Exhibit
10.1


 


SECURITIES
PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”)
is dated as of January 6, 2006 among Crdentia Corp., a Delaware corporation
(the “Company”), and each purchaser identified on the signature pages
hereto (each, including its successors and assigns, a “Purchaser” and
collectively the “Purchasers”).


 


WHEREAS, subject to the terms and conditions
set forth in this Agreement and pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the “Securities Act”) and Rule 506 promulgated
thereunder, the Company desires to issue and sell to each Purchaser, and each
Purchaser, severally and not jointly, desires to purchase from the Company,
securities of the Company as more fully described in this Agreement.


 


NOW, THEREFORE, IN CONSIDERATION of the
mutual covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the Company
and each Purchaser agree as follows:


 


ARTICLE I.


DEFINITIONS


 


1.1           Definitions.  In addition to the terms defined elsewhere in
this Agreement: (a) capitalized terms that are not otherwise defined herein
have the meanings given to such terms in the Debentures (as defined herein),
and (b) the following terms have the meanings indicated in this Section 1.1:


 


“Action” shall have the meaning
ascribed to such term in Section 3.1(j).


 


“Affiliate” means any Person that,
directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with a Person, as such terms are used
in and construed under Rule 144 under the Securities Act.  With respect to a Purchaser, any investment
fund or managed account that is managed on a discretionary basis by the same
investment manager as such Purchaser will be deemed to be an Affiliate of such
Purchaser.


 


“Closing” means the closing of the
purchase and sale of the Securities pursuant to Section 2.1.


 


“Closing Date” means the Trading Day
when all of the Transaction Documents have been executed and delivered by the
applicable parties thereto, and all conditions precedent to (i) the Purchasers’
obligations to pay the Subscription Amount and (ii) the Company’s obligations
to deliver the Securities have been satisfied or waived.


 


 “Commission”
means the Securities and Exchange Commission.


 





















 


“Common Stock” means the common stock
of the Company, par value $.0001 per share, and any other class of securities
into which such securities may hereafter have been reclassified or changed into.


 


“Common Stock Equivalents” means any
securities of the Company or the Subsidiaries which would entitle the holder
thereof to acquire at any time Common Stock, including, without limitation, any
debt, preferred stock, rights, options, warrants or other instrument that is at
any time convertible into or exercisable or exchangeable for, or otherwise
entitles the holder thereof to receive, Common Stock.


 


“Company Counsel” means Morrison &
Foerster LLP.


 


“Conversion Price” shall have the
meaning ascribed to such term in the Debentures.


 


“Debentures” means, the 8% Convertible
Debentures due, subject to the terms therein, 3 years from their date of
issuance, issued by the Company to the Purchasers hereunder, in the form of Exhibit
A.


 


“Disclosure Schedules” shall have the
meaning ascribed to such term in Section 3.1.


 


“Effective Date” means the date that
the initial Registration Statement filed by the Company pursuant to the
Registration Rights Agreement is first declared effective by the Commission.


 


“Evaluation Date” shall have the
meaning ascribed to such term in Section 3.1(r).


 


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


 


“Exempt Issuance” means the issuance
of (a) shares of Common Stock or options to employees, officers or directors of
the Company pursuant to any stock or option plan duly adopted by a majority of
the non-employee members of the Board of Directors of the Company or a majority
of the members of a committee of non-employee directors established for such
purpose, (b) securities upon the exercise or exchange of or conversion of any Securities
issued hereunder and/or securities exercisable or exchangeable for or convertible
into shares of Common Stock issued and outstanding on the date of this
Agreement, provided that such securities have not been amended since the date
of this Agreement to increase the number of such securities or to decrease the
exercise, exchange or conversion price of any such securities, and (c)
securities issued pursuant to acquisitions or strategic transactions approved
by a majority of the disinterested directors, provided any such issuance shall
only be to a Person which is, itself or through its subsidiaries, an operating
company in a business synergistic with the business of the Company and in which
the Company receives benefits in addition to the investment of funds, but shall
not include a transaction in which the Company is issuing


 


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securities primarily for the purpose of
raising capital or to an entity whose primary business is investing in
securities.


 


 “FW”
means Feldman Weinstein LLP with offices located at 420 Lexington Avenue, Suite
2620, New York, New York 10170-0002.


 


“GAAP” shall have the meaning ascribed
to such term in Section 3.1(h).


 


“Intellectual Property Rights” shall
have the meaning ascribed to such term in Section 3.1(o).


 


“Legend Removal Date” shall have the
meaning ascribed to such term in Section 4.1(c).


 


“Liens” means a lien, charge, security
interest, encumbrance, right of first refusal, preemptive right or other
restriction.


 


“Long Term Warrants” means
collectively the Common Stock purchase warrants, in the form of Exhibit C
delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
hereof, which Warrants shall be exercisable immediately and have a term of
exercise equal to five (5) years.


 


“Material Adverse Effect” shall have
the meaning assigned to such term in Section 3.1(b).


 


“Material Permits” shall have the
meaning ascribed to such term in Section 3.1(m).


 


“Maximum Rate” shall have the meaning
ascribed to such term in Section 5.17.


 


“Participation Maximum” shall have the
meaning ascribed to such term in Section 4.13.


 


“Person” means an individual or
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or
an agency or subdivision thereof) or other entity of any kind.


 


“Pre-Notice” shall have the meaning
ascribed to such term in Section 4.13.


 


“Proceeding” means an action, claim,
suit, investigation or proceeding (including, without limitation, an
investigation or partial proceeding, such as a deposition), whether commenced
or threatened.


 


“Purchaser Party” shall have the
meaning ascribed to such term in Section 4.11.


 


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“Registration Rights Agreement” means
the Registration Rights Agreement, dated the date hereof, among the Company and
the Purchasers, in the form of Exhibit B attached hereto.


 


“Registration Statement” means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering the resale of the Underlying Shares by each
Purchaser as provided for in the Registration Rights Agreement.


 


“Required Approvals” shall have the
meaning ascribed to such term in Section 3.1(e).


 


“Required Minimum” means, as of any
date, the maximum aggregate number of shares of Common Stock then issued or
potentially issuable in the future pursuant to the Transaction Documents,
including any Underlying Shares issuable upon exercise or conversion in full of
all Warrants and Debentures (including Underlying Shares issuable as payment of
interest), ignoring any conversion or exercise limits set forth therein, and
assuming that the Conversion Price is at all times on and after the date of
determination 75% of the then Conversion Price on the Trading Day immediately
prior to the date of determination.


 


“Rule 144” means Rule 144 promulgated
by the Commission pursuant to the Securities Act, as such Rule may be amended
from time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.


 


“SEC Reports” shall have the meaning
ascribed to such term in Section 3.1(h).


 


“Securities” means the Debentures, the
Warrants, the Warrant Shares and the Underlying Shares.


 


“Securities Act” means the Securities
Act of 1933, as amended.


 


“Short Sales” shall
include all “short sales” as defined in Rule 200 of Regulation SHO under the
Exchange Act (but shall not be deemed to include the location and/or
reservation of borrowable shares of Common Stock) and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated brokers. 


 


“Short Term Warrants” means
collectively the Common Stock purchase warrants, in the form of Exhibit E
delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
hereof, which Warrants shall be exercisable immediately and have a term of
exercise equal to the earlier of the two month anniversary of the Effective
Date or the 13 month anniversary of the issuance thereof.


 


“Subscription Amount” means, as to
each Purchaser, the aggregate amount to be paid for Debentures and Warrants
purchased hereunder as specified below such


 


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Purchaser’s name on the signature page of
this Agreement and next to the heading “Subscription Amount”, in United States
Dollars and in immediately available funds.


 


“Subsequent Financing” shall have the
meaning ascribed to such term in Section 4.13.


 


“Subsequent Financing Notice” shall
have the meaning ascribed to such term in Section 4.13.


 


“Subsidiary” means any subsidiary of
the Company as set forth on Schedule 3.1(a).


 


“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 Capital Market, the American Stock
Exchange, the New York Stock Exchange, the Nasdaq National Market or the OTC
Bulletin Board.


 


“Transaction Documents” means this
Agreement, the Debentures, the Warrants, the Registration Rights Agreement and
any other documents or agreements executed in connection with the transactions
contemplated hereunder.


 


“Underlying Shares” means the shares
of Common Stock issued and issuable upon conversion of the Debentures and upon
exercise of the Warrants and issued and issuable in lieu of the cash payment of
interest on the Debentures in accordance with the terms of the Debentures.


 


“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 quoted on the OTC Bulletin Board, 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 listed or quoted
on the OTC Bulletin Board 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 (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 Purchasers and
reasonably acceptable to the Company.


 


“Warrants” means collectively the Long
Term and Short Term Warrants.


 


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“Warrant Shares” means the shares of
Common Stock issuable upon exercise of the Warrants.


 


ARTICLE II.


PURCHASE AND SALE


 


2.1           Closing.  On the Closing Date, upon the terms and
subject to the conditions set forth herein, concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser agrees to purchase in the aggregate, severally and not
jointly, up to $6,000,000 principal amount of the Debentures, with a minimum
aggregate Subscription Amount of $2,000,000. 
Each Purchaser shall deliver to the Company via wire transfer or a
certified check immediately available funds equal to their Subscription Amount
and the Company shall deliver to each Purchaser their respective Debenture and
Warrants as determined pursuant to Section 2.2(a) and the other items set forth
in Section 2.2 issuable at the Closing. 
Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3,
the Closing shall occur at the offices of FW, or such other location as the
parties shall mutually agree.


 


2.2           Deliveries.


 


(a)           On the Closing Date,
the Company shall deliver or cause to be delivered to each Purchaser the
following:


 


(i)                                     this
Agreement duly executed by the Company;


 


(ii)           a legal opinion of
Company Counsel, in the form of Exhibit D attached hereto;


 


(iii)          a Debenture with a
principal amount equal to such Purchaser’s Subscription Amount, registered in the
name of such Purchaser;


 


(iv)          a Long Term Warrant
registered in the name of such Purchaser to purchase up to a number of shares
of Common Stock equal to 50% of such Purchaser’s Subscription Amount divided by
$0.60, with an exercise price equal to $0.75, subject to adjustment therein;


 


(v)           a Short Term Warrant
registered in the name of such Purchaser to purchase up to a number of shares
of Common Stock equal to 100% of such Purchaser’s Subscription Amount divided
by $0.60, with an exercise price equal to $0.60, subject to adjustment therein;
and


 


(vi)          the Registration
Rights Agreement duly executed by the Company.


 


(b)           On the Closing Date,
each Purchaser shall deliver or cause to be delivered to the Company the
following:


 


(i)                                     this
Agreement duly executed by such Purchaser;


 


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(ii)           such Purchaser’s
Subscription Amount by wire transfer to the account as specified in writing by
the Company; and


 


(iii)          the Registration
Rights Agreement duly executed by such Purchaser.


 


2.3           Closing
Conditions.


 


(a)             The
obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being met:


 


(i)            the accuracy in all
material respects when made and on the Closing Date of the representations and
warranties of the Purchasers contained herein;


 


(ii)           all obligations,
covenants and agreements of the Purchasers required to be performed at or prior
to the Closing Date shall have been performed; and


 


(iii)          the delivery by the
Purchasers of the items set forth in Section 2.2(b) of this Agreement.


 


(b)             The
respective obligations of the Purchasers hereunder in connection with the
Closing are subject to the following conditions being met:


 


(i)            the accuracy in all
material respects on the Closing Date of the representations and warranties of
the Company contained herein;


 


(ii)           all obligations,
covenants and agreements of the Company required to be performed at or prior to
the Closing Date shall have been performed;


 


(iii)          the delivery by the Company of the items set forth in
Section 2.2(a) of this Agreement;


 


(iv)          there shall have been no Material Adverse Effect with
respect to the Company since the date hereof;


 


(v)           the sale of $2,000,000 of Common Stock to MedCap
Partners, L.P. (“MedCap”) at a purchase price of $0.60 per share paid through
the cancellation of those certain promissory notes of the Company issued to
MedCap on November 18, 2005 in the aggregate principal amount of $2,000,000
(the “MedCap Transaction”) shall have been consummated contemporaneous with the
Closing hereunder on terms and conditions reasonably satisfactory to the
Purchasers; and


 


(vi)          from the date hereof
to the Closing Date, trading in the Common Stock shall not have been suspended
by the Commission  or the Company’s
principal Trading Market (except for any suspension of trading of limited
duration


 


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agreed to by
the Company, which suspension shall be terminated prior to the Closing), and,
at any time prior to the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose
trades are reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States or New York
State authorities nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Debentures at the Closing.


 


ARTICLE III.


REPRESENTATIONS
AND WARRANTIES


 


3.1           Representations and Warranties of
the Company.  Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the “Disclosure Schedules”) which
Disclosure Schedules shall be deemed a part hereof, the Company hereby makes
the representations and warranties set forth below to each Purchaser.


 


(a)           Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and
clear of any Liens, and all the issued and outstanding shares of capital stock
of each Subsidiary are validly issued and are fully paid, non-assessable and
free of preemptive and similar rights to subscribe for or purchase
securities.  If the Company has no
subsidiaries, then references in the Transaction Documents to the Subsidiaries
will be disregarded.


 


(b)           Organization and
Qualification.  The Company and each
of the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted.  Neither the
Company nor any Subsidiary is in violation or default of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. 
Each of the Company and the Subsidiaries is duly qualified to conduct
business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not have or
reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material


 


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Adverse Effect”)
and no Proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing or seeking to revoke, limit or curtail such power and
authority or qualification.


 


(c)           Authorization;
Enforcement.  The Company has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and otherwise to
carry out its obligations hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals.  Each Transaction Document has been (or upon
delivery will have been) duly executed by the Company and, when delivered in
accordance with the terms hereof and thereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.


 


(d)           No
Conflicts.  The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the other transactions contemplated hereby and thereby
do not and will not: (i) conflict with or violate any provision of the Company’s
or any Subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, result in the creation of any Lien upon any of the properties
or assets of the Company or any Subsidiary, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii),
such as could not have or reasonably be expected to result in a Material
Adverse Effect.


 


(e)           Filings,
Consents and Approvals.  The Company
is not required to obtain any consent, waiver, authorization or order of, give
any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) filings required pursuant to Section 4.6,
(ii) the filing with the Commission of the Registration Statement, (iii) the


 


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notice and/or application(s) to each
applicable Trading Market for the issuance and sale of the Debentures and
Warrants and the listing of the Underlying Shares for trading thereon in the
time and manner required thereby and (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws (collectively, the “Required Approvals”).


 


(f)            Issuance
of the Securities.  The Securities
are duly authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued, fully paid
and nonassessable, free and clear of all Liens imposed by the Company other
than restrictions on transfer provided for in the Transaction Documents.  The Underlying Shares, when issued in
accordance with the terms of the Transaction Documents, will be validly issued,
fully paid and nonassessable, free and clear of all Liens imposed by the
Company.  The Company has reserved from
its duly authorized capital stock a number of shares of Common Stock for issuance
of the Underlying Shares at least equal to the Required Minimum on the date
hereof.


 


(g)           Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g).  The
Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other
than pursuant to the exercise of employee stock options under the Company’s
stock option plans, the issuance of shares of Common Stock to employees
pursuant to the Company’s employee stock purchase plan and pursuant to the
conversion or exercise of outstanding Common Stock Equivalents.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale
of the Securities, there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into or exercisable or exchangeable
for, or giving any Person any right to subscribe for or acquire, any shares of
Common Stock, or contracts, commitments, understandings or arrangements by
which the Company or any Subsidiary is or may become bound to issue additional
shares of Common Stock or Common Stock Equivalents. The issuance and sale of
the Securities will not obligate the Company to issue shares of Common Stock or
other securities to any Person (other than the Purchasers) and will not result
in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under such securities. All of the
outstanding shares of capital stock of the Company are validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities.  No further approval
or authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities.  There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company’s capital
stock to which the Company is a party or, to the knowledge of the Company,
between or among any of the Company’s stockholders.


 


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(h)           SEC Reports;
Financial Statements.  The Company
has filed all reports, schedules, forms, statements and other documents
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was required
by law to file such material) (the foregoing materials, including the exhibits
thereto and documents incorporated by reference therein, being collectively
referred to herein as the “SEC Reports”) on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission
promulgated thereunder, and none of the SEC Reports, when filed, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.  The financial statements of
the Company included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.


 


(i)            Material
Changes.  Since the date of the
latest audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option plans.
The Company does not have pending before the Commission any request for
confidential treatment of information. 
Except for the issuance of the Securities contemplated by this Agreement
or as set forth on Schedule 3.1(i), no event, liability or development
has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws at
the time this representation is made that has not been publicly disclosed 1
Trading Day prior to the date that this representation is made.


 


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(j)            Litigation.  There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) could, if there were an unfavorable
decision, have or reasonably be expected to result in a Material Adverse
Effect.  Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the subject of
any Action involving a claim of violation of or liability under federal or
state securities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge of
the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer
of the Company.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.  None
of the Company’s or its Subsidiaries’ employees is a member of a union that
relates to such employee’s relationship with the Company, and neither the
Company or any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good. 
No executive officer, to the knowledge of the Company, is, or is now expected
to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.  The Company and its Subsidiaries are in
compliance with all U.S. federal, state, local and foreign laws and regulations
relating to employment and employment practices, terms and conditions of
employment and wages and hours, except where the failure to be in compliance
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.


 


(k)           Labor
Relations.  No material labor dispute
exists or, to the knowledge of the Company, is imminent with respect to any of
the employees of the Company which could reasonably be expected to result in a
Material Adverse Effect.


 


(l)            Compliance.  Neither the Company nor any Subsidiary (i) is
in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws applicable to its business and


 


12





















 


all such laws
that affect the environment, except in each case as could not have a Material
Adverse Effect.


 


(m)          Regulatory Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not have or reasonably be expected to result in a
Material Adverse Effect (“Material Permits”), and neither the Company
nor any Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.


 


(n)           Title to Assets.  The Company and the Subsidiaries have good
and marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of
all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries and Liens for the
payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties.  Any
real property and facilities held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and enforceable leases of
which the Company and the Subsidiaries are in compliance.


 


(o)           Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, trade secrets,
inventions, copyrights, licenses and other intellectual property rights similar
rights necessary or material for use in connection with their respective
businesses as described in the SEC Reports and which the failure to so have
could have a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  Neither the
Company nor any Subsidiary has received a notice (written or otherwise) that
the Intellectual Property Rights used by the Company or any Subsidiary violates
or infringes upon the rights of any Person. To the knowledge of the Company,
all such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights of
others.  The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties, except where failure to do
so could not, individually or in the aggregate, reasonably be expect to have a
Material Adverse Effect.


 


(p)           Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged, including, but not limited
to, directors and officers insurance coverage at least equal to the aggregate
Subscription Amount.  To the best
knowledge of the Company, such insurance contracts and policies are accurate
and complete.  Neither the Company nor
any Subsidiary has any reason to believe that it will not be able to renew its


 


13





















 


existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in cost.


 


(q)           Transactions With
Affiliates and Employees.  Except as
set forth in the SEC Reports, none of the officers or directors of the Company
and, to the knowledge of the Company, none of the employees of the Company is
presently a party to any transaction with the Company or any Subsidiary (other
than for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or
from, or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any entity in which any officer,
director, or any such employee has a substantial interest or is an officer,
director, trustee or partner, in each case in excess of $60,000 other than (i)
for payment of salary or consulting fees for services rendered, (ii)
reimbursement for expenses incurred on behalf of the Company and (iii) for
other employee benefits, including stock option agreements under any stock option
plan of the Company.


 


(r)            Sarbanes-Oxley;
Internal Accounting Controls.  The
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are applicable to it as of the Closing Date.  The Company
and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences. The Company has established
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and designed such disclosure controls and
procedures to ensure that material information relating to the Company,
including its Subsidiaries, is made known to the certifying officers by others
within those entities, particularly during the period in which the Company’s
most recently filed periodic report under the Exchange Act, as the case may be,
is being prepared.  The Company’s
certifying officers have evaluated the effectiveness of the Company’s controls
and procedures as of the date prior to the filing date of the most recently
filed periodic report under the Exchange Act (such date, the “Evaluation
Date”).  The Company presented in its
most recently filed periodic report under the Exchange Act the conclusions of
the certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no
significant changes in the Company’s internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or, to the knowledge
of the Company, in other factors that could significantly affect the Company’s
internal controls.


 


14





















 


(s)           Certain
Fees.  Other than fees or commissions
payable to Dawson James Securities, no brokerage or finder’s fees or
commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or
other Person with respect to the transactions contemplated by the Transaction
Documents.  The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by the Transaction
Documents.


 


(t)            Private
Placement.  Assuming the accuracy of
the Purchasers representations and warranties set forth in Section 3.2, no
registration under the Securities Act is required for the offer and sale of the
Securities by the Company to the Purchasers as contemplated hereby. The
issuance and sale of the Securities hereunder does not contravene the rules and
regulations of the Trading Market.


 


(u)           Investment
Company. The Company is not, and is not an Affiliate of, and immediately
after receipt of payment for the Securities, will not be or be an Affiliate of,
an “investment company” within the meaning of the Investment Company Act of
1940, as amended.  The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.


 


(v)           Registration
Rights.  Except as set forth on
Schedule 3.1(v), other than each of the Purchasers, no Person has any right to
cause the Company to effect the registration under the Securities Act of any
securities of the Company.


 


(w)          Listing
and Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its knowledge
is likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the Commission is contemplating terminating such registration.  The Company has not, in the 12 months
preceding the date hereof, received notice from any Trading Market on which the
Common Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such Trading
Market. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.


 


(x)            Application
of Takeover Protections.  The Company
and its Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Certificate of Incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company’s issuance
of the Securities and the Purchasers’ ownership of the Securities.


 


15





















 


(y)           Disclosure.  The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Purchasers or their
agents or counsel with any information that constitutes or might constitute
material, nonpublic information.  The
Company understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement,
furnished by or on behalf of the Company with respect to the representations
and warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.


 


(z)            No
Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act or any applicable shareholder approval
provisions, including, without limitation, under the rules and regulations of
any Trading Market on which any of the securities of the Company are listed or
designated.


 


(aa)         Solvency.  Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder, (i) the
Company’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Company’s existing debts and other
liabilities (including known contingent liabilities) as they mature; (ii) the
Company’s assets do not constitute unreasonably small capital to carry on its
business for the current fiscal year as now conducted and as proposed to be
conducted including its capital needs taking into account the particular
capital requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof; and (iii) the current
cash flow of the Company, together with the proceeds the Company would receive,
were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. 
The SEC Reports set forth as of the dates thereof all outstanding
secured and unsecured Indebtedness of the Company or any Subsidiary, or for
which the Company or any Subsidiary has commitments.  For the


 


16





















 


purposes of
this Agreement, “Indebtedness” shall mean (a) any liabilities for
borrowed money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease payments in
excess of $50,000 due under leases required to be capitalized in accordance
with GAAP.  Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.


 


(bb)         Form
SB-2 Eligibility.           The
Company is eligible to register the resale of the Underlying Shares for resale
by the Purchaser on Form SB-2 promulgated under the Securities Act.


 


(cc)         Tax
Status.             Except for matters that would not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company and each Subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid or accrued all taxes shown as due thereon, and the Company has no
knowledge of a tax deficiency which has been asserted or threatened against the
Company or any Subsidiary.


 


(dd)         No
General Solicitation. Neither the Company nor any person acting on behalf
of the Company has offered or sold any of the Securities by any form of general
solicitation or general advertising.  The
Company has offered the Securities for sale only to the Purchasers and certain
other “accredited investors” within the meaning of Rule 501 under the
Securities Act.


 


(ee)         Foreign
Corrupt Practices.  Neither the
Company, nor to the knowledge of the Company, any agent or other person acting
on behalf of the Company, has (i) directly or indirectly, used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses related
to foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to
disclose fully any contribution made by the Company (or made by any person
acting on its behalf of which the Company is aware) which is  in violation of law, or (iv) violated in any
material respect any provision of the Foreign Corrupt Practices Act of 1977, as
amended.


 


(ff)           Accountants.  The Company’s accountants are set forth on Schedule
3.1(ff) of the Disclosure Schedule. 
To the knowledge of the Company, such accountants, who the Company
expects will express their opinion with respect to the financial statements to
be included in the Company’s Annual Report on Form 10-KSB for the year ending
December 31, 2005 are a registered public accounting firm as required by the
Securities Act.


 


(gg)         Seniority.  As of the Closing Date, no indebtedness or
other equity of the Company is senior to the Debentures in right of payment,
whether with respect to interest


 


17





















 


or upon liquidation or dissolution, or
otherwise, other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and capital
lease obligations (which is senior only as to the property covered thereby).


 


(hh)         No
Disagreements with Accountants and Lawyers. 
There are no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the accountants and lawyers
formerly or presently employed by the Company and the Company is current with
respect to any fees owed to its accountants and lawyers.


 


(ii)           Acknowledgment
Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each
of the Purchasers is acting solely in the capacity of an arm’s length purchaser
with respect to the Transaction Documents and the transactions contemplated
hereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Securities.  The Company
further represents to each Purchaser that the Company’s decision to enter into
this Agreement has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.


 


(jj)           Acknowledgement
Regarding Purchasers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Section 4.16 and Section 3.2(f) hereof), it is
understood and agreed by the Company (i) that none of the Purchasers have been
asked to agree, nor has any Purchaser agreed, to desist from purchasing or
selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Securities
for any specified term; (ii) that past or future open market or other
transactions by any Purchaser, including Short Sales, and specifically
including, without limitation, Short Sales or “derivative” transactions, before
or after the closing of this or future private placement transactions, may
negatively impact the market price of the Company’s publicly-traded securities;
(iii) that any Purchaser, and counter parties in “derivative” transactions to
which any such Purchaser is a party, directly or indirectly, presently may have
a “short” position in the Common Stock, and (iv) that each Purchaser shall not
be deemed to have any affiliation with or control over any arm’s length
counter-party in any “derivative” transaction. 
The Company further understands and acknowledges that (a) one or more
Purchasers may engage in hedging activities at various times during the period
that the Securities are outstanding, including, without limitation, during the
periods that the value of the Underlying Shares deliverable with respect to
Securities are being determined and (b) such hedging activities (if any) could
reduce the value of the existing stockholders’ equity interests in the Company
at and after the time that the hedging activities are being conducted. 
The Company acknowledges that such aforementioned hedging activities do not
constitute a breach of any of the Transaction Documents.


 


18





















 


(kk)         Manipulation of
Price.  The Company has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to cause or
to result in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or, paid any compensation for soliciting purchases
of, any of the Securities (other than for the placement agent’s placement of
the Securities), or (iii) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company.


 


3.2           Representations and Warranties of
the Purchasers.    Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of
the date hereof and as of the Closing Date to the Company as follows:


 


(a)           Organization;
Authority.  Such Purchaser is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization with full right, corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution, delivery and performance
by such Purchaser of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate or similar action on the part of
such Purchaser.  Each Transaction Document
to which it is a party has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with the terms hereof, will
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors’ rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may
be limited by applicable law.


 


(b)           Own Account.  Such Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account and not with a view to or for
distributing or reselling such Securities or any part thereof in violation of
the Securities Act or any applicable state securities law, has no
present intention of distributing any of such Securities in violation of the
Securities Act or any applicable
state securities law and has no arrangement or understanding with any
other persons regarding the distribution of such Securities (this
representation and warranty not limiting such Purchaser’s right to sell the
Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws) in violation of the
Securities Act or any applicable state
securities law.  Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business. Such
Purchaser does not have any agreement or understanding, directly or indirectly,
with any Person to distribute any of the Securities.


 


19





















 


(c)           Purchaser
Status.  At the time such Purchaser
was offered the Securities, it was, and at the date hereof it is, and on each
date on which it exercises any Warrants or converts any Debentures it will be
either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified
institutional buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.


 


(d)           Experience
of Such Purchaser.  Such Purchaser,
either alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.


 


(e)           General
Solicitation.  Such Purchaser is not
purchasing the Securities as a result of any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.


 


(f)            Short
Sales and Confidentiality Prior To The Date Hereof.  Other than the transaction contemplated
hereunder, such Purchaser has not directly or indirectly, nor has any Person
acting on behalf of or pursuant to any understanding with such Purchaser,
executed any disposition, including Short Sales, in the securities of the
Company during the period commencing from the time that such Purchaser first
received a term sheet from the Company or any other Person setting forth the
material terms of the transactions contemplated hereunder until the date hereof
(“Discussion Time”). 
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser’s assets, the representation set
forth above shall only apply with respect to the portion of assets managed by
the portfolio manager that made the investment decision to purchase the
Securities covered by this Agreement. 
Other than to other Persons party to this Agreement, such Purchaser has
maintained the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction).


 


The Company acknowledges and agrees that each Purchaser does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
this Section 3.2.


 


20





















 


ARTICLE IV.


OTHER
AGREEMENTS OF THE PARTIES


 


4.1           Transfer Restrictions.


 


(a)           The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any
transfer of Securities other than pursuant to an effective registration
statement or Rule 144, to the Company or to an affiliate of a Purchaser or in
connection with a pledge as contemplated in Section 4.1(b), the Company may
require the transferor thereof to provide to the Company an opinion of counsel
selected by the transferor and reasonably acceptable to the Company, the form
and substance of which opinion shall be reasonably satisfactory to the Company,
to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act.  As a condition of transfer, any such
transferee shall agree in writing to be bound by the terms of this Agreement
and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.


 


(b)           The Purchasers agree
to the imprinting, so long as is required by this Section 4.1(b), of a legend
on any of the Securities in the following form:


 


[NEITHER] THESE SECURITIES
[NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE] [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.  THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THESE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.


 


The Company acknowledges and
agrees that a Purchaser may from time to time pledge pursuant to a bona fide
margin agreement with a registered broker-dealer or grant a security interest
in some or all of the Securities to a financial institution that is an “accredited
investor” as defined in Rule 501(a) under the Securities Act and who agrees to
be bound by the provisions of this Agreement and the Registration Rights
Agreement and, if required under the terms of such arrangement, such Purchaser
may transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would
not be subject to approval of the Company and no legal opinion of legal counsel
of the pledgee, secured party or pledgor shall be required in connection
therewith.  Further, no notice shall be
required of such pledge.  At the
appropriate Purchaser’s expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities may
reasonably request in connection with a pledge or transfer of the Securities,
including, if the Securities are 


 


21





















 


subject to registration
pursuant to the Registration Rights Agreement, the preparation and filing of
any required prospectus supplement under Rule 424(b)(3) under the Securities
Act or other applicable provision of the Securities Act to appropriately amend
the list of Selling Stockholders thereunder.


 


(c)   Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are
eligible for sale under Rule 144(k), or (iv) if such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue a legal opinion to the Company’s
transfer agent promptly after the Effective Date if required by the Company’s
transfer agent to effect the removal of the legend hereunder.  If all or any portion of a Debenture or
Warrant is converted or exercised (as applicable) at a time when there is an
effective registration statement to cover the resale of the Underlying Shares,
or if such Underlying Shares may be sold under Rule 144(k) or if such legend is
not otherwise required under applicable requirements of the Securities Act
(including judicial interpretations thereof) then such Underlying Shares shall
be issued free of all legends.  The
Company agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 4.1(c), it will, no later than three
Trading Days following the delivery by a Purchaser to the Company or the
Company’s transfer agent of a certificate representing Underlying Shares, as
applicable, issued with a restrictive legend (such third Trading Day, the “Legend
Removal Date”), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and
other legends.  The Company may not make
any notation on its records or give instructions to any transfer agent of the
Company that enlarge the restrictions on transfer set forth in this Section.  Certificates for Securities subject to legend
removal hereunder shall be transmitted by the transfer agent of the Company to
the Purchasers by crediting the account of the Purchaser’s prime broker with
the Depository Trust Company System.


 


(d)           In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Company’s transfer agent) delivered
for removal of the restrictive legend and subject to Section 4.1(c), $10 per
Trading Day (increasing to $20 per Trading Day 5 Trading Days after such
damages have begun to accrue) for each Trading Day after the Legend Removal
Date until such certificate is delivered without a legend.  Nothing herein shall limit such Purchaser’s
right to pursue actual damages for the Company’s failure to deliver
certificates representing any Securities as required by the Transaction
Documents, and such Purchaser 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.


 


22





















 


(e)           Each
Purchaser, severally and not jointly with the other Purchasers, agrees that the
removal of the restrictive legend from certificates representing Securities as
set forth in this Section 4.1 is predicated upon the Company’s reliance that
the Purchaser will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus
delivery requirements, or an exemption therefrom.


 


(f)            Until
the one year anniversary of the Effective Date, the Company shall not undertake
a reverse or forward stock split or reclassification of the Common Stock
without the prior written consent of the Purchasers holding a majority in
principal amount outstanding of the Debentures, unless the Board of Directors
determines that a particular reverse split is necessary in order to secure the
inclusion or listing of the Common Stock on the Nasdaq Stock Market or a
national securities exchange.


 


4.2           Acknowledgment of Dilution.  The Company acknowledges that the issuance of
the Securities may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions.  The Company further acknowledges that its
obligations under the Transaction Documents, including without limitation its
obligation to issue the Underlying Shares pursuant to the Transaction
Documents, are unconditional and absolute and not subject to any right of set
off, counterclaim, delay or reduction, regardless of the effect of any such
dilution or any claim the Company may have against any Purchaser and regardless
of the dilutive effect that such issuance may have on the ownership of the
other stockholders of the Company.


 


4.3           Furnishing of Information.  As long as any Purchaser owns Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act.  As long as any Purchaser owns Securities, if
the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the Purchasers
to sell the Securities under Rule 144. 
The Company further covenants that it will take such further action as
any holder of Securities may reasonably request, all to the extent required
from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.


 


4.4           Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers or
that would be integrated with the offer or sale of the Securities for purposes
of the rules and regulations of any Trading Market.


 


4.5           Conversion and Exercise Procedures.  The form of Notice of Exercise included in
the Warrants and the form of Notice of Conversion included in the Debentures set forth the totality of the procedures
required of the Purchasers in order to exercise the Warrants or convert the
Debentures.  No additional legal opinion
or other information or instructions shall be


 


23





















 


required of
the Purchasers to exercise their Warrants or convert their Debentures.  The Company shall honor exercises of the
Warrants and conversions of the Debentures and shall deliver Underlying Shares
in accordance with the terms, conditions and time periods set forth in the
Transaction Documents.


 


4.6           Securities
Laws Disclosure; Publicity.  The
Company shall, by 8:30 a.m. Eastern time on the Trading Day following the date
hereof, issue a Current Report on Form 8-K, reasonably acceptable to each Purchaser
disclosing the material terms of the transactions contemplated hereby, and
shall attach the Transaction Documents thereto. 
The Company and each Purchaser shall consult with each other in issuing
any other press releases with respect to the transactions contemplated hereby,
and neither the Company nor any Purchaser shall issue any such press release or
otherwise make any such public statement without the prior consent of the
Company, with respect to any press release of any Purchaser, or without the
prior consent of each Purchaser, with respect to any press release of the
Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall
promptly provide the other party with prior notice of such public statement or
communication.  Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser,
or include the name of any Purchaser in any filing with the Commission or any
regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except (i) as required by federal securities law in connection with
the registration statement contemplated by the Registration Rights Agreement
and (ii) to the extent such disclosure is required by law or Trading Market
regulations, in which case the Company shall provide the Purchasers with prior
notice of such disclosure permitted under subclause (i) or (ii).


 


4.7           Shareholder Rights Plan.  No claim will be made or enforced by the Company
or, to the knowledge of the Company, any other Person that any Purchaser is an “Acquiring
Person” under any shareholder rights plan or similar plan or arrangement in
effect or hereafter adopted by the Company, or that any Purchaser could be
deemed to trigger the provisions of any such plan or arrangement, by virtue of
receiving Securities under the Transaction Documents or under any other
agreement between the Company and the Purchasers. The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act.


 


4.8           Non-Public Information.  The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information.  The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company.


 


4.9           Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Securities hereunder as set forth on Schedule 4.9 hereto,
including the payment of a minimum of 50% of the principal amount outstanding
under the Amended and Restated Loan and Security Agreement-Term Loan, dated May
16, 2005 by and among the Company, its Subsidiaries and Bridge Opportunity
Finance, LLC, and not for the satisfaction of any other portion of the Company’s
debt (other than payment of trade payables in the ordinary course of the
Company’s 


 


24





















 


business and
prior practices), to redeem any Common Stock or Common Stock Equivalents or to
settle any outstanding litigation except as specifically set forth on such
schedule.


 


4.10         Reimbursement.  If any Purchaser becomes involved in any
capacity in any Proceeding by or against any Person who is a stockholder of the
Company (except as a result of sales, pledges, margin sales and similar
transactions by such Purchaser to or with any current stockholder), solely as a
result of such Purchaser’s acquisition of the Securities under this Agreement,
the Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation preparation and travel in
connection therewith) incurred in connection therewith, as such expenses are
incurred.  The reimbursement obligations
of the Company under this paragraph shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and conditions
to any Affiliates of the Purchasers who are actually named in such action,
proceeding or investigation, and partners, directors, agents, employees and
controlling persons (if any), as the case may be, of the Purchasers and any
such Affiliate, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, the
Purchasers and any such Affiliate and any such Person.  The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person asserting
claims on behalf of or in right of the Company solely as a result of acquiring
the Securities under this Agreement.


 


4.11         Indemnification
of Purchasers.   Subject to the
provisions of this Section 4.11, the Company will indemnify and hold each Purchaser
and its directors, officers, shareholders, members, partners, employees and
agents (and any other Persons with a functionally equivalent role of a Person
holding such titles notwithstanding a lack of such title or any other title),
each Person who controls such Purchaser (within the meaning of Section 15 of
the Securities Act and Section 20 of the Exchange Act), and the directors,
officers, agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a “Purchaser
Party”) harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of
investigation that any such Purchaser Party may suffer or incur as a result of
or relating to (a) any breach of any of the representations, warranties, covenants
or agreements made by the Company in this Agreement or in the other Transaction
Documents or (b) any action instituted against a Purchaser, or any of them or
their respective Affiliates, by any stockholder of the Company who is not an
Affiliate of such Purchaser, with respect to any of the transactions
contemplated by the Transaction Documents (unless such action is based upon a
breach of such Purchaser’s representations, warranties or covenants under the
Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by the Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes
fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any
Purchaser Party in respect of which indemnity may be sought pursuant to this
Agreement, such Purchaser Party shall promptly notify the Company in writing,
and the Company shall have the right to assume the defense thereof with counsel
of its own choosing.  Any Purchaser Party
shall have the right to employ separate counsel in any such action and
participate in the defense


 


25





















 


thereof, but the fees and expenses of such counsel shall be at the
expense of such Purchaser Party except to the extent that (i) the employment
thereof has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable opinion
of such separate counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party.  The Company will not be liable to any Purchaser
Party under this Agreement (i) for any settlement by a Purchaser Party effected
without the Company’s prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party’s breach of
any of the representations, warranties, covenants or agreements made by the
Purchasers in this Agreement or in the other Transaction Documents.


 


4.12         Reservation and Listing of
Securities.


 


(a)           The
Company shall maintain a reserve from its duly authorized shares of Common
Stock for issuance pursuant to the Transaction Documents in such amount as may
be required to fulfill its obligations in full under the Transaction Documents.


 


(b)           If,
on any date, the number of authorized but unissued (and otherwise unreserved)
shares of Common Stock is less than the Required Minimum on such date, then the
Board of Directors of the Company shall use commercially reasonable efforts to
amend the Company’s certificate or articles of incorporation to increase the
number of authorized but unissued shares of Common Stock to at least the
Required Minimum at such time, as soon as possible and in any event not later
than the 90th day after such date.


 


(c)           The
Company shall, if applicable: (i) in the time and manner required by the
Trading Market, prepare and file with such Trading Market an additional shares
listing application covering a number of shares of Common Stock at least equal
to the Required Minimum on the date of such application, (ii) take all steps
necessary to cause such shares of Common Stock to be approved for listing on
the Trading Market as soon as possible thereafter, (iii) provide to the
Purchasers evidence of such listing, and (iv) maintain the listing of such
Common Stock on any date at least equal to the Required Minimum on such date on
such Trading Market or another Trading Market.


 


4.13         Participation in Future Financing.


 


(a)           From
the date hereof until the date that the Debentures are no longer outstanding,
upon any financing by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents (the primary purpose of which is capital raising) (a “Subsequent
Financing”), each Purchaser shall have the right to participate in up to an
amount of the Subsequent Financing equal to 25% of the Subsequent Financing
(the “Participation Maximum”).


 


(b)           At
least 5 Trading Days prior to the closing of the Subsequent Financing, the
Company shall deliver to each Purchaser a written notice of its intention to
effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask
such Purchaser if it


 


26





















 


wants to review the details of such financing
(such additional notice, a “Subsequent Financing Notice”).  Upon the request of a Purchaser, and only
upon a request by such Purchaser, for a Subsequent Financing Notice, the
Company shall promptly, but no later than 1 Trading Day after such request,
deliver a Subsequent Financing Notice to such Purchaser.  The Subsequent Financing Notice shall
describe in reasonable detail the proposed terms of such Subsequent Financing,
the amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Financing is proposed to be effected, and attached to which
shall be a term sheet or similar document relating thereto.


 


(c)           Any
Purchaser desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City time)
on the 5th Trading Day after all of the Purchasers have received the
Pre-Notice that the Purchaser is willing to participate in the Subsequent
Financing, the amount of the Purchaser’s participation, and that the Purchaser
has such funds ready, willing, and available for investment on the terms set
forth in the Subsequent Financing Notice. 
If the Company receives no notice from a Purchaser as of such 5th
Trading Day, such Purchaser shall be deemed to have notified the Company that
it does not elect to participate.


 


(d)           If
by 5:30 p.m. (New York City time) on the 5th Trading Day after all
of the Purchasers have received the Pre-Notice, notifications by the Purchasers
of their willingness to participate in the Subsequent Financing (or to cause
their designees to participate) is, in the aggregate, less than the total
amount of the Subsequent Financing, then the Company may effect the remaining
portion of such Subsequent Financing on the terms and to the Persons set forth
in the Subsequent Financing Notice.


 


(e)           If
by 5:30 p.m. (New York City time) on the 5th Trading Day after all
of the Purchasers have received the Pre-Notice, the Company receives responses
to a Subsequent Financing Notice from Purchasers seeking to purchase more than
the aggregate amount of the Participation Maximum, each such Purchaser shall
have the right to purchase the greater of (a) their Pro Rata Portion (as
defined below) of the Participation Maximum and (b) the difference between the
Participation Maximum and the aggregate amount of participation by all other
Purchasers.  “Pro Rata Portion” is the ratio of (x) the
Subscription Amount of Securities purchased on the Closing Date by a Purchaser participating
under this Section 4.13 and (y) the sum of the aggregate Subscription Amounts
of Securities purchased on the Closing Date by all Purchasers participating
under this Section 4.13.


 


(f)            The
Company must provide the Purchasers with a second Subsequent Financing Notice,
and the Purchasers will again have the right of participation set forth above
in this Section 4.13, if the Subsequent Financing subject to the initial
Subsequent Financing Notice is not consummated for any reason on the terms set
forth in such Subsequent Financing Notice within 60 Trading Days after the date
of the initial Subsequent Financing Notice.


 


(g)           Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of (i) an Exempt
Issuance and (ii) the issuance of securities upon the exercise or


 


27





















 


exchange of or conversion of the Company’s
outstanding Series C Preferred Stock and outstanding warrants to purchase
Series C Preferred Stock and Series B-1 Preferred Stock.


 


4.14         Most Favored Nation Provision.  If the Company effects a Subsequent Financing
at any time while the Debentures remain outstanding, each Purchaser may elect,
in its sole discretion, to exchange all or some of the Debentures then held by
such Purchaser for any securities issued in a Subsequent Financing based on the
effective price at which such securities were sold in such Subsequent
Financing.


 


4.15         Equal Treatment of Purchasers.  No consideration shall be offered or paid to
any person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents. Further, the Company shall
not make any payment of principal or interest on the Debentures in amounts
which are disproportionate to the respective principal amounts outstanding on the
Debentures at any applicable time.  For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended for the Company to treat the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.


 


4.16         Short Sales and Confidentiality
After The Date Hereof. Each Purchaser severally and not jointly with the
other Purchasers covenants that neither it nor any affiliates acting on its
behalf or pursuant to any understanding with it will execute any Short Sales
during the period after the Discussion Time and ending at the time that the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.6. Further, each Purchaser severally and not jointly
with the other Purchasers covenants that until such Purchaser does not hold any
of the Debentures or Warrants, such Purchaser shall not create any “net short”
position in the Company’s Common Stock, whereby the Purchaser shall have
engaged in a Short Sale which would make such Purchaser’s short position
greater than the number of shares of Common Stock which such Purchaser could
obtain by converting its Debentures and exercising its Warrants held at the
time of such determination. Each Purchaser, severally and not jointly with the
other Purchasers, covenants that until such time as the transactions contemplated
by this Agreement are publicly disclosed by the Company as described in Section
4.6, such Purchaser will maintain, the confidentiality of all disclosures made
to it in connection with this transaction (including the existence and terms of
this transaction).  Each Purchaser
understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock “against the box” prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section 5 under
Section A, of the Manual of Publicly Available Telephone Interpretations, dated
July 1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance.  Notwithstanding the foregoing,
no Purchaser makes any representation, warranty or covenant hereby that it will
not engage in Short Sales in the
securities of the Company after the time that the transactions contemplated by
this Agreement are first publicly announced as described in Section 4.6.  Notwithstanding the foregoing, in the case of
a Purchaser that is a multi-managed investment vehicle whereby


 


28





















 


separate
portfolio managers manage separate portions of such Purchaser’s assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser’s assets, the
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.


 


4.17         Form D; Blue Sky Filings.        The
Company agrees to timely file a Form D with respect to the Securities as
required under Regulation D and to provide a copy thereof, promptly upon
request of any Purchaser. The Company shall, on or before or after the Closing
Date, take such action as the Company shall reasonably determine is necessary
in order to obtain an exemption for, or to qualify the Securities for, sale to
the Purchasers at the Closing under applicable securities or “Blue Sky” laws of
the states of the United States, and shall provide evidence of such actions
promptly upon request of any Purchaser.


 


 


ARTICLE V.


MISCELLANEOUS


 


5.1           Termination.  This
Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Closing has not been consummated on or before December 30,
2005; provided, however, that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).


 


5.2           Fees and Expenses.  The Company shall deliver, prior to the
Closing, a completed and executed copy of the Closing Statement, attached
hereto as Annex A.  Except as
expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent
fees, stamp taxes and other taxes and duties levied in connection with the delivery
of any Securities.


 


5.3           Entire Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements
and understandings, oral or written, with respect to such matters, which the
parties acknowledge have been merged into such documents, exhibits and
schedules.


 


5.4           Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto prior to
5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number


 


29





















 


set forth on the signature pages attached hereto on a day that is not a
Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day,
(c) the 2nd Trading Day following the date of mailing, if sent by
U.S. nationally recognized overnight courier service, or (d) upon actual
receipt by the party to whom such notice is required to be given.  The address for such notices and communications
shall be as set forth on the signature pages attached hereto.


 


5.5           Amendments; Waivers.  No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and each Purchaser or, in the case of a
waiver, by the party against whom enforcement of any such waiver is
sought.  No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of either party to exercise any right hereunder
in any manner impair the exercise of any such right.


 


5.6           Headings.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction
will be applied against any party.


 


5.7           Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted
assigns.  The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of each Purchaser.  Any Purchaser
may assign any or all of its rights under this Agreement to any Person to whom
such Purchaser assigns or transfers any Securities, provided such transferee
agrees in writing to be bound, with respect to the transferred Securities, by
the provisions hereof that apply to the “Purchasers”.


 


5.8           No Third-Party Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.11.


 


5.9           Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents 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 this Agreement and any other Transaction
Documents (whether brought against a party hereto or its respective affiliates,
directors, officers, shareholders, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New
York.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of New York, borough of Manhattan 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


 


30





















 


the jurisdiction
of any such court, that such suit, action or proceeding is 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 Agreement 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.  The parties hereby waive all rights
to a trial by jury.  If either party
shall commence an action or proceeding to enforce any provisions of the
Transaction Documents, then the prevailing party in such action or proceeding
shall be reimbursed by the other party for its attorneys’ fees and other costs
and expenses incurred with the investigation, preparation and prosecution of
such action or proceeding.


 


5.10         Survival.  The covenants and other agreements contained
herein shall survive the Closing and the delivery, exercise and/or conversion
of the Securities, as applicable. The representations and warranties contained
herein shall survive the Closing and the delivery, exercise and/or conversion
of the Securities, as applicable until the third anniversary of the Closing.


 


5.11         Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. 
In the event that any signature is delivered by facsimile transmission,
such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such facsimile signature page were an original thereof.


 


5.12         Severability.  If any provision of this Agreement is held to
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.


 


5.13         Rescission and Withdrawal Right.  Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its
related obligations within the periods therein provided, then such Purchaser
may rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights; provided, however,
in the case of a rescission of a conversion of a Debenture or exercise of a
Warrant, the Purchaser shall be required to return any shares of Common Stock
subject to any such rescinded conversion or exercise notice.


 


5.14         Replacement of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in


 


31





















 


exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested.  The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement Securities.


 


5.15         Remedies.  In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each
of the Purchasers and the Company will be entitled to specific performance
under the Transaction Documents.  The
parties agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.


 


5.16         Payment Set Aside. To the extent
that the Company makes a payment or payments to any Purchaser pursuant to any
Transaction Document or a Purchaser enforces or exercises its rights
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a
trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.


 


5.17         Usury.  To the extent it may lawfully do so, the
Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit
or advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be brought
by any Purchaser in order to enforce any right or remedy under any Transaction Document.  Notwithstanding any provision to the contrary
contained in any Transaction Document, it is expressly agreed and provided that
the total liability of the Company under the Transaction Documents for payments
in the nature of interest shall not exceed the maximum lawful rate authorized
under applicable law (the “Maximum Rate”), and, without limiting the
foregoing, in no event shall any rate of interest or default interest, or both
of them, when aggregated with any other sums in the nature of interest that the
Company may be obligated to pay under the Transaction Documents exceed such
Maximum Rate.  It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law.  If under any
circumstances whatsoever, interest in excess of the Maximum Rate is paid by the
Company to any Purchaser with respect to indebtedness evidenced by the
Transaction Documents, such excess shall be applied by such Purchaser to the
unpaid principal


 


32





















 


balance of any
such indebtedness or be refunded to the Company, the manner of handling such
excess to be at such Purchaser’s election.


 


5.18         Independent Nature of Purchasers’
Obligations and Rights.  The
obligations of each Purchaser under any Transaction Document are several and
not joint with the obligations of any other Purchaser, and no Purchaser shall
be responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. 
Nothing contained herein or in any Transaction Document, and no action
taken by any Purchaser pursuant thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. 
Each Purchaser shall be entitled to independently protect and enforce
its rights, including without limitation the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.  Each
Purchaser has been represented by its own separate legal counsel in their
review and negotiation of the Transaction Documents.  For reasons of administrative convenience
only, Purchasers and their respective counsel have chosen to communicate with
the Company through FW.  FW does not
represent all of the Purchasers but only Dawson James Securities, the placement
agent for the transaction.  The Company
has elected to provide all Purchasers with the same terms and Transaction
Documents for the convenience of the Company and not because it was required or
requested to do so by the Purchasers.


 


5.19         Liquidated Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.


 


5.20         Construction. The parties agree
that each of them and/or their respective counsel has reviewed and had an
opportunity to revise the Transaction Documents and, therefore, the normal rule
of construction to the effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of the
Transaction Documents or any amendments hereto.


 


(Signature
Pages Follow)


 


33





















 


IN WITNESS WHEREOF, the parties hereto have
caused this Securities Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.


 


	
  CRDENTIA CORP.

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ James D. Durham 

  	
   

  	
  14114 Dallas Pkwy, Suite 600 

  
	
   

  	
  Name: James D. Durham 

  	
  Dallas, TX 75254

  
	
   

  	
  Title: Chief Executive Officer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  With a copy to (which shall not constitute notice):

  	
  Morrison & Foerster LLP

  12531 High Bluff Drive

  San Diego, CA 92130

  Fax: (858) 720-5125

  Attn: Steven G. Rowles, Esq.

  
				



 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK


SIGNATURE PAGE FOR PURCHASER FOLLOWS]


 


34





















 


[PURCHASER SIGNATURE PAGES TO CRDE SECURITIES PURCHASE AGREEMENT]


 


IN WITNESS
WHEREOF, the undersigned have caused this Securities Purchase Agreement to be
duly executed by their respective authorized signatories as of the date first
indicated above.


 


 


	
  Name of
  Purchaser:

  	
   

  
	
  Signature
  of Authorized Signatory of Purchaser:

  	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  
	
  Title of
  Authorized Signatory:

  	
   

  
	
  Email
  Address of Purchaser:

  	
   

  
						



 


Address for Notice of Purchaser:


 


 


Address for Delivery of
Securities for Purchaser (if not same as above):


 


 


Subscription Amount:


Warrant Shares:


EIN Number:  [PROVIDE THIS UNDER
SEPARATE COVER]


 


[SIGNATURE PAGES CONTINUE]


 


35





















 


Annex A


 


CLOSING STATEMENT


 


Pursuant to the attached
Securities Purchase Agreement, dated as of the date hereto, the purchasers
shall purchase up to $6,000,000 of Debentures and Warrants from Crdentia Corp.
(the “Company”).  All funds will
be wired into a trust account maintained by Morrison & Foerster, LLP,
counsel to the Company.  All funds will
be disbursed in accordance with this Closing Statement.


 


Disbursement Date:           January 6, 2006


 


	
  I.     PURCHASE PRICE

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Gross Proceeds to be Received in Trust

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
  II.    DISBURSEMENTS

  	
   

  	
   

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
  Total
  Amount Disbursed:

  	
   

  	
  $

  



 


	
  WIRE
  INSTRUCTIONS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To:

  	
   

  	
   

  	
   

  	
   

  



 


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