SECURED 8% CONVERTIBLE PROMISSORY NOTE DUE APRIL 3, 2007

 

 

                                                                       EXHIBIT A

 

 

 

NEITHER THESE   SECURITIES NOR THE SECURITIES   ISSUABLE UPON   CONVERSION OF THESE

SECURITIES 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 CONVERSION OF THESE

SECURITIES   MAY BE PLEDGED IN A MANNER   CONSISTENT   WITH THE   SECURITIES   ACT IN

CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

No. [   ]                                                                  $[     ]

                                              Original Issue Date: April 4, 2005

 

 

 

                         CALYPTE BIOMEDICAL CORPORATION

 

            SECURED 8% CONVERTIBLE PROMISSORY NOTE DUE APRIL 3, 2007

 

      THIS   NOTE is one of a   series   of duly   authorized   and   issued   notes of

Calypte   Biomedical    Corporation,    a   Delaware   corporation   (the   "COMPANY"),

designated as its Secured 8% Convertible   Promissory Notes due April 3, 2007, in

the original   aggregate   principal   amount eight   million   dollars   ($8,000,000)

(collectively, the "NOTES" and each Note comprising the Notes, a "NOTE").

 

      FOR VALUE RECEIVED, the Company promises to pay to the order of [ ] or its

registered   assigns (the "INVESTOR"),   the principal sum of [ ] ($), on April 3,

2007 or such   earlier   date as this Note is   required   to be repaid as   provided

hereunder   (the   "MATURITY   DATE"),   and to pay   interest to the Investor on the

principal   amount of this Note   outstanding from time to time in accordance with

the provisions   hereof. All holders of Notes are referred to collectively as the

"INVESTORS." This Note is subject to the following additional provisions:

 

 

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            1.   Definitions.   In addition to the terms defined elsewhere in this

Note: (a) capitalized   terms that are used but not otherwise defined herein have

the meanings given to such terms in the Purchase Agreement, dated as of April 4,

2005,   among the   Company and the   Investors   identified   therein (the "PURCHASE

AGREEMENT"), and (b) the following terms have the meanings indicated below:

 

      "BANKRUPTCY   EVENT" means any of the following events:   (a) the Company or

any   Subsidiary   commences   a case or other   proceeding   under   any   bankruptcy,

reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,

insolvency or   liquidation   or similar law of any   jurisdiction   relating to the

Company or any Subsidiary thereof; (b) there is commenced against the Company or

any Subsidiary any such case or proceeding that is not dismissed   within 60 days

after commencement;   (c) the Company or any subsidiary is adjudicated by a court

of competent   jurisdiction insolvent or bankrupt or any order of relief or other

order   approving any such case or proceeding is entered;   (d) the Company or any

Subsidiary   suffers any   appointment   of any custodian or the like for it or any

substantial   part of its property   that is not   discharged   or stayed   within 60

days; (e) under   applicable   law the Company or any   Subsidiary   makes a general

assignment for the benefit of creditors; (f) the Company or any Subsidiary fails

to pay,   or states   that it is   unable   to pay or is   unable   to pay,   its debts

generally as they become due; (g) the Company or any Subsidiary   calls a meeting

of   its   creditors   with   a view   to   arranging   a   composition,   adjustment   or

restructuring of its debts; or (h) the Company or any Subsidiary,   by any act or

failure to act, expressly   indicates its consent to, approval of or acquiescence

in any of the   foregoing or takes any   corporate or other action for the purpose

of effecting any of the foregoing.

 

      "CHANGE OF CONTROL" means the occurrence of any of the following in one or

a series of related transactions: (i) an acquisition after the date hereof by an

individual   or legal entity or "group" (as described in Rule   13d-5(b)(1)   under

the   Exchange   Act) of more   than   one-third   of the   voting   rights   or   equity

interests   in the   Company;   (ii) a   replacement   of more than   one-half   of the

members of the   Company's   board of directors in a single   election of directors

that is not   approved   by those   individuals   who are   members   of the   board of

directors   on the date hereof (or other   directors   previously   approved by such

individuals);   (iii) a Fundamental   Transaction (as defined in Section 11(c)), a

merger or   consolidation of the Company or any Subsidiary or a sale of more than

one-half   of   the   assets   of   the   Company   in   one   or   a   series   of   related

transactions,   unless following such transaction or series of transactions,   the

holders of the Company's securities prior to the first such transaction continue

to hold at least a majority   of the voting   rights and equity   interests   in the

surviving   entity   or   acquirer   of   such   assets;    (iv)   a    recapitalization,

reorganization or other transaction involving the Company or any Subsidiary that

constitutes   or results in a transfer   of more than fifty   percent of the voting

rights or equity interests in the Company,   unless following such transaction or

series of   transactions,   the holders of the Company's   securities   prior to the

first such   transaction   continue to hold at least   fifty   percent of the voting

rights and equity   interests in the surviving entity or acquirer of such assets;

(v)   consummation   of a "Rule 13e-3   transaction" as defined in Rule 13e-3 under

the   Exchange   Act with   respect to the   Company,   or (vi) the   execution by the

Company   or   its   controlling   stockholders   of an   agreement   providing   for or

reasonably likely to result in any of the foregoing events.

 

                                        2

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      "CLOSING PRICE" 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 an Eligible Market, the last trade price per share of the Common Stock

for such date (or the nearest   preceding date) on the primary Eligible Market on

which the Common   Stock is then   listed or quoted;   (b) if prices for the Common

Stock are then quoted on the OTC Bulletin Board, the closing bid price per share

of the Common Stock for such date (or the nearest preceding date) so quoted; (c)

if prices for the Common Stock are then reported in the "Pink Sheets"   published

by the National   Quotation   Bureau   Incorporated   (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

qualified   appraiser   selected   in good   faith   and   paid for by a   majority   in

interest of the Investors.

 

      "COMMON STOCK" means the common stock of the Company,   $0.03 par value per

share,   and any   securities   into   which   such   common   stock may   hereafter   be

reclassified.

 

       "COMMON   STOCK   EQUIVALENTS"   means any   securities   of the   Company   or a

Subsidiary   thereof which entitle the holder   thereof to acquire Common Stock at

any time,   including   without   limitation,   any debt,   preferred stock,   rights,

options,   warrants or other   instrument that is at any time   convertible into or

exchangeable   for, or otherwise   entitles the holder thereof to receive,   Common

Stock or other   securities   that   entitle   the holder to   receive,   directly   or

indirectly, Common Stock.

 

      "CONVERSION   DATE" means the date a Conversion   Notice   together   with the

Conversion Schedule is delivered to the Company in accordance with Section 5(a).

 

      "CONVERSION   NOTICE" means a written notice in the form attached hereto as

Exhibit A.

 

      "CONVERSION   PRICE" means $0.30   subject to   adjustment   from time to time

pursuant to Section 11.

 

      "DEFAULT"   means   any event or   condition   which   constitutes   an Event of

Default   or that   upon   notice,   lapse of time or both   would,   unless   cured or

waived, become an Event of Default.

 

      "ELIGIBLE   MARKET" means any of the New York Stock Exchange,   the American

Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market.

 

      "EQUITY   CONDITIONS ARE SATISFIED" means, as of any date of determination,

that each of the   following   conditions is (or would be) satisfied on such date,

if the   Company   were to issue on such date all of the   Underlying   Shares   then

issuable upon (1) conversion in full of the outstanding   principal amount of all

Notes,   and (2) the payment on such date of accrued   and unpaid   interest on all

Notes: (i) the number of authorized but unissued and otherwise unreserved shares

of Common Stock is sufficient for such issuance, (ii) the Common Stock is listed

or quoted (and is not   suspended   from   trading) on an Eligible   Market and such

shares of Common   Stock are approved   for listing on such   Eligible   Market upon

issuance,    (iii)   such   Common   Stock   is   registered    for   resale   under   the

Registration   Statement and the prospectus under such Registration   Statement is

 

 

                                       3

<PAGE>

 

available for the sale of all Registrable Securities held by the Investor,   (iv)

such issuance would be permitted in full without   violating   Section 5(b) hereof

or the rules or   regulations   of the   Eligible   Market on which such   shares are

listed or quoted,   (v) both immediately   before and after giving effect thereto,

no Default shall or would exist, and (vi) no public announcement of a pending or

proposed   Change   of   Control    transaction   has   occurred   that   has   not   been

consummated.

 

      "EVENT EQUITY VALUE" means the average of the Closing   Prices for the five

consecutive   Trading Days preceding   either:   (a) the date of an Event Notice or

the date the Company   becomes   obligated   to pay the Event   Price under   Section

7(b),   as   applicable,   or (b) the date on which the Event   Price   with   respect

thereto (together with any other payments,   expenses and liquidated damages then

due and payable under the Transaction   Documents) is paid in full,   whichever is

greater.

 

      "EVENT OF DEFAULT"   means any one of the   following   events   (whatever the

reason and whether it shall be voluntary or involuntary or effected by operation

of law or pursuant to any judgment,   decree or order of any court, or any order,

rule or regulation of any administrative or governmental body):

 

                  (i)   any   default   in   the   payment   (free   of   any   claim   of

subordination),   when the same becomes due and payable   (whether on a Prepayment

Date, the Maturity Date or by acceleration   or prepayment or otherwise),   of (a)

liquidated   damages in respect of this Note which default   continues   unremedied

for a period of three   Trading   Days after the date on which   written   notice of

such   default is first given to the Company by the   Investor,   or (b)   principal

under or interest in respect of this Note.

 

                  (ii) the Company or any   Subsidiary   (1) fails to pay when due

or there is an   acceleration of any monetary   obligation   (regardless of amount)

under any currently   existing or hereafter arising debenture (other than a Note)

or any   mortgage,   credit   agreement   or other   facility,   indenture   agreement,

factoring   agreement or other instrument under which there may be issued,   or by

which there may be secured or evidenced, any Indebtedness or under any long term

leasing or factoring arrangement, if the aggregate amount of the obligations and

liabilities of the Company and the subsidiaries thereunder exceeds $50,000 (each

of the   foregoing   a   "MATERIAL   DEBT   AGREEMENT"),   or (2) fails to   observe or

perform any other obligation under any Material Debt Agreement, and such failure

results in the obligations thereunder becoming or being declared due and payable

prior to the date on which they would otherwise become due and payable.

 

                  (iii) the   occurrence   of a Change in   Control or the entry by

the Company or any subsidiary into any transaction that would result in a Change

of Control of the Company.

 

                  (iv)   the   Company   shall   fail   to   observe   or   perform   any

covenant,   condition or agreement   contained in any Transaction   Document (other

than   those   specified   in clause (i) above and clause   (xvi)   below),   and such

failure shall   continue   unremedied   for a period of five Trading Days after the

date on which   written   notice of such   default is first given to the Company by

the Investor (it being understood that no prior notice need be given in the case

of a default that cannot reasonably be cured within five Trading Days).

 

                                       4

<PAGE>

 

                  (v) the   occurrence   and   continuance   of an Event of   Default

under any other Note.

 

                   (vi) any   prepayment   by the   Company of any other Note or any

other   Indebtedness   issued by it or any issuance of   securities in exchange for

any Notes issued by it (other than   Underlying   Shares upon   conversion   of such

Notes in   accordance   with their terms as in effect on the   Original   Issue Date

thereof),   except in each case (i) if the   Company   offers   to the   Investor   in

writing the same   prepayment   of this Note and all other Notes then held by such

Investor on the same   economic   terms on which the Company   prepays or offers to

prepay   (whichever is more favorable to the holder of such Note) such Notes, and

(ii) the Investor   consents to such   prepayment of this Note in accordance   with

the prepayment provisions of Section 13 of this Note.

 

                   (vii) any of the Company's   representations and warranties set

forth in any Transaction   Document shall be incorrect in any material respect as

of the date made or as of the Original Issue Date.

 

                  (viii) the occurrence of a Bankruptcy Event.

 

                  (ix)   one or more   judgments   for the   payment   of money in an

aggregate   amount in excess of $50,000 shall be rendered   against the Company or

any subsidiary or any   combination   thereof (which shall not be fully covered by

insurance   without   taking into account any   applicable   deductibles)   and which

shall remain undischarged or unbonded for a period of 30 consecutive days during

which execution shall not be effectively   stayed, or any action shall be legally

taken by a judgment creditor to attach or levy upon any assets of the Company or

any subsidiary to enforce any such judgment.

 

                  (x) any Transaction   Document shall cease, for any reason,   to

be in full force and effect,   or the Company shall so assert in writing or shall

disavow any of its obligations thereunder.

 

                  (xi) the Common   Stock   shall not be listed or   quoted,   or is

suspended from trading,   on an Eligible Market for a period of five Trading Days

(which need not be consecutive Trading Days).

 

                  (xii)   the   Company   fails   to   deliver   a   stock   certificate

evidencing   Underlying   Shares to an Investor   within five   Trading Days after a

Conversion Date or in the case of exercises under a Warrant, within five Trading

days   after a Date of   Exercise   under,   and as such term is   defined   in,   such

Warrant,   or the conversion or exercise rights of the Investors   pursuant to the

terms hereof or the terms of the Warrants are otherwise suspended for any reason

(other than as a result of the limitations set forth in Section 5(b)(i)).

 

                  (xiii) the Company fails to have available a sufficient number

of   authorized   but unissued   and   otherwise   unreserved   shares of Common Stock

available to issue   Underlying   Shares upon any   conversion of Notes or upon any

exercise of Warrants.

 

                  (xiv) the Company effects or publicly   announces its intention

to effect any exchange,   recapitalization   or other transaction that effectively

requires or rewards   physical   delivery of   certificates   evidencing   the Common

Stock, unless

 

                                       5

<PAGE>

 

following such transaction, the holders of the Company's securities prior to the

first   such   transaction   continue   to   beneficially   own at   least   a   majority

(one-third   in the case of a Change in Control) of the voting   rights and equity

interests in the surviving entity or acquirer of such assets.

 

                  (xv)   a   Registration   Statement   under   Section   2(a)   of the

Registration Rights Agreement is not declared effective by the Commission by the

120th day following   the Closing Date, or is not effective as to all   Underlying

Shares   issuable   upon   the   conversion   of the   Notes   (other   than   any   which

constitutes   interest accreted to principal of the Notes), and available for use

by the holders of such   Underlying   Shares,   for in excess of an aggregate of 20

Trading Days (which need not be   consecutive   Trading   Days) in any twelve month

period during the   Effectiveness   Period (as defined in the Registration   Rights

Agreement).

 

                  (xvi)   the   Company   fails to make any cash   payment   required

under the Transaction Documents (other than as set forth in paragraph (i) above)

and such   failure is not cured   within five   Trading   Days after   notice of such

default is first given to the Company by an Investor.

 

                  (xvii) any   violation   of the Prior   Placements   or   Amendment

thereto.

 

      "INDEBTEDNESS"   has the meaning   given to the term "Debt" in the   Purchase

Agreement.

 

      "ORIGINAL ISSUE DATE" has the meaning set forth on the face of this Note.

 

      "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.

 

      "STOCKHOLDER   APPROVAL"   shall   have the   meaning   set   forth   in   Section

5(b)(ii).

 

      "STRATEGIC   TRANSACTION"   shall have the meaning set forth in the Purchase

Agreement.

 

      "TRADING   DAY" means (i) a day on which the   Common   Stock is traded on an

Eligible   Market,   or (ii) if the   Common   Stock is not   listed   on an   Eligible

Market,   a day on which   the   Common   Stock is   traded   in the   over-the-counter

market,   as reported by the OTC Bulletin Board or the National   Quotation Bureau

Incorporated,   or (iii) if the Common   Stock is not   quoted on the OTC   Bulletin

Board, a day on which the Common Stock is quoted in the over-the-counter   market

as   reported   by the   National   Quotation   Bureau   Incorporated   (or any similar

organization   or   agency   succeeding   to its   functions   of   reporting   prices);

provided, that in the event that the Common Stock is not listed or quoted as set

forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.

 

      "UNDERLYING   SHARES"   means   the   shares   of Common   Stock   issuable   upon

conversion of the Notes and payment of interest thereunder.

 

      "VWAP" means, with respect to any date of determination,   the daily volume

weighted   average price (as reported by Bloomberg using the VAP function) of the

Common Stock on such date of determination, or if there is no such price on such

date of determination,   then the daily volume weighted average price on the date

nearest preceding such date.

 

                                       6

<PAGE>

 

      2.   Interest.   (a) The Company   shall pay   interest to the Investor on the

aggregate   unconverted and then outstanding principal amount of this Note at the

rate of 8% per annum, payable quarterly in cash or, subject to the conditions of

Section   2(b),   by adding the amount of such   interest   to the then   outstanding

principal amount under this Note, in arrears on each three month   anniversary of

the Original Issue Date (each, an "INTEREST PAYMENT DATE"),   except if such date

is not a Trading Day, in which case such   interest   shall be payable on the next

succeeding   Trading Day.   Interest shall be calculated on the basis of a 360-day

year for the actual number of days elapsed and shall accrue daily   commencing on

the Original Issue Date.

 

            (b) Subject to the conditions and limitations set forth below,   from

and after such time as the Company has obtained   Stockholder Approval and if the

Equity Conditions Are Satisfied,   in lieu of paying interest in cash the Company

may, at its option,   on each Interest   Payment Date,   add the amount of interest

due on an Interest   Payment Date to the   principal   amount under this Note.   The

Company must deliver   written   notice to the Investor   indicating   the manner in

which it   intends   to pay   interest   at least   ten   Trading   Days   prior to each

Interest   Payment Date, but the Company may indicate in any such notice that the

election contained therein shall continue for subsequent   Interest Payment Dates

until   rescinded.   Failure to timely provide such written notice shall be deemed

an   irrevocable   election   by the   Company   to pay such   interest   in cash.   All

interest   payable in respect of the Notes on any   Interest   Payment Date must be

paid in the same manner.   Investor shall have the right, but not the obligation,

to add to the principal   amount of the Notes any interest not fully paid,   which

may be converted at the Conversion Price.

 

      3.   Registration   of Notes.   The   Company   shall   register   the Notes upon

records   maintained by the Company for that purpose (the "NOTE REGISTER") in the

name of each record Investor thereof from time to time. The Company may deem and

treat the registered   Investor of this Note as the absolute owner hereof for the

purpose of any conversion hereof or any payment of interest hereon,   and for all

other purposes, absent actual notice to the contrary from such record Investor.

 

      4. Registration of Transfers and Exchanges. The Company shall register the

transfer of any portion of this Note in the Note Register upon surrender of this

Note to the Company at its address   for notice set forth   herein.   Upon any such

registration   or transfer,   a new Note, in   substantially   the form of this Note

(any such new debenture,   a "NEW NOTE"),   evidencing the portion of this Note so

transferred   shall be issued to the   transferee   and a New Note   evidencing   the

remaining   portion of this Note not so   transferred,   if any, shall be issued to

the   transferring   Investor.   The   acceptance of the New Note by the   transferee

thereof shall be deemed the   acceptance by such   transferee of all of the rights

and obligations of a holder of a Note. The Company agrees that its prior consent

is not required for the transfer of any portion of this Note; provided, however,

that the Company shall be entitled to reasonable assurance, including an opinion

of counsel   reasonably   acceptable to Company,   that such transfer complies with

applicable   federal and state   securities laws. This Note is exchangeable for an

equal aggregate principal amount of Notes of different authorized denominations,

as requested by the Investor   surrendering   the same. No service charge or other

fee will be imposed in   connection   with any such   registration   of   transfer or

exchange.

 

                                       7

<PAGE>

 

      5. Conversion.

 

            (a) (i) At the   Option of the   Investor.   All or any   portion of the

principal   amount of this Note then   outstanding   together   with any accrued and

unpaid interest   hereunder   shall be convertible   into shares of Common Stock at

the Conversion   Price (subject to limitations set forth in Section 5(b)), at the

option   of the   Investor,   at any time and from   time to time from and after the

Original   Issue Date.   The   Investor may effect   conversions   under this Section

5(a), by delivering to the Company a Conversion   Notice together with a schedule

in the form of Schedule 1 attached hereto (the   "CONVERSION   SCHEDULE").   If the

Investor is converting less than all of the principal amount represented by this

Note,   or if a   conversion   hereunder   may not be   effected   in full   due to the

application   of Section   5(b),   the Company   shall honor such   conversion to the

extent   permissible   hereunder   and shall   promptly   deliver   to the   Investor a

Conversion    Schedule   indicating   the   principal   amount   which   has   not   been

converted.

 

                  (ii) At the Option of the Company.   Subject to the   provisions

of this Section 5(a)(ii),   at any time after the eighteenth month anniversary of

the Closing Date, the Company may deliver (via certified United States mail with

a return receipt requested) a written notice (such notice, a "COMPANY CONVERSION

NOTICE") to the   Investor   within   five days after any day (such day,   the "TEST

DATE") on which the   conditions   in (i),   (ii),   (iii) and (iv)   below   shall be

satisfied,   stating its irrevocable   election to convert at the Conversion Price

of all (but not less than all) of the outstanding principal amount of this Note,

provided that: (i) the VWAP for each of the 20 consecutive Trading Days prior to

the Test Date is greater   than the price per share   derived by   multiplying   the

Conversion   Price by the number two (2)   (subject to equitable   adjustment   as a

result of the events set forth in Sections 11(a),   (b) and (c)), (ii) the Equity

Conditions Are   Satisfied,   (iii) the average daily trading volume of the Common

Stock during the entire   period   referred to in clause (i) of this   subparagraph

(ii) shall be at least   450,000   shares   (subject to equitable   adjustment   as a

result   of   intervening   stock   splits   and   reverse   stock   splits),   and   (iv)

immediately   before or after   giving   effect to such   issuance on such date,   no

Event of   Default   or   Default   shall or would   exist.   Subject to the terms and

conditions of this Section 5(a)(ii),   the Company shall effect the conversion of

this Note   pursuant   to a Company   Conversion   Notice   on the 10th   Trading   Day

immediately   succeeding the date of the Company   Conversion Notice (the "COMPANY

CONVERSION   DATE").   Notwithstanding   anything to the contrary set forth in this

Note,   the   Investor   shall have the right to nullify   such   Company   Conversion

Notice if any of the   conditions   set forth in this Section   5(a)(ii)   shall not

have been met on each date   during the entire   period   referred to in clause (i)

above.   The   Company   covenants   and agrees   that it will   honor all   Conversion

Notices   tendered   from the time of delivery of the   Company   Conversion   Notice

through   6:30 p.m.   (California   time) on the   Trading   Day prior to the Company

Conversion   Date.   Notwithstanding   the foregoing,   the Company and the Investor

agree that,   if and to the extent   Section 5(b) of this Note would   restrict the

right of the Company to issue or the right of the Investor to receive any of the

Underlying Shares otherwise issuable upon the conversion in respect of a Company

Conversion Notice,   then   notwithstanding   anything to the contrary set forth in

the Company   Conversion   Notice,   the Company   Conversion Notice shall be deemed

automatically amended to apply only to such portion of this Note as would permit

conversion in full in compliance   with Section 5(b).   The Investor will promptly

(and, in any event,   prior to the Company Conversion Date) notify the Company in

writing   following   receipt of a Company   Conversion   Notice if Section   5(b)(i)

would   restrict   its right to   receive   the full   number of   otherwise   issuable

Underlying Shares following such Company Conversion Notice.

 

                                       8

<PAGE>

 

            (b) Certain Conversion Restrictions.

 

                  (i) Notwithstanding anything to the contrary contained herein,

the number of shares of Common   Stock that may be acquired   by an Investor   upon

each   conversion of Notes (or   otherwise in respect   hereof) shall be limited to

the   extent   necessary   to insure   that,   following   such   conversion   (or other

issuance), the total number of shares of Common Stock then beneficially owned by

such   Investor   and   its   Affiliates   and any   other   Persons   whose   beneficial

ownership of Common Stock would be aggregated   with such Investor's for purposes

of Section   13(d) of the   Exchange   Act,   does not   exceed   9.999%   of the total

number of issued and   outstanding   shares of Common   Stock   (including   for such

purpose the shares of Common   Stock   issuable   upon such   conversion).   For such

purposes,   beneficial   ownership   shall be determined in accordance with Section

13(d) of the Exchange Act and the rules and regulations   promulgated thereunder.

This provision   shall not restrict the number of shares of Common Stock which an

Investor may receive or   beneficially   own in order to   determine   the amount of

securities or other consideration that such Investor may receive in the event of

a Fundamental   Transaction (defined below) involving the Company as contemplated

herein. This restriction may not be waived.(1)

 

                  (ii) Notwithstanding anything to the contrary in this Note, if

the Company has not previously obtained Stockholder   Approval,   then the Company

may not issue   shares of Common   Stock in excess of the   Issuable   Maximum   upon

conversions of this Note. The "Issuable Maximum" means, as of any date, a number

of shares of Common Stock equal to   34,224,397.   Each Investor shall be entitled

to a portion of the Issuable Maximum equal to the quotient obtained by dividing:

(x) the   principal   amount   of Notes   issued   and sold to such   Investor   on the

Original   Issue Date by (y) the aggregate   principal   amount of all Notes issued

and sold by the Company on the Original   Issue Date.   If any   Investor   shall no

longer   hold   Notes,   then such   Investor's   remaining   portion of the   Issuable

Maximum shall be allocated pro-rata among the remaining Investors, giving effect

to the   Company's   desire   to   allocate   this   limitation   among   the   class   of

securities   known as the Notes. If on any Conversion Date or Company   Conversion

Date, or at such time as an Investor shall notify the Company that the condition

in (A) following   this clause shall be in effect:   (A) the   aggregate   number of

shares of Common Stock that would then be issuable   upon   conversion   in full of

all then outstanding principal amount of Notes would exceed the Issuable Maximum

on such date, and (B) the Company shall not have previously obtained the vote of

shareholders,   as may be required by the applicable rules and regulations of the

American Stock Exchange (or any successor   entity or any other Trading Market on

which the Company's   securities then trade),   applicable to approve the issuance

of shares of Common   Stock in excess of the   Issuable   Maximum   pursuant   to the

terms hereof (the "STOCKHOLDER APPROVAL"),   then, the Company shall issue to the

Investor a number of shares of Common Stock such that the total number of shares

issued pursuant to the Purchase   Agreement is equal to the Issuable Maximum and,

with respect to the remainder of the principal   amount of Notes then held by the

Investors for which a conversion would result in an issuance of shares of Common

Stock in excess of th