Exhibit 10.3


 


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: January 6, 2006


Original Conversion Price (subject to
adjustment herein): $0.60


 


$                      


 


 


8% CONVERTIBLE DEBENTURE

DUE DECEMBER JANUARY 6, 2008


 


THIS CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued 8% Convertible Debentures of Crdentia Corp., a Delaware corporation, having a principal place of business at                               (the “Company”), designated as its 8% Convertible Debenture, due January 6, 2009 (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 January 6, 2009 or such
earlier date as this Debenture is required or permitted to be repaid as
provided hereunder (the “Maturity Date”), and to pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture in accordance with the provisions hereof.  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:


 


1





















 


“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).


 


“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 40% 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 60% 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 60% 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) through (iv).


 


“Common Stock” means the common stock,
par value $.0001 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 or as payment of
interest in accordance with the terms.


 


2





















 


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


 


“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 believes, in
good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (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 believes, in good faith, that
trading of the Common Stock on a Trading Market will continue uninterrupted for
the foreseeable future), (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 or event which, with the passage of time or
the giving of notice, would constitute an Event of Default, (vii) the issuance
of the shares in question to the Holder would not violate the limitations 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.


 


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


 


“Interest Conversion Rate” means the
lesser of (a) the Conversion Price and (b) the 90% of the lesser of (i) the
average of the VWAPs for the 20 consecutive Trading Days ending on the Trading
Day that is immediately prior to the applicable Interest Payment Date or (ii)
the average of the VWAPs for the 20 consecutive Trading Days ending on the
Trading Day that is immediately prior to the date the applicable interest
payment shares are issued and delivered if after the Interest Payment Date.


 


“Interest Conversion Shares” shall
have the meaning set forth in Section 2(a).


 


“Interest Notice Period” shall have
the meaning set forth in Section 2(a).


 


“Interest Payment Date” shall have the
meaning set forth in Section 2(a).


 


3





















 


“Interest Share Amount” shall have the
meaning set forth in Section 2(a).


 


“Late Fees” shall have the meaning set
forth in Section 2(d).


 


“Mandatory Default Amount”  shall equal (1) as to Events of Default set
forth in Sections 8(a)(i), 8(a)(ii), 8(a)(iii), 8(a)(iv), 8(a)(v)(as to
voluntary bankruptcy or insolvency proceedings), 8(a)(vi), 8(a)(vii), 8(a)(viii)
(as to Change of Control Transactions or Fundamental Transactions approved by
the Board of Directors of the Company), 8(a)(ix) (if the Company does not respond
to all comments from the Commission within the time period  provided for in Section 2(b) of the
Registration Rights Agreement), 8(a)(x), 8(a)(xi) and 8(a)(xii) the sum of (i)
the greater of: (A) 130% of the principal amount of this Debenture to be
prepaid, plus all accrued and unpaid interest thereon, or (B) the principal
amount of this Debenture to be prepaid, plus all other accrued and unpaid
interest hereon, 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 VWAP 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 and (2) as to Events of Default set forth in Sections
8(a)(v) (as to involuntary bankruptcy proceedings), 8(a)(viii) (as to Change of
Control Transactions or Fundamental Transactions not approved by the Board of
Directors of the Company) and 8(a)(ix) (so long as the Company responds to all
comments from the Commission within the time period provided for in Section
2(b) of the Registration Rights Agreement) the sum of (i) if such Event of
Default occurs on or before the one year anniversary of the Original Issue
Date, 108% of the principal amount of this Debenture to be prepaid, plus all
accrued and unpaid interest thereon, (ii) if such Event of Default occurs after
the one year anniversary of the Original Issue Date but on or before the two
year anniversary of the Original Issue Date, 104% of the principal amount of
this Debenture to be prepaid, plus all accrued and unpaid interest thereon or
(iii) if such Event of Default occurs after the two year anniversary of the
Original Issue Date, 100% of the principal amount of this Debenture to be
prepaid, plus all accrued and unpaid interest thereon.


 


“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).


 


“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.


 


“Permitted Indebtedness” shall mean
(a) the Indebtedness existing on the Original Issue Date and set forth on Schedule
3.1(gg) attached to the Purchase Agreement, (b) lease obligations and
purchase money Indebtedness of up to $250,000, in the aggregate,


 


4





















 


incurred in connection with the acquisition
of capital assets and lease obligations with respect to newly acquired or
leased assets, (c) up to $11,350,000 of Indebtedness incurred under the Company’s
existing credit facility with Bridge Healthcare Finance, LLC and Bridge
Opportunity Finance, LLC) and (d) up to $6,000,000 of Indebtedness issued to
the owners of targets of acquisitions or strategic transactions; provided that
any such Indebtedness referred to in this clause (d) shall be expressly
subordinated in right of payment of principal and interest to the prior payment
in full (by cash payment or conversion) of the Indebtedness represented by this
Debenture.


 


“Permitted Lien” shall mean 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 business, such as carriers’, warehousemen’s and mechanics’
Liens, statutory landlords’ Liens, and other similar Liens arising in the
ordinary course of business, and (x) which 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) which are being contested in
good faith by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property or asset subject to such Lien
and (c) Liens incurred in connection with Permitted Indebtedness under clauses
(a), (b) or (c) thereunder.


 


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


 


“Purchase Agreement” means the
Securities Purchase Agreement, dated as of January 6, 2006 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.


 


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


 


5





















 


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


 


“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 OTC Bulletin Board or the Nasdaq
National Market.


 


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


 


“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
as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m.
Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common Stock is not then
listed or quoted on a Trading Market and if prices for the Common Stock are
then reported in the “Pink Sheets” published by the Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported;
or (c) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the Holder
and reasonably acceptable to the Company.


 


Section 2.               Interest.


 


a)             Payment
of Interest in Cash or Kind. The Company shall pay interest to the Holder
on the aggregate unconverted and then outstanding principal amount of this
Debenture at the rate of 8% per annum, payable semiannually on January 1 and June
1, beginning on the first such date after the Original Issue Date, on each
Conversion Date (as to that principal amount then being converted) and on the
Maturity Date (except that, if any such date is not a Business Day, then such
payment shall be due on the next succeeding Business Day) (each such date, an “Interest
Payment Date”), in cash or duly authorized, fully paid and non-assessable shares
of Common Stock at the Interest Conversion Rate, or a combination thereof  (the amount to be paid in shares, the “Interest
Share Amount”); provided, however, (i) payment in shares of
Common Stock may only occur if during the 20 Trading Days immediately prior to
the applicable Interest Payment Date  (the “Interest Notice Period”) and
through and including the date such shares of Common Stock are issued to the
Holder all of the Equity Conditions, unless waived by the Holder in writing,
have been met and the Company shall have given the Holder notice in accordance
with the notice requirements set forth below and (ii) as to such Interest Payment
Date, prior to the such Interest Notice Period (but not more 5 Trading Days


 


6





















 


prior to the commencement of the Interest Notice 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 Interest Share
Amount equal to the quotient of (x) the applicable Interest Share Amount
divided by (y) the then Conversion Price (the “Interest Conversion Shares”).


 


b)            Company’s
Election to Pay Interest in Kind.  Subject
to the terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the discretion of the
Company.  Prior to the commencement of an
Interest Notice Period, the Company shall provide the Holder with written
notice of its election to pay interest hereunder on the applicable Interest
Payment Date either in cash, shares of Common Stock or a combination thereof (the
Company may indicate in such notice that the election contained in such notice
shall continue for later periods until revised) and the Interest Share Amount
as to the applicable Interest Payment Date. 
During any Interest Notice Period, the Company’s election (whether
specific to an Interest Payment Date or continuous) shall be irrevocable as to
such Interest Payment Date.  Subject to
the aforementioned conditions, failure to timely provide such written notice
shall be deemed an election by the Company to pay the interest on such Interest
Payment Date in cash.  At any time the
Company delivers a notice to the Holder of its election to pay the interest in
shares of Common Stock, the Company shall file a prospectus supplement pursuant
to Rule 424 disclosing such election. 
The aggregate number of shares of Common Stock otherwise issuable to the
Holder on an Interest Payment Date shall be reduced by the number of Interest
Conversion Shares previously issued to the Holder in connection with such
Interest Payment Date.


 


c)             Interest
Calculations. Interest shall be calculated on the basis of a 360-day year
and shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made.  Payment of interest in shares of Common Stock
(other than the Interest Conversion Shares issued prior to an Interest Notice
Period) shall otherwise occur pursuant to Section 4(d)(ii) and only for
purposes of the payment of interest in shares, the Interest Payment Date shall
be deemed the Conversion Date.  Interest
shall cease to accrue with respect to any principal amount converted, provided
that the Company in fact delivers the Conversion Shares within the time period
required by Section 4(d)(ii).  Interest
hereunder will be paid to the Person in whose name this Debenture is registered
on the records of the Company regarding registration and transfers of this
Debenture (the “Debenture Register”). Except as otherwise provided
herein, if at any time the Company pays interest partially in cash and
partially in shares of Common Stock to the holders of the Debentures, then such
payment shall be distributed ratably among the holders of the Debentures based
on their (or their predecessor’s initial purchases of Debentures pursuant to
the Purchase Agreement.


 


d)            Late
Fee.  All overdue accrued and unpaid
interest to be paid hereunder shall entail a late fee at the rate of 18% per
annum (or such lower maximum amount of interest permitted to be charged under
applicable law) (“Late Fees”) which will accrue


 


7





















 


daily, from the date such interest is due hereunder through and
including the date of payment. Notwithstanding anything to the contrary
contained herein, if on any Interest Payment Date the Company has elected to
pay interest in Common Stock and is not able to pay accrued interest in the
form of Common Stock because it does not then satisfy the conditions for
payment in the form of Common Stock set forth above, then, at the option of the
Holder, the Company, in lieu of delivering either shares of Common Stock
pursuant to this Section 2 or paying the regularly scheduled cash interest
payment, shall deliver, within three Trading Days of each applicable Interest Payment
Date, an amount in cash equal to the product of the number of shares of Common
Stock otherwise deliverable to the Holder in connection with the payment of
interest due on such Interest Payment Date and the highest VWAP during the
period commencing on the Interest Payment Date and ending on the Trading Day
prior to the date such payment is made. 
If any Interest Conversion Shares are issued to the Holder in connection
with an Interest Payment Date and are not applied against an Interest Share
Amount, then the Holder shall promptly return such excess shares to the
Company.


 


e)             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.


 


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 


 


8





















 


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 plus all accrued and
unpaid interest thereon 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 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 $0.60 (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 such conversion, such Holder (together with such Holder’s affiliates, and
any other person or entity acting as a group together with such Holder or any
of such Holder’s affiliates), as set forth on the applicable Notice of
Conversion, would beneficially own in excess of the Beneficial Ownership
Limitation (as defined below).  For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by such Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which 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
principal amount of this Debenture beneficially owned by such 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 such 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 such Holder together with
any affiliates) and of which amounts of this Debenture are convertible shall be
in the sole discretion of such Holder, and the submission of a Notice of
Conversion shall be


 


9





















 


deemed to be such Holder’s determination of whether this Debenture may
be converted (in relation to other securities owned by such Holder) and which
amounts of this Debenture are convertible, in each case subject to such
aggregate percentage limitations. To ensure compliance with this restriction,
each Holder will be deemed to represent to the Company each time it delivers a
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,
a Holder may rely on the number of outstanding shares of Common Stock as
reflected in the most recent of the following: (A) the Company’s most recent
Form 10-QSB or Form 10-KSB, as the case may be, (B) a more recent public
announcement by the Company or (C) 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 a Holder, the Company
shall within two Trading Days confirm orally and in writing to such Holder the
number of shares of Common Stock then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Debenture, by such Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon conversion of this Debenture held by the
Holder.  The Beneficial Ownership
Limitation provisions of this Section 4(c) may be waived by such Holder, at the
election of such Holder, upon not less than 61 days’ prior notice to the
Company to change the Beneficial Ownership Limitation to 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 provisions of this Section 4(c) shall continue to
apply.  Upon such a change by a Holder of
the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99%
limitation, the Beneficial Ownership Limitation may not be waived by such
Holder.  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 Beneficial Ownership
Limitation herein contained 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.


 


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


 


10





















 


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) 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 (including,
if the Company has given continuous notice pursuant to Section 2(b) for payment
of interest in shares of Common Stock at least 20 Trading Days prior to the
date on which the Conversion Notice is delivered to the Company, shares of
Common Stock representing the payment of accrued interest otherwise determined
pursuant to Section 2(a) but assuming that the Interest Payment Period is the
20 Trading Days period immediately prior to the date on which the Conversion
Notice is delivered to the Company and excluding for such issuance the
condition that the Company deliver Interest Conversion Shares as to such
interest payment) and (B) a bank check in the amount of accrued and unpaid
interest (if the Company is required to pay accrued interest in cash). 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 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


 


11





















 


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 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


 


12





















 


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.


 


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 and payment of interest 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 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 interest
hereunder.  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 respect of any final
fraction of a share based on the VWAP 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


 


13





















 


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,
including as interest thereon), (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)            [RESERVED].


 


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 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 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 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


 


14





















 


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.


 


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 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


 


15





















 


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


 


Section 6.               [RESERVED].


 


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)             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


 


16





















 


owned or
hereafter acquired or any interest therein or any income or profits therefrom;
without the prior written consent of a majority in interest of the Holders in
each instance;


 


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
certificate of incorporation, bylaws or other charter documents so as to materially
and 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 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.


 


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) interest
(including Late Fees) on, 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 an interest payment or other default under clause (B) above, is not
cured, within 3 Trading Days (except that the Company shall have 10 Trading
Days to cure any default arising out of the failure of the Company’s transfer
agent to deliver stock certificates to a Holder if an interest payment is made
in the form of Common Stock);


 


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) 10 Trading Days after
notice of such default sent by the Holder or by any other Holder and (B)20
Trading Days after the Company shall become or should have become aware of such
failure;


 


17





















 


iii.            a default or event
of default (subject to any grace or cure period provided for in the applicable
agreement, document or instrument) shall be declared by the counterparty under
(A) any of the Transaction Documents, or (B) any other material agreement,
lease, document or instrument to which the Company or any Subsidiary is bound
(other than, with respect to (B), a default or event of default related to
claims which the Company is contesting in good faith);


 


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;


 


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 $250,000,
whether such 


 


18





















 


indebtedness
now exists or shall hereafter be created and such default shall result in such
indebtedness being declared due and payable prior to the date on which it would
otherwise become due and payable;


 


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,
shall agree to sell or dispose of all or in excess of 50% of its assets in one
or more transactions (whether or not such sale would constitute a Change of
Control Transaction) or shall 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 270th 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 45 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
fail for any reason to deliver certificates to a Holder prior to the tenth
Trading Day after a 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; or


 


xii.           any monetary
judgment, writ or similar final process shall be entered or filed against the
Company, any Subsidiary or any of their respective 


 


19





















 


property or other assets for than $250,000,
and shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.


 


b)            Remedies
Upon Event of Default. If any Event of Default occurs, the full principal
amount of this Debenture, together with interest and 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


 


20





















 


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, interest 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


 


21





















 


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.


 


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 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


 


22





















 


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


 


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


 


23





















 


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.


 


 


	
   

  	
  CRDENTIA
  CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 


24





















 


ANNEX
A


 


NOTICE
OF CONVERSION


 


 


The undersigned hereby elects to convert
principal under the 8% Convertible Debenture of Crdentia Corp., a Delaware corporation (the “Company”),
due on January 6, 2009 into
shares of common stock, par value $.0001 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:

  
	
   

  	
   

  
	
   

  	
  Payment of Interest in Common Stock     yes    
  no

  
	
   

  	
  If yes, $      of
  Interest Accrued on Account of Conversion at Issue.

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be issued:

  
	
   

  	
   

  
	
   

  	
  Signature:

  
	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
   

  
	
   

  	
  Address:

  



 


25





















 


Schedule
1


 


CONVERSION
SCHEDULE


 


The 8%
Convertible Debentures due on December [  , 2008 in the
aggregate principal amount of $            
issued by Crdentia Corp.  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

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


26