EXHIBIT 10.6
 
THIS SECURITY AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN
THE MANNER AND TO THE EXTENT SET FORTH IN THE SENIOR LENDER INTERCREDITOR
AGREEMENTS (AS SUCH TERM IS DEFINED IN THE PURCHASE AGREEMENT) AND EACH HOLDER
OF THIS SECURITY, BY ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE
PROVISIONS OF THE JULY SENIOR LENDER INTERCREDITOR AGREEMENT.
 
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:  July ___, 2009
$
 
Original Conversion Price (subject to adjustment herein):  $0.24
Principal Amount of this Debenture is comprised of the sum of:
 
(i)
Cash Subscription Amount of
$
 
; and
 
(ii)
OID Amount of:
$
     

ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE DEBENTURE
DUE MAY 30, 2011
 
THIS ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE DEBENTURE is one of a series of
duly authorized and validly issued Original Issue Discount Secured Convertible
Debentures of Capital Growth Systems, Inc., a Florida corporation, (the
“Company”), having its principal place of business at 200 S. Wacker Drive –
Suite 1650, Chicago, Illinois 60606, designated as its Original Issue Discount
Secured Convertible Debenture due on May 30, 2011 (the “Termination Date) (this
debenture, the “Debenture” and, collectively with the other debentures of such
series maturing on May 30, 2011, 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 $_______________ on May 30, 2011 (the “Maturity
Date”) or such earlier date as this Debenture is required or permitted to be
repaid as provided hereunder, and to pay default interest, if any, to the Holder
on the then outstanding and unconverted and unredeemed principal amount of this
Debenture in accordance with the provisions hereof.  This Debenture is subject
to the following additional provisions:

 
 

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Section 1.              Definitions.
 
For the purposes hereof, in addition to the terms defined elsewhere in this
Debenture:  (a) capitalized terms not otherwise defined herein shall have the
meanings set forth in the Purchase Agreement; and (b) the following terms shall
have the following meanings:
 
“Aequitas” means Aequitas Capital Management, Inc., or any successor thereof.
 
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
 
“Applicable Margin” means 14%.
 
“Applicable Rate” means the rate of interest to be paid on the Cash Subscription
Amount from and after the date hereof, being a rate per annum equal to the sum
of (i) the Prime Rate, plus (ii) the Applicable Margin, of which the Basic
Interest amount shall be paid in cash, and the amount in excess of the Basic
Interest shall be capitalized, compounded monthly and added to the Cash
Subscription Amount (whereupon from and after such date such additional amounts
shall also accrue interest) (such excess above the Basic Interest component to
be paid in cash being “PIK Interest”)..
 
“Bankruptcy Event” means any of the following events: (a) the Company or any
Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation
S-X) thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to the
Company or any Significant Subsidiary thereof; (b) there is commenced against
the Company or any Significant Subsidiary thereof any such case or proceeding
that is not dismissed within 60 days after commencement; (c) the Company or any
Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order
of relief or other order approving any such case or proceeding is entered; (d)
the Company or any Significant Subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property that is not
discharged or stayed within 60 calendar days after such appointment; (e) the
Company or any Significant Subsidiary thereof makes a general assignment for the
benefit of creditors; (f) the Company or any Significant Subsidiary thereof
calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (g) the Company or any Significant
Subsidiary thereof, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.
 
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
 
“Basic Interest” shall mean the component of the Applicable Rate hereunder
comprised of the Prime Rate plus 9%; this is the component of interest of this
Debenture which is payable monthly, in cash, to the extent permitted under the
July Senior Lender Intercreditor Agreement.
 
“Beneficial Ownership Limitation” shall have the meaning set forth in Section
4(c).
 
“Business Day” means any day except any Saturday, any Sunday, any day which
shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by law
or other governmental action to close.
 
“Buy-In” shall have the meaning set forth in Section 4(d)(v).

 
 

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“Cash Subscription Amount” shall have the meaning set forth in Section 2(a).
 
“Change of Control Transaction” means the occurrence after the date hereof of
any of:  (a) 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 40% of the voting securities of the Company (other than by means of
conversion or exercise of the Debentures and the Securities issued together with
the Debentures); (b) 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 60% of the aggregate voting power of the
Company or the successor entity of such transaction; (c) the Company sells or
transfers all or substantially all of its assets to another Person and the
stockholders of the Company immediately prior to such transaction own less than
60% of the aggregate voting power of the acquiring entity immediately after the
transaction; (d) a replacement at one time or within a three year period of more
than one-half of the members of the 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); (e) the employment of Patrick C. Shutt with the Company is terminated
for any reason (other than a voluntary resignation) (a “Termination”), and in
the case of such Termination the Company shall fail to hire a replacement chief
executive officer or chief restructuring officer reasonably acceptable to the
Holders holding 67% or more of the Debentures within sixty (60) days following
such Termination; or (f) 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 in clauses (a) through (e) above
 
“Collateral Agent” shall mean the collateral agent for the benefit of the
Debenture holders, as named in the Security Agreement.
 
“Conversion” shall have the meaning ascribed to such term in Section 4.
 
“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 Schedule” means the Conversion Schedule in the form of Schedule 1
attached hereto.
 
“Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of this Debenture in accordance with the terms hereof.
 
“Debentures” shall mean this Debenture and the other Debentures issued by the
Company pursuant to the form of Securities Purchase Agreement pursuant to which
this form of Debenture has been issued.
 
“Debenture Register” shall have the meaning set forth in Section 2(c).
 
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).

 
 

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“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
 
“Equity Conditions” means, during the period in question: (a) the Company shall
have duly honored all conversions and redemptions scheduled to occur or
occurring by virtue of one or more Notices of Conversion of the Holder, if any;
(b) the Company shall have paid all liquidated damages and other amounts owing
to the Holder in respect of this Debenture; (c) (i) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the shares of Common Stock issuable
pursuant to the Transaction Documents; or (ii) at all times after August 19,
2009 with respect to the Conversion Shares and six months following the date of
this Debenture with respect to the shares underlying the Warrants, all of the
Conversion Shares issuable pursuant to the Transaction Documents may be resold
pursuant to Rule 144 without volume or manner-of-sale restrictions as determined
by the counsel to the Company pursuant to a written opinion letter to such
effect addressed and acceptable to the Transfer Agent and the Holder; with
shares of Common Stock underlying the Warrants, the Rule 144 condition shall be
deemed met to the extent there is a right to exercise the Warrants pursuant to
the cashless exercise option (irrespective of the method in which such Warrant
shares are acquired); (d) the Common Stock is trading on a Trading Market and
all of the shares issuable pursuant to the Transaction Documents are listed or
quoted for trading on such Trading Market (and the Company believes, in good
faith, that trading of the Common Stock on a Trading Market will continue
uninterrupted for the foreseeable future); (e) following the approval by the
stockholders of the Company of the Authorized Share Issuance, 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; (f) there is no existing Event of Default or no existing
event which, with the passage of time or the giving of notice, would constitute
an Event of Default; (g) the issuance of the shares in question (or, in the case
of a Quarterly Redemption, the shares issuable upon conversion in full of the
Quarterly Redemption Amount to the Holder would not violate the limitations set
forth in Section 4(c) herein); (h) there has been no public announcement of a
pending or proposed Fundamental Transaction or Change of Control Transaction
that has not been consummated; and (i) the Holder is not in possession of any
information provided by the Company after the date of initial issuance of the
July 2009 Debentures by the Company that constitutes, or may constitute,
material non-public information, unless the Holder has consented to be provided
such information.
 
“Event of Default” shall have the meaning set forth in Section 8(a).
 
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
 
“Mandatory Default Amount”  means the sum of: (a) the greater of (i) the
outstanding principal amount of this Debenture, divided by the Conversion Price
on the date the Mandatory Default Amount is either (A) demanded (if demand or
notice is required to create an Event of Default) or otherwise due or (B) paid
in full, whichever has a lower Conversion Price, multiplied by the VWAP on the
date the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
paid in full, whichever has a higher VWAP, or (ii) 120% of the outstanding
principal amount of this Debenture; plus (b) all other amounts, costs, expenses
and liquidated damages due in respect of this Debenture, including, without
limitation, any accrued and unpaid default interest.
 
 “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).

 
 

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“OID Amount” shall have the meaning set forth in Section 2(a).
 
“Original Issue Date” means the date of the first issuance of the Debentures,
regardless of any transfers of any Debenture and regardless of the number of
instruments which may be issued to evidence such Debentures.
 
“Permitted Indebtedness” means:  (a) the indebtedness evidenced by the
Debentures; (b) the Indebtedness existing on the Original Issue Date and set
forth on Schedule 3.1(aa) attached to the Purchase Agreement, together with all
obligations accruing with respect to the same (and in the case of the Senior
Lender Indebtedness includes any amendments thereto or any refinancings thereof
with a new senior secured lender); (c) lease obligations and purchase money
indebtedness of up to $250,000, in the aggregate, incurred in connection with
the acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets; (d) the Senior Debt or any refinancing thereof; (e)
any debt obligation created by the Company as part of its Vendor Payment Plan as
approved by the Collateral Agent and the Company, including but not limited to
any original issue discount debentures issued by the Company to creditors of the
Company or its subsidiaries (hereinafter referred to as “VPP Debentures”); and
(f) any other obligations of the Company or any of its subsidiaries with respect
to the Vendor Payment Plan adopted by the Company in connection with the
issuance of the Debentures.
 
“Permitted Lien” means the individual and collective reference to the
following:  (a) Liens for taxes, assessments and other governmental charges or
levies not yet due or Liens for taxes, assessments and other governmental
charges or levies being contested in good faith and by appropriate proceedings
for which adequate reserves (in the good faith judgment of the management of the
Company) have been established in accordance with GAAP; (b) Liens imposed by law
which were incurred in the ordinary course of the Company’s business, such as
carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and
other similar Liens arising in the ordinary course of the Company’s business,
and which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof in the
operation of the business of the Company and its consolidated Subsidiaries or
(y) are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing for the foreseeable future the
forfeiture or sale of the property or asset subject to such Lien; (c) Liens
incurred in connection with Permitted Indebtedness under clause (a), (b) or (d)
thereof; and (d) Liens incurred in connection with Permitted Indebtedness under
clause (c) thereunder, provided that such Liens are not secured by assets of the
Company or its Subsidiaries other than the assets so acquired or leased.
 
“PIK Interest” shall have the meaning set forth in the definition of “Applicable
Rate.”
 
“Prime Rate” means, at any time, the rate of interest noted in The Wall Street
Journal, Money Rates section, as the “Prime Rate” (currently defined as the base
rate on corporate loans posted by at least 75% of the nation’s thirty (30)
largest banks).  In the event that The Wall Street Journal quotes more than one
rate, or range of rates, as the Prime Rate, then the Prime Rate shall mean the
average of the quoted rates.  In the event that The Wall Street Journal ceases
to publish a Prime Rate, then the Prime Rate shall be the average of the quoted
prime rates of the three (3) largest U.S. money center commercial banks, as
determined by Aequitas.  Notwithstanding the foregoing, at no time shall the
Prime Rate be less than five percent (5%) per annum.  The Prime Rate may not be
the lowest or best rate at which the Collateral Agent calculates interest.  Any
change in the Prime Rate shall be effective for purposes of calculating interest
hereunder as of the date of such change.

 
 

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“Purchase Agreement” means the Securities Purchase Agreement, dated as of
July__, 2009 among the Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.
 
“Quarter” shall have the meaning set forth in Section 6(a) hereof.
 
“Quarterly Conversion Period” shall have the meaning set forth in Section 6(a)
hereof.
 
“Quarterly Conversion Price” shall have the meaning set forth in Section 6(a)
hereof.
 
“Quarterly Redemption” means the redemption of this Debenture pursuant to
Section 6(a) hereof.
 
“Quarterly Redemption Amount” means, as to a Quarterly Redemption,
$[___________],(1) plus liquidated damages and any other amounts then owing to
the Holder in respect of this Debenture.  The “Aggregate Quarterly Redemption
Amount” hereunder means $____________.(2)
 
“Quarterly Redemption Date” means the 45th day (or next Trading Day if such 45th
day is not a Trading Day) of each Quarter (commencing with February 14, 2010)
during the term of this Debenture and terminating upon the full redemption of
the aggregate Quarterly Redemption amount plus liquidated damages and any other
amounts then owing to the Holder in respect of this Debenture.
 
“Quarterly Redemption Notice” shall have the meaning set forth in Section 6(a)
hereof.
 
 “Securities Act” means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
 
“Senior Debt” shall have the meaning set forth in the July Senior Lender
Intercreditor Agreement.
 
“Share Delivery Date” shall have the meaning set forth in Section 4(d)(ii).
 
“Subsidiary” shall have the meaning set forth in the Purchase Agreement.
 
“Trading Day” means a day on which the New York Stock Exchange is open for
business.
 
“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 American
Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the
Pink Sheets.
 
“Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.
 

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1
((A*B) – A)/7, where A = the initial Subscription Amount and B = 1.75.

2
(A*B) - A.

 
 

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“VWAP” means, for any date, the price determined by the first of the following
clauses that applies:  (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted for trading as reported by Bloomberg L.P.
(based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time)); (b)  if the OTC Bulletin Board is not a Trading Market, the
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (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 (d) in
all other cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Company.
 
Section 2.              Interest and Prepayment.
 
(a)           Interest.  The Company acknowledges and agrees that this Debenture
was issued at an original issue discount, in the amount designated as “OID
Amount” on the first page hereof, with the cash payment funded by the original
Holder hereof being the “Cash Subscription Amount” shown on the first page
hereof.  No interest shall accrue on the OID Amount prior to the maturity date
of this Debenture or acceleration of the indebtedness evidenced by this
Debenture.  The Cash Subscription Amount of this Debenture shall bear interest
at the Applicable Rate.  Interest on the Cash Subscription Amount shall be
computed on the basis of the actual number of days elapsed over a year of 360
days.  All accrued interest on the Cash Subscription Amount (the “Cash
Subscription Amount Interest”) shall be paid monthly in arrears on or before the
20th day of each month during the term hereof, in cash as to the Basic Interest
component, with the PIK Interest component to be accrued and added to the
principal amount of this Debenture unless the Company elects to pay PIK Interest
with cash and such payment in cash is permitted under the terms of the July
Senior Lender Intercreditor Agreement.  The OID Amount shall be subject to
increase following the date hereof as provided in Section 6,
below.  Notwithstanding anything to the contrary contained herein, if while this
Debenture is outstanding, for any reason the Company fails to pay any of the
Basic Interest called for hereunder, then the unpaid amount of such interest
shall be added to the principal amount of this Note as additional Cash
Subscription Amount, and in addition, the OID Amount shall be increased by 75%
of the amount of such unpaid Basic Interest; provided however, that failure to
pay Basic Interest shall not be an event of default hereunder if payment is
prohibited due to failure of the Company to meet one or more covenants with
respect to the Senior Debt, or blocked or prohibited pursuant to an
intercreditor agreement to which the Holder and the holder of the Senior Debt is
a party, but shall be an Event of Default to the extent that such payment is
permitted pursuant to the Senior Lender July Intercreditor Agreement and not
blocked by such intercreditor agreement and the Company fails to make payment of
the Basic Interest.

 
 

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(b)           Default Interest.  To the extent permitted by law and without
limiting any other right or remedy of the Holder hereunder, whenever there is an
Event of Default, the rate of interest on the Cash Subscription Amount shall, at
the option of the Holders holding 67% or more of the Debentures, be increased
effective as of the date of delivery of written notice to the Company electing
to increase such interest rate, by adding 4.00% to the interest rate otherwise
in effect hereunder.  In addition, upon the occurrence and during the
continuation of an Event of Default, provided that the Company is permitted to
pay the PIK Interest in cash pursuant to the terms of the July Senior Lender
Intercreditor Agreement, all accrued PIK Interest which has not been previously
added to principal shall thereafter immediately become due and payable to the
extent permitted by the July Senior Lender Intercreditor Agreement and without
any notice, demand or presentment of any kind. Notwithstanding any acceleration
hereunder, should the July Senior Lender Intercreditor Agreement prohibit the
payment of the PIK Interest amount, it shall not accelerate during the period of
such prohibition.  The Company acknowledges that:  (i) such additional rate is a
material inducement to the Holder to fund the Cash Subscription Amount described
herein; (ii) Holder would not have funded the Cash Subscription Amount in the
absence of the agreement of the Company to pay such additional rate; (iii) such
additional rate represents compensation for increased risk to Holder that the
Cash Subscription Amount will not be repaid; and (iv) such rate is not a penalty
and represents a reasonable estimate of (A) the cost to Holder in allocating
resources (both personnel and financial) to the ongoing review, monitoring,
administration and collection of the Cash Subscription Amount, and (B)
compensation to Holder for losses that are difficult to ascertain.  In the event
of termination of this Agreement by either party hereto, Holder’s entitlement to
this charge will continue until the Cash Subscription Amount is paid in full.
 
(c)           Prepayment.  Except as otherwise set forth in this Debenture, the
Company may not prepay any portion of the principal amount of this Debenture
without the prior written consent of the Holder; provided however, should the
67% Majority elect to permit prepayment of the Debentures on a pro rata basis
without penalty, then in such event this Debenture may be prepaid without
penalty, provided prepayment is made in such manner.  To the extent that Holder
allows the Company to prepay any portion of the principal amount of this
Debenture, such prepayment shall reduce first the OID Amount then outstanding on
a dollar-for-dollar basis and, once the OID Amount has been repaid in full, then
shall reduce the Cash Subscription Amount then outstanding in the same manner.
 
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 payable 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 for
transfer to the Company 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.

 
 

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Section 4.              Conversion.
 
(a)           Voluntary Conversion.  At any time after the Authorized Share
Approval until this Debenture is no longer outstanding, this Debenture shall be
convertible, in whole or in part, into shares of Common Stock at the option of
the Holder, at any time and from time to time (subject to the conversion
limitations set forth in Section 4(c) hereof).  The Holder shall effect
conversions by delivering to the Company a Notice of Conversion, the form of
which is attached hereto as Annex A (each, a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on
which such conversion shall be effected (such date, the “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 deemed delivered
hereunder.  To effect conversions hereunder, the Holder shall not be required to
physically surrender this Debenture to the Company unless the exercise is the
final exercise of conversion rights hereunder. 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(s) converted and the date of such
conversion(s).  The Company may deliver an objection to any Notice of Conversion
within 2 Business Days of delivery of such Notice of Conversion.  In the event
of any dispute or discrepancy, the records of the Holder shall be controlling
and determinative in the absence of manifest error. The Holder, and any assignee
by acceptance of this Debenture, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of this Debenture may be
less than the amount stated on the face hereof.
 
(b)           Conversion Price.  The conversion price in effect on any
Conversion Date shall be equal to $0.24, subject to adjustment herein (the
“Conversion Price”).
 
(c)           Conversion Limitations.  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 set forth on the applicable Notice of Conversion, the Holder
(together with the Holder’s Affiliates, and any other person or entity acting as
a group together with the Holder or any of the 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 the 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
the 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 the Warrants) 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), 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 4(c)
applies, the determination of whether this Debenture is convertible (in relation
to other securities owned by the Holder together with any Affiliates) and of
which principal amount of this Debenture is convertible shall be in the sole
discretion of the Holder, and the submission of a Notice of Conversion shall be
deemed to be the Holder’s determination of whether this Debenture may be
converted (in relation to other securities owned by the Holder together with any
Affiliates) and which principal amount of this Debenture is convertible, in each
case subject to the Beneficial Ownership Limitation. 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), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as stated in the most
recent of the following:  (A) the Company’s most recent periodic or annual
report, 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 the Holder the number of shares of Common Stock
then outstanding.  In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Debenture, by the Holder or its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “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 Holder, upon not less than 61 days’
prior notice to the Company, may increase or decrease the Beneficial Ownership
Limitation provisions of this Section 4(c), provided that the Beneficial
Ownership Limitation in no event exceeds 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 this Debenture held by the Holder and
the Beneficial Ownership Limitation provisions of this Section 4(c) shall
continue to apply.  Any such increase or decrease will not be effective until
the 61st day after such notice is delivered to the Company.  The Beneficial
Ownership Limitation provisions of this paragraph shall be construed and
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 Beneficial Ownership Limitation
contained herein or to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations contained in this
paragraph shall apply to a successor holder of this Debenture.  Notwithstanding
anything to the contrary contained herein, the Beneficial Ownership Limitations
with respect to this Section 4(c) shall not apply to David Lies, Aequitas or
their respective affiliates.

 
 

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(d)           Mechanics of Conversion.
 
(i)           Conversion Shares Issuable Upon Conversion of Principal
Amount.  The number of Conversion Shares 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 each Conversion Date (the “Share Delivery Date”), the Company
shall deliver, or cause to be delivered, to the Holder a certificate or
certificates representing the Conversion Shares which, on or after the earlier
of (i) the six month anniversary of the Original Issue Date or (ii) the
Effective Date, shall be free of restrictive legends and trading restrictions
(other than those which may then be required by the Purchase Agreement)
representing the number of Conversion Shares being acquired upon the conversion
of this Debenture.
 
(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 the Conversion Date, the
Holder shall be entitled to elect by written notice to the Company at any time
on or before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder any
original Debenture delivered to the Company and the Holder shall promptly return
to the Company the Common Stock certificates representing the principal amount
of this Debenture unsuccessfully tendered for conversion to the Company.

 
 

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(iv)         Obligation Absolute; Partial Liquidated Damages.  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, that 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 anyone 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 to Holder,
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 outstanding principal amount
of this Debenture, which is subject to the injunction, which bond shall remain
in effect until the completion of arbitration/litigation of the underlying
dispute and the proceeds of which shall be payable to the Holder to the extent
it obtains judgment.  In the absence of such injunction, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion.  If the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(d)(ii) by the fifth Trading
Day after the Conversion Date (the “Share Delivery Deadline”), the Company shall
pay to the Holder, in cash, as liquidated damages and not as a penalty, for each
$1,000 of principal amount being converted, $10 per Trading Day (increasing to
$20 per Trading Day on the fifth (5th) Trading Day after such liquidated damages
begin to accrue) for each Trading Day after such fifth (5th) Trading Day until
such certificates are delivered.  Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and the Holder shall have the right to pursue all remedies
available to it hereunder, 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.  Notwithstanding
anything to the contrary contained herein, if at any time prior to the Senior
Creditor Repayment (as defined in the July Senior Lender Intercreditor
Agreement) the Company is prohibited from paying, and the Holder is prohibited
from receiving, cash payments of liquidated damages pursuant to this Section
4(d)(iv), at the option of the Holder upon written notice to the Company, such
amounts otherwise payable in cash pursuant to this Section 4(d)(iv) shall either
accrue, or be payable in the form of shares of Common Stock.  The price at which
shares of Common Stock issuable in lieu of the cash payment of liquidated
damages hereunder shall be equal to the lesser of (x) 90% of the average of the
10 consecutive VWAPs immediately prior to the date of the applicable Share
Delivery Deadline, (y) 90% of the average of the 10 consecutive VWAPs
immediately prior to the date such shares are actually issued or (z) the then
applicable Conversion Price.

 
 

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(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 by the Share Delivery Date pursuant to Section 4(d)(ii), and if
after such Share Delivery Date the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise), or the Holder’s brokerage
firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a
sale by the Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a “Buy-In”),
then the Company shall:  (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that the Holder was entitled to receive from the
conversion at issue multiplied by (2) the actual sale price at which the sell
order giving rise to such purchase obligation was executed (including any
brokerage commissions); 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 if the Company had 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 (including any brokerage
commissions) 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
and, upon request of the Company, evidence of the amount of such loss.  Nothing
herein shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
conversion of this Debenture as required pursuant to the terms hereof.
 
(vi)         Reservation of Shares Issuable Upon Conversion.  After the
Authorized Share Approval, the Company covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of Common
Stock for the sole purpose of issuance upon conversion of this Debenture and
payment of redemption amounts on this Debenture, each 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 aggregate 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 and payment of redemption
amounts hereunder.  The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly authorized, validly issued,
fully paid and nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.

 
 

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(vii)        Fractional Shares.  No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of this Debenture.  As to
any fraction of a share which Holder would otherwise be entitled to purchase
upon such conversion, the Company shall at its election, either pay a cash
adjustment in respect of such final fraction in an amount equal to such fraction
multiplied by the Conversion Price or round up to the next whole share.
 
(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 certificates, 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: (i) pays a stock dividend or otherwise
makes a distribution or distributions payable in shares of Common Stock on
shares of Common Stock or any Common Stock Equivalents (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the Company upon
conversion of, or payment of a redemption amount on, the Debentures), (ii)
subdivides outstanding shares of Common Stock into a larger number of shares,
(iii) combines (including by way of a reverse stock split) outstanding shares of
Common Stock into a smaller number of shares or (iv) issues, in the event of a
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 any
treasury shares of the Company) 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 5(a)
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re classification.

 
 

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(b)           Subsequent Equity Sales.  If, at any time while this Debenture is
outstanding,  the Company or any Subsidiary, as applicable, sells or grants any
option to purchase or sells or grants any right to reprice, or otherwise
disposes of or issues (or announces any 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 that is
lower than the then Conversion Price (such lower price, the “Base Conversion
Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder
of the Common Stock or Common Stock Equivalents so issued shall at any time,
whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share
that is lower 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.  If the Company enters into a Variable Rate Transaction, despite the
prohibition set forth in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised. The
Company shall notify the Holder in writing, no later than 1 Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 5(b), indicating therein the applicable issuance price, or
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, the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.
 
(c)           Subsequent Rights Offerings.  If the Company, at any time while
the Debenture is outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to subscribe for or
purchase shares of Common Stock at a price per share that is lower than the VWAP
on the record date referenced below, then the Conversion Price shall be
multiplied by a fraction of which the denominator shall be the number of shares
of the Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered (assuming delivery to the Company in full of
all consideration payable upon exercise of such rights, options or warrants)
would purchase at such VWAP.  Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights,
options or warrants.
 
(d)           Pro Rata Distributions.  If the Company, at any time while this
Debenture is outstanding, distributes to all holders of Common Stock (and not to
the Holders) evidences of its indebtedness or assets (including cash and cash
dividends) or rights or warrants to subscribe for or purchase any security
(other than the Common Stock, which shall be subject to Section 5(b)), then in
each such case the Conversion Price shall be adjusted by multiplying such
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to 1
outstanding share of the Common Stock as determined by the Board of Directors of
the Company in good faith.  In either case the adjustments shall be described in
a statement delivered to the Holder describing the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to 1 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.

 
 

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(e)           Fundamental Transaction.  If, at any time while this Debenture is
outstanding, (i) the Company effects any merger or consolidation of the Company
with or into another Person, (ii) the Company effects any sale of all or
substantially all of its assets in one transaction or a series of related
transactions, (iii) 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 (iv) 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 1 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 1 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 Section 5(e) 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 to the contrary, in the
event of a Fundamental Transaction that is (1) an all cash transaction, (2) a
“Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3)
a Fundamental Transaction involving a person or entity not traded on a national
securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market,
or the Nasdaq Capital Market, the Company or any successor entity shall pay at
the Holder’s option, exercisable at any time concurrently with or within 30 days
after the consummation of the Fundamental Transaction, an amount of cash equal
to the value of this Warrant as determined in accordance with the Black Scholes
Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (A)
a price per share of Common Stock equal to the VWAP of the Common Stock for the
Trading Day immediately preceding the date of consummation of the
applicable  Fundamental Transaction, (B) a risk-free interest rate corresponding
to the U.S. Treasury rate for a 30 day period immediately prior to the
consummation of the applicable Fundamental Transaction, (C) an expected
volatility equal to the 100 day volatility obtained from the “HVT” function on
Bloomberg L.P. determined as of the Trading Day immediately following the public
announcement of the applicable Fundamental Transaction and (D) a remaining
option time equal to the time between the date of the public announcement of
such transaction and the Termination Date.
 
(f)           Calculations.  All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.  For
purposes of this Section 5, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding any treasury shares of the Company) issued and
outstanding.

 
 

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(g)           Notice to the Holder.
 
(i)           Adjustment to Conversion Price.  Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 5, the Company shall promptly
deliver 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.
 
(ii)           Notice to Allow Conversion by Holder.  If:  (A) the Company shall
declare a dividend (or any other distribution in whatever form) 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 of 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; or (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 delivered to the Holder at its last address as
it shall appear upon the Debenture Register, at least twenty (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 deliver such notice or any defect therein or in the delivery thereof
shall not affect the validity of the corporate action required to be specified
in such notice.  The Holder is entitled to convert this Debenture during the
20-day period commencing on the date of such notice through the effective date
of the event triggering such notice.

 
 

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Section 6.              Quarterly Redemption.
 
(a)           Quarterly Redemption.  On each Quarterly Redemption Date except
during the period where there is an outstanding Event of Default, or where
payment of the Quarterly Redemption Amount is prohibited by the terms of the
July Senior Lender Intercreditor Agreement, the Company shall redeem the
Quarterly Redemption Amount (the “Quarterly Redemption”). The Quarterly
Redemption Amount payable on each Quarterly Redemption Date shall be paid in
cash no later than 45 days following the end of each consecutive three month
period during the term hereof commencing with the 3 months ended December 31,
2009, and continuing with respect to each 3 month period thereafter during the
term of this Debenture (each such period being a “Quarter”); provided, however,
as to any Quarterly Redemption and upon 15 Trading Days’ prior written
irrevocable notice (the “Quarterly Redemption Notice”), in lieu of a cash
redemption payment the Company may elect to pay all or part of a Quarterly
Redemption Amount in Conversion Shares based on a conversion price equal to the
lesser of (i) the then Conversion Price and (ii) 90% of the average of the VWAPs
for the 10 consecutive Trading Days ending on the Trading Day that is
immediately prior to the applicable Quarterly 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
Quarterly Redemption Date, the “Quarterly Conversion Price” and such 10 Trading
Day period, the “Quarterly Conversion Period”); provided, further, that the
Company may not pay the Quarterly Redemption Amount in Conversion Shares unless
(y) from the date the Holder receives the duly delivered Quarterly Redemption
Notice through and until the date such Quarterly Redemption is paid in full, the
Equity Conditions have been satisfied, unless waived in writing by the Holder,
and (z) as to such Quarterly Redemption, prior to such Quarterly Conversion
Period (but not more than 5 Trading Days prior to the commencement of the
Quarterly Conversion Period), the Company shall have delivered to the Holder’s
account with The Depository Trust Company (or if such account is not so
maintained, then to the address of the Holder) a number of shares of Common
Stock to be applied against such Quarterly Redemption Amount equal to the
quotient of (x) the applicable Quarterly Redemption Amount divided by (y) the
lesser of:  (A) the Conversion Price and (B) 90% of the average of the 10 VWAPs
during the period ending on the 3rd Trading Day immediately prior to the date of
the Quarterly Redemption Notice (the “Pre-Redemption Conversion Shares”).  The
Holder may convert, pursuant to Section 4(a), any principal amount of this
Debenture subject to a Quarterly Redemption at any time prior to the date that
the Quarterly Redemption Amount, plus liquidated damages and any other amounts
then owing to the Holder are due and paid in full.  The Holder shall have the
right to designate how any conversions effected during the applicable Quarterly
Conversion Period until the date the Quarterly Redemption Amount is paid in full
shall be applied (i.e., against the principal amount of this Debenture scheduled
to be redeemed on such Quarterly Redemption Date, against future Quarterly
Redemption Amounts or against the principal amount of this Debenture then
outstanding that is not subject to a Quarterly Redemption); provided, if no such
written designation is made in the applicable Notice of Conversion, the Company
shall request that the Holder provide such written designation prior to the
applicable Quarterly Redemption Date; provided, further, that in the event no
such written designation is ever received from the Holder prior to such
applicable Quarterly Redemption Date, any such conversion shall be applied
against the principal amount of this Debenture then outstanding.  The Company
covenants and agrees that it will honor all Notices of Conversion tendered up
until such amounts are paid in full.  The Company’s determination to pay a
Quarterly Redemption in cash, shares of Common Stock or a combination thereof
shall be applied ratably to all of the holders of the then outstanding
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 Quarterly Redemption Amount in
shares of Common Stock, and, if a Registration Statement is then effective, the
Company shall file a prospectus supplement pursuant to Rule 424 disclosing such
election.   If at any time prior to the Senior Creditor Repayment (as defined in
the July Senior Lender Intercreditor Agreement) the Company is permitted to make
cash payments of a Quarterly Redemption Amount, such permissible cash
payments  pursuant to this Section 6(a) shall be made ratably to all of the
holders of the then outstanding Debentures and any other debenture holder of the
Company not subordinated in right of payment to the Debentures, and thereafter,
ratably to the holders of the Other Debentures, and notwithstanding anything
herein to the contrary, prior to the Senior Creditor Repayment, (x) with respect
to the Quarterly Redemption Amount payable in cash as permitted pursuant to
Section 2(c)(iii) of the July Senior Lender Intercreditor Agreement that is due
on January 1, 2010, such Quarterly Redemption payment shall be due and paid on
the same date the Company pays the Senior Lender Purchasers pursuant to Section
2(c)(v) of the Senior Lender Loan Agreement and (y) with respect to any
Quarterly Redemption Amount payable in cash as permitted pursuant to Section
2(c)(iv) of the July Senior Lender Intercreditor Agreement, such Quarterly
Redemption payment shall be due and paid on the first day of each
month.   Notwithstanding anything to the contrary contained herein, if at any
time prior to the Senior Creditor Repayment (as defined in the July Senior
Lender Intercreditor Agreement) the Company is prohibited from paying, and the
Holder is prohibited from receiving, cash payments of a Quarterly Redemption
Amount pursuant to this Section 6(a), the Company shall be required to elect to
make such payment in shares of Common Stock in accordance with the terms
hereof.  If the Company does not meet the Equity Conditions in connection with
such Quarterly Redemption Amount described in the preceding sentence, at the
option of the Holder upon written notice to the Company, the Holder shall either
waive such Equity Conditions or such amounts otherwise payable in cash shall be
added to principal as additional “Cash Subscription Amount,” and in addition,
the OID Amount shall be increased by 75% of such additional Cash Subscription
Amount related to the Quarterly Redemption Amount that had been added to
principal for that month.  Notwithstanding anything to the contrary contained
herein, at any time preceding the Authorized Share Approval, the Company shall
be under no obligation to issue shares of Common Stock with respect to any
Quarterly Redemption to the extent that the issuance of said shares would
constitute an event of default with respect to any outstanding debentures issued
by the Company or corresponding purchase agreement, in which event the scheduled
Quarterly Redemption amount shall be converted to principal as outlined in the
preceding sentence.

 
 

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(b)           Redemption Procedure.  The payment of a Quarterly Redemption shall
be payable on the Quarterly Redemption Date.  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 the delivery
of a Notice of Conversion to the Company.
 
Section 7.              Negative Covenants.
 
As long as any portion of this Debenture remains outstanding, unless the holders
of at least 67% in principal amount of the then outstanding Debentures (“67%
Majority”) shall have otherwise given  written consent, the Company shall not,
and shall not permit any of its subsidiaries (whether or not a Subsidiary on the
Original Issue Date) to, directly or indirectly:
 
(a)           other than 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)           other than 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;
 
(c)           amend its charter documents, including, without limitation, its
certificate of incorporation and bylaws, in any manner that materially and
adversely affects any rights of the Holder;

 
 

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(d)           repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock or Common
Stock Equivalents other than as to (i) the Conversion Shares or Warrant Shares
as permitted or required under the Transaction Documents or under the
transaction documents associated with the Other Debentures (as that term is
defined in the Securities Purchase Agreement to which the form of this Debenture
is attached as an exhibit); (ii) repurchases of Common Stock or Common Stock
Equivalents of departing officers and directors of the Company, provided that
such repurchases shall not exceed an aggregate of $100,000 for all officers and
directors during the term of this Debenture; and (iii) repurchases of Debentures
or Other Debentures pursuant to approval of a 67% Majority.
 
(e)           other than the Senior Debt, repay, repurchase or offer to repay,
redeem or otherwise acquire any Indebtedness, other than: (i) the Debentures if
on a pro-rata basis, (ii) the Other Debentures as permitted under their
transaction documents; or (iii) any payables or other obligations with respect
to the Vendor Payment Plan and any amendments thereto as agreed to between the
Company and Collateral Agent, other than regularly scheduled principal and
interest payments as such terms are in effect as of the Original Issue Date, or
as otherwise agreed to between the Company and Collateral Agent,  provided that
such payments shall not be permitted if, at such time, or after giving effect to
such payment, any Event of Default exists or occurs;
 
(f)           pay cash dividends or distributions on any equity securities of
the Company;
 
(g)           enter into any transaction with any Affiliate of the Company which
would be required to be disclosed in any public filing with the Commission,
unless such transaction is made on an arm’s-length basis and expressly approved
by a majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval); or
 
(h)           enter into any agreement with respect to any of the foregoing.
 
Section 8.              Events of Default.
 
(a)           “Event of Default” means, wherever used herein, any of the
following events (whatever the reason for such event and whether such event
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) default interest, liquidated damages and other amounts owing
to a Holder on 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 default interest or other
default under clause (B) above, is not cured within 5 Trading Days or waived by
a 67% Majority of the Holders;
 
(ii)           the Company shall fail to observe or perform any other covenant
or agreement contained in the Debentures (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 (x) below) which failure is not waived by a
67% Majority  of the Holders, or cured, if possible to cure, within the earlier
to occur of:  (A) 7 Trading Days after notice of such failure sent by the Holder
or by any other Holder to the Company; and (B) 10 Trading Days after the Company
has become or should have become aware of such failure;

 
 

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(iii)          (A) a default or event of default (subject to any grace or cure
period provided in the applicable agreement, document or instrument) shall occur
under any of the Transaction Documents and not be cured or waived by a 67%
Majority of the Holders; or (B) there shall be an acceleration of the
indebtedness due by the Company with respect to the Senior Debt or any
refinancing thereof;
 
(iv)         any representation or warranty made in this Debenture, any other
Transaction Documents, any written statement pursuant hereto or thereto or any
other report, financial statement or certificate made or delivered to the Holder
or any other Holder shall be untrue or incorrect in any material respect as of
the date when made or deemed made;
 
(v)          the Company or any Significant Subsidiary (as such term is defined
in Rule 1-02(w) of Regulation S-X)  shall be subject to a Bankruptcy Event;
 
(vi)         except as noted below, the Company or any Subsidiary shall default
on 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 that:  (a) involves an obligation greater than $150,000,
whether such indebtedness now exists or shall hereafter be created; and (b)
results in such indebtedness becoming or being declared due and payable prior to
the date on which it would otherwise become due and payable and where such
obligation is not paid off or reinstated for its original term within 10 days
following such acceleration, unless waived by  a 67% Majority of the Holders;
 
(vii)        the Common Stock shall not be eligible for listing or quotation for
trading on a Trading Market and shall not be eligible to resume listing or
quotation for trading thereon within five Trading Days;
 
(viii)       the Company shall be a party to any Change of Control Transaction
or Fundamental Transaction or shall agree to sell or dispose of all or in excess
of 40% of its assets in one transaction or a series of related transactions
(whether or not such sale would constitute a Change of Control Transaction);
 
(ix)          the Company does not meet the current public information
requirements under Rule 144 in respect of the Underlying Shares at any time
following August 19, 2009;
 
(x)           the Company shall fail for any reason to deliver certificates to a
Holder prior to the seventh Trading Day after a Conversion Date pursuant to
Section 4(d) or the Company shall provide at any time notice to the Holder,
including by way of public announcement, of the Company’s intention to not honor
requests for conversions of any Debentures in accordance with the terms hereof;
or
 
(xi)          any monetary judgment, writ or similar final process shall be
entered or filed against the Company, any subsidiary or any of their respective
property or other assets for more than $100,000, and such judgment, writ or
similar final process shall remain unvacated, unbonded or unstayed for a period
of 45 calendar days, unless waived by a 67% Majority of the Holders..

 
 

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(b)           Remedies Upon Event of Default.  Subject to the July Senior Lender
Intercreditor Agreement, if any Event of Default occurs, the outstanding
principal amount of this Debenture, plus liquidated damages and other amounts
owing in respect thereof through the date of acceleration, shall become, at the
election of Holders of at least 67% of the Debentures, immediately due and
payable in cash at the Mandatory Default Amount.  Commencing 5 days after the
occurrence of any Event of Default that results in the eventual acceleration of
this Debenture, interest on this Debenture shall accrue at an interest rate
equal to the lesser of 12% per annum or the maximum rate permitted under
applicable law.  Accrued and unpaid default interest shall be paid by the
Company in cash in arrears on the first day of each calendar month.  Upon the
payment in full of the Mandatory Default Amount, the Holder shall promptly
surrender this Debenture to or as directed by the Company.  In connection with
such acceleration described herein, 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 acceleration may be rescinded and
annulled by Holder at any time prior to payment hereunder and the Holder shall
have all rights as a holder of the Debenture until such time, if any, as the
Holder receives full payment pursuant to this Section 8(b).  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, or sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, or such other
facsimile number or address as the Company may specify for such purpose by
notice to the Holder delivered in accordance with this Section 9(a).  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, or sent by
a nationally recognized overnight courier service addressed to each Holder at
the facsimile number or address of the Holder appearing on the books of the
Company, or if no such facsimile 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 number specified on the signature page prior to 5:30
p.m. (New York City time), (ii) the date immediately following the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified on the signature page between 5:30 p.m. (New York
City time) and 11:59 p.m. (New York City time) on any date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) upon actual receipt by the party to whom such
notice is required to be given.
 
(b)           Absolute Obligation.  Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, liquidated damages
and default interest, as applicable, 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.

 
 

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(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, 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 conflict of laws thereof.  Each
party agrees that all legal proceedings concerning the interpretation,
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 such New York Courts,
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 other
manner permitted by applicable 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 in the investigation,
preparation and prosecution of such action or proceeding.
 
(e)           Waiver.  Any waiver by the Company or the Holder of a breach of
any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture.  The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture.  Any waiver by the Company or the Holder must be in writing.

 
 

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(f)           Severability.  If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any Person or circumstance, it shall
nevertheless remain applicable to all other Persons and circumstances.  If it
shall be found that any default interest or other amount deemed interest due
hereunder violates the applicable law governing usury, the applicable rate of
interest due hereunder shall automatically be lowered to equal the maximum rate
of interest permitted under applicable law. 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 default 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 impede 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 any surviving entity
in a Fundamental Transaction shall (i) assume, prior to such Fundamental
Transaction, 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) and (ii) 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 amount and the interest rate of this
Debenture and having similar ranking to this Debenture, which shall be
satisfactory to the Holder (any such approval not to be unreasonably withheld or
delayed).  The provisions of this Section 9(i) shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to
any limitations of this Debenture.
 
(j)           Secured Obligation.  The obligations of the Company under this
Debenture are secured by all assets of the Company and each Subsidiary pursuant
to the Security Agreement, dated as of July__, 2009 between the Company, the
Subsidiaries of the Company and the Secured Parties (as defined therein).
 
(k)           Amendments.  This Debenture may be modified or amended and the
provisions hereof waived with the written consent of the Company and Holders
holding Debentures at least equal to 67% of the aggregate principal amount then
outstanding under all Debentures.
 
*********************
 
[SIGNATURE PAGES FOLLOW]

 
 

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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.
 

 
CAPITAL GROWTH SYSTEMS, INC.
     
By:
     
  Patrick C. Shutt
   
  Chief Executive Officer
     
Facsimile:  
(312) 673-2422
   
(for delivery of Notices)

 
 

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