Exhibit 10.4

 

EXHIBIT A

 

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

 

Original Issue Date: September     , 2005

Original Conversion Price (subject to adjustment herein): $2.30

 

$                              

 

AMORTIZING CONVERTIBLE DEBENTURE

 

THIS AMORTIZING DEBENTURE is one of a series of duly authorized and issued
Amortizing Convertible Debentures of Advanced Cell Technology, Inc., a Nevada
corporation, having a principal place of business at 
                                                           (the “Company”),
designated as its Amortizing Convertible Debenture (this debenture, the
“Debenture” and collectively with the other such series of debentures, the
“Debentures”).

 

FOR VALUE RECEIVED, the Company promises to pay to
                                                 or its registered assigns (the
“Holder”), or shall have paid pursuant to the terms hereunder, the principal sum
of $                               by September     , 2008, or such earlier date
as this Debenture is required or permitted to be repaid as provided hereunder
(the “Maturity Date”).  This Debenture is subject to the following additional
provisions:

 

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

 

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

 

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

 

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

 

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

 

“Capital Restructuring” shall mean those actions taken in connection with
(i) the distribution of substantially all the assets of ACT Group, Inc. to the
shareholders of ACT Group, Inc. (such distribution hereinafter referred to as
the “Group Liquidation”), and (ii) the reincorporation of the Company in
Delaware effected pursuant to (A) a merger (the “Parent Merger”) by the Company
with and into a newly formed Delaware corporation (the surviving corporation
hereinafter referred to as the “Surviving Corporation”), and (B) the related
merger and consolidation (the “Roll-Up Merger”) of Advanced Cell, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company, with and into
the Surviving Corporation (the Parent Merger and the Roll-up Merger are
hereinafter collectively referred to as the “Reincorporation”).

 

“Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity
or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, or (ii) the Company merges into or
consolidates with any other Person, or any Person merges into or consolidates
with the Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 66% of the
aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers its assets, as an entirety
or substantially as an entirety, to another Person and the stockholders of the
Company immediately prior to such transaction own less than 66% of the aggregate
voting power of the acquiring entity immediately after the transaction, (iv) a
replacement at one time or within a three year period of more than one-half of
the members of the Company’s board of directors which is not approved by a
majority of those individuals who are members of the board of directors on the
date hereof (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on the date
hereof), or (v) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i) or (iv). Notwithstanding anything herein to the contrary, in
no event shall any action taken directly in connection with the Capital
Restructuring be deemed a Change of Control Transaction provided that such
action is necessary to effect the Capital Restructuring.

 

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“Common Stock” means the common stock, par value $0.001 per share, of the
Company and stock of any other class of securities into which such securities
may hereafter have been reclassified or changed into.

 

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

 

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

 

“Conversion Shares” means the shares of Common Stock issuable upon conversion of
this Debenture in accordance with the terms.

 

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

 

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

 

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

 

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

 

“Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions and redemptions scheduled to occur or
occurring by virtue of one or more Notice of Conversions of the Holder, if any,
(ii) all liquidated damages and other amounts owing to the Holder in respect of
this Debenture shall have been paid; (iii) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction
Documents (and the Company is not aware of any information that would cause it
to believe such use would be interrupted), (iv) the Common Stock is trading on
the Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company is not
aware of any information that would cause it to believe trading would be
interrupted), (v) there is a sufficient number of authorized but unissued and
otherwise unreserved shares of Common Stock for the issuance of all of the
shares issuable pursuant to the Transaction Documents, (vi) there is then
existing no Event of Default, (vii) the issuance of the shares in question (or,
in the case of a redemption, the shares issuable upon conversion in full of the
redemption amount) to the Holder would not violate the limitation set forth in
Section 4(c) and (viii) no public announcement of a pending or proposed
Fundamental Transaction, Change of Control Transaction or acquisition
transaction has occurred that has not been consummated.

 

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

 

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

 

“Exempt Redemptions” means redemption of shares by the Company solely as a

 

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result of (a) the Capital Structure Requirements or (b) redemption of a de
minimus number of shares from employees, officers or directors of the Company
pursuant to termination of employment or resolution of employment disputes with
any such Persons, which issuances are approved by the Board of Directors.

 

“Forced Conversion” shall have the meaning set forth in Section 6(d).

 

“Forced Conversion Notice” shall have the meaning set forth in Section 6(d).

 

“Forced Conversion Notice Date” shall have the meaning set forth in
Section 6(d).

 

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

 

“Group Liquidation” shall have the meaning given such term in the definition of
Capital Restructuring.

 

“Mandatory Default Amount”  shall equal the sum of (i) the greater of: (A) 120%
of the principal amount of this Debenture to be prepaid, or (B) the principal
amount of this Debenture to be prepaid, divided by the Conversion Price on (x)
the date the Mandatory Default Amount is demanded or otherwise due or (y) the
date the Mandatory Default Amount is paid in full, whichever is less, multiplied
by the Closing Price on (x) the date the Mandatory Default Amount is demanded or
otherwise due or (y) the date the Mandatory Default Amount is paid in full,
whichever is greater, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of this Debenture.

 

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

 

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

 

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

 

“Monthly Redemption Amount” shall mean, as to a Monthly Redemption,
$            (1).

 

“Monthly Redemption Date” means the 1st of each month, commencing on March     ,
2006 and ending upon the full redemption of this Debenture.

 

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

 

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(1)           1/30th of the original Principal Amount of this Debenture.

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

 

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

 

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

 

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

 

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

 

“Optional Redemption Amount” shall mean the sum of (i) 100% of the principal
amount of the Debenture then outstanding and (ii) all liquidated damages and
other amounts due in respect of the Debenture.

 

“Optional Redemption Notice” shall have the meaning set forth in Section 6(a).

 

“Optional Redemption Notice Date” shall have the meaning set forth in
Section 6(a).

 

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

 

“Parent Merger” shall have the meaning given such term in the definition of
Capital Restructuring.

 

“Permitted Indebtedness” means trade payables, indebtedness consisting of
capitalized lease obligations and purchase money indebtedness incurred in
connection with acquisition of capital assets and obligations under
sale-leaseback arrangements with respect to newly acquired or leased assets;
provided, however, that in each case such obligations are not secured by liens
on any assets of the Company or its Subsidiaries existing as of the date of the
Purchase Agreement and may only be secured by the assets so acquired or leased
thereafter.

 

“Permitted Lien” mean (a) Liens with respect to the payment of taxes or
governmental charges in all cases which are not yet due or which are subject to
a good faith contest; (b) any Liens incurred in connection with Permitted Debt
provided that such liens are not secured by assets of the Company or its
Subsidiaries other than the assets so acquired or leased; and (c) statutory
Liens of landlords or equipment lessors against any property of the Company or
its Subsidiaries existing as of the date of the Purchase Agreement in favor of
suppliers, mechanics, carriers, materialmen, warehousemen or workmen.

 

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

 

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

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of
September 15, 2005, to which the Company and the original Holder are parties, as
amended, modified or supplemented from time to time in accordance with its
terms.

 

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

 

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

 

“Reincorporation” shall have the meaning given such term in the definition of
Capital Restructuring.

 

“Roll-Up Merger” shall have the meaning given such term in the definition of
Capital Restructuring.

 

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

 

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

 

“Surviving Corporation” shall have the meaning given such term in the definition
of Capital Restructuring.

 

“Threshold Period” shall have the meaning given to such term in Section 6(d).

 

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

 

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

 

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

 

Section 2.               Interest and Prepayment.  No regularly scheduled
interest payments shall be made on this Debenture. Except as otherwise set forth
in this Debenture, the Company may not prepay any portion of the principal
amount of this Debenture without the prior written consent of the Holder.

 

Section 3.               Registration of Transfers and Exchanges.

 

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

 

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

 

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

 

Section 4.               Conversion.

 

a)             Voluntary Conversion. At any time after the Original Issue Date
until this Debenture is no longer outstanding, this Debenture shall be
convertible into shares of Common Stock at the option of the Holder, in whole or
in part at any time and from time to time (subject to the limitations on
conversion set forth in Section 4(c) hereof).  The Holder shall effect
conversions by delivering to the Company the form of Notice of Conversion
attached hereto as Annex A (a “Notice of Conversion”), specifying therein the
principal amount of this Debenture to be converted and the date on which such
conversion is to be effected (a “Conversion Date”).  If no Conversion Date is
specified in a Notice of Conversion, the Conversion Date shall be the date that
such Notice of Conversion is provided hereunder.  To effect conversions
hereunder, the Holder shall not be required to physically surrender this
Debenture to the Company unless the entire principal amount of this Debenture
has been so converted. Conversions hereunder shall have the effect of lowering
the outstanding principal amount of this Debenture in an amount equal to the
applicable conversion.  The Holder and the Company shall maintain records
showing the principal amount converted and the date of such conversions.  The
Company shall deliver any objection to any Notice of Conversion within 1
Business Day of receipt of such notice.  In the event of any dispute or
discrepancy, the records of the

 

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Holder shall be controlling and determinative in the absence of manifest error.
The Holder and any assignee, by acceptance of this Debenture, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion
of a portion of this Debenture, the unpaid and unconverted principal amount of
this Debenture may be less than the amount stated on the face hereof.

 

b)            Conversion Price.  The conversion price in effect on any
Conversion Date shall be equal to $2.30 (subject to adjustment herein)(the
“Conversion Price”).

 

c)             Holder’s Restriction on Conversion.  The Company shall not effect
any conversion of this Debenture, and the Holder shall not have the right to
convert any portion of this Debenture, pursuant to Section 4(a) or otherwise, to
the extent that after giving effect to such conversion, the Holder (together
with the Holder’s affiliates), as set forth on the applicable Notice of
Conversion, would beneficially own in excess of 4.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to such
conversion.  For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Debenture
with respect to which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would be issuable upon
(A) conversion of the remaining, nonconverted portion of this Debenture
beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other Debentures or the
Warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for purposes of this
Section 4(c)(ii), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder.  To the extent that the limitation contained in this
section applies, the determination of whether this Debenture is convertible (in
relation to other securities owned by the Holder) and of which a portion of this
Debenture is convertible shall be in the sole discretion of such Holder. To
ensure compliance with this restriction, the Holder will be deemed to represent
to the Company each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and the
Company shall have no obligation to verify or confirm the accuracy of such
determination.  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 4(c)(ii), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares of Common
Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as
the case may be, (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Company’s Transfer Agent setting forth the
number of shares of Common Stock outstanding.  Upon the written or oral request
of the Holder, the Company shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding.  In
any case, the number of outstanding shares of

 

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Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Debenture, by the Holder
or its affiliates since the date as of which such number of outstanding shares
of Common Stock was reported.  The provisions of this Section 4(c) may be waived
by the Holder, at the election of the Holder, upon not less than 61 days’ prior
notice to the Company, and the provisions of this Section 4(c) shall continue to
apply until such 61st day (or such later date, as determined by the Holder, as
may be specified in such notice of waiver).  The provisions of this paragraph
shall be implemented in a manner otherwise than in strict conformity with the
terms of this Section 4(c) to correct this paragraph (or any portion hereof)
which may be defective or inconsistent with the intended 4.99% beneficial
ownership limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such 4.99% limitation. The
limitations contained in this paragraph shall apply to a successor holder of
this Debenture. The holders of Common Stock of the Company shall be third party
beneficiaries of this Section 4(c) and the Company may not waive this
Section 4(c) without the consent of holders of a majority of its Common Stock.

 

d)                                     Mechanics of Conversion

 

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

 

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

 

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

 

iv.            Obligation Absolute; Partial Liquidated Damages.  If the Company
fails for any reason to deliver to the Holder such certificate or certificates

 

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pursuant to Section 4(d)(ii) by the third Trading Day after the Conversion Date,
the Company shall pay to such Holder, in cash, as liquidated damages and not as
a penalty, for each $1000 of principal amount being converted, $10 per Trading
Day (increasing to $20 per Trading Day after 5 Trading Days after such damages
begin to accrue) for each Trading Day after such third Trading Day until such
certificates are delivered.  The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in accordance with the terms
hereof are absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person
of any obligation to the Company or any violation or alleged violation of law by
the Holder or any other person, and irrespective of any other circumstance which
might otherwise limit such obligation of the Company to the Holder in connection
with the issuance of such Conversion Shares; provided, however, such delivery
shall not operate as a waiver by the Company of any such action the Company may
have against the Holder.  In the event the Holder of this Debenture shall elect
to convert any or all of the outstanding principal amount hereof, the Company
may not refuse conversion based on any claim that the Holder or any one
associated or affiliated with the Holder has been engaged in any violation of
law, agreement or for any other reason, unless, an injunction from a court, on
notice, restraining and or enjoining conversion of all or part of this Debenture
shall have been sought and obtained and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the principal amount of this
Debenture outstanding, which is subject to the injunction, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Holder to the extent it
obtains judgment.  In the absence of an injunction precluding the same, the
Company shall issue Conversion Shares or, if applicable, cash, upon a properly
noticed conversion.  Nothing herein shall limit a Holder’s right to pursue
actual damages or declare an Event of Default pursuant to Section 8 herein for
the Company’s failure to deliver Conversion Shares within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief.  The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.

 

v.             Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the third Trading Day after the
Conversion Date, and if after such third Trading Day the Holder is required by
its brokerage firm to purchase (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale by such Holder of the
Conversion Shares

 

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

 

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

 

vii.           Fractional Shares. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
the Common Stock, but may if otherwise permitted, make a cash payment in

 

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respect of any final fraction of a share based on the Closing Price at such
time.  If the Company elects not, or is unable, to make such a cash payment, the
Holder shall be entitled to receive, in lieu of the final fraction of a share,
one whole share of Common Stock.

 

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

 

Section 5.               Certain Adjustments.

 

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

 

b)            Subsequent Equity Sales.  If the Company or any Subsidiary
thereof, as applicable, at any time while this Debenture is outstanding, shall
offer, sell, grant any option to purchase or offer, sell or grant any right to
reprice its securities, or otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other disposition) any Common Stock or
Common Stock Equivalents entitling any Person to acquire shares of Common Stock,
at an effective price per share less than the then Conversion Price (such lower
price, the “Base Conversion Price” and such issuances collectively, a “Dilutive
Issuance”), as adjusted hereunder (if the holder of the Common

 

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Stock or Common Stock Equivalents so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
per share which is issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share which is less
than the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price on such date of the Dilutive Issuance), then the
Conversion Price shall be reduced to equal the Base Conversion Price.  Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued.  Notwithstanding the foregoing, no adjustment will be made under
this Section 5(b) in respect of an Exempt Issuance.  The Company shall notify
the Holder in writing, no later than the Business Day following the issuance of
any Common Stock or Common Stock Equivalents subject to this section, indicating
therein the applicable issuance price, or of applicable reset price, exchange
price, conversion price and other pricing terms (such notice the “Dilutive
Issuance Notice”).  For purposes of clarification, whether or not the Company
provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the
occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance
the Holder is entitled to receive a number of Conversion Shares based upon the
Base Conversion Price regardless of whether the Holder accurately refers to the
Base Conversion Price in the Notice of Conversion.  Notwithstanding anything
contained herein to the contrary, in no event shall any offer, sale, issuance,
or grant of Common Stock or Common Stock Equivalents directly as a result of the
Capital Structure Requirements be deemed a Dilutive Issuance. Notwithstanding
the foregoing, if the Company issues shares of Common Stock or Common Stock
Equivalents in connection with the Legal Fee Settlement, the Conversion Price
shall be adjusted to a price equal the lesser of (i) the price determined
pursuant to the first sentence of this Section 5(b) or (ii) if the effective
price per share for such issuances is not ascertainable, a price determined by
multiplying the then effective Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock and Common Stock Equivalents
outstanding immediately prior to such issuance and the denominator of which
shall be the number of shares of Common Stock and Common Stock Equivalents
outstanding immediately following such issuance.

 

c)             Pro Rata Distributions. If the Company, at any time while this
Debenture is outstanding, shall distribute to all holders of Common Stock (and
not to the holders of the Debenture) evidences of its indebtedness or assets
(including cash and cash dividends) or rights or warrants to subscribe for or
purchase any security, then in each such case the Conversion Price shall be
adjusted by multiplying such Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Closing Price
determined as of the record date mentioned above, and of which the numerator
shall be such Closing Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith.  In either case the
adjustments shall be described in a statement provided to

 

13

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the Holder of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of Common Stock.  Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.

 

d)            Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions,
(C) any tender offer or exchange offer (whether by the Company or another
Person) is completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property, or
(D) the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property (in any such
case, a “Fundamental Transaction”), then upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Conversion Share
that would have been issuable upon such conversion immediately prior to the
occurrence of such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of one share of Common Stock (the
“Alternate Consideration”).  For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration.  If holders of Common
Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this Debenture
following such Fundamental Transaction.  To the extent necessary to effectuate
the foregoing provisions, any successor to the Company or surviving entity in
such Fundamental Transaction shall issue to the Holder a new debenture
consistent with the foregoing provisions and evidencing the Holder’s right to
convert such debenture into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the provisions
of this paragraph (d) and insuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction. Notwithstanding anything herein to the contrary,
in no event shall the Capital Restructuring be deemed a Fundamental Transaction.

 

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

 

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as of a given date shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) issued and outstanding.

 

f)             Notice to the Holder.

 

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

 

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

 

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commencing the date of such notice to the effective date of the event triggering
such notice.

 

Section 6.               Redemption and Forced Conversion.

 

a)             Optional Redemption at Election of Company.  Subject to the
provisions of this Section 6 the Company may deliver a notice to the Holder (an
“Optional Redemption Notice” and the date such notice is deemed delivered
hereunder, the “Optional Redemption Notice Date”) of its irrevocable election to
redeem some or all of the then outstanding Debentures, for an amount, in cash,
equal to the Optional Redemption Amount on the 10th Trading Day following the
Optional Redemption Notice Date (such date, the “Optional Redemption Date” and
such redemption, the “Optional Redemption”).  The Optional Redemption Amount is
due in full on the Optional Redemption Date.  The Company may only effect an
Optional Redemption if during the period commencing on the Optional Redemption
Notice Date through to the Optional Redemption Date and through and including
the date such Optional Redemption Amount is paid to the Holder, each of the
Equity Conditions shall have been met.  If any of the Equity Conditions shall
cease to be satisfied at any time during the required period, then the Holder
may elect to nullify the Optional Redemption Notice by notice to the Company
within 3 Trading Days after the first day on which any such Equity Condition has
not been met (provided that if, by a provision of the Transaction Documents the
Company is obligated to notify the Holder of the non-existence of an Equity
Condition, such notice period shall be extended to the third Trading Day after
proper notice from the Company) in which case the Optional Redemption Notice
shall be null and void, ab initio.  The Company covenants and agrees that it
will honor all Notice of Conversions tendered from the time of delivery of the
Optional Redemption Notice through the date all amounts owing thereon are due
and paid in full.

 

b)            Monthly Redemption.  On each Monthly Redemption Date, the Company
shall redeem the Monthly Redemption Amount, the sum of all liquidated damages
and any other amounts then owing to such Holder in respect of this Debenture
(the “Monthly Redemption”). The Monthly Redemption Amount due on each Monthly
Redemption Date shall be paid in cash; provided, however, as to any Monthly
Redemption and upon 20 Trading Days’ prior written irrevocable notice (the
“Monthly Redemption Notice” and the 20 Trading Day period immediately following
the Monthly Redemption Notice, the “Monthly Redemption Period”), in lieu of a
cash redemption payment the Company may elect to pay all or part of a Monthly
Redemption Amount in Conversion Shares (such dollar amount to be paid on a
Monthly Redemption Date in Conversion Shares, the “Monthly Redemption Share
Amount”) based on a conversion price equal to the lesser of (i) the then
Conversion Price and (ii) 85% of the average of the 10 Closing Prices
immediately prior to the applicable Monthly Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 10 Trading Day period) (the
price calculated during the 10 Trading Day period immediately prior to the
Monthly Redemption Date, the “Monthly Conversion Price” and such period, the
“Monthly Conversion Period”); provided, further,

 

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that the Company may not pay the Monthly Redemption Amount in Conversion Shares
unless, (y) from the date the Holder receives the duly delivered Monthly
Redemption Notice through and until the date such Monthly Redemption is paid in
full, the Equity Conditions and Corporate Milestones, unless waived in writing
by the Holder, have been satisfied and (z) as to such Monthly Redemption, prior
to such Monthly Redemption Period (but not more than 5 Trading Days prior to the
commencement of the Monthly Redemption Period), the Company shall have delivered
to the Holder’s account with The Depository Trust Company a number of shares of
Common Stock to be applied against such Monthly Redemption Share Amount equal to
the quotient of (x) the applicable Monthly Redemption Share Amount divided by
(y) the then Conversion Price (the “Pre-Redemption Conversion Shares”).  The
Holder may convert, pursuant to Section 4(a), any principal amount of this
Debenture subject to a Monthly Redemption at any time prior to the date that the
Monthly Redemption Amount and all amounts owing thereon are due and paid in
full.  Unless otherwise indicated by the Holder in the applicable Notice of
Conversion, any principal amount of this Debenture converted during the
applicable Monthly Redemption Period until the date the Monthly Redemption
Amount is paid in full shall be first applied to the principal amount subject to
the Monthly Redemption Amount payable in cash and then to the Monthly Redemption
Share Amount.  Any principal amount of this Debenture converted during the
applicable Monthly Redemption Period in excess of the Monthly Redemption Amount
shall be applied against the last principal amount of this Debenture scheduled
to be redeemed hereunder, in reverse time order from the Maturity Date;
provided, however, if any such conversion is applied to such Monthly Redemption
Amount, the Pre-Redemption Conversion Shares, if any were issued in connection
with such Monthly Redemption or were not already applied to such conversions,
shall be first applied against such conversion.  The Company covenants and
agrees that it will honor all Notice of Conversions tendered up until such
amounts are paid in full.  The Company’s determination to pay a Monthly
Redemption in cash, shares of Common Stock or a combination thereof shall be
applied ratably to all of the holders of the Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.  At any time the Company delivers a notice to the Holder of its
election to pay the Monthly Redemption Amount in shares of Common Stock, the
Company shall file a prospectus supplement pursuant to Rule 424 disclosing such
election.

 

c)             Redemption Procedure.  The payment of cash pursuant to the
Monthly Redemption or an Optional Redemption shall be made on the Monthly
Redemption Date or the Optional Redemption Date, as applicable.  If any portion
of the cash payment for a Monthly Redemption or an Optional Redemption, as
applicable shall not be paid by the Company by the respective due date, interest
shall accrue thereon at the rate of 18% per annum (or the maximum rate permitted
by applicable law, whichever is less) until the payment of the Monthly
Redemption Amount or the Optional Redemption Amount, as applicable, plus all
amounts owing thereon is paid in full.  Alternatively, if any portion of the
Monthly Redemption Amount or the Optional Redemption Amount, as applicable,
remains unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Company given at any time thereafter,
to invalidate ab initio such

 

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redemption, notwithstanding anything herein contained to the contrary, and, with
respect the failure to honor the Optional Redemption as applicable, the Company
shall have no further right to exercise such Optional Redemption. 
Notwithstanding anything to the contrary in this Section 6, the Company’s
determination to redeem in cash or its elections under Section 6(b) shall be
applied among the Holders of Debentures ratably. The Holder may elect to convert
the outstanding principal amount of the Debenture pursuant to Section 4 prior to
actual payment in cash for any redemption under this Section 6 by fax delivery
of a Notice of Conversion to the Company.

 

d)            Forced Conversion. Notwithstanding anything herein to the
contrary, if after the Effective Date, (i) each of the Closing Prices for any 20
consecutive Trading Days (such period commencing only after the Effective Date,
such period the “Threshold Period”)) exceeds the then Conversion Price by 200%
(subject to adjustment for reverse and forward stock splits, stock dividends,
stock combinations and other similar transactions of the Common Stock that occur
after the Original Issue Date) or (ii) the Company consummates a bona fide firm
commitment public underwritten offering of the Common Stock by a nationally
recognized investment bank of its Common Stock for an offering price that is
equal to or exceeds the then Conversion Price by 200%, the Company may, within 1
Trading Day of the end of any such period or offering, deliver a notice to the
Holder (a “Forced Conversion Notice” and the date such notice is received by the
Holder, the “Forced Conversion Notice Date”) to cause the Holder to immediately
convert all or part of the then outstanding principal amount of Debentures
pursuant to Section 4.  The Company may only effect a Forced Conversion Notice
if all of the Equity Conditions and Corporate Milestones are met through the
applicable Threshold Period (or public offering period) until the date of the
applicable Forced Conversion and through and including the date such shares of
Common Stock are issued to the Holder.  Any Forced Conversion shall be applied
ratably to all Holders based on their initial purchases of Debentures pursuant
to the Purchase Agreement.  For purposes of clarification, a Forced Conversion
shall be subject to all of the provisions of Section 4, including, without
limitation, the provision requiring payment of liquidated damages and
limitations on conversions.

 

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

 

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

 

b)            except for Permitted Liens, enter into, create, incur, assume or
suffer to exist any 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;

 

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c)             amend its articles of incorporation, bylaws or other charter
documents so as to materially and adversely affect any rights of the Holder,
provided that, for purposes of this Section 7(c), any amendments to the
Company’s organizational documents necessary to satisfy the Capital
Restructuring shall not be deemed to adversely affect any rights of the Holder;

 

d)            repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock or Common
Stock Equivalents other than (i) in connection with the Capital Restructuring
and/or the Aronson Settlement or (ii) as to the Conversion Shares to the extent
permitted or required under the Transaction Documents or as otherwise permitted
by the Transaction Documents;

 

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

 

f)             pay cash dividends or distributions on any equity securities of
the Company other than as is necessary to satisfy the Capital Restructuring or
in connection with the Aronson Settlement.

 

Section 8.               Events of Default.

 

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

 

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

 

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

 

iii.            a default or event of default (subject to any grace or cure
period provided for in the applicable agreement, document or instrument) shall
occur under (A) any of the Transaction Documents, including but not limited to,
the failure by the Company to satisfy the Capital Structure Requirements on or
before

 

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November 18, 2005, or (B) any other material agreement, lease, document or
instrument to which the Company or any Subsidiary is bound;

 

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

 

v.             (i) the Company or any of its Subsidiaries shall commence a case,
as debtor, a case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company or any Subsidiary
commences any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction whether now or hereafter in effect relating to the
Company or any Subsidiary thereof or (ii) there is commenced a case against the
Company or any Subsidiary thereof, under any applicable bankruptcy or insolvency
laws, as now or hereafter in effect or any successor thereto which remains
undismissed for a period of 60 days; or (iii) the Company or any Subsidiary
thereof is adjudicated by a court of competent jurisdiction insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or (iv) the Company or any Subsidiary thereof suffers any
appointment of any custodian or the like for it or any substantial part of its
property which continues undischarged or unstayed for a period of 60 days; or
(v) the Company or any Subsidiary thereof makes a general assignment for the
benefit of creditors; or (vi) the Company shall fail to pay, or shall state that
it is unable to pay, or shall be unable to pay, its debts generally as they
become due; or (vii) the Company or any Subsidiary thereof shall call a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary thereof
shall by any act or failure to act expressly indicate its consent to, approval
of or acquiescence in any of the foregoing; or (ix) any corporate or other
action is taken by the Company or any Subsidiary thereof for the purpose of
effecting any of the foregoing; provided, however, in the event the Company
calls a meeting with the Holders to discuss any of the foregoing, such event
shall not be deemed a “Bankruptcy Event”;

 

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

 

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

 

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

 

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

 

x.             if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), the effectiveness of the Registration Statement
lapses for any reason or the Holder shall not be permitted to resell Registrable
Securities (as defined in the Registration Rights Agreement) under the
Registration Statement, in either case, for more than 30 consecutive Trading
Days or 60 non-consecutive Trading Days during any 12 month period; provided,
however, that in the event that the Company is negotiating a merger,
consolidation, acquisition or sale of all or substantially all of its assets or
a similar transaction and in the written opinion of counsel to the Company, the
Registration Statement, would be required to be amended to include information
concerning such transactions or the parties thereto that is not available or may
not be publicly disclosed at the time, the Company shall be permitted an
additional 10 consecutive Trading Days during any 12 month period relating to
such an event;

 

xi.            the Company shall not be compliant with the Sarbanes-Oxley Act of
2002 on or before March 31, 2006; or

 

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

 

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b)            Remedies Upon Event of Default. If any Event of Default occurs,
the full principal amount of this Debenture, together with other amounts owing
in respect thereof, to the date of acceleration shall become, at the Holder’s
election, immediately due and payable in cash.   The aggregate amount payable
upon an Event of Default shall be equal to the Mandatory Default Amount. 
Commencing 5 days after the occurrence of any Event of Default that results in
the eventual acceleration of this Debenture, the interest rate on this Debenture
shall accrue at the rate of 18% per annum, or such lower maximum amount of
interest permitted to be charged under applicable law.  Upon the payment in full
of the Mandatory Default Amount on this entire Debenture the Holder shall
promptly surrender this Debenture to or as directed by the Company.  The Holder
need not provide and the Company hereby waives any presentment, demand, protest
or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law.  Such
declaration may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a Debenture holder until such
time, if any, as the full payment under this Section shall have been received by
it.  No such rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon.

 

Section 9.               Miscellaneous.

 

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

 

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

 

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

 

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

 

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e)             Waiver.  Other than Section 7, any waiver by the Company or the
Holder of a breach of any provision of this Debenture shall not operate as or be
construed to be a waiver of any other breach of such provision or of any breach
of any other provision of this Debenture.  The failure of the Company or the
Holder to insist upon strict adherence to any term of this Debenture on one or
more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other term
of this Debenture.  Any waiver must be in writing.

 

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

 

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

 

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

 

i)              Assumption.  Any successor to the Company or surviving entity in
a Fundamental Transaction shall (i) assume in writing all of the obligations of
the Company under this Debenture and the other Transaction Documents pursuant to
written agreements in form and substance satisfactory to the Holder (such
approval not to be unreasonably withheld or delayed) prior to such Fundamental
Transaction and (ii) to issue to the Holder a new debenture of such successor
entity evidenced by a written instrument substantially similar in form and
substance to this Debenture, including, without limitation, having a principal
amount and interest rate equal to the principal amounts and the interest rates
of the Debentures held by the Holder and having similar ranking to this
Debenture, and satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed).  The provisions of this Section 9(i) shall
apply

 

24

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similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations of this Debenture.

 

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

 

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

 

 

 

ADVANCED CELL TECHNOLOGY, INC.

 

 

 

 

 

By:

/s/ William M. Caldwell, IV

 

 

 

Name:  William M. Caldwell, IV

 

 

Title:  Chief Executive Officer

 

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ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal under the Amortizing
Convertible Debenture of Advanced Cell Technology, Inc., a Nevada corporation
(the “Company”) into shares of common stock, par value $0.001 per share (the
“Common Stock”), of the Company according to the conditions hereof, as of the
date written below.  If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith.  No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

 

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

 

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

 

Conversion calculations:

 

Date to Effect Conversion:

 

 

 

Principal Amount of Debenture to be Converted:

 

 

 

Number of shares of Common Stock to be issued:

 

 

 

 

 

Signature:

 

 

 

Name:

 

 

 

Address:

 

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Schedule 1

 

CONVERSION SCHEDULE

 

The Amortizing Convertible Debentures in the aggregate principal amount of
$                         issued by Advanced Cell Technology, Inc.  This
Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.

 

Dated:

 

Date of Conversion
(or for first entry,
Original Issue Date)

 

Amount of
Conversion

 

Aggregate
Principal
Amount
Remaining
Subsequent to
Conversion
(or original
Principal
Amount)

 

Company Attest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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