Business
Days after the date such interest payment was due, (B) the Company shall fail to
deliver to Holder either the Common Stock set forth in a Conversion Notice
submitted by the Holder or the amount of cash necessary to redeem such portion
of the Debenture, if allowed by and subject to the terms and conditions of
Section 3.1 of this Debenture, within two (2) Business Days after the Company’s
receipt of such Conversion Notice, or (C) the Company shall fail to perform or
observe any other covenant, agreement, term, provision, undertaking or
commitment under this Debenture or the Securities Purchase Agreement and such
default shall continue for a period of ten (10) Business Days after the delivery
to the Company of written notice that the Company is in default hereunder or
thereunder;
 
(ii)  any of the representations, warranties, or covenants made by the Company
herein, in the Securities Purchase Agreement or in any certificate or financial
or other written statements heretofore or hereafter furnished by or on behalf of
the Company in connection with the execution and delivery of this Debenture or
the Securities Purchase Agreement shall be false or misleading in a material
respect on the Closing Date;
 
(iii)  under the laws of any jurisdiction not otherwise covered by clauses (iv)
and (v) below, the Company or any Subsidiary (A) becomes insolvent or generally
not able to pay its debts as they become due, (B) admits in writing its
inability to pay its debts generally or makes a general assignment for the
benefit of creditors, (C) institutes or has instituted against it any proceeding
seeking (x) to adjudicate it a bankrupt or insolvent, (y) liquidation,
winding-up, reorganization, arrangement, adjustment, protection, relief or
composition of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors including any plan of compromise or
arrangement or other corporate proceeding involving or affecting its creditors
or (z) the entry of an order for relief or the appointment of a receiver,
trustee or other similar person for it or for any substantial part of its
properties and assets, and in the case of any such official proceeding
instituted against it (but not instituted by it), either the proceeding remains
undismissed or unstayed for a period of sixty (60) calendar days, or any of the
actions sought in such proceeding (including the entry of an order for relief
against it or the appointment of a receiver, trustee, custodian or other similar
official for it or for any substantial part of its properties and assets) occurs
or (D) takes any corporate action to authorize any of the above actions;
 
(iv)  the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Company or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under the Bankruptcy
Code or any other applicable Federal or state law, or appointing a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Company or of any substantial part of its property, or ordering the winding-up
or liquidation of its affairs, and any such decree or order continues and is
unstayed and in effect for a period of sixty (60) calendar days;
 

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(v)  the institution by the Company or any Subsidiary of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
Bankruptcy Code or any other applicable federal or state law, or the consent by
it to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Company or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as and when they become due, or the
taking of corporate action by the Company in furtherance of any such action;
 
(vi)  a final judgment or final judgments for the payment of money shall have
been entered by any court or courts of competent jurisdiction against the
Company and remains undischarged for a period (during which execution shall be
effectively stayed) of thirty (30) days, provided that the aggregate amount of
all such judgments at any time outstanding (to the extent not paid or to be
paid, as evidenced by a written communication to that effect from the applicable
insurer, by insurance) exceeds Two Hundred Thousand Dollars ($200,000);
 
(vii)  it becomes unlawful for the Company to perform or comply with its
obligations under this Debenture or the Securities Purchase Agreement in any
respect;
 
(viii)  the Common Shares shall no longer be traded in the over the counter
market via the OTC Bulletin Board, or shall be suspended from trading on the OTC
Bulletin Board, and shall not be reinstated, relisted or such suspension lifted,
as the case may be, within five (5) days;
 
(ix)  the Company shall fail to timely file all reports required to be filed by
it with the Commission (as defined in the Securities Purchase Agreement)
pursuant to Section 13 or 15(d) of the Exchange Act (as defined in the
Securities Purchase Agreement), or otherwise required by the Exchange Act; or
 
(x)  the Company shall default (giving effect to any applicable grace period) in
the payment of principal or interest as and when the same shall become due and
payable, under any indebtedness, individually or in the aggregate, of more than
Fifty Thousand Dollars ($50,000).
 
SECTION 6.   Acceleration of Maturity; Rescission and Annulment.  If an Event of
Default occurs and is continuing, then and in every such case the Holder may, in
Holder’s sole and absolute discretion, by a notice in writing to the Company,
rescind any outstanding Conversion Notice and declare that any or all amounts
owing or otherwise outstanding under this Debenture are immediately due and
payable and upon any such declaration this Debenture or such portion thereof, as
applicable, shall become immediately due and payable in cash at a price of one
hundred eighteen percent (118%) of the Principal Amount thereof, together with
all accrued and unpaid interest thereon to the date of payment; provided,
however, in the case of any Event of Default described in clauses (iii), (iv),
(v) or (vii) of Section 6.1, all amounts owing or otherwise outstanding under
this Debenture automatically shall become immediately due and payable without
the necessity of any notice or declaration as aforesaid. In the event that the
Company is obligated to pay any amount to the Holder in connection with an
acceleration of the maturity of this Debenture as set forth herein, the Company
shall first apply against such amount an amount equal to the outstanding amount
owed by the Holder to the Company under the Promissory Note, if any, and the
amount otherwise owed by the Company to the Holder in connection with an
acceleration of the maturity of this Debenture shall be reduced by the
outstanding amount owed by the Holder to the Company under the Promissory Note,
with the Promissory Note deemed paid by Holder to the extent of and with respect
to such amount, and if the amount due from the Company to the Holder in
connection with an acceleration of the maturity of this Debenture is equal to or
greater than the outstanding amount owed under the Promissory Note, the Company
shall cancel and deem the Promissory Note as paid in full in connection with the
application of the amount owed by the Holder to the Company under Promissory
Note against the amount otherwise owed by the Company to the Holder hereunder.
The Company shall immediately pay in cash to the Holder any remaining amount
owed by the Company to the Holder in connection with the acceleration of the
maturity of this Debenture as described herein, after the application of the
outstanding amount owed under the Promissory Note, if any, to such obligation.
 

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SECTION 6.3  Late Payment Penalty.  If any portion of the principal of or
interest on this Debenture shall not be paid within ten (10) days of when it is
due, the Discount Multiplier under this Debenture shall decrease by one
percentage point (1%) for each period of ten (10) Business Days that any portion
of such amount remains unpaid by the Company for all conversions of this
Debenture thereafter.
 
SECTION 6.4  Maximum Interest Rate.  Notwithstanding anything herein to the
contrary, if at any time the applicable interest rate as provided for herein
shall exceed the maximum lawful rate which may be contracted for, charged, taken
or received by the Holder in accordance with any applicable law (the “Maximum
Rate”), the rate of interest applicable to this Debenture shall be limited to
the Maximum Rate. To the greatest extent permitted under applicable law, the
Company hereby waives and agrees not to allege or claim that any provisions of
this Debenture could give rise to or result in any actual or potential violation
of any applicable usury laws.
 
SECTION 6.5  Remedies Not Waived.  No course of dealing between the Company and
the Holder or any delay in exercising any rights hereunder shall operate as a
waiver by the Holder.
 
SECTION 6.6  Remedies.  The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Debenture will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Debenture, that the
Holder shall be entitled to all other available remedies at law or in equity,
and in addition to the penalties assessable herein, to an injunction or
injunctions restraining, preventing or curing any breach of this Debenture and
to enforce specifically the terms and provisions thereof, without the necessity
of showing economic loss and without any bond or other security being required. 
 

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SECTION 6.7  Payment of Certain Amounts.  Whenever pursuant to this Debenture
the Company is required to pay an amount in excess of the Principal Amount plus
accrued and unpaid interest, the Company and the Holder agree that the actual
damages to the Holder from the receipt of cash payment on this Debenture may be
difficult to determine and the amount to be so paid by the Company represents
stipulated damages and not a penalty and is intended to compensate the Holder in
part for loss of the opportunity to convert this Debenture and to earn a return
from the sale of shares of Common Stock acquired upon conversion of this
Debenture at a price in excess of that price paid for such shares pursuant to
this Debenture. The Company and the Holder hereby agree that such amount of
stipulated damages is not disproportionate to the possible loss to the Holder
from the receipt of a cash payment without the opportunity to convert this
Debenture into shares of Common Stock.
 
SECTION 6.8  Filing of Form 8-K.  On or before the fourth Business Day following
the date hereof, the Company shall file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Documents (as defined in the
Securities Purchase Agreement), as required by the terms of the Securities
Purchase Agreement, in the form required by the Exchange Act and attaching the
material Documents (including, without limitation, the Securities Purchase
Agreement and this Debenture) as exhibits to such filing (the “8-K Filing”). In
the event that the Company does not file the 8-K Filing within four Business
Days following the date hereof, the Discount Multiplier under this Debenture
shall decrease by one percentage point (1%) for each period of five Business
Days that the 8-K Filing is not filed by the Company following the date hereof
for all conversions of this Debenture thereafter.
 
ARTICLE 7
INTEREST RATE ADJUSTMENT
 
SECTION 7.1  Interest Rate Adjustment.  In the event that the Common Stock shall
trade on the Trading Market at a price per share that is $0.245 per share or
lower at any time during the six month period commencing on the date hereof and
ending on the six month anniversary of the date hereof (as adjusted for any
stock splits, stock dividends, combinations, subdivisions, recapitalizations or
the like), then (i) the Interest Rate shall immediately be increased to Nine and
Three-Quarters Percent (9 ¾ %) and shall remain at such level for the duration
of this Debenture; and (ii) the Company shall, within three Business Days of the
written request of the Holder prepay to the Holder the amount of interest that
would be otherwise paid under this Debenture from the date of such written
request through the Maturity Date (such amount referred to herein as the
“Interest Prepayment”). In the event that after the payment by the Company of
the Interest Prepayment all or any of the Principal Amount of this Debenture is
converted by Holder or redeemed pursuant to the terms of this Debenture prior to
the Maturity Date, then the Holder shall repay the corresponding pro rata
portion of the Interest Prepayment equal to the amount of the Interest
Prepayment that is represented by such portion of the Principal Amount at such
time that that is so converted or redeemed (taking into account both the amount
of the Principal Amount so converted or redeemed and the date upon which such
amount is so converted or redeemed).
 

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ARTICLE 8
MISCELLANEOUS
 
SECTION 8.1  Notice of Certain Events.  In the case of the occurrence of any
event described in Section 3.4 of this Debenture, the Company shall cause to be
mailed to the Holder of this Debenture at its last address as it appears in the
Company’s security registry, at least twenty (20) days prior to the applicable
record, effective or expiration date hereinafter specified (or, if such twenty
(20) days’ notice is not possible, at the earliest possible date prior to any
such record, effective or expiration date), a notice thereof, including, if
applicable, a statement of (y) the date on which a record is to be taken for the
purpose of such dividend, distribution, issuance or granting of rights, options
or warrants, or if a record is not to be taken, the date as of which the holders
of record of Common Stock to be entitled to such dividend, distribution,
issuance or granting of rights, options or warrants are to be determined or (z)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of record of Common Stock will be
entitled to exchange their shares for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale transfer,
dissolution, liquidation or winding-up.
 
SECTION 8.2  Register.  The Company shall keep at its principal office a
register in which the Company shall provide for the registration of this
Debenture. Upon any transfer of this Debenture in accordance with Articles 2 and
4 hereof, the Company shall register such transfer on the Debenture register.
 
SECTION 8.3  Withholding.  To the extent required by applicable law, the Company
may withhold amounts for or on account of any taxes imposed or levied by or on
behalf of any taxing authority in the United States having jurisdiction over the
Company from any payments made pursuant to this Debenture.
 
SECTION 8.4  Transmittal of Notices.  Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon confirmation of receipt, when sent
by facsimile; (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested, or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
 

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(1)
If to the Company, to:

 
CSMG Technologies, Inc.
Attn: Donald S. Robbins, President and CEO
500 North Shoreline Drive, Suite 1005 North
Corpus Christi, Texas 78471

 
Telephone:
361-887-7546

 
Facsimile:
361-884-0792

 
(2)
If to the Holder, to:

La Jolla Cove Investors, Inc.
1150 Silverado Street, Suite 220
La Jolla, California 92037

 
Telephone:
858-551-8789

 
Facsimile:
858-551-8779

 
Each of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 8.4.
 
SECTION 8.5  Attorneys’ Fees.  Should any party hereto employ an attorney for
the purpose of enforcing or construing this Debenture, or any judgment based on
this Debenture, in any legal proceeding whatsoever, including insolvency,
bankruptcy, arbitration, declaratory relief or other litigation, the prevailing
party shall be entitled to receive from the other party or parties thereto
reimbursement for all reasonable attorneys' fees and all reasonable costs,
including but not limited to service of process, filing fees, court and court
reporter costs, investigative costs, expert witness fees, and the cost of any
bonds, whether taxable or not, and that such reimbursement shall be included in
any judgment or final order issued in that proceeding. The "prevailing party"
means the party determined by the court to most nearly prevail and not
necessarily the one in whose favor a judgment is rendered.
 
SECTION 8.6  Governing Law.  This Debenture shall be governed by, and construed
in accordance with, the laws of the State of California (without giving effect
to conflicts of laws principles). With respect to any suit, action or
proceedings relating to this Debenture, the Company irrevocably submits to the
exclusive jurisdiction of the courts of the State of California sitting in San
Diego and the United States District Court located in the City of San Diego and
hereby waives, to the fullest extent permitted by applicable law, any claim that
any such suit, action or proceeding has been brought in an inconvenient forum.
Subject to applicable law, the Company agrees that final judgment against it in
any legal action or proceeding arising out of or relating to this Debenture
shall be conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified copy of which
judgment shall be conclusive evidence thereof and the amount of its
indebtedness, or by such other means provided by law.
 

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SECTION 8.7  Waiver of Jury Trial.  To the fullest extent permitted by law, each
of the parties hereto hereby knowingly, voluntarily and intentionally waives its
respective rights to a jury trial of any claim or cause of action based upon or
arising out of this Debenture or any other document or any dealings between them
relating to the subject matter of this Debenture and other documents. Each party
hereto (i) certifies that neither of their respective representatives, agents or
attorneys has represented, expressly or otherwise, that such party would not, in
the event of litigation, seek to enforce the foregoing waivers and (ii)
acknowledges that it has been induced to enter into this Debenture by, among
other things, the mutual waivers and certifications herein.
 
SECTION 8.8  Headings.  The headings of the Articles and Sections of this
Debenture are inserted for convenience only and do not constitute a part of this
Debenture.
 
SECTION 8.9  Payment Dates.  Whenever any payment hereunder shall be due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business Day.
 
SECTION 8.10  Binding Effect.  Each Holder by accepting this Debenture agrees to
be bound by and comply with the terms and provisions of this Debenture.
 
SECTION 8.11  No Stockholder Rights.  Except as otherwise provided herein, this
Debenture shall not entitle the Holder to any of the rights of a stockholder of
the Company, including, without limitation, the right to vote, to receive
dividends and other distributions, or to receive any notice of, or to attend,
meetings of stockholders or any other proceedings of the Company, unless and to
the extent converted into shares of Common Stock in accordance with the terms
hereof.
 
SECTION 8.12  Facsimile Execution.  Facsimile execution of this Debenture shall
be deemed original.
 
IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by its
duly authorized officer on the date of this Debenture.

        CSMG Technologies, Inc.  
   
   
  By:   /s/ Donald S. Robbins  

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Name: Donald S. Robbins   Title: President and CEO

 

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EXHIBIT A
DEBENTURE CONVERSION NOTICE

TO:
CSMG Technologies, Inc.

501 North Shoreline Drive, Suite 1005 North
Corpus Christi, Texas 78471

 
Facsimile:
(361) 884-0792

 
The undersigned owner of the Convertible Debenture due November 30, 2011 (the
“Debenture”) issued by CSMG Technologies, Inc. (the “Company”) hereby
irrevocably exercises its option to convert $__________ of the Principal Amount
of the Debenture into shares of Common Stock in accordance with the terms of the
Debenture. The undersigned hereby instructs the Company to convert the portion
of the Debenture specified above into shares of Common Stock Issued at
Conversion in accordance with the provisions of Article 3 of the Debenture. The
undersigned directs that the Common Stock and certificates therefor deliverable
upon conversion, the Debenture reissued in the Principal Amount not being
surrendered for conversion hereby, [the check or shares of Common Stock in
payment of the accrued and unpaid interest thereon to the date of this Notice,]
together with any check in payment for fractional Common Stock, be registered in
the name of and/or delivered to the undersigned unless a different name has been
indicated below. All capitalized terms used and not defined herein have the
respective meanings assigned to them in the Debenture. The conversion pursuant
hereto shall be deemed to have been effected at the date and time specified
below, and at such time the rights of the undersigned as a Holder of the
Principal Amount of the Debenture set forth above shall cease and the Person or
Persons in whose name or names the Common Stock Issued at Conversion shall be
registered shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby and all voting and other rights associated
with the beneficial ownership of such Common Shares shall at such time vest with
such Person or Persons.
 

Date and time:    

 
 

   

          By:    
 
Title: 

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      Fill in for registration of Debenture:       Please print name and address
      (including ZIP code number):      

           

 
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