CALLABLE SECURED CONVERTIBLE NOTE

 

 

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED

         UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE

         SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF

         AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT,

         OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR

         OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT

         REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR

         REGULATION S UNDER SAID ACT.

 

                        CALLABLE SECURED CONVERTIBLE NOTE

 

New York, New York

March 23, 2005                                                            $20,000

 

      FOR VALUE RECEIVED, IGIA, INC., a Delaware corporation (hereinafter called

the "BORROWER"),   hereby promises to pay to the order of NEW MILLENNIUM   CAPITAL

PARTNERS II, LLC or registered   assigns (the   "Holder")   the sum of $20,000,   on

March   23,   2008   (the   "MATURITY   DATE"),   and to pay   interest   on the   unpaid

principal balance hereof at the rate of eight percent (8%) (the "INTEREST RATE")

per annum from March 23, 2005 (the "ISSUE   DATE") until the same becomes due and

payable, whether at maturity or upon acceleration or by prepayment or otherwise.

Any   amount of   principal   or   interest   on this Note which is not paid when due

shall bear interest at the rate of fifteen   percent (15%) per annum from the due

date   thereof   until   the   same is paid   ("DEFAULT   Interest").   Interest   shall

commence accruing on the Issue Date, shall be computed on the basis of a 365-day

year and the   actual   number   of days   elapsed   and shall be   payable   quarterly

provided   that no   interest   shall be due and payable for any month in which the

Trading   Price (as such term is defined   below) is greater than $.03125 for each

Trading   Day (as such term is defined   below) of the   month.   All   payments   due

hereunder   (to the extent not converted   into common stock,   $.001 par value per

share (the "COMMON STOCK") in accordance with the terms hereof) shall be made in

lawful   money of the United   States of America   provided   that   interest due and

payable for the first six (6) months   following   the Issue Date shall be paid on

the date hereof.   All payments shall be made at such address as the Holder shall

hereafter   give to the Borrower by written   notice made in   accordance   with the

provisions of this Note. Whenever any amount expressed to be due by the terms of

this Note is due on any day which is not a business   day, the same shall instead

be due on the next   succeeding   day which is a business   day and, in the case of

any   interest   payment   date which is not the date on which this Note is paid in

full,   the extension of the due date thereof shall not be taken into account for

purposes of determining the amount of interest due on such date. As used in this

Note, the term   "business day" shall mean any day other than a Saturday,   Sunday

or a day on   which   commercial   banks   in the   city of New   York,   New   York are

 

 

                                     

<PAGE>

 

authorized   or   required   by law or   executive   order   to   remain   closed.   Each

capitalized term used herein, and not otherwise defined,   shall have the meaning

ascribed thereto in that certain Securities Purchase Agreement,   dated March 23,

2005,   pursuant   to   which   this   Note   was   originally   issued   (the   "PURCHASE

AGREEMENT").

 

      This Note is free from all   taxes,   liens,   claims and   encumbrances   with

respect to the issue   thereof and shall not be subject to   preemptive   rights or

other   similar   rights   of   shareholders   of the   Borrower   and will not   impose

personal   liability   upon the holder   thereof.   The   obligations of the Borrower

under   this   Note   shall be   secured   by that   certain   Security   Agreement   and

Intellectual   Property   Security   Agreement   each   dated   March 23,   2005 by and

between the Borrower and the Holder.

 

      The following terms shall apply to this Note:

 

                          ARTICLE I. CONVERSION RIGHTS

 

            1.1 Conversion   Right. To the extent the Company is able to register

shares on the initial   Registration   Statement   without the Amendment Filing (as

such term is defined   in Section   4(p) of the   Purchase   Agreement),   the Holder

shall   have the   right   from   time to   time,   and at any time on or prior to the

earlier of (i) the   Maturity   Date and (ii) the date of   payment of the   Default

Amount (as defined in Article   III)   pursuant to Section   1.6(a) or Article III,

the   Optional   Prepayment   Amount (as   defined in   Section   5.1 or any   payments

pursuant to Section 1.7, each in respect of the remaining   outstanding principal

amount of this Note to   convert   all or any part of the   outstanding   and unpaid

principal   amount of this   Note into   fully   paid and   non-assessable   shares of

Common   Stock,   as such Common Stock exists on the Issue Date,   or any shares of

capital   stock or other   securities of the Borrower into which such Common Stock

shall   hereafter   be   changed   or   reclassified   at the   conversion   price   (the

"CONVERSION   PRICE")   determined as provided herein (a "CONVERSION");   provided,

however, that in no event shall the Holder be entitled to convert any portion of

this Note in excess of that   portion of this Note upon   conversion   of which the

sum of (1) the number of shares of Common Stock beneficially owned by the Holder

and its   affiliates   (other   than   shares   of Common   Stock   which may be deemed

beneficially owned through the ownership of the unconverted portion of the Notes

or the unexercised or unconverted   portion of any other security of the Borrower

(including,   without limitation, the warrants issued by the Borrower pursuant to

the   Purchase   Agreement)   subject to a   limitation   on   conversion   or exercise

analogous to the limitations   contained   herein) and (2) the number of shares of

Common   Stock   issuable   upon the   conversion   of the   portion of this Note with

respect to which the   determination   of this proviso is being made, would result

in beneficial   ownership by the Holder and its   affiliates of more than 4.99% of

the   outstanding   shares of Common   Stock and   provided   further that the Holder

shall not be   entitled   to convert   any   portion   of this Note   during any month

immediately   succeeding a Determination Date on which the Borrower exercises its

prepayment   option   pursuant   to Section 5.2 of this Note.   For   purposes of the

proviso to the immediately   preceding   sentence,   beneficial   ownership shall be

determined in accordance   with Section 13(d) of the   Securities   Exchange Act of

1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided

in clause (1) of such proviso. The number of shares of Common Stock to be issued

upon each conversion of this Note shall be determined by dividing the Conversion

Amount (as defined below) by the applicable   Conversion   Price then in effect on

 

 

                                       2

<PAGE>

 

the date specified in the notice of conversion,   in the form attached   hereto as

Exhibit A (the "NOTICE OF CONVERSION"),   delivered to the Borrower by the Holder

in accordance with Section 1.4 below;   provided that the Notice of Conversion is

submitted by facsimile (or by other means   resulting in, or reasonably   expected

to result in, notice) to the Borrower   before 6:00 p.m., New York, New York time

on such conversion date (the "CONVERSION   DATE").   The term "CONVERSION   AMOUNT"

means, with respect to any conversion of this Note, the sum of (1) the principal

amount of this Note to be   converted   in such   conversion   plus (2)   accrued and

unpaid interest, if any, on such principal amount at the interest rates provided

in this Note to the Conversion   Date plus (3) Default   Interest,   if any, on the

amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4)

at the Holder's option,   any amounts owed to the Holder pursuant to Sections 1.3

and 1.4(g)   hereof or   pursuant   to Section   2(c) of that   certain   Registration

Rights   Agreement,   dated as of March 23, 2005,   executed in connection with the

initial   issuance of this Note and the other Notes issued on the Issue Date (the

"REGISTRATION   RIGHTS Agreement").   The term "DETERMINATION DATE" means the last

business   day of each month   after the Issue Date.   Notwithstanding   anything in

this   Section 1.1 to the   contrary,   after the   Company   has done the   Amendment

Filing,   the Buyers   shall be able to   exercise   any and all   conversion   rights

granted herein

 

      1.2 Conversion Price.

 

            (A) Calculation of Conversion   Price.   The Conversion Price shall be

the lesser of (i) the Variable Conversion Price (as defined herein) and (ii) the

Fixed Conversion Price (as defined herein) (subject,   in each case, to equitable

adjustments   for   stock   splits,   stock   dividends   or rights   offerings   by the

Borrower   relating   to   the   Borrower's   securities   or   the   securities   of any

subsidiary of the Borrower, combinations,   recapitalization,   reclassifications,

extraordinary distributions and similar events). The "VARIABLE CONVERSION PRICE"

shall mean the   Applicable   Percentage   (as defined   herein)   multiplied   by the

Market Price (as defined herein). "MARKET PRICE" means the average of the lowest

three (3) Trading   Prices (as   defined   below) for the Common   Stock   during the

twenty   (20)   Trading   Day period   ending one   Trading Day prior to the date the

Conversion   Notice is sent by the   Holder to the   Borrower   via   facsimile   (the

"CONVERSION DATE").   "TRADING PRICE" means, for any security as of any date, the

intraday trading price on the   Over-the-Counter   Bulletin Board (the "OTCBB") as

reported by a reliable   reporting   service mutually   acceptable to and hereafter

designated   by Holders of a majority in   interest of the Notes and the   Borrower

or, if the OTCBB is not the   principal   trading   market for such   security,   the

intraday trading price of such security on the principal   securities exchange or

trading   market   where   such   security   is listed or traded   or, if no   intraday

trading price of such security is available in any of the foregoing manners, the

average of the intraday   trading   prices of any market   makers for such security

that are listed in the "pink sheets" by the National   Quotation Bureau,   Inc. If

the Trading   Price cannot be   calculated   for such   security on such date in the

manner   provided   above,   the Trading   Price   shall be the fair market   value as

mutually determined by the Borrower and the holders of a majority in interest of

the Notes being   converted   for which the   calculation   of the Trading   Price is

required in order to determine the Conversion Price of such Notes. "TRADING DAY"

shall   mean any day on which the   Common   Stock is traded   for any period on the

OTCBB, or on the principal   securities   exchange or other   securities   market on

which the Common Stock is then being traded.   "APPLICABLE PERCENTAGE" shall mean

50.0%. The "FIXED CONVERSION PRICE" shall mean $.04.

 

                                       3

<PAGE>

 

            (B)   Conversion   Price During Major   Announcements.   Notwithstanding

anything contained in Section 1.2(a) to the contrary,   in the event the Borrower

(i) makes a public announcement that it intends to consolidate or merge with any

other corporation (other than a merger in which the Borrower is the surviving or

continuing   corporation   and its capital stock is unchanged) or sell or transfer

all or substantially all of the assets of the Borrower or (ii) any person, group

or entity (including the Borrower) publicly announces a tender offer to purchase

50% or more of the Borrower's   Common Stock (or any other takeover   scheme) (the

date of the   announcement   referred   to in   clause   (i) or   (ii) is   hereinafter

referred   to as the   "ANNOUNCEMENT   DATE"),   then the   Conversion   Price   shall,

effective   upon   the   Announcement   Date and   continuing   through   the   Adjusted

Conversion Price   Termination Date (as defined below),   be equal to the lower of

(x) the   Conversion   Price which   would have been   applicable   for a   Conversion

occurring   on the   Announcement   Date and (y) the   Conversion   Price   that would

otherwise be in effect. From and after the Adjusted Conversion Price Termination

Date,   the   Conversion   Price shall be   determined   as set forth in this Section

1.2(a). For purposes hereof,   "ADJUSTED CONVERSION PRICE TERMINATION DATE" shall

mean,   with   respect to any   proposed   transaction   or tender offer (or takeover

scheme) for which a public   announcement   as contemplated by this Section 1.2(b)

has been   made,   the date upon   which the   Borrower   (in the case of clause   (i)

above)   or the   person,   group or   entity   (in the case of   clause   (ii)   above)

consummates or publicly announces the termination or abandonment of the proposed

transaction   or tender   offer (or   takeover   scheme)   which   caused this Section

1.2(b) to become operative.

 

      1.3 Authorized Shares.   Subject to the Amendment Filing (as defined in the

Purchase   Agreement),    the   Borrower   covenants   that   during   the   period   the

conversion   right   exists,   the Borrower   will reserve from its   authorized   and

unissued   Common   Stock a   sufficient   number of   shares,   free from   preemptive

rights,   to provide for the issuance of Common Stock upon the full conversion of

this Note and the other Notes   issued   pursuant to the Purchase   Agreement.   The

Borrower is required at all times to have   authorized and reserved two times the

number of shares that is actually   issuable   upon full   conversion   of the Notes

(based   on the   Conversion   Price   of the   Notes   or the   Exercise   Price of the

Warrants   in effect from time to time) (the   "RESERVED   AMOUNT").   The   Reserved

Amount shall be increased   from time to time in accordance   with the   Borrower's

obligations   pursuant to Section   4(h) of the Purchase   Agreement.   The Borrower

represents   that upon   issuance,   such shares   will be duly and validly   issued,

fully paid and   non-assessable.   In addition,   if the   Borrower   shall issue any

securities   or make any change to its capital   structure   which would change the

number of shares of Common   Stock into which the Notes shall be   convertible   at

the then current   Conversion   Price,   the   Borrower   shall at the same time make

proper provision so that thereafter there shall be a sufficient number of shares

of Common Stock   authorized   and   reserved,   free from   preemptive   rights,   for

conversion of the outstanding   Notes. The Borrower (i) acknowledges   that it has

irrevocably   instructed its transfer agent to issue   certificates for the Common

Stock   issuable upon   conversion of this Note, and (ii) agrees that its issuance

of this Note shall   constitute full authority to its officers and agents who are

charged with the duty of executing   stock   certificates to execute and issue the

necessary   certificates   for shares of Common Stock in accordance with the terms

and conditions of this Note.

 

      If, at any time a Holder of this Note submits a Notice of Conversion,   and

the Borrower does not have   sufficient   authorized but unissued shares of Common

Stock   available to effect such   conversion in accordance with the provisions of

 

 

                                       4

<PAGE>

 

this Article I (a   "CONVERSION   DEFAULT"),   subject to Section 4.8, the Borrower

shall   issue to the   Holder   all of the   shares of Common   Stock   which are then

available to effect such   conversion.   The portion of this Note which the Holder

included in its   Conversion   Notice and which   exceeds the amount   which is then

convertible   into available   shares of Common Stock (the "EXCESS AMOUNT") shall,

notwithstanding   anything to the contrary   contained herein,   not be convertible

into Common Stock in accordance with the terms hereof until (and at the Holder's

option   at any time   after)   the date   additional   shares   of   Common   Stock are

authorized   by the   Borrower   to   permit   such   conversion,   at   which   time the

Conversion   Price in respect   thereof shall be the lesser of (i) the   Conversion

Price on the Conversion   Default Date (as defined below) and (ii) the Conversion

Price on the   Conversion   Date   thereafter   elected   by the   Holder   in   respect

thereof. In addition, the Borrower shall pay to the Holder payments ("CONVERSION

DEFAULT   PAYMENTS") for a Conversion Default in the amount of (x) the sum of (1)

the then   outstanding   principal amount of this Note plus (2) accrued and unpaid

interest on the unpaid principal   amount of this Note through the   Authorization

Date (as   defined   below)   plus (3)   Default   Interest,   if any,   on the amounts

referred to in clauses (1) and/or (2),   multiplied by (y) .24, multiplied by (z)

(N/365),   where N = the number of days from the day the holder   submits a Notice

of   Conversion   giving rise to a   Conversion   Default (the   "CONVERSION   DEFAULT

DATE") to the date (the   "AUTHORIZATION   DATE") that the   Borrower   authorizes a

sufficient   number of shares of Common   Stock to effect   conversion   of the full

outstanding   principal   balance of this Note.   The   Borrower   shall use its best

efforts to   authorize a   sufficient   number of shares of Common Stock as soon as

practicable   following the earlier of (i) such time that the Holder notifies the

Borrower or that the Borrower   otherwise   becomes aware that there are or likely

will be   insufficient   authorized and unissued   shares to allow full   conversion

thereof and (ii) a Conversion   Default.   The   Borrower   shall send notice to the

Holder   of   the    authorization   of   additional   shares   of   Common   Stock,   the

Authorization   Date   and the   amount   of   Holder's   accrued   Conversion   Default

Payments.   The accrued Conversion Default Payments for each calendar month shall

be paid in cash or shall be convertible into Common Stock (at such time as there

are sufficient   authorized shares of Common Stock) at the applicable   Conversion

Price, at the Borrower's option, as follows:

 

            (A) In the event Holder   elects to take such   payment in cash,   cash

payment   shall be made to Holder by the fifth   (5th) day of the month   following

the month in which it has accrued; and

 

            (B) In the event Holder elects to take such payment in Common Stock,

the Holder may convert such payment   amount into Common Stock at the   Conversion

Price (as in effect at the time of   conversion)   at any time after the fifth day

of the month   following the month in which it has accrued in accordance with the

terms   of this   Article   I (so   long as there   is then a   sufficient   number   of

authorized shares of Common Stock).

 

      The Holder's election shall be made in writing to the Borrower at any time

prior to 6:00   p.m.,   New   York,   New York   time,   on the third day of the month

following the month in which   Conversion   Default   payments have accrued.   If no

election is made,   the Holder shall be deemed to have   elected to receive   cash.

Nothing   herein shall limit the Holder's   right to pursue actual damages (to the

extent in excess of the Conversion   Default Payments) for the Borrower's failure

to maintain a sufficient   number of authorized   shares of Common Stock, and each

holder shall have the right to pursue all remedies available at law or in equity

(including degree of specific performance and/or injunctive relief).

 

                                       5

<PAGE>

 

      1.4 Method of Conversion.

 

            (A) Mechanics of   Conversion.   Subject to Section 1.1, this Note may

be   converted   by the   Holder   in whole or in part at any time from time to time

after the Issue Date,   by (A)   submitting to the Borrower a Notice of Conversion

(by   facsimile or other   reasonable   means of   communication   dispatched   on the

Conversion   Date prior to 6:00 p.m., New York, New York time) and (B) subject to

Section 1.4(b), surrendering this Note at the principal office of the Borrower.

 

            (B) Surrender of Note Upon Conversion.   Notwithstanding   anything to

the contrary set forth herein,   upon   conversion of this Note in accordance with

the terms hereof, the Holder shall not be required to physically   surrender this

Note to the Borrower unless the entire unpaid   principal   amount of this Note is

so converted.   The Holder and the Borrower   shall maintain   records   showing the

principal   amount so converted   and the dates of such   conversions   or shall use

such other method, reasonably satisfactory to the Holder and the Borrower, so as

not to require physical surrender of this Note upon each such conversion. In the

event of any   dispute or   discrepancy,   such   records of the   Borrower   shall be

controlling and determinative in the absence of manifest error.   Notwithstanding

the foregoing, if any portion of this Note is converted as aforesaid, the Holder

may not transfer this Note unless the Holder first   physically   surrenders   this

Note to the Borrower,   whereupon the Borrower will   forthwith   issue and deliver

upon the order of the Holder a new Note of like tenor,   registered as the Holder

(upon   payment   by the Holder of any   applicable   transfer   taxes) may   request,

representing   in the   aggregate the remaining   unpaid   principal   amount of this

Note. The Holder and any assignee,   by acceptance of this Note,   acknowledge and

agree that, by reason of the provisions of this paragraph,   following conversion

of a portion of this Note, the unpaid and unconverted   principal   amount of this

Note   represented   by this Note may be less than the   amount   stated on the face

hereof.

 

            (C) Payment of Taxes.   The Borrower shall not be required to pay any

tax which may be payable in respect of any   transfer   involved   in the issue and

delivery of shares of Common Stock or other securities or property on conversion

of this Note in a name other than that of the   Holder (or in street   name),   and

the Borrower   shall not be required to issue or deliver any such shares or other

securities   or property   unless and until the person or persons   (other than the

Holder or the   custodian in whose street name such shares are to be held for the

Holder's   account)   requesting   the   issuance   thereof   shall   have   paid to the

Borrower   the   amount   of   any   such   tax   or   shall   have   established   to   the

satisfaction of the Borrower that such tax has been paid.

 

            (D)   Delivery of Common Stock upon   Conversion.   Upon receipt by the

Borrower from the Holder of a facsimile   transmission (or other reasonable means

of   communication)   of a Notice   of   Conversion   meeting   the   requirements   for

conversion as provided in this Section 1.4, the Borrower shall issue and deliver

or   cause   to be   issued   and   delivered   to or upon   the   order   of the   Holder

certificates   for the Common Stock issuable upon such conversion   within two (2)

business days after such receipt   (and,   solely in the case of conversion of the

entire   unpaid   principal   amount   hereof,   surrender of this Note) (such second

business day being hereinafter referred to as the "DEADLINE") in accordance with

 

 

                                       6

<PAGE>

 

the terms hereof and the Purchase Agreement (including,   without limitation,   in

accordance with the requirements of Section 2(g) of the Purchase   Agreement that

certificates for shares of Common Stock issued on or after the effective date of

the   Registration   Statement   upon   conversion   of this Note   shall not bear any

restrictive legend).

 

            (E) Obligation of Borrower to Deliver Common Stock.   Upon receipt by

the   Borrower of a Notice of   Conversion,   the Holder   shall be deemed to be the

holder   of   record of the   Common   Stock   issuable   upon   such   conversion,   the

outstanding   principal   amount and the amount of accrued and unpaid   interest on

this Note shall be reduced to reflect such conversion,   and, unless the Borrower

defaults on its obligations under this Article I, all rights with respect to the

portion of this Note being so converted   shall   forthwith   terminate   except the

right to receive the Common Stock or other securities,   cash or other assets, as

herein provided, on such conversion.   If the Holder shall have given a Notice of

Conversion as provided   herein,   the Borrower's   obligation to issue and deliver

the   certificates   for   Common   Stock   shall   be   absolute   and    unconditional,

irrespective of the absence of any action by the Holder to enforce the same, any

waiver or consent with   respect to any   provision   thereof,   the recovery of any

judgment   against any person or any action to enforce   the same,   any failure or

delay in the   enforcement of any other   obligation of the Borrower to the holder

of record, or any setoff, counterclaim,   recoupment,   limitation or termination,

or any breach or alleged breach by the Holder of any obligation to the Borrower,

and   irrespective   of any other   circumstance   which might   otherwise limit such

obligation of the Borrower to the Holder in connection with such conversion. The

Conversion   Date   specified in the Notice of Conversion   shall be the Conversion

Date so long as the Notice of Conversion is received by the Borrower before 6:00

p.m., New York, New York time, on such date.

 

            (F)   Delivery of Common   Stock by   Electronic   Transfer.   In lieu of

delivering   physical   certificates   representing   the Common Stock issuable upon

conversion,   provided the   Borrower's   transfer   agent is   participating   in the

Depository   Trust Company ("DTC") Fast Automated   Securities   Transfer   ("FAST")

program,   upon   request   of the Holder and its   compliance   with the   provisions

contained in Section 1.1 and in this   Section   1.4,   the Borrower   shall use its

best efforts to cause its transfer agent to   electronically   transmit the Common

Stock   issuable   upon   conversion   to the   Holder by   crediting   the   account of

Holder's Prime Broker with DTC through its Deposit   Withdrawal   Agent Commission

("DWAC") system.

 

            (G) Failure to Deliver   Common Stock Prior to   Deadline.   Without in

any way limiting the Holder's right to pursue other remedies,   including   actual

damages   and/or   equitable   relief,   the   parties   agree that if delivery of the

Common Stock   issuable   upon   conversion   of this Note is more than two (2) days

after the Deadline (other than a failure due to the   circumstances   described in

Section 1.3 above, which failure shall be governed by such Section) the Borrower

shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline

that the Borrower fails to deliver such Common Stock.   Such cash amount shall be

paid to Holder by the fifth day of the month following the month in which it has

accrued   or, at the option of the Holder (by written   notice to the   Borrower by

the first day of the month   following the month in which it has accrued),   shall

be added to the   principal   amount of this Note, in which event   interest   shall

accrue   thereon in   accordance   with the terms of this Note and such   additional

principal   amount shall be convertible   into Common Stock in accordance with the

terms of this Note.

 

                                       7

<PAGE>

 

      1.5   Concerning   the   Shares.   The shares of Common   Stock   issuable   upon

conversion   of this Note may not be sold or   transferred   unless (i) such shares

are sold pursuant to an effective   registration   statement under the Act or (ii)

the Borrower or its transfer   agent shall have been furnished with an opinion of

counsel   (which   opinion   shall be in form,   substance   and scope   customary for

opinions of counsel in comparable transactions) to the effect that the shares to

be sold or transferred may be sold or transferred   pursuant to an exemption from

such registration or (iii) such shares are sold or transferred   pursuant to Rule

144 under the Act (or a   successor   rule)   ("RULE   144") or (iv) such shares are

transferred   to an   "affiliate"   (as   defined in Rule 144) of the   Borrower   who

agrees to sell or   otherwise   transfer the shares only in   accordance   with this

Section   1.5 and who is an   Accredited   Investor   (as   defined   in the   Purchase

Agreement).   Except as otherwise provided in the Purchase Agreement (and subject

to the removal   provisions   set forth   below),   until such time as the shares of

Common Stock issuable upon   conversion of this Note have been   registered   under

the Act as contemplated by the Registration Rights Agreement or otherwise may be

sold pursuant to Rule 144 without any restriction as to the number of securities

as of a particular date that can then be immediately   sold, each certificate for

shares of Common Stock   issuable upon   conversion of this Note that has not been

so included in an   effective   registration   statement   or that has not been sold

pursuant to an effective   registration   statement   or an exemption   that permits

removal of the legend,   shall bear a legend substantially in the following form,

as appropriate:

 

         "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN

         REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES

         MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE

         REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION

         OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF

         COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED

         UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER

         SAID ACT."

 

      The legend set forth above shall be removed and the   Borrower   shall issue

to the Holder a new certificate   therefor free of any transfer legend if (i) the

Borrower or its   transfer   agent shall have   received an opinion of counsel,   in

form,   substance   and scope   customary   for   opinions   of counsel in   comparable

transactions,   to the effect that a public sale or transfer of such Common Stock

may be made   without   registration   under the Act and the   shares are so sold or

transferred,   (ii) such Holder   provides the Borrower or its transfer agent with

reasonable   assurances   that the Common Stock   issuable upon   conversion of this

Note (to the extent such securities are deemed to have been acquired on the same

date) can be sold   pursuant to Rule 144 or (iii) in the case of the Common Stock

issuable upon   conversion of this Note,   such security is registered for sale by

the Holder   under an   effective   registration   statement   filed under the Act or

otherwise   may be sold   pursuant to Rule 144 without any   restriction   as to the

number of securities as of a particular date that can then be immediately   sold.

Nothing   in this   Note   shall   (i) limit   the   Borrower's   obligation   under the

Registration Rights Agreement or (ii) affect in any way the Holder's obligations

to comply with applicable   prospectus   delivery   requirements upon the resale of

the securities referred to herein.

 

                                       8

<PAGE>

 

      1.6 Effect of Certain Events.

 

            (A)   Effect of   Merger,   Consolidation,   etc.   At the   opt