-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U9yleVQo641KeTf0KGzG1DBnaphyslXU+G1F/pVtjOwhEc5NdnIgta55V+FQgm6l 43cA3YNQrlEyTgtuNXi1rA== 0000946644-05-000015.txt : 20051028 0000946644-05-000015.hdr.sgml : 20051028 20051028170024 ACCESSION NUMBER: 0000946644-05-000015 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051028 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20051028 DATE AS OF CHANGE: 20051028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMISPHERX BIOPHARMA INC CENTRAL INDEX KEY: 0000946644 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 520845822 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13441 FILM NUMBER: 051163997 BUSINESS ADDRESS: STREET 1: 1617 JFK BLVD #660 STREET 2: ONE PENN CENTER CITY: PHILADELPHIA STATE: PA ZIP: 19104 BUSINESS PHONE: 2159880080 MAIL ADDRESS: STREET 1: 1617 JFK BLVD STREET 2: ONE PENN CENTER CITY: PHILADELPHIA STATE: PA ZIP: 19103 8-K/A 1 r8k_1025.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 7, 2005 ( October 6, 2005) HEMISPHERX BIOPHARMA, INC. (Exact name of registrant as specified in its charter) Delaware 0-27072 52-0845822 (state or other juris- (Commission (I.R.S. Employer diction of incorporation) File Number) (Identification No.) 1617 JFK Boulevard, Philadelphia, Pennsylvania 19103 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 988-0080 (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Section 1 - Registrant's Business and Operations Item 1.01 Entry into a Material Definitive Agreement. We entered into a more formal agreement with regard to the transactions reported in our original Current Report on Form 8-K. Effective October 6, 2005, we amended our outstanding debentures due to mature on October 31, 2005 and January 31, 2006 as follows: 1. The maturity date was extended to June 30, 2007 and 2. the interest rate was increased from 6% per annum to 7% per annum. We agreed to issue to the debenture holders common stock purchase warrants to purchase, in the aggregate, 225,000 shares of our common stock for a period of four years at an exercise price of $2.50 per share. We also agreed to register on their behalf 135% of the shares issuable upon the payment of interest on the debentures (giving effect to the revised terms of the debentures) and exercise of the warrants. For a complete description of this transaction, see the Amendment Agreement, forms of amended Convertible Debenture and form of Warrant filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to this amended Report and incorporated herein by reference. Item 9.01 Financial Statements and Exhibits. (c) Exhibits. The following exhibits are filed herewith: 10.1 Amendment Agreement, effective October 6, 2005, by and among the Company and debenture holders. 10.2 Form of Series A amended 7% Convertible Debenture of the Company(amending Debenture due October 31, 2005). 10.3 Form of Series B amended 7% Convertible Debenture of the Company (amending Debenture issued on January 26, 2004 and due January 31, 2006). 10.4 Form of Series C amended 7% Convertible Debentures of the Company (amending Debenture issued on July 13, 2004 and due January 31, 2006). 10.5 Form of Warrant for Common Stock of the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HEMISPHERX BIOPHARMA, INC. October 28, 2005 By: /s/ William A. CArter -------------------------------- William A. Carter M.D., President EX-99.13 OTH CONTRCT 2 rexh_101.txt Exhibit 10.1 AMENDMENT AGREEMENT AMENDMENT AGREEMENT (this "Agreement"), dated October 28, 2005 and effective as of October 6, 2005 (the "Effective Date"), by and among Hemispherx Biopharma, Inc., a Delaware corporation (the "Company"), Portside Growth and Opportunity Fund ("Portside") and Leonardo, L.P. ("Leonardo" and, together with Portside, each, a "Buyer" and, collectively, the "Buyers"). WHEREAS: A. The Company and the Buyers are parties to (i) that certain Securities Purchase Agreement, dated as of October 29, 2003 (the "October 2003 SPA"), pursuant to which, among other things, the Company issued to the Buyers 6% Senior Secured Convertible Debentures due October 31, 2005 of the Company (the "October 2003 Debentures"), which are convertible into shares of the Company's common stock, par value $0.001 per share (the "Common Stock"), and (ii) that certain Securities Purchase Agreement, dated as of January 26, 2004 (the "January 2004 SPA"), pursuant to which, among other things, the Company issued to the Buyers 6% Senior Secured Convertible Debentures due January 31, 2006 of the Company (the "January 2004 Debentures") and additional 6% Senior Secured Convertible Debentures due January 31, 2006 of the Company (the "Additional Debentures" and, together with the October 2003 Debentures and the January 2004 Debentures, the "Debentures") pursuant to the exercise of certain Additional Investment Rights (as defined in the January 2004 SPA). B. Contemporaneously with the execution and delivery of the January 2004 SPA, the Company and the Buyers entered into a Registration Rights Agreement, dated as of January 26, 2004 (the "Registration Rights Agreement"), pursuant to which the Company agreed to provide certain registration rights to the Buyers under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"), and applicable state securities laws. C. The Company and the Buyers desire to enter into this Agreement to, among other things, (i) extend the Maturity Date (as defined in the Debentures) of the Debentures to June 30, 2007, (ii) amend the definition of Installment Date in the Debentures to extend the date on which Installment Amounts (as defined in the Debentures) are required to be paid, (iii) increase the interest rate of the Debentures to 7% per annum and (iv) provide for the issuance to the Buyers of warrants (the "Warrants") to purchase an aggregate of 225,000 shares of Common Stock (as may be adjusted pursuant to the terms of the Warrants, the "Warrant Shares"). D. The parties hereto desire that the Warrant Shares and the Interest Shares (as defined in the Debentures) be covered by the terms set forth in the Registration Rights Agreement. E. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to them in the Debentures. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the Company and the Buyers hereby agree as follows: 1. Amendment of Debentures. ----------------------- (a) Maturity Date; Installment Amount; Installment Date. The Debentures are hereby amended to extend the Maturity Date thereof to June 30, 2007. In addition, the definition of "Installment Amount" in the January 2004 Debentures and the Additional Debentures is hereby amended by replacing the reference to "January 31, 2006" with "June 30, 2007." The definition of "Installment Date" in the January 2004 Debentures is hereby amended by replacing the reference to "July 26, 2005" with "July 1, 2006," and the definition of "Installment Date" in the Additional Debentures is hereby amended by replacing the reference to "July 26, 2005" with "January 1, 2007." (b) Interest Rate. The Debentures are hereby amended to increase the interest rate set forth in the Debentures from 6% per annum to 7% per annum effective as of the Effective Date, and on and after the Effective Date interest on the Debentures shall accrue at the rate of 7% per annum. (c) Registration Rights Agreement. All references in the Debentures to the Registration Rights Agreement, the Registration Statement and Registrable Securities shall be deemed to include the Registration Rights Agreement, as modified by Section 2(b) below, the Registration Statement to be filed pursuant to Section 2(b) below and the definition of Registrable Securities set forth in Section 2(b) below, respectively. (d) Further Amendments. The Debentures are further amended as provided in the forms of Debentures attached hereto as Exhibits A, B and C. ------------------- 2. OTHER TRANSACTION DOCUMENTS. --------------------------- (a) Warrant. As of the Effective Date, the Company shall issue and deliver to (i) Portside a Warrant to purchase 107,104 Warrant Shares and (ii) Leonardo a Warrant to purchase 117,896 Warrant Shares. The Warrants issued to the Buyers shall be in the form of Exhibit C attached hereto. The issuance by the Company of the Warrants and the Warrant Shares is exempt from registration under the 1933 Act. (b) Registration Rights Agreement. The Company shall file with the Securities and Exchange Commission a Registration Statement on Form S-3 covering the resale of at least 135% of the number of Warrant Shares and Interest Shares as of the trading day immediately preceding the date of the filing of such Registration Statement. The calculation of the number of shares to be registered shall be made without regard to any limitations on the exercise of the Warrants, and such calculation shall assume that the Warrants are then exercisable into shares of Common Stock and the maximum number of Interest Shares under the Debentures, assuming the respective initial outstanding principal amounts of the Debentures remain outstanding through June 30, 2007, assuming no conversions or redemptions of the Debentures prior to June 30, 2007, and taking into account the amendment to the interest rate of the Debentures effected hereby, are issuable at the then prevailing Warrant Exercise Price (as defined in the Warrants) or Interest Share Conversion Rate (as defined in the applicable Debentures), as applicable. The registration for resale of the Warrant Shares and the Interest Shares, and all rights, remedies and obligations of the Company and the Buyers related thereto, shall be governed in all respects by the terms of the Registration Rights Agreement; provided, that, to effectuate this provision, the following terms defined in the Registration Rights Agreement shall be deemed to have the following meanings: (i) "Warrants" and "Warrant Shares" shall have the meanings given to those terms in this Agreement; (ii) "Convertible Debentures" shall mean the Debentures; (iii) "Closing Date" shall mean the Effective Date; (iv) "Registrable Securities" shall mean the (i) the Warrant Shares issued or issuable upon exercise of all of the Warrants, (ii) the Interest Shares (as defined in the Convertible Debentures) issued or issuable on the Convertible Debentures and (iii) any shares of capital stock issued or issuable with respect to the Warrant Shares or the Interest Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on the exercise of the Warrants; provided, however, that shares of Common Stock which are Registrable Securities shall cease to be Registrable Securities (A) upon any sale pursuant to a Registration Statement, Rule 144 under the 1933 Act or upon any sale in any manner to a person or entity which, by virtue of Section 9 of the Registration Rights Agreement, is not entitled to the rights provided in the Registration Rights Agreement or (B) at such time as all such shares may be sold under Rule 144(k); and (v) "Filing Deadline" shall mean the date that is 60 days after the Effective Date. 3. REPRESENTATIONS AND WARRANTIES (a) Buyer Bring Down. Each Buyer hereby represents and warrants to the Company with respect to only itself as set forth in Section 2 of the January 2004 SPA as to this Agreement, the Registration Rights Agreement, The Warrants, the Warrant Shares and the Interest Shares as if such representations and warranties were made as of the Effective Date and set forth in their entirety in this Agreement. References in such Section 2 to the Securities shall be deemed to refer to the Warrants, the Warrant Shares and the Interest Shares. (b) Company Bring Down. The Company hereby represents and warrants to each Buyer as set forth in Sections 3(b) and 3(e) and the first and third sentences of Section 3(d) of the January 2004 SPA as to this Agreement, the Registration Rights Agreement, the Warrants, the Warrant Shares and the Interest Shares as if such representations and warranties were made as of the Effective Date and set forth in their entirety in this Agreement. References in such Sections to (i) the Transactions Documents shall be deemed to refer to this Agreement, the Warrants and the Registration Rights Agreement and (ii) the Securities shall be deemed to refer to the Warrants, the Warrant Shares and the Interest Shares. 4. CONDITIONS TO ComPANY'S OBLIGATIONs hereunder. The obligations of the Company to each Buyer hereunder are subject to the satisfaction of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: (a) Such Buyer shall have executed this Agreement and delivered the same to the Company. (b) Such Buyer shall have delivered to the Company its original Debentures. (c) The representations and warranties of such Buyer in Section 3(a) hereof shall be true and correct in all respects as of the Effective Date. 5. CONDITIONS TO Buyer's OBLIGATIONs hereunder. The obligations of each Buyer hereunder are subject to the satisfaction of each of the following conditions, provided that these conditions are for such Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof: (a) The Company shall have executed this Agreement and delivered the same to such Buyer. (b) The Company shall have executed and delivered to such Buyer the Warrant to be issued to it hereunder. (c) The Company shall have executed and delivered to such Buyer replacement Debentures, which shall be identical in all respects to such Buyer's original Debentures, but shall incorporate the amendments to the Debentures effected by Section 1 hereof. (d) The Board of Directors of the Company shall have adopted resolutions consistent with the transactions contemplated hereby. (e) Within fifteen business days after the Effective Date, the Company shall have delivered to the Company's transfer agent a letter stating that the Irrevocable Transfer Agent Instructions dated January 26, 2004 shall also apply to the Warrant Shares and the Interest Shares issuable under the Debentures. (f) The representations and warranties of the Company in Section 3(b) hereof shall be true and correct in all respects as of the Effective Date. 6. MISCELLANEOUS. (a) Expenses. Each party hereto shall bear its respective costs, fees and expenses in connection with the negotiation, execution and delivery of this Agreement and any and all documents executed in connection herewith. (b) Counterparts. This Agreement may be executed in two or more identical counterparts, all of which 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 parties; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. (c) Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (d) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. (e) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. This Agreement may not be assigned by the Company without the prior written consent of the Buyers. (f) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (g) No Strict Construction. 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. (h) Filing of Form 8-K. At or before 8:30 a.m., New York City time, on the business day following the date of execution hereof, the Company shall file an amendment to its Current Report on Form 8-K (originally filed on October 7, 2005) with the Securities and Exchange Commission describing the terms of this Agreement and including this Agreement as an exhibit to such Current Report on Form 8-K amendment. (i) Debentures in Full Force and Effect. Except to the extent modified hereby, the terms of the Debentures shall remain unchanged and continue in full force and effect. (j) Amendments; Waivers. No provision of this Agreement may be amended or waived except by a written instrument signed by all of the parties hereto. (k) Governing Law. This Agreement shall be governed by the laws of the State of New York, without regard to its conflicts of laws principles. (l) Independent Obligations. The obligations of each Buyer hereunder are several and not joint with the obligations of the other Buyer, and no provision of this Agreement is intended to confer any obligations on one Buyer vis-a-vis the other Buyer. Nothing contained herein, and no action taken by any Buyer pursuant hereto, shall be deemed to constitute the Buyers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated herein. [Signature Page Follows] IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Agreement to be duly executed as of the date first written above. COMPANY: HEMISPHERX BIOPHARMA, INC. By: s/ --------------------------- Name: Title: IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Agreement to be duly executed as of the date first written above BUYER: PORTSIDE GROWTH & OPPORTUNITY FUND By: s/ ----------------------------------- Name: Title: IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Agreement to be duly executed as of the date first written above. BUYER: LEONARDO, L.P. By: s/ ----------------------------------- Name: Title: EX-99.13 OTH CONTRCT 3 rexh_102.txt Exhibit 10.2 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES. THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR PURPOSES OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS DEBENTURE. THIS DEBENTURE HAS AN ISSUE PRICE OF $3,550,000, AN AGGREGATE AMOUNT OF OID OF $592,357, AN ISSUE DATE OF OCTOBER 29, 2003 AND A YIELD TO MATURITY OF 14.33 %. No. $ -------- ---------- HEMISPHERX BIOPHARMA, INC. Series A 7% SENIOR SECURED CONVERTIBLE DEBENTURE DUE JUNE 30, 2007 THIS DEBENTURE (this "Debenture") is one of a duly authorized issue of replacement Debentures of HEMISPHERX BIOPHARMA, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), now designated as its 7% Senior Secured Convertible Debentures Due June 30, 2007. The Debenture amends and replaces a series of 6% Senior Convertible Debentures due October 31, 2005, originally in an aggregate principal amount of up to Four Million, One Hundred Forty-Two Thousand Three Hundred Fifty-Seven U.S. Dollars (U.S. $4,142,357) (the "Debentures"). The Debenture and the Series B and Series C 7% Senior Secured Convertible Debentures Due June 30, 2007 are pari passu and the designation of series is for identification purposes only. FOR VALUE RECEIVED, the Company promises to pay to ____________, the holder hereof, or its registered assigns (the "Holder"), the principal sum of Dollars($___) on June 30, 2007(subject to extension as provided herein, the "Maturity Date") and to pay interest ("Interest Payments") on the Outstanding Principal Amount at the rate of 7% per annum which shall be cumulative, accrue, but not compound, daily from the date of issuance of this Debenture and be due and payable in arrears on the first day of each Quarterly Period commencing with the Quarterly Period immediately following the date of issuance of this Debenture (each, an "Interest Payment Date"). If the Maturity Date is not a Business Day, then the Maturity Date shall be deemed to be the Business Day immediately following such date. If an Interest Payment Date is not a Business Day, then the Interest Payment shall be due and payable on the Business Day immediately following such Interest Payment Date. Subject to the limitations in Sections 11 and 26, interest shall be payable by the issuance of shares of Common Stock ("Interest Shares") to the Holder or, at the option of the Company, in cash (the "Cash Interest Payment"); provided, however, that the Company may not make Cash Interest Payments and interest payments shall be payable in Interest Shares unless the Company provides written notice to each holder of Debentures at least five Business Days prior to the applicable Interest Payment Date that such Interest Payments shall be made in cash. Interest Shares shall be paid in a number of fully paid and nonassessable shares (rounded up or down to the nearest whole share) of Common Stock equal to the quotient of (1) the amount of the Interest Payment due on the applicable Interest Payment Date divided by (2) ninety-five percent (95%) of the arithmetic average of the Closing Sale Price of the Common Stock on the five consecutive Business Days ending on and including the third Business Day immediately preceding the applicable Interest Payment Date (the "Interest Share Conversion Rate"); provided, further; that in no event may the Company issue more than an aggregate of 40,000 shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction), pro rata among all holders of Debentures, in respect of any single Interest Payment (it being understood that the balance of each such Interest Payment shall be paid in the form of a Cash Interest Payment). Notwithstanding the foregoing, the Company shall be required to make a Cash Interest Payment on any Interest Payment Date if (a) any event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing on the Interest Payment Date or any date which is within 10 Business Days prior to the Interest Payment Date, unless otherwise consented to in writing by the holder of the Debenture entitled to receive such Interest Payment or (b) from and after the time that any Registration Statement (as defined in the Registration Rights Agreement, the "Registration Statement") is required to be effective, such Registration Statement is not then effective and available for the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) on the Interest Payment Date or each date which is within 10 Business Days prior to the Interest Payment Date. Any accrued and unpaid interest which is not paid within five (5) Business Days of the Interest Payment Date on which such payment of interest was due shall bear interest at the rate of 14.0% per annum from such Interest Payment Date until the same is paid in full (or, if less, the maximum interest rate then permitted by applicable law) (the "Default Interest"). Interest Payments and payments of principal will be paid only to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"). This Debenture is subject to the following additional provisions: 1. Exchange. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different denominations, as requested by the Holder surrendering the same. No service charge will be charged to the Holder for such registration transfer or exchange. 2. Transfers. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the United States only in compliance with the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws. Prior to due presentment for transfer of this Debenture, the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not this Debenture is overdue, and the Company shall not be affected by notice to the contrary. 3. Definitions. For purposes of this Debenture, the location of defined terms in this Debenture is set forth on the Index of Terms attached hereto and the following terms shall have the following meanings: "Account Control Agreement" shall have the meaning ascribed thereto in the Securities Purchase Agreement. "Agent" shall mean Portside Growth & Opportunity Fund, in its capacity as collateral agent for the holders of Debentures, and any successor in such capacity. "Approved Stock Plan shall mean any employee benefit plan, stock incentive plan or other similar plan or arrangement which has been approved by the Board of Directors of the Company or any authorized committee thereof, pursuant to which the Company's securities may be issued to any employee, officer, consultant or director for services provided to the Company. "ASE" shall mean The American Stock Exchange. --- "Bloomberg" shall mean Bloomberg Financial Markets or any other similar financial reporting service as may be selected from time to time by the Company and the holders of not less than 60% of the then Outstanding Principal Amount of Debentures issued on the Original Issuance Date. "Business Day" shall mean any day other than Saturday, Sunday or any other day on which commercial banks in The City of New York are authorized or required by law to remain closed. "Cash Collateral Account" shall mean the account maintained by the Company at the Cash Collateral Account Bank, in the name of Portside Growth & Opportunity Fund ("Portside") and subject to the control of Portside pursuant to the Account Control Agreement, together with any successor account designated by Portside. The Cash Collateral Account referred to herein is the same account being used for all debentures of the Company, including replacement debentures, originally issued to Portside and Leonardo L.P. (collectively "PL Debentures"). "Cash Collateral Account Bank" shall mean the financial institution designated as the Cash Collateral Account Bank under the Account Control Agreement. "Cash Transaction" shall mean any Organic Change with a third party on an arm's length basis pursuant to which the holders of the Common Stock are to receive consideration consisting solely of cash. "Closing Sale Price" shall mean, for any security as of any date, the last closing trade price for such security on the Principal Market as reported by Bloomberg, or if the Principal Market begins to operate on an extended hours basis, and does not designate the closing trade price, then the last trade price at 4:00 p.m., New York City Time, as reported by Bloomberg, or if the foregoing do not apply, the last closing trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the last closing ask price of such security as reported by Bloomberg, or, if no last closing ask price is reported for such security by Bloomberg, the average of the highest bid price and the lowest ask price of any market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Closing Sale Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(e)(iii) below. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. "Collateral" shall mean all of the property and assets, other than Intellectual Property, and all interests therein and proceeds thereof now owned or hereafter acquired by the Company, any of its Subsidiaries and any other Person upon which a Lien is granted or purported to be granted by such Person as security for all or any part of the obligations of the Company under the Debentures. "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company. "Common Stock Deemed Outstanding" shall mean, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 6(a)(i) and 6(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any shares of Common Stock owned or held by or for the account of the Company or issuable upon conversion of the Debentures or exercise of the Warrants. "Conversion Failure" shall mean that for any reason the Holder has not received all of the shares of Common Stock to which the Holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture. "Conversion Price" shall mean as of any Conversion Date or other date of determination $2.02, subject to adjustment as provided in Section 6, Anti-dilution Adjustments to Conversion Price. "Convertible Securities" shall mean any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. "Default Conversion Price" shall mean the lower of (a) the Conversion Price then in effect and (b) 95% of the lowest Closing Sale Price during the three (3) trading days ending on and including the Conversion Date or other date of determination. "Intellectual Property" means all trademarks, trade names, trade dress, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, technology licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights. "Interferon Acquisition" shall mean the acquisition of certain assets and technology of Interferon Sciences, Inc. ("Interferon") pursuant to asset purchase agreements, dated as of March 11, 2003, between the Company and Interferon, a true and complete copy of which has been delivered by the Company to each initial holder of Debentures in accordance with the Securities Purchase Agreement. "Letters of Credit" shall mean the irrevocable standby letters of credit in the aggregate stated amount of $1,000,000 issued by banks acceptable to the Agent and naming the Agent as beneficiary, and any letters of credit issued in substitution or replacement thereof, in accordance with the Securities Purchase Agreement. "Mortgage" shall mean each mortgage, deed of trust or deed to secure debt, made by the Company in favor of the Agent and recorded against each real property location acquired by the Company from Interferon pursuant to the Interferon Acquisition. "NASDAQ" shall mean The Nasdaq National Market, The Nasdaq Small Cap Market or the ASE. "NYSE" shall mean The New York Stock Exchange, Inc. ---- "Options" shall mean any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Original Issuance Date" shall mean October 31, 2003, the date on which any Debentures have been issued pursuant to the Securities Purchase Agreement. "Outstanding Principal Amount" shall mean the principal sum outstanding from time to time under this Debenture. "Person" shall mean an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Principal Market" shall mean the ASE, or if the Common Stock is not traded on the ASE, then the principal securities exchange or trading market for the Common Stock. "Quarterly Period" shall mean each of the following periods: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30, the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31. "Registration Rights Agreement" shall mean that certain registration rights agreement between the Company and the initial holders of the Debentures relating to the filing of a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants, as such agreement may be amended from time to time as provided in such agreement. "SEC" shall mean the United States Securities and Exchange Commission. "Securities Purchase Agreement" shall mean that certain securities purchase agreement between the Company and the initial holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Security Agreement" shall mean that certain second amended and restated security agreement made by the Company in favor of the Agent for the benefit of all holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Strategic Financing" shall mean the issuance of Common Stock or Options in connection with any acquisition by the Company, by whatever means, of any business, assets or technologies, or to any strategic investor, vendor, customer, lease or similar arrangement, the primary purpose of which is not to raise equity capital; provided that the aggregate number of shares of Common Stock which the Company may issue pursuant to this definition shall not exceed (i) 25% of the total outstanding equity on the Original Issuance Date in connection with any one or more related issuances to strategic investors, vendors, customers, lessors or similar parties or (ii) 40% of the total outstanding equity on the Original Issuance Date in connection with all issuances to strategic investors, vendors, customers, lessors or similar parties (in each case, subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions). "Subsidiary" shall mean, as to any Person, any entity in which such Person, directly or indirectly, owns 30% or more of the capital stock or other equity or similar interests or owns capital stock or holds an equity or similar interest which ownership entitles such Person to elect 30% or more of the board of directors or similar governing body of such entity. "Transaction Documents" shall have the meaning ascribed thereto in the Securities Purchase Agreement. "Warrants" shall mean the warrants to purchase shares of Common Stock issued by the Company pursuant to the Securities Purchase Agreement. "Weighted Average Price" shall mean, for any security as of any date, the dollar volume-weighted average price per share for such security on the Principal Market during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg through its "Volume at Price" function or, if the foregoing does not apply, the dollar volume-weighted average price per share of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(e)(iii) with the term "Weighted Average Price" being substituted for the term "Closing Sale Price." All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. 4. Conversion. The Holder of this Debenture shall have the following conversion ---------- rights: (a) Holder's Right to Convert. Subject to Sections 11 and 26, at any time or times until 5:00 p.m., New York City Time, on the Business Day prior to the Maturity Date this Debenture is convertible, at the option of the Holder hereof, into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) at the Conversion Rate (as defined below). The Holder hereof may convert a portion of the Outstanding Principal Amount of this Debenture if such portion is an integral multiple of $1,000. If this Debenture remains outstanding on the Maturity Date, then this Debenture shall be redeemed by the Company in accordance with Section 5(a). Notwithstanding anything herein to the contrary, concurrent with each delivery of Conversion Shares to a holder pursuant to this Debenture, the Company shall pay (in Interest Shares, only if all terms, conditions and requirements set forth in this Debenture concerning payment of interest in the form of Interest Shares are satisfied, or cash as determined by the Company) to such holder all accrued and unpaid interest on the Outstanding Principal Amount then being converted from the last date on which interest had been paid on such Outstanding Principal Amount through the Conversion Date. (b) Company's Right to Mandatory Conversion. Subject to Sections 11 and 26 hereof, if at any time from and after the Original Issuance Date the Weighted Average Price of the Common Stock shall exceed 175% of the Conversion Price for any 25 consecutive trading days (the "Mandatory Conversion Measuring Period"), the Company may deliver on or before the second (2nd) Business Day following the end of the Mandatory Conversion Measuring Period a written notice to all, but not less than all, of the Holders and the Transfer Agent (as defined in Section 4(e)(i)) (the "Mandatory Conversion Notice"), indicating that the Company is requiring each Holder to convert the then Outstanding Principal Amount of such Holder's Debenture plus accrued and unpaid interest thereon to the date fixed for conversion into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below); provided, however, that the Company may not require such conversion if (i) an Event of Default shall have occurred at any time on or prior to the Mandatory Conversion Date and shall have not been cured to the reasonable satisfaction of the holder of this Debenture, (ii) an event shall have occurred and be continuing at any time on or prior to the Mandatory Conversion Date which with the passage of time and the failure to cure would result in an Event of Default, (iii) either (A) any Registration Statement is not effective and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement or (B) there has been any Grace Period, in either case on any trading day during the period beginning on the first day of the Mandatory Conversion Measuring Period and ending on the Mandatory Conversion Date or (iv) there has been a public announcement of a pending, proposed or intended Change of Control, unless such pending, proposed or intended Change of Control has been terminated, abandoned or consummated and the Company has publicly announced such termination, abandonment or consummation of such Change of Control (a "Mandatory Conversion"). The Company shall send the Mandatory Conversion Notice by facsimile and overnight courier to each Holder and shall indicate (X) the date fixed for conversion, which shall be not less than fifteen (15) days nor more than thirty (30) days after each Holder's receipt of the Mandatory Conversion Notice (the "Mandatory Conversion Date"), (Y) the Conversion Price and (Z) the number of shares of Common Stock to be issued to such Holder as of the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the mechanics of conversion set forth in Section 4(e) shall apply, to the extent applicable, as if the Company and the Transfer Agent had received from each Holder on the Mandatory Conversion Date a Conversion Notice (as defined below) with respect to the entire Outstanding Principal Amount of the Debenture and the interest accrued and unpaid thereon as of the Mandatory Conversion Date. Promptly following the Mandatory Conversion Date, the Holder shall surrender its Debenture to the Company or the Transfer Agent. (c) Partial Conversion of Debenture. If this Debenture is converted in part, the -------------------------------- remaining portion of this Debenture not so converted shall remain entitled to the conversion rights provided herein. (d) Conversion Price for Holder Converted Shares. The Outstanding Principal Amount of this Debenture that is converted into shares of Common Stock shall be convertible into the number of shares of Common Stock which results from application of the following formula: P ------------------- Conversion Price P = Outstanding Principal Amount of this Debenture submitted for conversion The number of shares of Common Stock into which this Debenture hereto may be converted pursuant to the foregoing formula is hereafter referred to as the "Conversion Rate." (e) Mechanics of Conversion. The conversion of this Debenture shall be conducted ----------------------- in the following manner: (i) Holder's Delivery Requirements. To convert this Debenture (in whole or in part) into full shares of Common Stock on any date, the Holder shall (A) transmit by facsimile (or otherwise physically deliver), for receipt on or prior to 5:00 p.m., New York City Time, on such date, a copy of a properly completed notice of conversion executed by the Holder in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and the Company's designated transfer agent (the "Transfer Agent") and (B) surrender this Debenture to a common carrier for delivery to the Company as soon as practicable following such date. (ii) Company's Response. Upon receipt by the Company of a copy of a Conversion Notice, the Company shall (A) as soon as practicable, but in any event within two (2) Business Days, send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder and the Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein and (B) then, on or before the second (2nd) Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date"), (x) issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled, or (y) in the case of a public resale of such Conversion Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system. If the specified principal amount submitted for conversion is less than the then Outstanding Principal Amount of this Debenture, then the Company shall, as soon as practicable using reasonable best efforts, and in no event later than five Business Days after receipt of the Debenture (the "Debenture Delivery Date") and at its own expense, issue and deliver to the holder a new Debenture representing the Outstanding Principal Amount not converted. The effective date of conversion (the "Conversion Date") shall be deemed to be the date on which the Company receives by facsimile the Conversion Notice, and the Person or Persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (iii) Dispute Resolution. In the case of a dispute as to the determination of the Closing Sale Price, the Weighted Average Price, the Conversion Price or the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed determinations or arithmetic calculations to the Holder via facsimile within two (2) Business Days of receipt of the Holder's Conversion Notice or other date of determination. If the Holder and the Company are unable to agree upon the determination of the Closing Sale Price, the Weighted Average Price, the Conversion Price or arithmetic calculation of the Conversion Rate within two (2) Business Days of such disputed determination or arithmetic calculation being transmitted to the Holder, then the Company shall within two (2) Business Days submit via facsimile (A) the disputed determination of the Closing Sale Price, the Weighted Average Price or the Conversion Price, as applicable, to an independent, reputable investment bank selected by the Company and approved by the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding or (B) the disputed determination of the Conversion Price, the Weighted Average Price or the Conversion Price, as applicable, or the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent manifest error. (iv) Company's Failure to Timely Convert. ----------------------------------- (A) If (x) within five (5) Business Days after the Company's receipt of the facsimile copy of a Conversion Notice the Company has failed to issue and deliver a certificate to a Holder or credit the Holder's designee's balance account with DTC, in accordance with Section 4(e) hereof for the number of shares of Common Stock to which the Holder is entitled upon the Holder's conversion of this Debenture or (y) within five (5) Business Days of the Company's receipt of this Debenture the Company has failed to issue and deliver a Debenture representing the principal amount of this Debenture not so converted, then in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof), the Company shall pay additional damages to such holder for each day after the Share Delivery Date that such conversion is not timely effected and/or each day after the Debenture Delivery Date that this Debenture is not delivered in an amount equal to 0.05% of the product of (I) the sum of the number of shares of Common Stock not issued to the holder on or prior to the Share Delivery Date and to which such holder is entitled as set forth in the applicable Conversion Notice and, in the event the Company has failed to deliver a Debenture to the holder on or prior to the Debenture Delivery Date, the number of shares of Common Stock issuable upon conversion of this Debenture as of the Debenture Delivery Date and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date, in the case of the failure to deliver Common Stock, or the Debenture Delivery Date, in the case of failure to deliver a Debenture. The foregoing notwithstanding, the damages set forth in this Section 4(e)(iv) shall be stayed with respect to the number of shares of Common Stock for which there is a good faith dispute being resolved pursuant to Section 4(e)(iii), pending the resolution of such dispute. (B) If for any reason a holder has not received all of the shares of Common Stock to which such holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture, then the Holder, upon written notice to the Company, with a copy to the Transfer Agent, may void its Conversion Notice; provided that the voiding of the Holder's Conversion Notice shall not affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 4(e)(iv)(A) or otherwise. (f) No Fractional Shares. The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. (g) Release of Funds from Segregated Account. Notwithstanding anything herein to the contrary, if at any time and from time to time, the balance of the funds remaining in the Segregated Account (as defined in the Securities Purchase Agreement and including the Cash Collateral Account), if any, that were paid into the Segregated Account exceeds the then Outstanding aggregate Principal Amount of the PL Debentures, together with accrued interest thereon and so long as no Event of Default, or event that with notice or lapse of time would constitute an Event of Default, has occurred and is continuing, the holder agrees, by its acceptance of the PL Debentures, to distribute promptly to the Company an amount in cash equal to its pro rata share of such excess from the Segregated Account established, or, if advised in writing by the Company, to use such excess to remit payment for any obligation under the PL Debentures to the holder of the PL Debentures. If for any reason any portion of the funds held in the Segregated Account established by the initial holder of the PL Debentures are not paid to the Company in accordance with the terms of the Securities Purchase Agreement and the Outstanding Principal Amount on the PL Debentures, together with accrued and unpaid interest thereon, becomes due and payable either at maturity or upon acceleration or demand upon an Event of Default, the Company and the holder, by its acceptance of this Debenture, agree that the funds held in the Segregated Account shall be released to the holder of the PL Debentures and shall be deemed to constitute a partial payment of the Outstanding Principal Amount of the PL Debentures together with accrued interest thereon then due in an amount equal to the funds in the Segregated Account. All such payments from the Segregated Account shall be deemed to be payments of (i) first, accrued and unpaid interest on the Outstanding Principal Amount of the PL Debentures and (ii) second, Outstanding Principal Amount of the PL Debentures. 5. Redemption. ---------- (a) Mandatory Redemption at Maturity. If this Debenture remains outstanding on the Maturity Date, the Company shall redeem (a "Maturity Date Mandatory Redemption") the Outstanding Principal Amount of this Debenture that is not subject to a Conversion Notice for an amount in cash (the "Maturity Date Redemption Price") equal to the Outstanding Principal Amount of the Debenture not converted into shares of Common Stock pursuant to a Conversion Notice, plus accrued and unpaid interest thereon. The Maturity Date Redemption Price shall be paid on the Maturity Date to the Holder by wire transfer of immediately available funds to an account designated in writing by such Holder. Promptly following payment of the Maturity Date Redemption Price, the Holder shall surrender this Debenture to the Company. (b) Payment Failures If the Company fails to make any payment of a Maturity Date Redemption Price, then in addition to any remedy the Holder may have under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, until the Maturity Date Redemption Price is paid in full, (x) the Maturity Date Redemption Price payable in respect of such unpaid Maturity Date Redemption Price shall bear interest at the rate of 1.5% per month, prorated for partial months, and (y) the Holder shall have the option to require the Company to convert any or all of the Outstanding Principal Amount of this Debenture subject to redemption and for which the Maturity Date Redemption Price (together with any interest thereon) has not been paid into a number of shares of Common Stock equal to the quotient of the Maturity Date Redemption Price (together with any interest thereon) divided by the Default Conversion Price. 6. Anti-dilution Adjustments to Conversion Price. The Conversion Price will be subject to adjustment from time to time as provided in this Section 6 at all times prior to, but not after, the date on which cash collateral payments have been made pursuant to Section 25 in an amount equal to the entire Outstanding Principal Amount, together with accrued and unpaid interest on all Debentures outstanding: (a) Anti-dilution Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Original Issuance Date and prior to the twelve (12) month anniversary of the Original Issuance Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock: (v) deemed to have been issued by the Company in connection with an Approved Stock Plan; (w) deemed to have been issued upon issuance of the Debentures or the Warrants, or issued upon conversion of the Debentures or exercise of the Warrants; (x) issued upon exercise of Options or Convertible Securities which are outstanding on the date immediately preceding the Original Issuance Date, provided that such issuance of shares of Common Stock upon exercise of such Options or Convertible Securities is made pursuant to the terms of such Options or Convertible Securities in effect on the date immediately preceding the Original Issuance Date, such Options or Convertible Securities are not amended after the date immediately preceding the Original Issuance Date other than with respect to Options originally issued pursuant to an Approved Stock Plan and the purchase or exercise price provided for in any such Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any such Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock does not change at any time after the Original Issuance Date; (y) issued to the public pursuant to an underwritten offering registered pursuant to the Securities Act (but in all events excluding offerings pursuant to "equity lines" or similar products); and (z) issued pursuant to a Strategic Financing ((v) through (z) collectively "Excluded Issuances")) for a consideration per share (the "New Securities Issuance Price") less than the Conversion Price in effect immediately prior to such time (each such sale or issuance, a "Dilutive Issuance"), then concurrent with such Dilutive Issuance, the Conversion Price then in effect shall be reduced to an amount equal to the New Securities Issuance Price. If and whenever on or after the twelve (12) month anniversary of the Original Issuance Date and prior to the Maturity Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock issued or deemed to have been issued pursuant to any Excluded Issuance) in a Dilutive Issuance, then concurrent with such Dilutive Issuance, the Conversion Price then in effect shall be reduced to a price (rounded to the nearest cent) equal to the product of (A) the Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price in effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the Conversion Price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For purposes of determining the adjusted Conversion Price under this Section 6(a), the following shall be applicable: (i) Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 6(a)(i), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 6(a)(ii), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 6(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of the Debentures are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect. (iv) Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then solely for purposes of this Section 6, the Options will be deemed to have been issued for a consideration of $0.01. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the Closing Sale Prices of such securities during the ten (10) consecutive trading days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company. (v) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares and the Conversion Price in effect immediately prior to such combination will be proportionately increased. (c) Holder's Right of Alternative Conversion Price Following Issuance of Convertible Securities. If the Company issues or sells any Options or Convertible Securities after the Original Issuance Date that are convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to a fixed price (each of the formulations for such variable price being herein referred to as, the "Variable Price"), the Company shall provide written notice thereof via facsimile and overnight courier to the Holder (the "Variable Notice") on the date of issuance of such Convertible Securities or Options. From and after the date the Company issues any such Convertible Securities or Options with a Variable Price, but only for so long as such Convertible Securities or Options are outstanding, the Holder shall have the right, but not the obligation, in its sole discretion to substitute the Variable Price for the Conversion Price upon conversion of any Debentures held by it by designating in the Conversion Notice delivered upon conversion of such Debentures that solely for purposes of such conversion the Holder is relying on the Variable Price rather than the Conversion Price then in effect. The Holder's election to rely on a Variable Price for a particular conversion of Debentures shall not obligate the Holder to rely on a Variable Price for any future conversions of Debentures. (d) Other Events. If any event occurs of the type contemplated by the provisions of this Section 6 in a private transaction (the primary purpose of which is to raise equity capital) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features other than pursuant to an Excluded Issuance), then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Debentures; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 6. (e) Notices. ------- (i) Promptly following any adjustment of the Conversion Price pursuant to this Section 6, the Company will give written notice thereof to the Holder, setting forth in reasonable detail, and certifying, the calculation of such adjustment. In the case of a dispute as to the determination of such adjustment, then such dispute shall be resolved in accordance with the procedures set forth in Section 4(e)(iii). (ii) The Company will give written notice to the Holder at least ten (10) Business Days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined in Section 7(a)), dissolution or liquidation, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. (iii) The Company will also give written notice to the Holder at least ten (10) Business Days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. 7. Other Rights. ------------ (a) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any (i) sale of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor, or, if applicable, the parent of the successor, resulting from such Organic Change (in each case, the "Acquiring Entity") a written agreement to deliver to each holder of Outstanding Principal Amount of the Debentures in exchange for such securities, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Debentures, and reasonably satisfactory to the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding; provided that the new security of the Acquiring Entity shall not be required to be of rank equal to the Debenture if the issuance of a security of such rank is not permitted by, or is inconsistent with, any agreement or instrument to which the Acquiring Entity is a party or any security of the Acquiring Entity that is outstanding, upon the consummation of the Organic Change. Prior to the consummation of any other Organic Change, the Company shall make appropriate provision to insure that each of the holders of the Debentures will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Debentures such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of shares of Common Stock which would have been acquirable and receivable upon the conversion of such holder's Debentures as of the date of such Organic Change (without taking into account any limitations or restrictions on the convertibility of the Debentures). (b) Optional Redemption at Holder's Election Upon Change of Control. In addition to the rights of the holders of Debentures under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, upon a Change of Control (as defined below) of the Company each holder of Debentures shall have the right, at such holder's option, to require the Company to redeem all or a portion of such holder's Debentures at a price equal to 100% of the Outstanding Principal Amount of such Debentures plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Change of Control and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures on the date of consummation of the Change of Control ("Change of Control Redemption Price"). No sooner than 20 Business Days nor later than 10 Business Days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier (a "Notice of Change of Control") to each holder of Debentures. At any time during the period beginning after receipt of a Notice of Change of Control (or, in the event a Notice of Change of Control is not delivered at least 10 Business Days prior to a Change of Control, at any time on or after the date which is 10 Business Days prior to a Change of Control) and ending on the date one (1) Business Day prior to such Change of Control, any holder of the Debentures then outstanding may require the Company to redeem all or a portion of the holder's Debentures then outstanding by delivering written notice thereof via facsimile and overnight courier (a "Notice of Redemption Upon Change of Control") to the Company, which Notice of Redemption Upon Change of Control shall indicate (i) the principal amount of the Debentures that such holder is submitting for redemption, and (ii) the applicable Change of Control Redemption Price, as calculated pursuant to this Section 7(b). Upon the Company's receipt of a Notice(s) of Redemption Upon Change of Control from any holder of Debentures, the Company shall promptly, but in no event later than two (2) Business Days following such receipt, notify each holder of Debentures by facsimile of the Company's receipt of such Notice(s) of Redemption Upon Change of Control. The Company shall deliver to the holder of each Debenture who has delivered a Notice of Redemption upon Change of Control, the applicable Change of Control Redemption Price simultaneously with the consummation of the Change of Control provided that a holder's Debentures shall have been so delivered to the Company. For purposes of this Section 7(b), "Change of Control" shall mean (i) the consolidation, merger or other business combination of the Company with or into another Person (other than (A) a consolidation, merger or other business combination in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company), (ii) the sale or transfer of all or substantially all of the Company's assets, or (iii) a tender or exchange offer made to and accepted by the holders of more than 50% of the aggregate voting power of the outstanding Common Stock. (c) Optional Redemption At the Company's Election Upon Cash Transaction. At any time or times on or after the date the Company publicly discloses a pending, proposed or intended Cash Transaction, the Company shall have the right, in its sole discretion, to require that all, but not less than all, of the Outstanding Principal Amount of this Debenture be redeemed ("Cash Transaction Redemption Election") at a price equal to 100% of the Outstanding Principal Amount of this Debenture plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Cash Transaction and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures redeemed on the date of consummation of the Cash Transaction (the "Cash Transaction Redemption Price"). The Company shall exercise its right to make a Cash Transaction Redemption Election by providing each holder of Debentures written notice ("Notice of Cash Transaction Redemption") by facsimile or overnight courier, after the public disclosure of a proposed, pending or intended Cash Transaction and at least ten (10) Business Days prior to the date of consummation of the Cash Transaction ("Cash Transaction Election Redemption Date"), which Cash Transaction Election Redemption Date shall be the date of the consummation of the Cash Transaction. The Notice of Cash Transaction Redemption shall indicate the anticipated Cash Transaction Election Redemption Date. If the Company has exercised its right of Cash Transaction Redemption Election then the Outstanding Principal Amount of the Debenture at the time of the consummation of the Cash Transaction shall be redeemed on the Cash Transaction Election Redemption Date by payment by or on behalf of the Company to each holder of Debentures of the applicable Cash Transaction Redemption Price concurrent with the closing of the Cash Transaction. All holders of Debentures shall thereupon, if the Cash Transaction Redemption Price has been paid, except as specifically set forth herein, in the Securities Purchase Agreement or in the Registration Rights Agreement, cease to have any rights with respect to the Debentures and within two (2) Business Days after the Cash Transaction Election Redemption Date, or such earlier date as the Company and holders of no less then 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date mutually agree, shall surrender all Debentures to the Company. (d) Right to Convert on an Organic Change or Change of Control or Agreement of the Parties. In addition to the foregoing, following the announcement of any Change of Control or other Organic Change following which the Company is not the surviving entity or otherwise upon the mutual agreement of the Company and holders of at least 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date, the Holder shall continue pursuant to Section 4(a) hereof to have the right to convert the Outstanding Principal Amount of this Debenture at the then prevailing Conversion Rate until the Debenture is redeemed or otherwise converted pursuant to this Section 7. 8. Reservation of Stock Issuable Upon Conversion. The Company shall, so long as any of the Debentures are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversions of the Debentures, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Debentures then outstanding; provided that the number of shares of Common Stock so reserved shall at no time prior to the date on which cash collateral payments have been made pursuant to Section 25 in an amount equal to the entire Outstanding Principal Amount, together with accrued and unpaid interest on all Debentures outstanding be less than 135% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion) and the maximum number of Interest Shares issuable over the full term of the Debentures (assuming the Company paid the maximum amount of interest permitted to be paid in Interest Shares over the full term of the Debentures) and after such time 100% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion). 9. No Reissuance of Debentures. No Debentures acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such Debentures shall be retired. No additional Debentures (other than the Debentures issued pursuant to the Securities Purchase Agreement) shall be authorized or issued without the consent of the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date. 10. No Impairment. The Company shall not intentionally take any action which --------------- would impair the rights and privileges of the Debentures set forth herein or the Holders thereof. 11. Limitation on Beneficial Ownership. The Company shall not effect and shall have no obligation to effect any conversion of Debentures, and no holder of Debentures shall have the right to convert any Debentures, to the extent that after giving effect to such conversion, the beneficial owner of such shares (together with such Person's affiliates) would have acquired, through conversion of Debentures or otherwise, beneficial ownership of a number of shares of Common Stock that exceeds 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by a Person and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Debentures with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted Debentures beneficially owned by such Person or any of its affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Person or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 11, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 11, in determining the number of outstanding shares of Common Stock, a holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a more recent public announcement by the Company, or (3) any other notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written request of the Holder, the Company shall promptly, but in no event later than two (2) Business Days following the receipt of such notice, confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to conversions of Debentures by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. 12. Obligations Absolute. No provision of this Debenture shall alter or impair ---------------------- the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place and rate, and in the manner, herein prescribed. 13. Waivers of Demand, Etc. The Company hereby expressly waives (to the extent permitted by applicable law) demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and will be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 14. Replacement Debentures. In the event that any Holder notifies the Company that its Debenture(s) have been lost, stolen or destroyed, replacement Debenture(s) identical in all respects to the original Debenture(s) (except for registration number and Outstanding Principal Amount, if different than that shown on the original Debenture(s)) shall be issued by the Company to the Holder, provided that the Holder executes and delivers to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such Debenture(s). 14A. Payment of Expenses. The Company agrees to pay all reasonable expenses, including reasonable attorneys' fees, which may be incurred by the Holder in successfully enforcing the provisions of this Debenture and/or successfully collecting any amount due under this Debenture, the Securities Purchase Agreement, the Security Agreement, the Account Control Agreement (as defined in the Securities Purchase Agreement), the Warrants, the Registration Rights Agreement or any other Transaction Document. 15. Defaults. The following shall constitute "Events of Default": -------- (a) Any Event of Default under any other Debenture; or (b) The suspension from trading or failure of the Common Stock to be listed on NASDAQ, the ASE or the NYSE for more than an aggregate of ten (10) trading days in any 365-day period; or (c) Any money judgment (including any arbitration award, but only if reduced to a judgment), writ or warrant of attachment, or similar process in excess of Two Hundred and Fifty Thousand Dollars ($250,000) in the aggregate, net of any applicable insurance coverage, shall be entered or filed against the Company, its Subsidiaries or any of their properties or other assets and which shall remain unpaid, unvacated, unbonded and unstayed for a period of seventy-five (75) days; or (d) The Company shall default in the payment when due of (i) interest on this Debenture, and such default shall continue for thirty (30) calendar days after the due date thereof, or (ii) the Outstanding Principal Amount of this Debenture; or (e) Any of the representations or warranties made by the Company herein (including any Cash Collateral Certificate delivered under Section 25(g)(iii)), in the Securities Purchase Agreement, the Warrants, the Security Agreement, the Account Control Agreement, any Mortgage, the Registration Rights Agreement or any other Transaction Document shall be untrue in any material respect at the time made and such condition (to the extent capable of being cured) shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such condition; and such breach of representations and warranties, singly or in the aggregate, would have a Material Adverse Effect or materially impair the ability of the Company to perform or satisfy its obligations to the Holder pursuant to the Transaction Documents; or (f) The Company shall fail to perform or observe in any material respect any material covenant or agreement in the Securities Purchase Agreement, the Security Agreement, the Warrants, any Mortgage, the Account Control Agreement, the Registration Rights Agreement, this Debenture or any other Transaction Document, including, without limitation, (i) the failure to honor any Conversion Notice and deliver shares pursuant thereto, and such failure shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such failure or (ii) the failure by the Company to comply with its obligations under Section 25(g) hereof, including, without limitation, (A) the obligation to disclose sufficient and timely information in its public filings with the SEC for the holder to verify and reconcile Company Consolidated Revenues for the relevant periods, as required by Section 25(g)(iv) hereof, (B) the obligation to make payments timely as and when due and in the form of cash and/or Repayment Shares as provided thereunder, (C) the failure of the Company to deliver timely a completed Cash Collateral Certificate in the manner required by Section 25(g)(v) hereof and (D) the delivery by or on behalf of the Company of any Cash Collateral Certificate to any holder of Debentures without the express prior written consent of such holder; or (g) The Company shall (i) become insolvent; (ii) admit in writing its inability to pay its debts generally as they mature; (iii) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (iv) apply for or consent to the appointment of a trustee, liquidator or receiver for it or for a substantial part of its property or business; or (h) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or (i) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; or (j) The Company shall fail to pay any debt for borrowed money or other similar obligation or liability ("Indebtedness") (excluding Indebtedness evidenced by the Debentures, Subordinated Indebtedness and Pari Passu Indebtedness) of the Company, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), in an outstanding principal amount equal to or in excess of One Million Dollars ($1,000,000), singly or in the aggregate and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or any such Indebtedness of the Company shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (k) The Company shall fail to make any payment of principal in respect of Subordinated Indebtedness or Pari Passu Indebtedness or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Subordinated Indebtedness or Pari Passu Indebtedness, or any such Subordinated Indebtedness or Pari Passu Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (l) Bankruptcy, reorganization, insolvency or liquidation proceedings or other similar proceedings, or relief under any bankruptcy law or any similar law for the relief of debt shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit to any material allegations of, or default in answering a petition filed in any such proceeding; or (m) Unless the Company shall have made cash collateral payments in an amount equal to the entire Outstanding Principal Amount of all Debentures, together with accrued and unpaid interest thereon, in accordance with Section 25(g), the Registration Statement (as defined in the Registration Rights Agreement) is not declared effective by the SEC and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement on or before April 29, 2004; or (n) the Security Agreement, any Mortgage (as defined in the Securities Purchase Agreement) or any other security document, after delivery thereof pursuant to the Securities Purchase Agreement, shall for any reason fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority lien in favor of the agent for the benefit of the holders of Debentures on any collateral purported to be covered thereby; or (o) the Cash Collateral Account Bank shall fail to comply with any of the terms of the Account Control Agreement; (p) at any time required to be in full force and effect under the Securities Purchase Agreement, the Letters of Credit shall for any reason cease to be in full force and effect other than in accordance with their express terms or any issuer of any of the Letters of Credit shall fail to maintain a Minimum Rating (as defined in the Securities Purchase Agreement) or fail to perform its obligations thereunder or shall, in writing, repudiate the Letter of Credit issued by it or deny that its obligations thereunder are valid, binding and enforceable, and such failure shall continue uncured for a period of fifteen (15) days after notice from the Holder of such failure; (q) the report of the Company's auditors on the Company's consolidated audited financial statements for the year ended December 31, 2002 shall have contained any going concern qualification; or (r) any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any material facility of the Company or any of its Subsidiaries. Unless an Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default), upon the occurrence of an Event of Default, and for so long as such Event of Default shall be continuing, at the option of and on notice by the Holder to the Company in writing and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any other instruments contained to the contrary notwithstanding to the extent permitted by applicable law (provided, however, that upon the occurrence of any Event of Default described in subsection (g), (h) or (l) above, without any notice to the Company or any act by the Holder or the Agent, this Debenture shall become due and payable automatically and immediately, without presentment, demand, protest or notice of any kind, all of which are expressly waived by the Company, anything herein or in any other instrument contained to the contrary notwithstanding to the extent permitted by applicable law), and the Holder may immediately, and without expiration of any further period of grace, enforce any and all of the Holder's rights and remedies provided herein, or under the Security Agreement, the Mortgages, the Account Control Agreement and the Letters of Credit or any other rights or remedies afforded by law. In such event this Debenture shall be redeemed at a redemption price equal to 100% of the Outstanding Principal Amount of the Debenture, plus accrued and unpaid interest on this Debenture. In addition to the foregoing, upon an Event of Default, the rate of interest on this Debenture, shall, to the maximum extent of the law, be permanently increased by two percent (2%) per annum (i.e., from 7% to 9% per annum) commencing on the first day of the thirty (30) day period (or part thereof) following the Event of Default; and, solely in the case of an Event of Default triggered by a Conversion Failure, an additional two percent (2%) per annum commencing on the first day of each of the second and third such thirty (30) day periods (or part thereof); and an additional one percent (1%) on the first day of each consecutive thirty (30) day period (or part thereof) thereafter until this Debenture has been duly converted or redeemed as herein provided; provided that in no event shall the rate of interest exceed the lower of 20% or the highest rate permitted by applicable law. The Company shall within one (1) Business Day notify each Holder of Debentures upon becoming aware of the occurrence of any Event of Default (whether or not waived by any other Holder of Debentures) or of any action taken by any Holder of Debentures with respect to the occurrence of any Event of Default. 16. Savings Clause. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 17. Entire Agreement. This Debenture and the agreements referred to in this Debenture constitute the full and entire understanding and agreement between the Company and the Holder with respect to the subject hereof. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 18. Assignment, Etc. The Holder may, subject to compliance with the Securities Purchase Agreement and to applicable federal and state securities laws, transfer or assign this Debenture or any portion thereof and may pledge, encumber or transfer its rights or interest in and to this Debenture or any part hereof, provided, that such transfer or assignment of this Debenture does not result in more than ten (10) holders of the total Outstanding Principal Amount of all Debentures and any such part or portion of this Debenture constitutes at least 10% of the Outstanding Principal Amount or such lesser amount if such transfer involves the entire Outstanding Principal Amount then held by such transferor. Any such transfer or assignment shall only be effective upon the Company's receipt of written notice thereof. Each such assignee, transferee and pledgee shall have all of the rights of the Holder under this Debenture. The Company agrees that, subject to compliance with the Securities Purchase Agreement, after receipt by the Company of written notice of assignment from the Holder and the Holder's assignee, all principal, interest and other amounts which are then, and thereafter become, due under this Debenture shall be paid to such assignee, transferee or pledgee at the place of payment designated in such notice. This Debenture shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and registered assigns. 19. No Waiver. No failure on the part of the Holder to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to the Holder or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Holder from time to time. 20. Notices. Unless otherwise provided herein, any notices, consents, waivers or other communications required or permitted to be given under the terms of this Debenture must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Hemispherx Biopharma, Inc. 1617 JFK Boulevard Suite 660 Philadelphia, PA 19103 Telephone: (215) 998-8000 Facsimile: (215) 998-1739 Attention: Chief Executive Officer With a copy to: Ransom W. Etheridge, Esq. 2610 Potters Road Suite 200 Virginia Beach, VA 23452 Telephone: (757-486-0599 Facsimile: (757) 486-0792 If to a holder, to its address and facsimile number set forth on the Schedule of Buyers attached to the Securities Purchase Agreement, with copies to such holder's representatives as set forth on the Schedule of Buyers, or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 21. Miscellaneous. Whenever the sense of this Debenture requires, words in the -------------- singular shall be deemed to include the plural and words in the plural shall be deemed to include the singular. Paragraph headings are for convenience only and shall not affect the meaning of this document. 22. Choice of Law and Venue; Waiver of Jury Trial. THIS DEBENTURE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with this Debenture shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in Section 20 (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to this Debenture. 23. Rule 144. With a view to making available to the Holder the benefits of Rule 144 promulgated under the Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit the Holder to sell the underlying stock of the Company issuable upon conversion or exercise of the Debentures and the Warrants to the public without registration, the Company agrees to use its reasonable best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) furnish to any Holder, promptly upon request, a written statement by the Company (provided true at the time) that it has complied with the applicable reporting and filing requirements of the Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and copies of such other reports and documents (if any) so filed by the Company as may be reasonably requested to permit any such Holder to take advantage of any rule or regulation of the SEC permitting the selling of any such securities without registration. 24. Reserved. -------- 25. Rank; Covenants; Cash Collateral. -------------------------------- (a) Definitions. For purposes of this Section 25, the following terms ----------- shall have the following meanings: (i) "Acquisition Buildings" shall mean the buildings being purchased by the ------------------------ Company in connection with the Interferon Acquisition and located at 783 Jersey Avenue, 5 Jules Lane, New Brunswick Middlesex Co., New Jersey. (ii) "Acquisition Indebtedness" shall mean any Indebtedness incurred, assumed or guaranteed by the Company or any of its Subsidiaries in respect of the purchase price for, or in connection with the purchase of, any assets, business or securities (an "Acquired Business") acquired by the Company or any of its Subsidiaries, other than Indebtedness incurred, assumed or guaranteed in connection with the Interferon Acquisition. (iii) "Acquisition Multiple" shall mean, subject in all respects to the final sentence of Section 25(b)(i) hereof, (i) in the event the Acquired Business is not a Qualified Competitor, three times the EBITDA of the Acquired Business or (ii) in the event the Acquired Business is a Qualified Competitor, four times the EBITDA of the Acquired Business; provided, however, that if prior to the closing of the acquisition of any Acquired Business under subsections (i) or (ii) of this definition, the Company has not been furnished with financial statements of such Acquired Business that have been audited by a nationally recognized auditing firm, the Acquisition Multiple shall be two and one half (2 1/2) times the EBITDA of the Acquired Business. (iv) "Biweekly Revenue Cash Collateral Date" shall mean the 15th and last calendar day of each month during the Initial Cash Collateral Period. If any Biweekly Revenue Cash Collateral Date is not a Business Day, then the Biweekly Revenue Cash Collateral Date shall be the Business Day immediately following such Biweekly Revenue Cash Collateral Date. (v) "Cash Collateral Date" shall mean each Biweekly Revenue Cash Collateral Date, Monthly Revenue Cash Collateral Date, the First Revenue Milestone Cash Collateral Date, the Second Revenue Milestone Cash Collateral Date, the Third Revenue Milestone Cash Collateral Date, the Qualified Inventory Financing Date and the Qualified Mortgage Financing Date. (vi) "Company Consolidated Revenues" shall mean the aggregate amount of all cash collected by the Company and its Subsidiaries, including, without limitation, cash proceeds from the sales of inventory, cash collections of accounts receivable, cash collections of licensing fees, cash proceeds from the issuance of all Indebtedness (excluding cash received for the purchase of the Debentures), but excluding cash received from (a) the issuance of any equity or equity linked securities of the Company, (b) the Qualified Mortgage Financing and (c) the Qualified Inventory Financing. (vii) "EBITDA" shall mean (1) the earnings before interest, income taxes, depreciation and amortization of the Acquired Business for the twelve (12) full months immediately preceding the closing date in respect of the purchase of the Acquired Business less (2) any capital expenditures of the Acquired Business during such period. (viii) "First Revenue Milestone Cash Collateral Date" shall mean March 31, 2004. -------------------------------------------- (ix) "First Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the First Revenue Milestone Cash Collateral Date. (x) "First Revenue Milestone Target" shall mean $800,000.00. ------------------------------ (xi) "Initial Cash Collateral Period" shall mean the period commencing on and including April 15, 2004 and ending on and including April 29, 2005. (xii) "Inventory" shall mean, with respect to any Person, all goods and merchandise of such Person, including, without limitation, all raw materials, work-in-process, packaging, supplies, materials and finished goods of every nature used or usable in connection with the shipping, storing, advertising or sale of such goods and merchandise, whether now owned or hereafter acquired, and all such other property the sale or other disposition of which would give rise to an account receivable, including, without limitation, all of the items listed on Exhibit B to this Debenture. (xiii) "Lien" shall mean any mortgage, deed of trust, pledge, lien (statutory or otherwise), security interest, charge or other encumbrance or security or preferential arrangement of any nature, including, without limitation, any conditional sale or title retention arrangement, any capitalized lease and any assignment, deposit arrangement or financing lease intended as, or having the effect of, security. (xiv) "Monthly Revenue Cash Collateral Date" shall mean the 30th calendar day of each month during the Secondary Cash Collateral Period (except for the month of January 2005, which shall be the 31st calendar day of such month and the month of February, which shall be the 28th calendar day of such month). If any Monthly Revenue Cash Collateral Date is not a Business Day, then the Monthly Revenue Cash Collateral Date shall be the Business Day immediately following such Monthly Revenue Cash Collateral Date. (xv) "Pari Passu Indebtedness" shall mean Indebtedness that is made expressly "pari passu" in right of payment with the Debentures in an aggregate of (i) up to an aggregate principal amount of $5,000,000 of Indebtedness, (ii) up to an additional aggregate principal amount of $5,000,000 of Indebtedness incurred at any time after the eighteen (18) month anniversary of the Original Issuance Date, provided that in order to incur any Pari Passu Indebtedness pursuant to this clause (ii) the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the twenty consecutive trading day period prior to the incurrence of any such Pari Passu Indebtedness under this clause (ii) must equal or exceed 150% of the Conversion Price then in effect, (iii) up to an additional aggregate principal amount of $4,000,000 of Indebtedness incurred any time after the Outstanding Principal Amount of all Debentures is less than $1,000,000; provided, that in order to incur any Pari Passu Indebtedness under this clause (iii) the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the twenty consecutive trading day period prior to the incurrence of any such Pari Passu Indebtedness under this clause (iii) must equal or exceed 150% of the Conversion Price then in effect (iv) Acquisition Indebtedness, and (v) any other indebtedness of the Company which the Company and the holders of more than 60% of the then Outstanding Principal Amount of the Debentures issued on the Original Issuance Date may hereafter from time to time expressly and specifically agree in writing shall constitute Pari Passu Indebtedness. (xvi) "Permitted Liens" shall mean: --------------- (A) Liens securing all obligations under the Debentures and the agreements and instruments entered into in connection therewith; (B) the Qualified Mortgage; (C) the Qualified Inventory Liens; (D) Liens on any Intellectual Property of the Company or any of its Subsidiaries; and (E) Liens securing all obligations under the Company's Series B and C 7% Senior Secured Convertible Debentures Due June 30, 2007 and the agreements and instruments entered into in connection therewith. (xvii) "Qualified Competitor" shall mean an Acquired Business that is competitive with and in the same business with a business of the Company or any of its Subsidiaries, where the Company's Board of Directors determines, in its reasonable judgment, that substantially all overhead expenses of the Acquired Business during the trailing twelve months immediately preceding the acquisition of such Acquired Business are duplicative with overhead expenses of the Company or any of such Subsidiaries and such duplicative expenses will be eliminated within six (6) months immediately following the purchase of the Acquired Business. (xviii) "Qualified Indebtedness" shall mean Pari Passu Indebtedness that is not evidenced by any certificate, instrument, note or other agreement that, directly or indirectly, permits or requires such Indebtedness to be convertible into or exercisable or exchangeable for Common Stock (other than Options that may be issued by the Company to the holder(s) of such Indebtedness, the value of which does not exceed 10% of the principal amount of Indebtedness so incurred, as determined using the Black-Scholes valuation methodology). (xix) "Qualified Inventory Financing" shall mean a single financing arrangement pursuant to which the Company and/or its Subsidiaries obtains financing solely through the granting of Liens on Inventory that yield total net unrestricted cash proceeds to the Company at the time of the creation of such Liens of not less than $2,000,000.00. (xx) "Qualified Inventory Financing Date" shall mean the date on which the Qualified Inventory Financing is consummated. (xxi) "Qualified Inventory Liens" shall mean Liens on Inventory that are created or imposed solely in connection with a Qualified Inventory Financing. (xxii) "Qualified Mortgage" shall mean a mortgage on the Acquisition Buildings that is created or imposed solely in connection with a Qualified Mortgage Financing. (xxiii) "Qualified Mortgage Financing" shall mean a single financing arrangement pursuant to which the Company either (i) obtains financing solely through the granting of Liens on the Acquisition Buildings or (ii) sells the Acquisition Building, in each case in a transaction that yields total net unrestricted cash proceeds to the Company at the time of the creation of such Liens or at the time of such sale, as applicable, of not less than $1,500,000.00. (xxiv) "Qualified Mortgage Financing Date" shall mean the date on which the Qualified Mortgage Financing is consummated. (xxv) "Secondary Cash Collateral Period" shall mean the period commencing on and including April 30, 2005 and ending on and including the Maturity Date. (xxvi) "Second Revenue Milestone Cash Collateral Date" shall mean June 30, 2004; provided that if such day is not a Business Day, then the Second Revenue Milestone Cash Collateral Date shall be the Business Day immediately following the Second Revenue Milestone Cash Collateral Date. (xxvii) "Second Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the Second Revenue Milestone Cash Collateral Date. (xxviii) "Second Revenue Milestone Target" shall mean $1,500,000.00. ------------------------------- (xxix) "Third Revenue Milestone Cash Collateral Date" shall mean December 31 2004; provided that if such day is not a Business Day, then the Third Revenue Milestone Cash Collateral Date shall be the Business Day immediately following the Third Revenue Milestone Cash Collateral Date. (xxx) "Third Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the Third Revenue Milestone Cash Collateral Date. (xxxi) "Third Revenue Milestone Target" shall mean $3,000,000.00. ------------------------------ (b) Incurrence of Indebtedness. -------------------------- (i) So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (A) the Indebtedness evidenced by the Debentures which shall rank ratably and equally with each other, (B) Pari Passu Indebtedness that is not secured by any assets of the Company or any of its Subsidiaries and that does not provide at any time for the payment of any principal thereon until at least 91 days after the Maturity Date of the Debentures (except for the payment of principal on Qualified Indebtedness to the extent permitted under Section 25(e)(ii)), (C) Indebtedness represented by trade payables incurred by the Company in the ordinary course of business, (D) Indebtedness incurred in connection with a Qualified Inventory Financing, provided that the proceeds of such Qualified Inventory Financing are applied to make cash collateral payments on the Debentures in the manner provided in Section 25(g)(i)(F) hereof, (E) Indebtedness incurred in connection with a Qualified Mortgage Financing, provided that the proceeds of such Qualified Mortgage Financing are applied to make cash collateral payments on the Debentures in the manner provided in Section 25(g)(i)(G) hereof, (F) Indebtedness that is not secured by any assets or property of the Company or any of its Subsidiaries, is made expressly subordinate in right of payment to the Debentures and that does not provide at any time for the payment of any principal thereon until at least 91 days after the Maturity Date of the Debentures ("Subordinated Indebtedness") pursuant to a subordination agreement containing the provisions attached hereto as Exhibit A executed and delivered by the Company and any holder of Subordinated Indebtedness to each holder of Debentures as a condition to the incurrence of such Indebtedness, (G) Indebtedness incurred, assumed or guaranteed in connection with the Interferon Acquisition, and (H) Indebtedness relating to the Company's Series B and/or C 7% Senior Secured Convertible Debentures Due June 30, 2007. Notwithstanding anything herein to the contrary, no Qualified Indebtedness may be incurred (but excluding Acquisition Indebtedness) unless as a condition to the incurrence of such Indebtedness, the Company shall have made cash collateral payments in an aggregate amount of Outstanding Principal Amount of all Debentures as of the date of the incurrence of such Indebtedness (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to fifty percent (50%) of the principal amount of the Indebtedness so incurred or an amount as otherwise required by this Section 25 (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). The Company shall file with the SEC on Form 8-K true and complete copies of the financial statements of an Acquired Business for which the purchase price is paid or payable in cash and/or cash equivalents and/or Indebtedness indicating thereon, among other things, the items comprising the EBITDA of the Acquired Business and contemporaneously therewith, but in no event prior to the filing of such Form 8-K, deliver a copy of such financial statements to each holder of Debentures; provided, however, that, notwithstanding anything herein to the contrary, if the Company does not file with the SEC financial statements of any Acquired Business for which the purchase price is paid or payable in cash and/or cash equivalents and/or Indebtedness in the time and manner provided herein, then the Acquisition Multiple with respect to such Acquired Business shall be deemed zero (0) and the Company shall not be entitled to acquire such Acquired Business unless as a condition thereto, the Company shall have contemporaneously with the closing of the acquisition of such Acquired Business made a cash collateral payment on the Outstanding Principal Amount of the Debentures then outstanding (pro rata among all holders of Debentures) in an amount equal to 100% of the aggregate cash, cash equivalents and Acquisition Indebtedness incurred in connection with the acquisition of such Acquired Business in accordance with Section 25(g)(ii) hereunder (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). (ii) Notwithstanding the foregoing, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), no Pari Passu Indebtedness or Subordinated Indebtedness may be incurred, directly or indirectly, by the Company or any of its Subsidiaries if during the period commencing on the tenth (10th) Business Day (or in the case of clause (ii) of the definition of Pari Passu Indebtedness, the twentieth (20th) Business Day) immediately preceding the incurrence of any such Pari Passu Indebtedness or Subordinated Indebtedness and ending on and including the date on which any such Pari Passu Indebtedness or Subordinated Indebtedness is incurred (A) an event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing, (B) any Registration Statement that is required to be effective pursuant to the Registration Rights Agreement is not effective and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement or (C) there has been any Grace Period (as such term is defined in the Registration Rights Agreement). (iii) If at any time when any of the Debentures are outstanding and cash collateral payments shall not have been made in an amount equal to the entire Outstanding Principal Amount of the Debentures, together with accrued interest thereon, in accordance with Section 25(g)(ii), the Company shall purchase any Acquired Business, whether in one or a series of transactions, for an amount of aggregate consideration (whenever paid in the form of cash, cash equivalents or Acquisition Indebtedness) that exceeds the Acquisition Multiple for such Acquired Business, (such excess amount, the "Excess Permitted Aggregate Consideration"), the Company shall, simultaneous with the closing of the purchase of the Acquired Business, make cash collateral payments in respect of an aggregate Outstanding Principal Amount of the Debentures (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to one hundred percent (100%) of the Excess Permitted Aggregate Consideration (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). (c) Restricted Payments. Notwithstanding anything herein to the contrary, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or marketable securities, including, without limitation, Common Stock (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness of the Company or any of its Subsidiaries, whether by way of payment in respect of principal of (or premium, if any) or interest on, such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness or otherwise; provided, however, that, so long as no event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing, on the date any of the following payments is due or is otherwise made and subject to the terms and conditions of any subordination agreement entered into in connection with the issuance of any Subordinated Indebtedness as provided herein, the Company may, without regard to the foregoing limitation: (i) pay in cash scheduled interest payments, in each case in the manner set forth in the original documentation governing such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness, at an annual rate not to exceed (A) 10% per annum, if such interest rate is fixed, or (B) the prime rate plus two percent (2%), if such interest rate is floating, of such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness, and (ii) make any principal payments when due on any Qualified Indebtedness at any time prior to the two-year anniversary of the Original Issuance Date; provided, however, that the Company may not make any such principal payments unless as a condition to each time any such Qualified Indebtedness is incurred, other than Acquisition Indebtedness, (including each time any Qualified Indebtedness is incurred under a revolving credit facility or otherwise), the Company shall have made cash collateral payments in an aggregate amount of Outstanding Principal Amount of all Debentures then outstanding at the time such Qualified Indebtedness was incurred (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to fifty percent (50%) of the principal amount of the Qualified Indebtedness so incurred, it being understood and agreed that, for the avoidance of doubt, if the Company has not satisfied its cash collateral payment obligations under Section 25(g)(ii) in connection with the incurrence of any such Qualified Indebtedness, the Company may not make any of the principal payments otherwise permitted under this subsection (ii). (d) Restrictions on Liens. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien upon or with respect to any of its assets or properties, whether now owned or hereafter acquired; file or suffer to exist under the Uniform Commercial Code or any similar law or statute of any jurisdiction, a financing statement (or the equivalent thereof) that names it or any of its Subsidiaries as debtor; sign or suffer to exist any security agreement authorizing any secured party thereunder to file such financing statement (or the equivalent thereof); sell any of its property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable) with recourse to it or any of its Subsidiaries or assign or otherwise transfer, or permit any of its Subsidiaries to assign or otherwise transfer, any account or other right to receive income; other than, as to all of the above, Permitted Liens; (e) Restricted Investments. ---------------------- (i) Except as provided in Section 4(v) of the Securities Purchase Agreement and except for cash held by the Company's Belgian Subsidiary in connection with the Belgian Contribution, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to, directly or indirectly, deposit or hold any cash, securities, certificates of deposit, investments or other funds or cash equivalent in any account for which the Agent has not executed an account control agreement and obtained a perfected first priority security interest thereover. (ii) So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, directly or indirectly, make or commit or agree to make any loan, advance, guarantee of obligations, other extension of credit or capital contributions to, or hold or invest in or commit or agree to hold or invest in, or purchase or otherwise acquire or commit or agree to purchase or otherwise acquire any shares of the capital stock, bonds, notes, debentures or other securities of, or make or commit or agree to make any other investment in, any other Person (including, without limitation, a Subsidiary), or purchase or own any futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or otherwise transfer any cash, property or other assets to any Subsidiary, or permit any of its Subsidiaries to do any of the foregoing, other than in connection with (i) the Interferon Acquisition, (ii) an acquisition of, or investment in, the assets or capital stock of any other Person by the Company or any of its Subsidiaries for consideration consisting solely of shares of Common Stock that are not subject to any repurchase, retirement or redemption obligation of the Company or any of its Subsidiaries (a "Stock Acquisition") and (iii) the contribution by the Company to its Belgian Subsidiary of not more than $25,000 in the aggregate for the payment of ordinary course business expenses (the "Belgian Contribution"). (f) Restrictions on Asset Sales and Purchases. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to convey, sell, lease or sublease, transfer or otherwise dispose of, whether in one transaction or a series of related transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired (or agree to do any of the foregoing), other than, so long as no event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing at the time of such sale, (i) sales of Intellectual Property, (ii) sales of Inventory in the ordinary course of business (iii) or as otherwise expressly permitted under this Debenture. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to purchase or otherwise acquire, whether in one transaction or a series of related transactions, all or substantially all of the assets of any Person (or any division thereof), other than in connection with (A) the Interferon Acquisition, (B) the incurrence of Acquisition Indebtedness to the extent permitted hereunder, (C) a Qualified Inventory Financing, (D) a Qualified Mortgage Financing or (E) a Stock Acquisition. (g) Cash Collateral. --------------- (i) Unless and until such time as the Company shall have made cash collateral payments in respect of the entire Outstanding Principal Amount of this Debenture, together with accrued and unpaid interest thereon, the Company shall make cash collateral payments in accordance with this Section 25(g) in respect of a portion of the Outstanding Principal Amount of this Debenture, together with accrued and unpaid interest thereon, in cash and/or Common Stock (as provided in Section 25(g)(ii) and (iii)) as follows: (A) on each Biweekly Revenue Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the product derived by multiplying (i) .5 by (ii) the Company Consolidated Revenues for the period commencing on the date of the immediately preceding Biweekly Revenue Cash Collateral Date (or the Original Issuance Date, in the case of the first Biweekly Revenue Cash Collateral Date) through the Business Day immediately preceding the applicable Biweekly Revenue Cash Collateral Date; (B) on each Monthly Revenue Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the greater of (i) the product derived by multiplying (a) .1 by (b) the portion of the Outstanding Principal Amount of all Debentures and accrued and unpaid interest thereon for which cash collateral payments have not been made under Section 25(g) as of March 31, 2004 and (ii) the product derived by multiplying (a) .5 by (b) the Company Consolidated Revenues for the period commencing on the date of the immediately preceding Monthly Revenue Cash Collateral Date (or April 1, 2004, in the case of the first Monthly Revenue Cash Collateral Date) through the Business Day immediately preceding the applicable Monthly Revenue Cash Collateral Date; (C) on the First Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the sum of (i) $400,000 and (ii) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the First Revenue Milestone Measuring Period exceeds the First Revenue Milestone Target; (D) on the Second Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the excess, if any, of (i) the sum of (a) $750,000 and (b) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the Second Revenue Milestone Measuring Period exceeds the Second Revenue Milestone Target, over (ii) the cumulative amount of cash collateral payments (including the dollar value attributed to any such payments made in the form of Repayment Shares in accordance with the provisions of Section 25(g)(iii)) that have been made by the Company prior to the Second Revenue Milestone Cash Collateral Date pursuant to Sections 25(g)(i)(A) and 25(g)(i)(C) hereof; (E) on the Third Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the excess, if any, of (i) the sum of (a) $1,500,000 and (b) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the Third Revenue Milestone Measuring Period exceeds the Third Revenue Milestone Target, over (ii) the cumulative amount of cash collateral payments (including the dollar value attributed to any such payments made in the form of Repayment Shares in accordance with the provisions of Section 25(g)(iii)) that have been made by the Company prior to the Third Revenue Milestone Cash Collateral Date pursuant to Sections 25(g)(i)(A), 25(g)(i)(C) and 25(g)(i)(D) hereof; (F) on the Qualified Inventory Financing Date, subject to Section 28(d), the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount an amount equal to $2,000,000.00; and (G) on the Qualified Mortgage Financing Date, subject to Section 28(c), the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to $1,500,000.00. (ii) On each Cash Collateral Date (and any date for which a cash collateral payment is required under this Section 25), the Company shall irrevocably deposit, or cause to be irrevocably deposited into the Cash Collateral Account, the portion of the total Outstanding Principal Amount of all Debentures and accrued and unpaid interest thereon for which cash collateral payments are required to be made in accordance with Section 25(g)(i) (or any other provision of Section 25 requiring cash collateral payments), subject to Section 25(g)(iii), in cash in U.S. Dollars to secure payment of the principal of, premium, if any, penalties, if any, and interest due on the outstanding Debentures, pursuant to the Account Control Agreement and such other written agreements and other arrangements satisfactory to the holders of 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date then outstanding, which shall, among other things, confirm that the funds deposited in the Cash Collateral Account and the proceeds of any letter of credit issued shall be subject to a perfected first priority security interest in favor of the Agent for the benefit of the holders of Debentures. (iii) Notwithstanding anything in Section 25(g)(ii) hereof, but subject to Sections 11 and 26 hereof, (A) on each Cash Collateral Date relating to a cash collateral payment under Section 25(g)(i)(A), the Company shall make a payment by way of delivery of 25,000 fully paid and nonassessable shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction and pro rata among all holders of Debentures) and (B) on each Cash Collateral Date relating to a cash collateral payment under Section 25(g)(i)(B), the Company shall make a payment by way of delivery of 50,000 fully paid and nonassessable shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction and pro rata among all holders of Debentures), in each case delivered to the holder in lieu of cash for such amount (it being understood and agreed that (x) the remaining balance of such payments, if any, shall be paid in cash in accordance with Section 25(g)(ii) above and (y) irrespective of whether the value of the shares of Common Stock payable under clauses (A) or (B) of this Section 25(g)(iii) exceeds the amount otherwise due under Section 25(g)(i)(A) or Section 25(g)(i)(B), as applicable, the Company shall issue the full amount of the 25,000 or 50,000 shares of Common Stock, as applicable, on the applicable Cash Collateral Date and the value of the additional shares of Common Stock, if any, delivered to the holder that exceed the amount required to be paid under the applicable subsection of this Section 25(g) shall be deemed to be a permitted prepayment of this Debenture as provided in the final sentence of this Section 25(g)(iii)) represented by duly executed stock certificates registered in the name of the holder or its designee (the "Repayment Shares") (or, in the case of a public resale of such Repayment Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The DTC Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system) with each Repayment Share being ascribed a valued for purposes of this Section 25(g)(iii) equal to the product derived by multiplying (A) .825 by (B) the arithmetic average of Weighted Average Prices of the Common Stock on the five consecutive Business Days ending on and including the Business Day immediately preceding the applicable Cash Collateral Date (the "Equity Collateral Conversion Rate") provided, however, that (x) in no event may the Company pay any portion of a cash collateral payment obligation in Repayment Shares if a Registration Statement is not then effective and available for the resale of all of the Repayment Shares on the applicable Cash Collateral Date or each date which is within 10 Business Days prior to such Cash Collateral Date, in which case the full amount of such payments shall instead be made in cash in accordance with Section 25(g)(ii) and (y) in the event the Company does not have a sufficient number of Repayment Shares reserved and available for issuance pursuant to this Section 25(g)(iii), the Company shall issue the maximum number of Repayment Shares that are available for issuance, pro rata among all holders of Debentures, and the balance of such payment shall instead be made in cash in accordance with Section 25(g)(ii) hereof. Cash collateral payments validly made in the form of Repayment Shares under this Section 25(g)(iii) shall be deemed prepayments of (i) first, accrued and unpaid interest on the Outstanding Principal Amount of this Debenture and (ii) second, Outstanding Principal Amount of this Debenture. (iv) The Company covenants and agrees that it shall make all calculations, including, without limitation, all calculations of Company Consolidated Revenues, necessary to determine the amounts to be paid from time to time under this Section 25(g) in strict accordance with the terms of this Agreement. The Company further covenants and agrees that it shall prepare and publish its quarterly and annual earnings releases and quarterly and annual reports filed with the SEC with sufficient detail so that the holder of this Debenture shall be able to determine and verify solely from the information contained therein the amount of Company Consolidated Revenues used to calculate amounts to be paid from time to time under this Section 25(g) and to reconcile the amount of Company Consolidated Revenues with the amounts actually paid under this Section 25(g). If any holder of Debentures disputes any calculations of Company Consolidated Revenues set forth in or omitted from any public release or SEC filing that covers any period relevant for the determinations required under this Section 25(g), such holder shall deliver written notice to the Company within ten Business Days of the publication of such release or SEC filing, describing in reasonable detail the basis for such dispute (and the Company shall promptly deliver such notice to all other holders). If the Company and the disputing holder(s) of Debentures are unable to resolve any such dispute within two Business Days of the Company's receipt of notice thereof, the Company shall within two (2) Business Days submit the disputed matters to the Company's independent, outside accountant. The Company shall cause the accountant to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such accountant's determination, as the case may be, shall be binding upon all parties absent manifest error. The Company shall bear all costs, fees and expenses of the accountant in rendering any such determinations. (v) On each Cash Collateral Date, the Company covenants and agrees to execute and deliver a completed Cash Collateral Accounting Certificate in the form attached hereto as Exhibit C (the "Cash Collateral Certificate") by facsimile and first class mail to the Person designated on the form of Cash Collateral Certificate (or such other Person or Persons as the holders of not less than 60% of the then Outstanding Principal Amount of Debentures may designate in writing to the Company), which shall be certified to each holder of Debentures as true and correct by the Chief Executive Officer or Chief Financial Officer of the Company. THE COMPANY ACKNOWLEDGES AND AGREES THAT IN NO EVENT SHALL IT OR ANY PERSON ON THE COMPANY'S BEHALF DELIVER ANY CASH COLLATERAL CERTIFICATE TO ANY HOLDER OF DEBENTURES WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF SUCH HOLDER. (vi) All payments by the Company pursuant to this Section 25(g), whether in the form of cash or Repayment Shares, shall be made pro rata among all Debentures. (vii) Notwithstanding anything herein to the contrary, the Company shall not be obligated to make any collateral payments pursuant to this Section 25(g) (whether in cash or in shares of Common Stock) on any Biweekly Revenue Cash Collateral Date, Monthly Revenue Cash Collateral Date, the First Revenue Milestone Cash Collateral Date, the Second Revenue Milestone Cash Collateral Date, or the Third Revenue Milestone Cash Collateral Date to the extent that the balance in the Cash Collateral Account (as defined in the Securities Purchase Agreement) is not less than $1,300,000. (viii) the Holder agrees that, in the event of any unauthorized distributions (as defined below) from the Cash Collateral Account, the principal amounts of the Debentures will be reduced by the amount of such unauthorized distributions; the allocation of such reduction to the PL Debentures to be made pro rata. An unauthorized distribution would be any distribution other than as permitted under the PL Debentures or the related agreements. (h) Conflicts. In the event there is any conflict among provisions of this Section 25 as to the amount of any cash collateral payment required to be paid by the Company into the Cash Collateral Account, the provision requiring the Company to pay the greater amount shall in all instances control. 26. Limitation on Number of Conversion Shares. The Company (1) shall not be obligated to issue Conversion Shares upon conversion of this Debenture, (2) shall not be permitted to issue Interest Shares (but instead shall make Cash Interest Payments) and (3) shall not be permitted to issue Repayment Shares (but instead shall make cash collateral payments in cash) to the extent that the issuance of such shares of Common Stock would cause the Company to exceed that number of shares of Common Stock which the Company may issue under this Debenture (the "Exchange Cap") without breaching the Company's obligations under the rules or regulations of the Principal Market, except that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the Principal Market (or any successor rule or regulation) for issuances of Common Stock in excess of such amount. Until such approval is obtained, the holder of this Debenture shall not be issued, upon conversion of this Debenture, Conversion Shares in an amount greater than the difference between (i) the product of (x) the Exchange Cap amount multiplied by (y) a fraction, the numerator of which is the aggregate principal amount of Debentures issued to such Holder pursuant to the Securities Purchase Agreement and the denominator of which is the aggregate principal amount of all the Debentures issued to all Debenture holders pursuant to the Securities Purchase Agreement and (ii) the sum of (A) the aggregate number of Interest Shares and Repayment Shares issued to the holder of this Debenture (and all predecessor holders) as of the date of such conversion plus (B) the aggregate number of shares of Common Stock issued to the holder of this Debenture (and all predecessor holders) upon the exercise of any Warrants held by such holder (and all predecessor holders) as of the date of such conversion (such difference, the "Cap Allocation Amount"). If at any time when the Holder shall deliver a Conversion Notice pursuant to Section 4 hereof the Company shall be prohibited pursuant to the provisions of this Section 26 from issuing all or any portion of the Conversion Shares issuable pursuant to such Conversion Notice, then the Company shall pay in immediately available funds to the holder of this Debenture within two (2) Business Days of the date of delivery of such Conversion Notice, an amount in cash equal to the product of (X) the number of shares of Common Stock which could not be issued by virtue of the limitations contained in this Section 26 multiplied by (Y) the average of the Closing Sale Prices of the Common Stock on each of the five (5) trading days ending on the third trading day immediately preceding the date the date of delivery of such Conversion Notice. The Outstanding Principal Amount of this Debenture shall be reduced by an amount equal to the Outstanding Principal Amount of this Debenture designated in the Conversion Notice that could not be converted by virtue of the limitations set forth in this Section 26 and for which the Company has made payment pursuant to the immediately preceding sentence. 27. Taxes. ----- (a) The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered holder thereof) and other similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of Debentures; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Stock or other securities or property in a name other than that of the registered holder of this Debenture to be converted and such holder shall pay such amount, if any, to cover any applicable transfer or similar tax. (b) The Company shall be permitted to withhold from any amounts payable to a Debenture holder or a holder of Common Stock any taxes required by law to be withheld from such amount. If the Company shall be required to withhold or deduct any tax, levy or other governmental charge, excluding (A) net income taxes, franchise taxes, or taxes imposed on or measured by net income (or overall gross receipts, to the extent such tax is imposed in lieu of a tax on net income by a jurisdiction that does not impose any tax based on or measured by net income) on any Debenture holder by the jurisdiction in which such Debenture holder is organized or any other jurisdiction in which such Debenture holder would be subject to tax without regard to the transactions contemplated hereby and (B) U.S. Federal withholding taxes (unless such U.S. Federal withholding taxes would not be imposed but for a change in or amendment to the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations or any other administrative authority thereunder or any tax treaty or the release or promulgation of any judicial decision relating thereto, in each case, on or after the date such Debenture holder acquires a Debenture (each, a "Change in Law")) (all such non-excluded taxes, levies or other governmental charges, "Taxes") from any payment of interest, or any accrual of original issue discount, for U.S. Federal income tax purposes made hereunder or under any Debenture to or for the benefit of any Debenture holder, then (A) the amount payable shall be increased by the amount necessary so that after making all required deductions and withholdings (including deductions and withholdings with respect to additional amounts payable under this Section 27(b)) such Debenture holder shall receive an amount equal to the amount it would have received if no such deduction or withholding of Taxes had been required, (B) the Company shall make such deduction or withholding and (C) the Company shall pay the full amount deducted to the appropriate governmental authority in accordance with applicable law. If any Debenture holder is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Debenture Holder"), it shall deliver to the Company two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming complete exemption from U.S. Federal withholding tax under an income tax treaty), or any successor form; (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form; (C) in the case of a Non-U.S. Debenture Holder claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code, with respect to payments of "portfolio interest," U.S. Internal Revenue Service Form W-8BEN (certifying as to beneficial ownership), or any successor form, and a certificate in form and substance reasonably acceptable to the Company representing that such Non-U.S. Debenture Holder is not a "bank" for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Company and is not a "controlled foreign corporation" related to the Company (within the meaning of Section 864(d)(4) of the Code); or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Debenture Holder's entitlement to a complete exemption from U.S. Federal withholding tax, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Debenture Holder claiming complete exemption from U.S. Federal withholding tax on payments of interest (or of original issue discount) for U.S. Federal income tax purposes by the Company under the Debentures. Each Debenture holder and each holder of common stock that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Equity Holder") also shall deliver to the Company, to the extent legally able to do so, with respect to payments of dividends for U.S. Federal income tax purposes by the Company, if applicable, two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming a reduction of U.S. Federal withholding tax under an applicable income tax treaty, if any), or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form, or (C) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Equity Holder's entitlement to an exemption from, or a reduction of, U.S. Federal withholding tax on payments of dividends for U.S. Federal income tax purposes by the Company, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Equity Holder. In addition, each Debenture holder and each holder of Common Stock that is not otherwise exempt from "back-up withholding" shall deliver to the Company two properly completed and duly executed copies of either (A) U.S. Internal Revenue Service Form W-8BEN, or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI, or any successor form, (C) U.S. Internal Revenue Service Form W-9, or any successor form, or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service, as applicable, in each case indicating that such Debenture holder or holder of Common Stock is not subject to "back-up withholding" for U.S. Federal income tax purposes. The forms and other documents required to be delivered pursuant to this Section 27(b) shall be delivered (A) on or prior to the Original Issuance Date and (B) from time to time thereafter if within ten (10) Business Days after receipt of a written request therefor by the Company. In addition, each Debenture holder and each holder of Common Stock shall promptly notify the Company at any time it determines that it is no longer in a position to provide any previously delivered (or requested) form, document or certificate to the Company, including as a result in whole or in part from a Change in Law; provided, however, that the failure to provide such notice shall not affect any Debenture holder's right to any additional amounts hereunder. (c) Notwithstanding anything to the contrary in Section 27(b) above, the Company shall not be required to pay any additional amount to any Debenture holder pursuant to the preceding paragraph to the extent the Tax in respect of which such additional amount would otherwise be payable would not have been imposed but for the failure of such Debenture holder to comply with its obligations under such paragraph; provided, however, that the failure to provide the applicable form, document or certificate pursuant to the preceding paragraph as provided in the notice required by the preceding paragraph resulting in whole or in part from a Change in Law shall not affect such Debenture holder's right to any additional amounts hereunder. 28. Security. -------- (a) The Debentures shall be secured to the extent and in the manner provided in the Security Agreement. (b) The Company acknowledges and agrees that all amounts deposited in the Cash Collateral Account (a) shall constitute Collateral for all obligations of the Company under the Debentures (the "Obligations"). At any time during the continuance of an Event of Default, the Agent may require the Cash Collateral Account Bank to transfer all amounts held in the Cash Collateral Account to the Agent for application to the Obligations pursuant to the terms of the Debentures. (c) In the event that the Company desires to enter into the Qualified Mortgage Financing, the holder, by its acceptance of this Debenture, agrees to cause the Agent to enter into a written agreement, reasonably satisfactory to the Agent, providing that, upon the consummation of the Qualified Mortgage Financing and the Company making the deposit into the Cash Collateral Account of not less than $1,500,000 in cash in accordance with Sections 25(g)(i)(G) and 25(g)(ii), the Agent shall release its Lien on the Acquisition Buildings and shall execute and deliver to the Company or to the provider of such financing or the purchaser of the Acquisition Buildings such release or reconveyance instruments and such other documents as shall be reasonably necessary to release the Lien of the Agent on the Acquisition Buildings pursuant to the Mortgages, in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. (d) In the event that the Company desires to enter into the Qualified Inventory Financing, the holder, by its acceptance of this Debenture, agrees to cause the Agent to enter into a written agreement, reasonably satisfactory to the Agent, providing that, upon the consummation of the Qualified Inventory Financing and the deposit into the Cash Collateral Account of not less than $2,000,000 in cash in accordance with Sections 25(g)(i)(F) and 25(g)(ii), the Agent shall release its Lien on the Inventory and shall execute and deliver to the Company or to the provider of such financing such UCC3 Amendments (or authorizations to file the same) and such other documents as shall be reasonably necessary to release the Lien of the Agent on the Inventory pursuant to the Security Agreement, in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. (e) If at any time the Company shall have deposited into the Cash Collateral Account an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the holder, by its acceptance of this Debenture, agrees to release, or cause the Agent to release, its Lien on all Collateral, other than the Cash Collateral Account, and shall execute and deliver to the Company (or cause the Agent to execute and deliver to the Company) such release or reconveyance instruments and such other documents as shall be reasonably necessary to release the Liens on the Collateral (other than the Cash Collateral Account) in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: October 6, 2005 HEMISPHERX BIOPHARMA, INC. By: s/ ------------------------- Name: Title: Print Address: Telephone: Facsimile: ATTEST - ------------------------------ Name: Title: EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 7% SENIOR SECURED CONVERTIBLE DEBENTURE DUE JUNE 30, 2007 The undersigned, as Holder of the 7% Senior Secured Convertible Debenture Due June 30, 2007 of HEMISPHERX BIOPHARMA, INC. (the "Company"), No. _, in the outstanding principal amount of $_______ (the "Debenture"), hereby elects to convert $_______ of the outstanding principal amount of the Debenture (as well as accrued and unpaid interest) into shares of Common Stock, par value $0.001 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: -------------------------------------------------- Principal Amount of Debentures to be converted: Accrued Interest to be converted: ------------------------------------ Tax ID Number (If applicable): -------------------------------------- Please confirm the following information: Conversion Price: ---------------------------------------------------- Number of shares of Common Stock to be issued: ------------------------ Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES ____ No ____ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: ---------------------------------------------------- 2283: Address: ---------------------------------------------------- Telephone Number: --------------------------------------------------- Facsimile Number: -------------------------------------------- Authorization: ----------------------------------------------- By: ---------------------------------------------------------- Title: ------------------------------------------------------- Dated: Account Number (if electronic book entry transfer): ----------- Transaction Code Number (if electronic book entry transfer): ----------- [NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT] ACKNOWLEDGMENT The Company hereby acknowledges this Conversion Notice and hereby directs Continental Stock Transfer & Trust Company to issue the above indicated number of shares of Common Stock in accordance with the Irrevocable Transfer Agent Instructions dated October 29, 2003 (as amended on October 24, 2005) from the Company and acknowledged and agreed to by Continental Stock Transfer & Trust Company. HEMISPHERX BIOPHARMA, INC. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Account Control Agreement ................................................. 3 Acquiring Entity ..........................................................15 Act ....................................................................... 2 Agent ..................................................................... 3 Approved Stock Plan ....................................................... 3 ASE ....................................................................... 3 Bloomberg ................................................................. 3 Business Day .............................................................. 3 Cap Allocation Amount .....................................................37 Cash Collateral Account ................................................... 3 Cash Collateral Account Bank .............................................. 3 Cash Collateral Certificate ...............................................36 Cash Interest Payment ..................................................... 1 Cash Transaction .......................................................3, 17 Change of Control .........................................................16 Change of Control Redemption Price ........................................16 Closing Sale Price ......................................................3, 7 Collateral ................................................................ 4 Common Stock ...........................................................4, 43 Common Stock Deemed Outstanding ........................................... 4 Company ............................................................1, 43, 52 Conversion Date ........................................................... 9 Conversion Failure ........................................................ 4 Conversion Notice ......................................................... 8 Conversion Price .......................................................... 4 Conversion Rate ........................................................... 8 Convertible Securities .................................................... 4 Debenture ..............................................................1, 43 Debenture Delivery Date ................................................... 9 Debenture Register ........................................................ 2 Debentures ................................................................ 1 Default Conversion Price .................................................. 4 Default Interest .......................................................... 2 Dilutive Issuance .........................................................12 DTC ....................................................................... 9 Events of Default .........................................................19 Exchange Act ..............................................................25 Exchange Cap ..............................................................37 Holder .................................................................... 1 Indebtedness ..............................................................20 Intellectual Property ..................................................... 4 Interest Payment Date ..................................................... 1 Interest Payments ......................................................... 1 Interferon Acquisition .................................................... 4 Letters of Credit ......................................................... 5 Mandatory Conversion ...................................................... 7 Mandatory Conversion Date ................................................. 8 Mandatory Conversion Measuring Period ..................................... 7 Mandatory Conversion Notice ............................................... 7 Maturity Date ............................................................. 1 Maturity Date Mandatory Redemption ........................................11 Maturity Date Redemption Price ............................................11 Mortgage .................................................................. 5 NASDAQ .................................................................... 5 New Securities Issuance Price .............................................12 Notice of Change of Control ...............................................16 Notice of Redemption Upon Change of Control ...............................16 NYSE ...................................................................... 5 Options ................................................................... 5 Organic Change ............................................................15 Original Issuance Date .................................................... 5 Outstanding Principal Amount .............................................. 5 Person .................................................................... 5 Principal Market .......................................................... 5 Quarterly Period .......................................................... 5 Registration Rights Agreement ............................................. 5 Rule 144 ..................................................................25 SEC ....................................................................... 5 Securities Agreement ...................................................... 6 Securities Purchase Agreement ............................................. 6 Share Delivery Date ....................................................... 8 Strategic Financing ....................................................... 6 Transaction Documents ..................................................... 6 Transfer Agent ............................................................ 8 Valuation Event ...........................................................14 Warrants .................................................................. 6 Weighted Average Price ..................................................6, 7 EXHIBIT A Subordination Provisions Section 1. Definitions. As used herein, the following terms shall have the following meanings: "Borrower" shall mean [Hemispherx][applicable Subsidiary of Hemispherx]. "Hemispherx" shall mean Hemispherx Biopharma, Inc., a corporation duly organized and existing under the laws of the State of Delaware. "Loan Documents" shall mean any agreement executed in connection with the issuance of the Senior Debt, in each case as amended, supplemented or otherwise modified from time to time. "Obligations" shall mean the obligations of the Borrower now or hereafter existing in favor of the holders of the Senior Debt, whether for principal, interest (including interest accruing subsequent to the filing of any petition initiating any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings relating to the Borrower), fees, expenses or otherwise. "Senior Debt" shall mean the Borrower's 7% Senior Secured Convertible Debentures due June 30, 2007. "Subordinated Creditor" shall mean . ------------------ "Subordinated Debt" shall mean all indebtedness of the Borrower now or hereafter existing in favor of the Subordinated Creditor, whether created directly or acquired by assignment or otherwise, all interest thereon and all fees, premiums and other amounts payable in respect thereof. "Subordinated Loan Documents" shall mean the instruments and agreements to which the Borrower is a party evidencing or relating to any Subordinated Debt. Section 2. Agreement to Subordinate. Each of the Subordinated Creditor, Hemispherx and the Borrower agrees that the Subordinated Debt is and shall be subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of the Obligations. Section 3. Restrictions on Payment of the Subordinated Debt. ------------------------------------------------ (a) The Subordinated Creditor may receive, and the Borrower may pay, interest on the Subordinated Debt evidenced by the Subordinated Loan Documents, in the stated amounts and on the stated dates of payment thereof as set forth in the Subordinated Loan Documents, provided, however, that no such payments shall be received or made at any time during which an Event of Default (as defined in the Senior Debt) shall have occurred and be continuing on any Senior Debt. (b) In the event of any dissolution, winding up, liquidation, arrangement or reorganization relating to Hemispherx or the Borrower, in any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of Hemispherx or the Borrower, any payment or distribution of any kind (whether in cash, securities or other property) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to the holders of the Senior Debt for application (in the case of cash) to, or as collateral (in the case of securities or other non-cash property) for, the payment or prepayment of the Obligations until the Obligations shall have been paid in full. (c) All payments or distributions upon or with respect to the Subordinated Debt which are received by the Subordinated Creditor contrary to these subordination provisions shall be received in trust for the benefit of the holders of the Senior Debt for the ratable benefit of such holders, shall be segregated from other funds and property held by the Subordinated Creditor and shall be forthwith paid over to the holders of the Senior Debt for the ratable benefit of such holders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of securities or other non-cash property) for the payment or prepayment of the Obligations until the Obligations shall have been paid in full. Section 4. Obligations Unconditional. ------------------------- (a) All rights and interests of the holders of the Senior Debt hereunder, and all agreements and obligations of the Subordinated Creditor, Hemispherx and the Borrower hereunder, shall remain in full force and effect irrespective of: (i) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto, (ii) any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any Loan Document, (iii) any exchange or release of, or non-perfection of any lien on or security interest in, any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Hemispherx or the Borrower in respect of the Obligations or the Subordinated Creditor, Hemispherx or the Borrower in respect of these subordination provisions. (b) These subordination provisions shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the holders of the Senior Debt upon the insolvency, bankruptcy or reorganization of Hemispherx or the Borrower or otherwise, all as though such payment had not been made. Section 5. Waivers. Each of the Subordinated Creditor, Hemispherx and the Borrower waives (i) promptness and diligence, (ii) notice of acceptance and notice of the incurrence of any Obligation by Hemispherx or the Borrower, (iii) notice of any actions taken by the holders of the Senior Debt, Hemispherx or the Borrower under any Loan Document or any other agreement or instrument relating thereto, (iv) all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of the Obligations or of the obligations of the Subordinated Creditor, Hemispherx and the Borrower under these subordination provisions, the omission of or delay in which, but for the provisions of this Section 5, might constitute grounds for relieving the Subordinated Creditor, Hemispherx or the Borrower of its obligations under these subordination provisions and (v) any requirement that the holders of the Senior Debt protect, secure, perfect or insure any security interest or other lien or any property subject thereto or exhaust any right to take any action against Hemispherx or the Borrower or any other person. Section 6. Subrogation. No payment or distribution to the holders of the Senior Debt pursuant to these subordination provisions shall entitle the Subordinated Creditor to exercise any rights of subrogation in respect thereof until the Obligations shall have been satisfied in full. Section 7. Miscellaneous. ------------- (a) Each of the Subordinated Creditor, Hemispherx and the Borrower will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and other documents, and take all further action that the holders of the Senior Debt may reasonably request in order to reflect the subordination provisions set forth herein. 29. (b) These subordination provisions shall be governed by and construed in accordance with the law of the State of New York without regard to principles of conflicts of law or choice of law (other than section 5-1401 of the New York General Obligations Law). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with these subordination provisions shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to thses subordination provisions. EXHIBIT B Inventory EXHIBIT C FORM OF CASH COLLATERAL CERTIFICATE IN NO EVENT SHALL THIS CERTIFICATE BE DELIVERED BY OR ON BEHALF OF THE COMPANY TO ANY HOLDER OF DEBENTURES WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF SUCH HOLDER. CERTIFICATE TO BE DELIVERED ONLY TO THE RECIPIENT DESIGNATED BELOW. To: Eleazer Klein, Esq. Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Telephone: (212) 756-2000 Facsimile: (212) 593-5955 The undersigned, the duly elected [Chief Executive Officer/Chief Financial Officer] of HEMISPHERX BIOPHARMA, INC. (the "Company"), hereby certifies to the holders of the 7% Senior Secured Convertible Debentures Due June 30, 2007 of the Company (the "Debentures") pursuant to Section 25(g)(v) of the Debentures, that the following information is true and correct in all respects (capitalized terms used in this certificate and not defined herein shall have the meanings ascribed to them in the Debentures): Cash Collateral Date . ------------------------ Qualified Inventory Financing Date (if applicable): . ---------------- Qualified Mortgage Financing Date (if applicable): . ---------------- Amount of Cash Collateral Payment: $ . ------------------------------- Amount of Cash Collateral Payment Made in Cash: . Aggregate Dollar Value of Cash Collateral Payments Made in Repayment Shares (if applicable): $---------------. Aggregate Number of Repayment Shares Issued (if applicable): . ---------------- Equity Collateral Conversion Rate (if applicable): . -------------------------- Company Consolidated Revenues for the relevant period (if applicable): $ . - ---------------- Aggregate Amount of Cash Collateral Payments Made Prior to this Cash Collateral Date:$ . ---------------- IN WITNESS WHEREOF, the undersigned has executed this certificate as of this day of , 200 . ------------ ------------ - ------------------------------ EX-99.13 OTH CONTRCT 4 rexh_103.txt Exhibit 10.3 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES. No. $ --------- -------- HEMISPHERX BIOPHARMA, INC. SERIES B 7% SENIOR SECURED CONVERTIBLE DEBENTURE DUE JUNE 30, 2007 THIS DEBENTURE (this "Debenture") is one of a duly authorized issue of replacement Debentures of HEMISPHERX BIOPHARMA, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), now designated as its 7% Senior Secured Convertible Debentures Due June 30, 2007. The Debenture is one of a series of debentures that amend and replace a series of 6% Senior Convertible Debentures due January 31, 2006, originally in an aggregate principal amount of up to Four Million U.S. Dollars (U.S. $4,000,000) (the "Debentures"). The Debenture and the Series A and Series C 7% Senior Secured Convertible Debentures Due June 30, 2007 are pari passu and the designation of series is for identification purposes only. FOR VALUE RECEIVED, the Company promises to pay to , the holder hereof, or its registered assigns (the "Holder"), the principal sum of Dollars($____) when due, whether on June 30, 2007 (subject to extension as provided herein, the "Maturity Date") or on any Installment Date with respect to the Installment Amount due on such Installment Date (each, as defined herein), and to pay interest ("Interest Payments") on the Outstanding Principal Amount at the rate of 7% per annum which shall be cumulative, accrue, but not compound, daily from the date of issuance of this Debenture and be due and payable in arrears on the first day of each Quarterly Period commencing with the Quarterly Period immediately following the date of issuance of this Debenture (each, an "Interest Payment Date"). If the Maturity Date is not a Business Day, then the Maturity Date shall be deemed to be the Business Day immediately following such date. If an Interest Payment Date is not a Business Day, then the Interest Payment shall be due and payable on the Business Day immediately following such Interest Payment Date. Subject to the limitations in Sections 11 and 26, interest shall be payable by the issuance of shares of Common Stock ("Interest Shares") to the Holder or, at the option of the Company, in cash (the "Cash Interest Payment"); provided, however, that the Company may not make Cash Interest Payments and interest payments shall be payable in Interest Shares unless the Company provides written notice to each holder of Debentures at least five Business Days prior to the applicable Interest Payment Date that such Interest Payments shall be made in cash. Interest Shares shall be paid in a number of fully paid and nonassessable shares (rounded up or down to the nearest whole share) of Common Stock equal to the quotient of (1) the amount of the Interest Payment due on the applicable Interest Payment Date divided by (2) ninety-five percent (95%) of the arithmetic average of the Closing Sale Price of the Common Stock on the five consecutive Business Days ending on and including the third Business Day immediately preceding the applicable Interest Payment Date (the "Interest Share Conversion Rate"); provided, further; that in no event may the Company issue more than an aggregate of 40,000 shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction), pro rata among all holders of Debentures, in respect of any single Interest Payment (it being understood that the balance of each such Interest Payment shall be paid in the form of a Cash Interest Payment). Notwithstanding the foregoing, the Company shall be required to make a Cash Interest Payment on any Interest Payment Date if (a) any event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing on the Interest Payment Date or any date which is within 10 Business Days prior to the Interest Payment Date, unless otherwise consented to in writing by the holder of the Debenture entitled to receive such Interest Payment or (b) from and after the time that any Registration Statement (as defined in the Registration Rights Agreement, the "Registration Statement") is required to be effective, such Registration Statement is not then effective and available for the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) on the Interest Payment Date or each date which is within 10 Business Days prior to the Interest Payment Date. Any accrued and unpaid interest which is not paid within five (5) Business Days of the Interest Payment Date on which such payment of interest was due shall bear interest at the rate of 14.0% per annum from such Interest Payment Date until the same is paid in full (or, if less, the maximum interest rate then permitted by applicable law) (the "Default Interest"). Interest Payments and payments of principal will be paid only to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"). This Debenture is subject to the following additional provisions: 1. Exchange. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different denominations, as requested by the Holder surrendering the same. No service charge will be charged to the Holder for such registration transfer or exchange. 2. Transfers. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the United States only in compliance with the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws. Prior to due presentment for transfer of this Debenture, the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not this Debenture is overdue, and the Company shall not be affected by notice to the contrary. 3. Definitions. For purposes of this Debenture, the location of defined terms in this Debenture is set forth on the Index of Terms attached hereto and the following terms shall have the following meanings: "Account Control Agreement" shall have the meaning ascribed thereto in the Securities Purchase Agreement. "Agent" shall mean Portside Growth & Opportunity Fund, in its capacity as collateral agent for the holders of Debentures, and any successor in such capacity. "Approved Stock Plan shall mean any employee benefit plan, stock incentive plan or other similar plan or arrangement which has been approved by the Board of Directors of the Company or any authorized committee thereof, pursuant to which the Company's securities may be issued to any employee, officer, consultant or director for services provided to the Company. "ASE" shall mean The American Stock Exchange. --- "Bloomberg" shall mean Bloomberg Financial Markets or any other similar financial reporting service as may be selected from time to time by the Company and the holders of not less than 60% of the then Outstanding Principal Amount of Debentures issued on the Original Issuance Date. "Business Day" shall mean any day other than Saturday, Sunday or any other day on which commercial banks in The City of New York are authorized or required by law to remain closed. "Cash Collateral Account" shall mean the account maintained by the Company at the Cash Collateral Account Bank, in the name of Portside Growth & Opportunity Fund ("Portside") and subject to the control of Portside pursuant to the Account Control Agreement, together with any successor account designated by Portside. The Cash Collateral Account referred to herein is the same account being used for all debentures of the Company, including replacement debentures, originally issued to Portside and Leonardo L.P. (collectively "PL Debentures"). "Cash Collateral Account Bank" shall mean the financial institution designated as the Cash Collateral Account Bank under the Account Control Agreement. "Cash Transaction" shall mean any Organic Change with a third party on an arm's length basis pursuant to which the holders of the Common Stock are to receive consideration consisting solely of cash. "Closing Sale Price" shall mean, for any security as of any date, the last closing trade price for such security on the Principal Market as reported by Bloomberg, or if the Principal Market begins to operate on an extended hours basis, and does not designate the closing trade price, then the last trade price at 4:00 p.m., New York City Time, as reported by Bloomberg, or if the foregoing do not apply, the last closing trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the last closing ask price of such security as reported by Bloomberg, or, if no last closing ask price is reported for such security by Bloomberg, the average of the highest bid price and the lowest ask price of any market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Closing Sale Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(e)(iii) below. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. "Collateral" shall mean all of the property and assets, other than Intellectual Property, and all interests therein and proceeds thereof now owned or hereafter acquired by the Company, any of its Subsidiaries and any other Person upon which a Lien is granted or purported to be granted by such Person as security for all or any part of the obligations of the Company under the Debentures. "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company. "Common Stock Deemed Outstanding" shall mean, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 6(a)(i) and 6(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any shares of Common Stock owned or held by or for the account of the Company or issuable upon conversion of the Debentures or exercise of the Warrants. "Conversion Failure" shall mean that for any reason the Holder has not received all of the shares of Common Stock to which the Holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture. "Conversion Price" shall mean (A) as of any Conversion Date or other date of determination (other than with respect to an Installment Amount on an Installment Date pursuant to a Company Conversion (as defined in Section 24 (a)), the Fixed Conversion Price, and (B) with respect to any Installment Amount on an Installment Date pursuant to a Company Conversion, at the option of the Holder, either the Fixed Conversion Price or the Company Conversion Price (as defined in Section 24(d)), each in effect as of such date and subject to adjustment as provided herein. "Convertible Securities" shall mean any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. "Default Conversion Price" shall mean the lower of (a) the Conversion Price then in effect and (b) 95% of the lowest Closing Sale Price during the three (3) trading days ending on and including the Conversion Date or other date of determination. "Fixed Conversion Price" shall mean as of any Conversion Date or other date of determination $2.08, subject to adjustment as provided in Section 6, Anti-dilution Adjustments to Conversion Price. "Intellectual Property" means all trademarks, trade names, trade dress, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, technology licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights. "Interferon Acquisition" shall mean the acquisition of certain assets and technology of Interferon Sciences, Inc. ("Interferon") pursuant to asset purchase agreements, dated as of March 11, 2003, between the Company and Interferon, a true and complete copy of which has been delivered by the Company to each initial holder of Debentures in accordance with the Securities Purchase Agreement. "Letters of Credit" shall mean the irrevocable standby letters of credit in the aggregate stated amount of $1,000,000 issued by banks acceptable to the Agent and naming the Agent as beneficiary, and any letters of credit issued in substitution or replacement thereof, in accordance with the Securities Purchase Agreement. "Mortgage" shall mean each mortgage, deed of trust or deed to secure debt, made by the Company in favor of the Agent and recorded against each real property location acquired by the Company from Interferon pursuant to the Interferon Acquisition. "NASDAQ" shall mean The Nasdaq National Market, The Nasdaq Small Cap Market or the ASE. "NYSE" shall mean The New York Stock Exchange, Inc. ---- "Options" shall mean any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Original Issuance Date" shall mean January 26, 2004, the first date on which any Debentures have been issued pursuant to the Securities Purchase Agreement. "Outstanding Principal Amount" shall mean the principal sum outstanding from time to time under this Debenture. "Person" shall mean an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Principal Market" shall mean the ASE, or if the Common Stock is not traded on the ASE, then the principal securities exchange or trading market for the Common Stock. "Quarterly Period" shall mean each of the following periods: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30, the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31. "Registration Rights Agreement" shall mean that certain registration rights agreement between the Company and the initial holders of the Debentures relating to the filing of a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants, as such agreement may be amended from time to time as provided in such agreement. "SEC" shall mean the United States Securities and Exchange Commission. "Securities Purchase Agreement" shall mean that certain securities purchase agreement between the Company and the initial holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Security Agreement" shall mean that certain third amended and restated security agreement made by the Company in favor of the Agent for the benefit of all holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Strategic Financing" shall mean the issuance of Common Stock or Options in connection with any acquisition by the Company, by whatever means, of any business, assets or technologies, or to any strategic investor, vendor, customer, lease or similar arrangement, the primary purpose of which is not to raise equity capital; provided that the aggregate number of shares of Common Stock which the Company may issue pursuant to this definition shall not exceed (i) 25% of the total outstanding equity on the Original Issuance Date in connection with any one or more related issuances to strategic investors, vendors, customers, lessors or similar parties or (ii) 40% of the total outstanding equity on the Original Issuance Date in connection with all issuances to strategic investors, vendors, customers, lessors or similar parties (in each case, subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions). "Subsidiary" shall mean, as to any Person, any entity in which such Person, directly or indirectly, owns 30% or more of the capital stock or other equity or similar interests or owns capital stock or holds an equity or similar interest which ownership entitles such Person to elect 30% or more of the board of directors or similar governing body of such entity. "Transaction Documents" shall have the meaning ascribed thereto in the Securities Purchase Agreement. "Warrants" shall mean the warrants to purchase shares of Common Stock issued by the Company pursuant to the Securities Purchase Agreement. "Weighted Average Price" shall mean, for any security as of any date, the dollar volume-weighted average price per share for such security on the Principal Market during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg through its "Volume at Price" function or, if the foregoing does not apply, the dollar volume-weighted average price per share of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(e)(iii) with the term "Weighted Average Price" being substituted for the term "Closing Sale Price." All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. 4. Conversion. The Holder of this Debenture shall have the following conversion rights: (a) Holder's Right to Convert. Subject to Sections 11 and 26, at any time or times until 5:00 p.m., New York City Time, on the Business Day prior to the Maturity Date this Debenture is convertible, at the option of the Holder hereof, into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) at the Conversion Rate (as defined below). The Holder hereof may convert a portion of the Outstanding Principal Amount of this Debenture if such portion is an integral multiple of $1,000. If this Debenture remains outstanding on the Maturity Date, then this Debenture shall be redeemed by the Company in accordance with Section 5(a). Notwithstanding anything herein to the contrary, concurrent with each delivery of Conversion Shares to a holder pursuant to this Debenture, the Company shall pay (in Interest Shares, only if all terms, conditions and requirements set forth in this Debenture concerning payment of interest in the form of Interest Shares are satisfied, or cash as determined by the Company) to such holder all accrued and unpaid interest on the Outstanding Principal Amount then being converted from the last date on which interest had been paid on such Outstanding Principal Amount through the Conversion Date. (b) Company's Right to Mandatory Conversion. Subject to Sections 11 and 26 hereof, if at any time from and after the Original Issuance Date the Weighted Average Price of the Common Stock shall exceed 175% of the Conversion Price for any 25 consecutive trading days (the "Mandatory Conversion Measuring Period"), the Company may deliver on or before the second (2nd) Business Day following the end of the Mandatory Conversion Measuring Period a written notice to all, but not less than all, of the Holders and the Transfer Agent (as defined in Section 4(e)(i)) (the "Mandatory Conversion Notice"), indicating that the Company is requiring each Holder to convert the then Outstanding Principal Amount of such Holder's Debenture plus accrued and unpaid interest thereon to the date fixed for conversion into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below); provided, however, that the Company may not require such conversion if (i) an Event of Default shall have occurred at any time on or prior to the Mandatory Conversion Date and shall have not been cured to the reasonable satisfaction of the holder of this Debenture, (ii) an event shall have occurred and be continuing at any time on or prior to the Mandatory Conversion Date which with the passage of time and the failure to cure would result in an Event of Default, (iii) either (A) any Registration Statement is not effective and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement or (B) there has been any Grace Period, in either case on any trading day during the period beginning on the first day of the Mandatory Conversion Measuring Period and ending on the Mandatory Conversion Date or (iv) there has been a public announcement of a pending, proposed or intended Change of Control, unless such pending, proposed or intended Change of Control has been terminated, abandoned or consummated and the Company has publicly announced such termination, abandonment or consummation of such Change of Control (a "Mandatory Conversion"). The Company shall send the Mandatory Conversion Notice by facsimile and overnight courier to each Holder and shall indicate (X) the date fixed for conversion, which shall be not less than fifteen (15) days nor more than thirty (30) days after each Holder's receipt of the Mandatory Conversion Notice (the "Mandatory Conversion Date"), (Y) the Conversion Price and (Z) the number of shares of Common Stock to be issued to such Holder as of the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the mechanics of conversion set forth in Section 4(e) shall apply, to the extent applicable, as if the Company and the Transfer Agent had received from each Holder on the Mandatory Conversion Date a Conversion Notice (as defined below) with respect to the entire Outstanding Principal Amount of the Debenture and the interest accrued and unpaid thereon as of the Mandatory Conversion Date. Promptly following the Mandatory Conversion Date, the Holder shall surrender its Debenture to the Company or the Transfer Agent. (c) Partial Conversion of Debenture. If this Debenture is converted in part, the remaining portion of this Debenture not so converted shall remain entitled to the conversion rights provided herein. (d) Conversion Price for Holder Converted Shares. The Outstanding Principal Amount of this Debenture that is converted into shares of Common Stock shall be convertible into the number of shares of Common Stock which results from application of the following formula: P ---------------- Conversion Price P = Outstanding Principal Amount of this Debenture submitted for conversion The number of shares of Common Stock into which this Debenture hereto may be converted pursuant to the foregoing formula is hereafter referred to as the "Conversion Rate." (e) Mechanics of Conversion. The conversion of this Debenture shall be conducted in the following manner: (i) Holder's Delivery Requirements. To convert this Debenture (in whole or in part) into full shares of Common Stock on any date, the Holder shall (A) transmit by facsimile (or otherwise physically deliver), for receipt on or prior to 5:00 p.m., New York City Time, on such date, a copy of a properly completed notice of conversion executed by the Holder in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and the Company's designated transfer agent (the "Transfer Agent") and (B) surrender this Debenture to a common carrier for delivery to the Company as soon as practicable following such date. (ii) Company's Response. Upon receipt by the Company of a copy of a Conversion Notice, the Company shall (A) as soon as practicable, but in any event within two (2) Business Days, send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder and the Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein and (B) then, on or before the second (2nd) Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date"), (x) issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled, or (y) in the case of a public resale of such Conversion Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system. If the specified principal amount submitted for conversion is less than the then Outstanding Principal Amount of this Debenture, then the Company shall, as soon as practicable using reasonable best efforts, and in no event later than five Business Days after receipt of the Debenture (the "Debenture Delivery Date") and at its own expense, issue and deliver to the holder a new Debenture representing the Outstanding Principal Amount not converted. The effective date of conversion (the "Conversion Date") shall be deemed to be the date on which the Company receives by facsimile the Conversion Notice, and the Person or Persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (iii) Dispute Resolution. In the case of a dispute as to the determination of the Closing Sale Price, the Weighted Average Price, the Conversion Price or the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed determinations or arithmetic calculations to the Holder via facsimile within two (2) Business Days of receipt of the Holder's Conversion Notice or other date of determination. If the Holder and the Company are unable to agree upon the determination of the Closing Sale Price, the Weighted Average Price, the Conversion Price or arithmetic calculation of the Conversion Rate within two (2) Business Days of such disputed determination or arithmetic calculation being transmitted to the Holder, then the Company shall within two (2) Business Days submit via facsimile (A) the disputed determination of the Closing Sale Price, the Weighted Average Price or the Conversion Price, as applicable, to an independent, reputable investment bank selected by the Company and approved by the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding or (B) the disputed determination of the Conversion Price, the Weighted Average Price or the Conversion Price, as applicable, or the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent manifest error. (iv) Company's Failure to Timely Convert. ----------------------------------- (A) If (x) within five (5) Business Days after the Company's receipt of the facsimile copy of a Conversion Notice the Company has failed to issue and deliver a certificate to a Holder or credit the Holder's designee's balance account with DTC, in accordance with Section 4(e) hereof for the number of shares of Common Stock to which the Holder is entitled upon the Holder's conversion of this Debenture or (y) within five (5) Business Days of the Company's receipt of this Debenture the Company has failed to issue and deliver a Debenture representing the principal amount of this Debenture not so converted, then in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof), the Company shall pay additional damages to such holder for each day after the Share Delivery Date that such conversion is not timely effected and/or each day after the Debenture Delivery Date that this Debenture is not delivered in an amount equal to 0.05% of the product of (I) the sum of the number of shares of Common Stock not issued to the holder on or prior to the Share Delivery Date and to which such holder is entitled as set forth in the applicable Conversion Notice and, in the event the Company has failed to deliver a Debenture to the holder on or prior to the Debenture Delivery Date, the number of shares of Common Stock issuable upon conversion of this Debenture as of the Debenture Delivery Date and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date, in the case of the failure to deliver Common Stock, or the Debenture Delivery Date, in the case of failure to deliver a Debenture. The foregoing notwithstanding, the damages set forth in this Section 4(e)(iv) shall be stayed with respect to the number of shares of Common Stock for which there is a good faith dispute being resolved pursuant to Section 4(e)(iii), pending the resolution of such dispute. (B) If for any reason a holder has not received all of the shares of Common Stock to which such holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture, then the Holder, upon written notice to the Company, with a copy to the Transfer Agent, may void its Conversion Notice; provided that the voiding of the Holder's Conversion Notice shall not affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 4(e)(iv)(A) or otherwise. (f) No Fractional Shares. The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. (g) Release of Funds from Segregated Account. Notwithstanding anything herein to the contrary, if at any time and from time to time, the balance of the funds remaining in the Segregated Account (as defined in the Securities Purchase Agreement), if any, that were paid into the Segregated Account by the initial holder of this Debenture, as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement, exceeds the then Outstanding Principal Amount of this Debenture, together with accrued interest thereon and so long as no Event of Default, or event that with notice or lapse of time would constitute an Event of Default, has occurred and is continuing, the holder agrees, by its acceptance of this Debenture, to distribute promptly to the Company an amount in cash equal to such excess from the Segregated Account established by the initial holder of this Debenture, or, if advised in writing by the Company, to use such excess to remit payment for any obligation under this Debenture to the holder of this Debenture. If for any reason any portion of the funds held in the Segregated Account established by the initial holder of this Debenture are not paid to the Company in accordance with the terms of the Securities Purchase Agreement and the Outstanding Principal Amount on this Debenture, together with accrued and unpaid interest thereon, becomes due and payable either at maturity or upon acceleration or demand upon an Event of Default, the Company and the holder, by its acceptance of this Debenture, agree that the funds held in the Segregated Account shall be released to the holder of this Debenture and shall be deemed to constitute a partial payment of the Outstanding Principal Amount of this Debenture together with accrued interest thereon then due in an amount equal to the funds in the Segregated Account. All such payments from the Segregated Account shall be deemed to be payments of (i) first, accrued and unpaid interest on the Outstanding Principal Amount of this Debenture and (ii) second, Outstanding Principal Amount of this Debenture. (h) Application of Conversion Amounts. Subject to the final sentence of Section 24(b), any portion of this Debenture that the Holder elects to convert in accordance with this Section 4 shall be deducted, at the option of the Holder (as set forth in the applicable Conversion Notice), either (x) from the Installment Amount relating to the latest Installment Date (i.e., the Installment Date nearest to the Maturity Date) with respect to which Installment Amounts remain outstanding or (y) from the Installment Amount relating to the nearest Installment Date (i.e., nearest to the Installment Date that has not yet occurred). 5. Redemption. ---------- (a) Mandatory Redemption at Maturity. If this Debenture remains outstanding on the Maturity Date, the Company shall redeem (a "Maturity Date Mandatory Redemption") the Outstanding Principal Amount of this Debenture that is not subject to a Conversion Notice for an amount in cash (the "Maturity Date Redemption Price") equal to the Outstanding Principal Amount of the Debenture not converted into shares of Common Stock pursuant to a Conversion Notice, plus accrued and unpaid interest thereon. The Maturity Date Redemption Price shall be paid on the Maturity Date to the Holder by wire transfer of immediately available funds to an account designated in writing by such Holder. Promptly following payment of the Maturity Date Redemption Price, the Holder shall surrender this Debenture to the Company. (b) Payment Failures If the Company fails to make any payment of a Maturity Date Redemption Price, then in addition to any remedy the Holder may have under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, until the Maturity Date Redemption Price is paid in full, (x) the Maturity Date Redemption Price payable in respect of such unpaid Maturity Date Redemption Price shall bear interest at the rate of 1.5% per month, prorated for partial months, and (y) the Holder shall have the option to require the Company to convert any or all of the Outstanding Principal Amount of this Debenture subject to redemption and for which the Maturity Date Redemption Price (together with any interest thereon) has not been paid into a number of shares of Common Stock equal to the quotient of the Maturity Date Redemption Price (together with any interest thereon) divided by the Default Conversion Price. 6. Anti-dilution Adjustments to Conversion Price. The Conversion Price will be subject to adjustment from time to time as provided in this Section 6 at all times prior to, but not after, the date on which cash collateral payments have been made pursuant to Section 25 in an amount equal to the entire Outstanding Principal Amount, together with accrued and unpaid interest on all Debentures outstanding: (a) Anti-dilution Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Original Issuance Date and prior to the twelve (12) month anniversary of the Original Issuance Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock: (v) deemed to have been issued by the Company in connection with an Approved Stock Plan; (w) deemed to have been issued upon issuance of the Debentures or the Warrants, or issued upon conversion of the Debentures or exercise of the Warrants; (x) issued upon exercise of Options or Convertible Securities which are outstanding on the date immediately preceding the Original Issuance Date, provided that (except with regard to the Previously-Issued Securities (as defined in the Securities Purchase Agreement)) such issuance of shares of Common Stock upon exercise of such Options or Convertible Securities is made pursuant to the terms of such Options or Convertible Securities in effect on the date immediately preceding the Original Issuance Date, such Options or Convertible Securities are not amended after the date immediately preceding the Original Issuance Date other than with respect to Options originally issued pursuant to an Approved Stock Plan and the purchase or exercise price provided for in any such Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any such Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock does not change at any time after the Original Issuance Date; (y) issued to the public pursuant to an underwritten offering registered pursuant to the Securities Act (but in all events excluding offerings pursuant to "equity lines" or similar products); and (z) issued pursuant to a Strategic Financing ((v) through (z) collectively "Excluded Issuances")) for a consideration per share (the "New Securities Issuance Price") less than the Conversion Price in effect immediately prior to such time (each such sale or issuance, a "Dilutive Issuance"), then concurrent with such Dilutive Issuance, the Conversion Price then in effect shall be reduced to an amount equal to the New Securities Issuance Price. If and whenever on or after the twelve (12) month anniversary of the Original Issuance Date and prior to the Maturity Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock issued or deemed to have been issued pursuant to any Excluded Issuance) in a Dilutive Issuance, then concurrent with such Dilutive Issuance, the Conversion Price then in effect shall be reduced to a price (rounded to the nearest cent) equal to the product of (A) the Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price in effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the Conversion Price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For purposes of determining the adjusted Conversion Price under this Section 6(a), the following shall be applicable: (i) Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 6(a)(i), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 6(a)(ii), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 6(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of the Debentures are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect. (iv) Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then solely for purposes of this Section 6, the Options will be deemed to have been issued for a consideration of $0.01. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the Closing Sale Prices of such securities during the ten (10) consecutive trading days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company. (v) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares and the Conversion Price in effect immediately prior to such combination will be proportionately increased. (c) Holder's Right of Alternative Conversion Price Following Issuance of Convertible Securities. If the Company issues or sells any Options or Convertible Securities after the Original Issuance Date that are convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to a fixed price (each of the formulations for such variable price being herein referred to as, the "Variable Price"), the Company shall provide written notice thereof via facsimile and overnight courier to the Holder (the "Variable Notice") on the date of issuance of such Convertible Securities or Options. From and after the date the Company issues any such Convertible Securities or Options with a Variable Price, but only for so long as such Convertible Securities or Options are outstanding, the Holder shall have the right, but not the obligation, in its sole discretion to substitute the Variable Price for the Conversion Price upon conversion of any Debentures held by it by designating in the Conversion Notice delivered upon conversion of such Debentures that solely for purposes of such conversion the Holder is relying on the Variable Price rather than the Conversion Price then in effect. The Holder's election to rely on a Variable Price for a particular conversion of Debentures shall not obligate the Holder to rely on a Variable Price for any future conversions of Debentures. (d) Other Events. If any event occurs of the type contemplated by the provisions of this Section 6 in a private transaction (the primary purpose of which is to raise equity capital) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features other than pursuant to an Excluded Issuance), then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Debentures; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 6. (e) Notices. ------- (i) Promptly following any adjustment of the Conversion Price pursuant to this Section 6, the Company will give written notice thereof to the Holder, setting forth in reasonable detail, and certifying, the calculation of such adjustment. In the case of a dispute as to the determination of such adjustment, then such dispute shall be resolved in accordance with the procedures set forth in Section 4(e)(iii). (ii) The Company will give written notice to the Holder at least ten (10) Business Days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined in Section 7(a)), dissolution or liquidation, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. (iii) The Company will also give written notice to the Holder at least ten (10) Business Days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. 7. Other Rights. ------------ (a) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any (i) sale of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor, or, if applicable, the parent of the successor, resulting from such Organic Change (in each case, the "Acquiring Entity") a written agreement to deliver to each holder of Outstanding Principal Amount of the Debentures in exchange for such securities, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Debentures, and reasonably satisfactory to the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding; provided that the new security of the Acquiring Entity shall not be required to be of rank equal to the Debenture if the issuance of a security of such rank is not permitted by, or is inconsistent with, any agreement or instrument to which the Acquiring Entity is a party or any security of the Acquiring Entity that is outstanding, upon the consummation of the Organic Change. Prior to the consummation of any other Organic Change, the Company shall make appropriate provision to insure that each of the holders of the Debentures will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Debentures such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of shares of Common Stock which would have been acquirable and receivable upon the conversion of such holder's Debentures as of the date of such Organic Change (without taking into account any limitations or restrictions on the convertibility of the Debentures). (b) Optional Redemption at Holder's Election Upon Change of Control. In addition to the rights of the holders of Debentures under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, upon a Change of Control (as defined below) of the Company each holder of Debentures shall have the right, at such holder's option, to require the Company to redeem all or a portion of such holder's Debentures at a price equal to 100% of the Outstanding Principal Amount of such Debentures plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Change of Control and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures on the date of consummation of the Change of Control ("Change of Control Redemption Price"). No sooner than 20 Business Days nor later than 10 Business Days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier (a "Notice of Change of Control") to each holder of Debentures. At any time during the period beginning after receipt of a Notice of Change of Control (or, in the event a Notice of Change of Control is not delivered at least 10 Business Days prior to a Change of Control, at any time on or after the date which is 10 Business Days prior to a Change of Control) and ending on the date one (1) Business Day prior to such Change of Control, any holder of the Debentures then outstanding may require the Company to redeem all or a portion of the holder's Debentures then outstanding by delivering written notice thereof via facsimile and overnight courier (a "Notice of Redemption Upon Change of Control") to the Company, which Notice of Redemption Upon Change of Control shall indicate (i) the principal amount of the Debentures that such holder is submitting for redemption, and (ii) the applicable Change of Control Redemption Price, as calculated pursuant to this Section 7(b). Upon the Company's receipt of a Notice(s) of Redemption Upon Change of Control from any holder of Debentures, the Company shall promptly, but in no event later than two (2) Business Days following such receipt, notify each holder of Debentures by facsimile of the Company's receipt of such Notice(s) of Redemption Upon Change of Control. The Company shall deliver to the holder of each Debenture who has delivered a Notice of Redemption upon Change of Control, the applicable Change of Control Redemption Price simultaneously with the consummation of the Change of Control provided that a holder's Debentures shall have been so delivered to the Company. For purposes of this Section 7(b), "Change of Control" shall mean (i) the consolidation, merger or other business combination of the Company with or into another Person (other than (A) a consolidation, merger or other business combination in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company), (ii) the sale or transfer of all or substantially all of the Company's assets, or (iii) a tender or exchange offer made to and accepted by the holders of more than 50% of the aggregate voting power of the outstanding Common Stock. (c) Optional Redemption At the Company's Election Upon Cash Transaction. At any time or times on or after the date the Company publicly discloses a pending, proposed or intended Cash Transaction, the Company shall have the right, in its sole discretion, to require that all, but not less than all, of the Outstanding Principal Amount of this Debenture be redeemed ("Cash Transaction Redemption Election") at a price equal to 100% of the Outstanding Principal Amount of this Debenture plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Cash Transaction and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures redeemed on the date of consummation of the Cash Transaction (the "Cash Transaction Redemption Price"). The Company shall exercise its right to make a Cash Transaction Redemption Election by providing each holder of Debentures written notice ("Notice of Cash Transaction Redemption") by facsimile or overnight courier, after the public disclosure of a proposed, pending or intended Cash Transaction and at least ten (10) Business Days prior to the date of consummation of the Cash Transaction ("Cash Transaction Election Redemption Date"), which Cash Transaction Election Redemption Date shall be the date of the consummation of the Cash Transaction. The Notice of Cash Transaction Redemption shall indicate the anticipated Cash Transaction Election Redemption Date. If the Company has exercised its right of Cash Transaction Redemption Election then the Outstanding Principal Amount of the Debenture at the time of the consummation of the Cash Transaction shall be redeemed on the Cash Transaction Election Redemption Date by payment by or on behalf of the Company to each holder of Debentures of the applicable Cash Transaction Redemption Price concurrent with the closing of the Cash Transaction. All holders of Debentures shall thereupon, if the Cash Transaction Redemption Price has been paid, except as specifically set forth herein, in the Securities Purchase Agreement or in the Registration Rights Agreement, cease to have any rights with respect to the Debentures and within two (2) Business Days after the Cash Transaction Election Redemption Date, or such earlier date as the Company and holders of no less then 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date mutually agree, shall surrender all Debentures to the Company. (d) Right to Convert on an Organic Change or Change of Control or Agreement of the Parties. In addition to the foregoing, following the announcement of any Change of Control or other Organic Change following which the Company is not the surviving entity or otherwise upon the mutual agreement of the Company and holders of at least 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date, the Holder shall continue pursuant to Section 4(a) hereof to have the right to convert the Outstanding Principal Amount of this Debenture at the then prevailing Conversion Rate until the Debenture is redeemed or otherwise converted pursuant to this Section 7. 8. Reservation of Stock Issuable Upon Conversion. The Company shall, so long as any of the Debentures are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversions of the Debentures, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Debentures then outstanding; provided that the number of shares of Common Stock so reserved shall at no time prior to the date on which cash collateral payments have been made pursuant to Section 25 in an amount equal to the entire Outstanding Principal Amount, together with accrued and unpaid interest on all Debentures outstanding be less than 135% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion) and the maximum number of Interest Shares issuable over the full term of the Debentures (assuming the Company paid the maximum amount of interest permitted to be paid in Interest Shares over the full term of the Debentures) and after such time 100% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion). 9. No Reissuance of Debentures. No Debentures acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such Debentures shall be retired. No additional Debentures (other than the Debentures issued pursuant to the Securities Purchase Agreement) shall be authorized or issued without the consent of the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date. 10. No Impairment. The Company shall not intentionally take any action which would impair the rights and privileges of the Debentures set forth herein or the Holders thereof. 11. Limitation on Beneficial Ownership. The Company shall not effect and shall have no obligation to effect any conversion of Debentures, and no holder of Debentures shall have the right to convert any Debentures, to the extent that after giving effect to such conversion, the beneficial owner of such shares (together with such Person's affiliates) would have acquired, through conversion of Debentures or otherwise, beneficial ownership of a number of shares of Common Stock that exceeds 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by a Person and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Debentures with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted Debentures beneficially owned by such Person or any of its affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Person or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 11, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 11, in determining the number of outstanding shares of Common Stock, a holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a more recent public announcement by the Company, or (3) any other notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written request of the Holder, the Company shall promptly, but in no event later than two (2) Business Days following the receipt of such notice, confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to conversions of Debentures by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. 12. Obligations Absolute. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place and rate, and in the manner, herein prescribed. 13. Waivers of Demand, Etc. The Company hereby expressly waives (to the extent permitted by applicable law) demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and will be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 14. Replacement Debentures. In the event that any Holder notifies the Company that its Debenture(s) have been lost, stolen or destroyed, replacement Debenture(s) identical in all respects to the original Debenture(s) (except for registration number and Outstanding Principal Amount, if different than that shown on the original Debenture(s)) shall be issued by the Company to the Holder, provided that the Holder executes and delivers to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such Debenture(s). 14A. Payment of Expenses. The Company agrees to pay all reasonable expenses, including reasonable attorneys' fees, which may be incurred by the Holder in successfully enforcing the provisions of this Debenture and/or successfully collecting any amount due under this Debenture, the Securities Purchase Agreement, the Security Agreement, the Account Control Agreement (as defined in the Securities Purchase Agreement), the Warrants, the Registration Rights Agreement or any other Transaction Document. 15. Defaults. The following shall constitute "Events of Default": -------- (a) Any Event of Default under any other Debenture; or (b) The suspension from trading or failure of the Common Stock to be listed on NASDAQ, the ASE or the NYSE for more than an aggregate of ten (10) trading days in any 365-day period; or (c) Any money judgment (including any arbitration award, but only if reduced to a judgment), writ or warrant of attachment, or similar process in excess of Two Hundred and Fifty Thousand Dollars ($250,000) in the aggregate, net of any applicable insurance coverage, shall be entered or filed against the Company, its Subsidiaries or any of their properties or other assets and which shall remain unpaid, unvacated, unbonded and unstayed for a period of seventy-five (75) days; or (d) The Company shall default in the payment when due (including, without limitation, the Company's failure to pay any redemption payments or amounts hereunder) of (i) interest on this Debenture, and such default shall continue for thirty (30) calendar days after the due date thereof, or (ii) the Outstanding Principal Amount of this Debenture; or (e) Any of the representations or warranties made by the Company herein (including any Cash Collateral Certificate delivered under Section 25(g)(iii)), in the Securities Purchase Agreement, the Warrants, the Security Agreement, the Account Control Agreement, any Mortgage, the Registration Rights Agreement or any other Transaction Document shall be untrue in any material respect at the time made and such condition (to the extent capable of being cured) shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such condition; and such breach of representations and warranties, singly or in the aggregate, would have a Material Adverse Effect or materially impair the ability of the Company to perform or satisfy its obligations to the Holder pursuant to the Transaction Documents; or (f) The Company shall fail to perform or observe in any material respect any material covenant or agreement in the Securities Purchase Agreement, the Security Agreement, the Warrants, any Mortgage, the Account Control Agreement, the Registration Rights Agreement, this Debenture or any other Transaction Document, including, without limitation, (i) the failure to honor any Conversion Notice and deliver shares pursuant thereto, and such failure shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such failure or (ii) the failure by the Company to comply with its obligations under Section 25(g) hereof, including, without limitation, (A) the obligation to disclose sufficient and timely information in its public filings with the SEC for the holder to verify and reconcile Company Consolidated Revenues for the relevant periods, as required by Section 25(g)(iv) hereof, (B) the obligation to make payments timely as and when due and in the form of cash and/or Repayment Shares as provided thereunder, (C) the failure of the Company to deliver timely a completed Cash Collateral Certificate in the manner required by Section 25(g)(v) hereof and (D) the delivery by or on behalf of the Company of any Cash Collateral Certificate to any holder of Debentures without the express prior written consent of such holder; or (g) The Company shall (i) become insolvent; (ii) admit in writing its inability to pay its debts generally as they mature; (iii) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (iv) apply for or consent to the appointment of a trustee, liquidator or receiver for it or for a substantial part of its property or business; or (h) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or (i) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; or (j) The Company shall fail to pay any debt for borrowed money or other similar obligation or liability ("Indebtedness") (excluding Indebtedness evidenced by the Debentures, Subordinated Indebtedness and Pari Passu Indebtedness) of the Company, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), in an outstanding principal amount equal to or in excess of One Million Dollars ($1,000,000), singly or in the aggregate and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or any such Indebtedness of the Company shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (k) The Company shall fail to make any payment of principal in respect of Subordinated Indebtedness or Pari Passu Indebtedness or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Subordinated Indebtedness or Pari Passu Indebtedness, or any such Subordinated Indebtedness or Pari Passu Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (l) Bankruptcy, reorganization, insolvency or liquidation proceedings or other similar proceedings, or relief under any bankruptcy law or any similar law for the relief of debt shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit to any material allegations of, or default in answering a petition filed in any such proceeding; or (m) Unless the Company shall have made cash collateral payments in an amount equal to the entire Outstanding Principal Amount of all Debentures, together with accrued and unpaid interest thereon, in accordance with Section 25(g), the Registration Statement (as defined in the Registration Rights Agreement) is not declared effective by the SEC and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement pursuant to the terms of the Registration Rights Agreement) required to be included in such Registration Statement on or before July 26, 2004; or (n) the Security Agreement, any Mortgage (as defined in the Securities Purchase Agreement) or any other security document, after delivery thereof pursuant to the Securities Purchase Agreement, shall for any reason fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority lien in favor of the agent for the benefit of the holders of Debentures on any collateral purported to be covered thereby; or (o) the Cash Collateral Account Bank shall fail to comply with any of the terms of the Account Control Agreement; (p) at any time required to be in full force and effect under the Securities Purchase Agreement, the Letters of Credit shall for any reason cease to be in full force and effect other than in accordance with their express terms or any issuer of any of the Letters of Credit shall fail to maintain a Minimum Rating (as defined in the Securities Purchase Agreement) or fail to perform its obligations thereunder or shall, in writing, repudiate the Letter of Credit issued by it or deny that its obligations thereunder are valid, binding and enforceable, and such failure shall continue uncured for a period of fifteen (15) days after notice from the Holder of such failure; (q) the report of the Company's auditors on the Company's consolidated audited financial statements for the year ended December 31, 2003 shall have contained any going concern qualification; or (r) any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any material facility of the Company or any of its Subsidiaries. Unless an Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default), upon the occurrence of an Event of Default, and for so long as such Event of Default shall be continuing, at the option of and on notice by the Holder to the Company in writing and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any other instruments contained to the contrary notwithstanding to the extent permitted by applicable law (provided, however, that upon the occurrence of any Event of Default described in subsection (g), (h) or (l) above, without any notice to the Company or any act by the Holder or the Agent, this Debenture shall become due and payable automatically and immediately, without presentment, demand, protest or notice of any kind, all of which are expressly waived by the Company, anything herein or in any other instrument contained to the contrary notwithstanding to the extent permitted by applicable law), and the Holder may immediately, and without expiration of any further period of grace, enforce any and all of the Holder's rights and remedies provided herein, or under the Security Agreement, the Mortgages, the Account Control Agreement and the Letters of Credit or any other rights or remedies afforded by law. In such event this Debenture shall be redeemed at a redemption price equal to 100% of the Outstanding Principal Amount of the Debenture, plus accrued and unpaid interest on this Debenture. In addition to the foregoing, upon an Event of Default, the rate of interest on this Debenture, shall, to the maximum extent of the law, be permanently increased by two percent (2%) per annum (i.e., from 7% to 9% per annum) commencing on the first day of the thirty (30) day period (or part thereof) following the Event of Default; and, solely in the case of an Event of Default triggered by a Conversion Failure, an additional two percent (2%) per annum commencing on the first day of each of the second and third such thirty (30) day periods (or part thereof); and an additional one percent (1%) on the first day of each consecutive thirty (30) day period (or part thereof) thereafter until this Debenture has been duly converted or redeemed as herein provided; provided that in no event shall the rate of interest exceed the lower of 20% or the highest rate permitted by applicable law. The Company shall within one (1) Business Day notify each Holder of Debentures upon becoming aware of the occurrence of any Event of Default (whether or not waived by any other Holder of Debentures) or of any action taken by any Holder of Debentures with respect to the occurrence of any Event of Default. 16. Savings Clause. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 17. Entire Agreement. This Debenture and the agreements referred to in this Debenture constitute the full and entire understanding and agreement between the Company and the Holder with respect to the subject hereof. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 18. Assignment, Etc. The Holder may, subject to compliance with the Securities Purchase Agreement and to applicable federal and state securities laws, transfer or assign this Debenture or any portion thereof and may pledge, encumber or transfer its rights or interest in and to this Debenture or any part hereof, provided, that such transfer or assignment of this Debenture does not result in more than ten (10) holders of the total Outstanding Principal Amount of all Debentures and any such part or portion of this Debenture constitutes at least 10% of the Outstanding Principal Amount or such lesser amount if such transfer involves the entire Outstanding Principal Amount then held by such transferor. Any such transfer or assignment shall only be effective upon the Company's receipt of written notice thereof. Each such assignee, transferee and pledgee shall have all of the rights of the Holder under this Debenture. The Company agrees that, subject to compliance with the Securities Purchase Agreement, after receipt by the Company of written notice of assignment from the Holder and the Holder's assignee, all principal, interest and other amounts which are then, and thereafter become, due under this Debenture shall be paid to such assignee, transferee or pledgee at the place of payment designated in such notice. This Debenture shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and registered assigns. 19. No Waiver. No failure on the part of the Holder to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to the Holder or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Holder from time to time. 20. Notices. Unless otherwise provided herein, any notices, consents, waivers or other communications required or permitted to be given under the terms of this Debenture must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Hemispherx Biopharma, Inc. 1617 JFK Boulevard Suite 660 Philadelphia, PA 19103 Telephone: (215) 998-8000 Facsimile: (215) 998-1739 Attention: Chief Executive Officer With a copy to: Ransom W. Etheridge, Esq. 2610 Potters Road Suite 200 Virginia Beach, VA 23452 Telephone: (757-486-0599 Facsimile: (757) 486-0792 If to a holder, to its address and facsimile number set forth on the Schedule of Buyers attached to the Securities Purchase Agreement, with copies to such holder's representatives as set forth on the Schedule of Buyers, or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 21. Miscellaneous. Whenever the sense of this Debenture requires, words in the singular shall be deemed to include the plural and words in the plural shall be deemed to include the singular. Paragraph headings are for convenience only and shall not affect the meaning of this document. 22. Choice of Law and Venue; Waiver of Jury Trial. THIS DEBENTURE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with this Debenture shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in Section 20 (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to this Debenture. 23. Rule 144. With a view to making available to the Holder the benefits of Rule 144 promulgated under the Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit the Holder to sell the underlying stock of the Company issuable upon conversion or exercise of the Debentures and the Warrants to the public without registration, the Company agrees to use its reasonable best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) furnish to any Holder, promptly upon request, a written statement by the Company (provided true at the time) that it has complied with the applicable reporting and filing requirements of the Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and copies of such other reports and documents (if any) so filed by the Company as may be reasonably requested to permit any such Holder to take advantage of any rule or regulation of the SEC permitting the selling of any such securities without registration. 24. Company Installment Conversion or Redemption. -------------------------------------------- (a) General. On each Installment Date (unless waived by the Holder), the Company shall pay to the Holder of this Note the Installment Amount as of such Installment Date by the combination of any of the following, but subject to and in accordance with the terms of this Section 24, (i) requiring the conversion of a portion of the applicable Installment Amount, in whole or in part, in accordance with this Section 24 but subject to the satisfaction of the Conditions to Company Conversion (as defined below) (a "Company Conversion"), and/or (ii) redeeming the applicable Installment Amount, in whole or in part, in accordance with this Section 24 (a "Company Redemption"); provided that all of the outstanding applicable Installment Amount as of each such Installment Date must be converted and/or redeemed by the Company on the applicable Installment Date, subject to the provisions of this Section 24. On or prior to the date which is at least 2 Trading Days prior to each Installment Measuring Period, the Company shall deliver written notice to the Holder (each, a "Company Installment Notice"), which Company Installment Notice shall state (i) the portion, if any, of the applicable Installment Amount which the Company elects to convert pursuant to a Company Conversion, which amount when added to the Company Redemption Amount, if any, must equal the applicable Installment Amount (the "Company Conversion Amount"), (ii) the portion, if any, of the applicable Installment Amount which the Company elects to redeem pursuant to a Company Redemption (the "Company Redemption Amount"), which amount when added to the Company Conversion Amount, if any, must equal the applicable Installment Amount, and (iii) if the Company has elected, in whole or in part, a Company Conversion, then the Company Installment Notice shall certify that the Conditions to Company Conversion are satisfied as of the date of the Company Installment Notice. If the Company does not deliver a Company Installment Notice in accordance with this Section 24(a), then the "Company Redemption Amount" and the "Company Conversion Amount" with respect to such Installment Date shall be in such amounts and proportions as the Holder shall designate in writing to the Company in its sole discretion and the Company shall be deemed to have delivered a Company Installment Notice setting forth such amounts. Each Company Installment Notice shall be irrevocable. Except as expressly provided in this Section 24(a), the Company shall redeem and convert the applicable Installment Amount of this Debenture pursuant to this Section 24 and the corresponding Installment Amounts of the other Debentures pursuant to the corresponding provisions of the other Debentures in the same ratio of the Installment Amount being redeemed and converted hereunder. The Company Redemption Amount (whether set forth in the Company Installment Notice or by operation of this Section 24) shall be redeemed in accordance with Section 24(b), and the Company Conversion Amount shall be converted in accordance with Section 24(c). (b) Mechanics of Company Redemption. If the Company elects, or is deemed to have elected, a Company Redemption in accordance with Section 24(a), then the Company Redemption Amount, if any, which is to be paid to the Holder on the applicable Installment Date shall be redeemed by the Company on such Installment Date, and the Company shall pay to the Holder on such Installment Date, by wire transfer of immediately available funds, an amount in cash (the "Company Installment Redemption Price") equal to the sum of 100% of the Company Redemption Amount. Notwithstanding anything to the contrary in this Section 24(b), but subject to Sections 11 and 26, until the Company Installment Redemption Price (together with any interest thereon) is paid in full, the Company Redemption Amount (together with any interest thereon to the extent permitted in this Debenture to be paid by the Company in Common Stock) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 4. (c) Mechanics of Company Conversion. Subject to Sections 11 and 26 and Section 24(e), if the Company delivers a Company Installment Notice and elects or is deemed to have elected, in whole or in part, a Company Conversion in accordance with Section 24(a), then the applicable Company Conversion Amount, if any, which remains outstanding shall be converted as of the applicable Installment Date by converting on such Installment Date such Company Conversion Amount as if the Holder had delivered a Conversion Notice pursuant to Section 4 with respect to such Company Conversion Amount on such Installment Date but without the Holder being required to actually deliver such Conversion Notice; provided that the Conditions to Company Conversion are satisfied (or waived in writing by the Holder) on such Installment Date. If the Conditions to Company Conversion are not satisfied (or waived in writing by the Holder) on such Installment Date, then at the option of the Holder designated in writing to the Company, the Holder may require the Company to do any one or more of the following: (i) the Company shall redeem all or any part designated by the Holder of the unconverted Company Conversion Amount (such designated amount is referred to as the "First Redemption Amount") on such Installment Date and the Company shall pay to the Holder on such Installment Date, by wire transfer of immediately available funds, an amount in cash equal to such First Redemption Amount, or (ii) the Company Conversion shall be null and void with respect to all or any part designated by the Holder of the unconverted Company Conversion Amount and the Holder shall be entitled to all the rights of a holder of this Note with respect to such amount of the Company Conversion Amount. If the Company fails to redeem any First Redemption Amount on the applicable Installment Date by payment of such amount on the applicable Installment Date, then the Holder shall have the rights set forth in Section 24(b) as if the Company failed to pay the applicable Company Redemption Price and all other rights under this Note (including, without limitation, such failure constituting an Event of Default described in Section 15(d)). In the event the Holder delivers a Conversion Notice to the Company after the earlier of the date which is 10 days prior to the applicable Installment Date and the Holder's receipt of the Company Installment Notice in respect of such Installment Date in which the Company elects or is deemed to have elected a Company Redemption, the Principal amount specified in such Conversion Notice shall be deducted (1) first, from the Principal represented by the Company Redemption Amount and then (2) second, in accordance with Section 4(e)(h). (d) Conditions to Company Conversion. For purposes of this Section 24, "Conditions to Company Conversion" means (i) during the period beginning on the Original Issuance Date and ending on and including the applicable Installment Date, the Company shall have delivered shares of Common Stock upon any conversion of Conversion Amounts on a timely basis as set forth in Section 4(e)(ii) and analogous provisions under the other Debentures, and shall have delivered shares of Common Stock upon exercise of any Warrants on a timely basis as set forth in Section 2(a) of the Warrants; (ii) on each day during the period beginning on the Original Issuance Date and ending on and including the applicable Installment Date, the Common Stock shall be listed on the Principal Market and delisting or suspension of the Common Stock by such market or exchange shall not have been threatened either (A) in writing by such market or exchange or (B) by falling below the minimum listing maintenance requirements of such market or exchange for the Common Stock; (iii) during the period beginning on the Original Issuance Date and ending on and including the applicable Installment Date, there shall not have occurred either (x) the public announcement of a pending, proposed or intended Change of Control which has not been abandoned, terminated or consummated or (y) an Event of Default; (iv) during the period beginning on the date which is the Original Issuance Date and ending on and including the applicable Installment Date, there shall not have occurred an event that with the passage of time or giving of notice, and assuming it were not cured, would constitute an Event of Default; (v) on each day of the period beginning on the date of delivery of a Company Installment Notice with respect to an Installment Date and ending on the applicable Installment Date either (x) the Registration Statement or Registration Statements required pursuant to the Registration Rights Agreement shall be effective and available for the resale of all of the Registrable Securities in accordance with and to the extent required by the terms of the Registration Rights Agreement or (y) all shares of Common Stock issuable upon conversion of the Debentures and shares of Common Stock issuable upon exercise of the Warrants shall be eligible for sale without restriction (other than any restriction arising under applicable federal or state securities laws as a result of the holder of such securities being an Affiliate of the Company) and without the need for registration under any applicable federal or state securities laws; (vi) on each day of the period beginning on the applicable Installment Date and ending thirty Trading Days thereafter either (x) the Registration Statements required pursuant to the Registration Rights Agreement shall be expected to be effective and available for the resale of at least all of the Registrable Securities in accordance with and to the extent required by the terms of the Registration Rights Agreement or (y) all shares of Common Stock issuable upon conversion of the Debentures and shares of Common Stock issuable upon exercise of the Warrants shall be eligible for sale without restriction (other than any restriction arising under applicable federal or state securities laws as a result of the holder of such securities states as an Affiliate of the Company) and without the need for registration under any applicable federal or state securities laws; and (vii) the Company otherwise shall have been in material compliance with and shall not have breached, in any material respect, any provision, covenant, representation or warranty of the Securities Purchase Agreement, any of the Warrants, any of the Debentures or any of the other Transaction Documents. (e) Certain Definitions. For purposes of this Section 24, the following capitalized terms shall have the following meanings: (i) "Company Conversion Price" means, with respect to any Company Conversion, that price which shall be computed as 95% of the arithmetic average of the Weighted Average Price of the Common Stock on each trading day in the Installment Measuring Period. (ii) "Installment Amount" means, with respect to any Installment Date, the Outstanding Principal Amount of this Debenture as of the Installment Date divided by the number of full months between the Installment Date and June 30, 2007. In the event the Holder shall sell or otherwise transfer any portion of this Debenture, the transferee shall be allocated a pro rata portion of the Installment Amount. (iii)"Installment Date" means each monthly anniversary of the Original Issuance Date, commencing on July 1, 2006. (iv) "Installment Measuring Period" means, with respect to an Installment Date, the 10-day trading day period commencing on and including the eleventh trading day immediately preceding such Installment Date and ending on and including the trading day immediately preceding such Installment Date. 25. Rank; Covenants; Cash Collateral. (a) Definitions. For purposes of this Section 25, the following terms shall have the following meanings: (i) "Acquisition Buildings" shall mean the buildings being purchased by the Company in connection with the Interferon Acquisition and located at 783 Jersey Avenue, 5 Jules Lane, New Brunswick Middlesex Co., New Jersey. (ii) "Acquisition Indebtedness" shall mean any Indebtedness incurred, assumed or guaranteed by the Company or any of its Subsidiaries in respect of the purchase price for, or in connection with the purchase of, any assets, business or securities (an "Acquired Business") acquired by the Company or any of its Subsidiaries, other than Indebtedness incurred, assumed or guaranteed in connection with the Interferon Acquisition. (iii) "Acquisition Multiple" shall mean, subject in all respects to the final sentence of Section 25(b)(i) hereof, (i) in the event the Acquired Business is not a Qualified Competitor, three times the EBITDA of the Acquired Business or (ii) in the event the Acquired Business is a Qualified Competitor, four times the EBITDA of the Acquired Business; provided, however, that if prior to the closing of the acquisition of any Acquired Business under subsections (i) or (ii) of this definition, the Company has not been furnished with financial statements of such Acquired Business that have been audited by a nationally recognized auditing firm, the Acquisition Multiple shall be two and one half (2 1/2) times the EBITDA of the Acquired Business. (iv) "Biweekly Revenue Cash Collateral Date" shall mean the 15th and last calendar day of each month during the Initial Cash Collateral Period. If any Biweekly Revenue Cash Collateral Date is not a Business Day, then the Biweekly Revenue Cash Collateral Date shall be the Business Day immediately following such Biweekly Revenue Cash Collateral Date. (v) "Cash Collateral Date" shall mean each Biweekly Revenue Cash Collateral Date, Monthly Revenue Cash Collateral Date, the First Revenue Milestone Cash Collateral Date, the Second Revenue Milestone Cash Collateral Date, the Third Revenue Milestone Cash Collateral Date, the Qualified Inventory Financing Date and the Qualified Mortgage Financing Date. (vi) "Company Consolidated Revenues" shall mean the aggregate amount of all cash collected by the Company and its Subsidiaries, including, without limitation, cash proceeds from the sales of inventory, cash collections of accounts receivable, cash collections of licensing fees, cash proceeds from the issuance of all Indebtedness (excluding cash received for the purchase of the Debentures), but excluding cash received from (a) the issuance of any equity or equity linked securities of the Company, (b) the Qualified Mortgage Financing and (c) the Qualified Inventory Financing. (vii) "EBITDA" shall mean (1) the earnings before interest, income taxes, depreciation and amortization of the Acquired Business for the twelve (12) full months immediately preceding the closing date in respect of the purchase of the Acquired Business less (2) any capital expenditures of the Acquired Business during such period. (viii) "First Revenue Milestone Cash Collateral Date" shall mean March 31, 2004. (ix) "First Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the First Revenue Milestone Cash Collateral Date. (x) "First Revenue Milestone Target" shall mean $800,000.00. (xi) "Initial Cash Collateral Period" shall mean the period commencing on and including April 15, 2004 and ending on and including April 29, 2005. (xii) "Inventory" shall mean, with respect to any Person, all goods and merchandise of such Person, including, without limitation, all raw materials, work-in-process, packaging, supplies, materials and finished goods of every nature used or usable in connection with the shipping, storing, advertising or sale of such goods and merchandise, whether now owned or hereafter acquired, and all such other property the sale or other disposition of which would give rise to an account receivable, including, without limitation, all of the items listed on Exhibit B to this Debenture. (xiii) "Lien" shall mean any mortgage, deed of trust, pledge, lien (statutory or otherwise), security interest, charge or other encumbrance or security or preferential arrangement of any nature, including, without limitation, any conditional sale or title retention arrangement, any capitalized lease and any assignment, deposit arrangement or financing lease intended as, or having the effect of, security. (xiv) "Monthly Revenue Cash Collateral Date" shall mean the 30th calendar day of each month during the Secondary Cash Collateral Period (except for the month of January 2005, which shall be the 31st calendar day of such month and the month of February, which shall be the 28th calendar day of such month). If any Monthly Revenue Cash Collateral Date is not a Business Day, then the Monthly Revenue Cash Collateral Date shall be the Business Day immediately following such Monthly Revenue Cash Collateral Date. (xv) "Pari Passu Indebtedness" shall mean Indebtedness that is made expressly "pari passu" in right of payment with the Debentures in an aggregate of (i) up to an aggregate principal amount of $5,000,000 of Indebtedness, (ii) up to an additional aggregate principal amount of $5,000,000 of Indebtedness incurred at any time after the eighteen (18) month anniversary of the Original Issuance Date, provided that in order to incur any Pari Passu Indebtedness pursuant to this clause (ii) the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the twenty consecutive trading day period prior to the incurrence of any such Pari Passu Indebtedness under this clause (ii) must equal or exceed 150% of the Conversion Price then in effect, (iii) up to an additional aggregate principal amount of $4,000,000 of Indebtedness incurred any time after the Outstanding Principal Amount of all Debentures is less than $1,000,000; provided, that in order to incur any Pari Passu Indebtedness under this clause (iii) the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the twenty consecutive trading day period prior to the incurrence of any such Pari Passu Indebtedness under this clause (iii) must equal or exceed 150% of the Conversion Price then in effect (iv) Acquisition Indebtedness, and (v) any other indebtedness of the Company which the Company and the holders of more than 60% of the then Outstanding Principal Amount of the Debentures issued on the Original Issuance Date may hereafter from time to time expressly and specifically agree in writing shall constitute Pari Passu Indebtedness. (xvi) "Permitted Liens" shall mean: (A) Liens securing all obligations under the Debentures and the agreements and instruments entered into in connection therewith; (B) the Qualified Mortgage; (C) the Qualified Inventory Liens; (D) Liens on any Intellectual Property of the Company or any of its Subsidiaries; and (E) Liens securing all obligations under the Company's Series A and Serieis C 7% Senior Secured Convertible Debentures Due June 30, 2007 and the agreements and instruments entered into in connection therewith. (xvii) "Qualified Competitor" shall mean an Acquired Business that is competitive with and in the same business with a business of the Company or any of its Subsidiaries, where the Company's Board of Directors determines, in its reasonable judgment, that substantially all overhead expenses of the Acquired Business during the trailing twelve months immediately preceding the acquisition of such Acquired Business are duplicative with overhead expenses of the Company or any of such Subsidiaries and such duplicative expenses will be eliminated within six (6) months immediately following the purchase of the Acquired Business. (xviii) "Qualified Indebtedness" shall mean Pari Passu Indebtedness that is not evidenced by any certificate, instrument, note or other agreement that, directly or indirectly, permits or requires such Indebtedness to be convertible into or exercisable or exchangeable for Common Stock (other than Options that may be issued by the Company to the holder(s) of such Indebtedness, the value of which does not exceed 10% of the principal amount of Indebtedness so incurred, as determined using the Black-Scholes valuation methodology). (xix) "Qualified Inventory Financing" shall mean a single financing arrangement pursuant to which the Company and/or its Subsidiaries obtains financing solely through the granting of Liens on Inventory that yield total net unrestricted cash proceeds to the Company at the time of the creation of such Liens of not less than $2,000,000.00. (xx) "Qualified Inventory Financing Date" shall mean the date on which the Qualified Inventory Financing is consummated. (xxi) "Qualified Inventory Liens" shall mean Liens on Inventory that are created or imposed solely in connection with a Qualified Inventory Financing. (xxii) "Qualified Mortgage" shall mean a mortgage on the Acquisition Buildings that is created or imposed solely in connection with a Qualified Mortgage Financing. (xxiii) "Qualified Mortgage Financing" shall mean a single financing arrangement pursuant to which the Company either (i) obtains financing solely through the granting of Liens on the Acquisition Buildings or (ii) sells the Acquisition Building, in each case in a transaction that yields total net unrestricted cash proceeds to the Company at the time of the creation of such Liens or at the time of such sale, as applicable, of not less than $1,500,000.00. (xxiv) "Qualified Mortgage Financing Date" shall mean the date on which the Qualified Mortgage Financing is consummated. (xxv) "Secondary Cash Collateral Period" shall mean the period commencing on and including April 30, 2005 and ending on and including the Maturity Date. (xxvi) "Second Revenue Milestone Cash Collateral Date" shall mean June 30, 2004; provided that if such day is not a Business Day, then the Second Revenue Milestone Cash Collateral Date shall be the Business Day immediately following the Second Revenue Milestone Cash Collateral Date. (xxvii) "Second Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the Second Revenue Milestone Cash Collateral Date. (xxviii) "Second Revenue Milestone Target" shall mean $1,500,000.00. (xxix) "Third Revenue Milestone Cash Collateral Date" shall mean December 31 2004; provided that if such day is not a Business Day, then the Third Revenue Milestone Cash Collateral Date shall be the Business Day immediately following the Third Revenue Milestone Cash Collateral Date. (xxx) "Third Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the Third Revenue Milestone Cash Collateral Date. (xxxi) "Third Revenue Milestone Target" shall mean $3,000,000.00. (b) Incurrence of Indebtedness. (i) So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (A) the Indebtedness evidenced by the Debentures which shall rank ratably and equally with each other, (B) Pari Passu Indebtedness that is not secured by any assets of the Company or any of its Subsidiaries and that does not provide at any time for the payment of any principal thereon until at least 91 days after the Maturity Date of the Debentures (except for the payment of principal on Qualified Indebtedness to the extent permitted under Section 25(e)(ii)), (C) Indebtedness represented by trade payables incurred by the Company in the ordinary course of business, (D) Indebtedness incurred in connection with a Qualified Inventory Financing, provided that the proceeds of such Qualified Inventory Financing are applied to make cash collateral payments on the Debentures in the manner provided in Section 25(g)(i)(F) hereof, (E) Indebtedness incurred in connection with a Qualified Mortgage Financing, provided that the proceeds of such Qualified Mortgage Financing are applied to make cash collateral payments on the Debentures in the manner provided in Section 25(g)(i)(G) hereof, (F) Indebtedness that is not secured by any assets or property of the Company or any of its Subsidiaries, is made expressly subordinate in right of payment to the Debentures and that does not provide at any time for the payment of any principal thereon until at least 91 days after the Maturity Date of the Debentures ("Subordinated Indebtedness") pursuant to a subordination agreement containing the provisions attached hereto as Exhibit A executed and delivered by the Company and any holder of Subordinated Indebtedness to each holder of Debentures as a condition to the incurrence of such Indebtedness, (G) Indebtedness incurred, assumed or guaranteed in connection with the Interferon Acquisition, and (H) Indebtedness relating to the Company's Series A and/or C 7% Senior Secured Convertible Debentures Due June 30, 2007. Notwithstanding anything herein to the contrary, no Qualified Indebtedness may be incurred (but excluding Acquisition Indebtedness) unless as a condition to the incurrence of such Indebtedness, the Company shall have made cash collateral payments in an aggregate amount of Outstanding Principal Amount of all Debentures as of the date of the incurrence of such Indebtedness (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to fifty percent (50%) of the principal amount of the Indebtedness so incurred or an amount as otherwise required by this Section 25 (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). The Company shall file with the SEC on Form 8-K true and complete copies of the financial statements of an Acquired Business for which the purchase price is paid or payable in cash and/or cash equivalents and/or Indebtedness indicating thereon, among other things, the items comprising the EBITDA of the Acquired Business and contemporaneously therewith, but in no event prior to the filing of such Form 8-K, deliver a copy of such financial statements to each holder of Debentures; provided, however, that, notwithstanding anything herein to the contrary, if the Company does not file with the SEC financial statements of any Acquired Business for which the purchase price is paid or payable in cash and/or cash equivalents and/or Indebtedness in the time and manner provided herein, then the Acquisition Multiple with respect to such Acquired Business shall be deemed zero (0) and the Company shall not be entitled to acquire such Acquired Business unless as a condition thereto, the Company shall have contemporaneously with the closing of the acquisition of such Acquired Business made a cash collateral payment on the Outstanding Principal Amount of the Debentures then outstanding (pro rata among all holders of Debentures) in an amount equal to 100% of the aggregate cash, cash equivalents and Acquisition Indebtedness incurred in connection with the acquisition of such Acquired Business in accordance with Section 25(g)(ii) hereunder (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). (ii) Notwithstanding the foregoing, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), no Pari Passu Indebtedness or Subordinated Indebtedness may be incurred, directly or indirectly, by the Company or any of its Subsidiaries if during the period commencing on the tenth (10th) Business Day (or in the case of clause (ii) of the definition of Pari Passu Indebtedness, the twentieth (20th) Business Day) immediately preceding the incurrence of any such Pari Passu Indebtedness or Subordinated Indebtedness and ending on and including the date on which any such Pari Passu Indebtedness or Subordinated Indebtedness is incurred (A) an event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing, (B) any Registration Statement that is required to be effective pursuant to the Registration Rights Agreement is not effective and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement pursuant to the terms of the Registration Rights Agreement or (C) there has been any Grace Period (as such term is defined in the Registration Rights Agreement). (iii) If at any time when any of the Debentures are outstanding and cash collateral payments shall not have been made in an amount equal to the entire Outstanding Principal Amount of the Debentures, together with accrued interest thereon, in accordance with Section 25(g)(ii), the Company shall purchase any Acquired Business, whether in one or a series of transactions, for an amount of aggregate consideration (whenever paid in the form of cash, cash equivalents or Acquisition Indebtedness) that exceeds the Acquisition Multiple for such Acquired Business, (such excess amount, the "Excess Permitted Aggregate Consideration"), the Company shall, simultaneous with the closing of the purchase of the Acquired Business, make cash collateral payments in respect of an aggregate Outstanding Principal Amount of the Debentures (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to one hundred percent (100%) of the Excess Permitted Aggregate Consideration (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). (c) Restricted Payments. Notwithstanding anything herein to the contrary, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or marketable securities, including, without limitation, Common Stock (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness of the Company or any of its Subsidiaries, whether by way of payment in respect of principal of (or premium, if any) or interest on, such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness or otherwise; provided, however, that, so long as no event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing, on the date any of the following payments is due or is otherwise made and subject to the terms and conditions of any subordination agreement entered into in connection with the issuance of any Subordinated Indebtedness as provided herein, the Company may, without regard to the foregoing limitation: (i) pay in cash scheduled interest payments, in each case in the manner set forth in the original documentation governing such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness, at an annual rate not to exceed (A) 10% per annum, if such interest rate is fixed, or (B) the prime rate plus two percent (2%), if such interest rate is floating, of such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness, and (ii) make any principal payments when due on any Qualified Indebtedness at any time prior to the two-year anniversary of the Original Issuance Date; provided, however, that the Company may not make any such principal payments unless as a condition to each time any such Qualified Indebtedness is incurred, other than Acquisition Indebtedness, (including each time any Qualified Indebtedness is incurred under a revolving credit facility or otherwise), the Company shall have made cash collateral payments in an aggregate amount of Outstanding Principal Amount of all Debentures then outstanding at the time such Qualified Indebtedness was incurred (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to fifty percent (50%) of the principal amount of the Qualified Indebtedness so incurred, it being understood and agreed that, for the avoidance of doubt, if the Company has not satisfied its cash collateral payment obligations under Section 25(g)(ii) in connection with the incurrence of any such Qualified Indebtedness, the Company may not make any of the principal payments otherwise permitted under this subsection (ii). (d) Restrictions on Liens. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien upon or with respect to any of its assets or properties, whether now owned or hereafter acquired; file or suffer to exist under the Uniform Commercial Code or any similar law or statute of any jurisdiction, a financing statement (or the equivalent thereof) that names it or any of its Subsidiaries as debtor; sign or suffer to exist any security agreement authorizing any secured party thereunder to file such financing statement (or the equivalent thereof); sell any of its property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable) with recourse to it or any of its Subsidiaries or assign or otherwise transfer, or permit any of its Subsidiaries to assign or otherwise transfer, any account or other right to receive income; other than, as to all of the above, Permitted Liens; (e) Restricted Investments. (i) Except as provided in Section 4(v) of the Securities Purchase Agreement and except for cash held by the Company's Belgian Subsidiary in connection with the Belgian Contribution, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to, directly or indirectly, deposit or hold any cash, securities, certificates of deposit, investments or other funds or cash equivalent in any account for which the Agent has not executed an account control agreement and obtained a perfected first priority security interest thereover. (ii) So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, directly or indirectly, make or commit or agree to make any loan, advance, guarantee of obligations, other extension of credit or capital contributions to, or hold or invest in or commit or agree to hold or invest in, or purchase or otherwise acquire or commit or agree to purchase or otherwise acquire any shares of the capital stock, bonds, notes, debentures or other securities of, or make or commit or agree to make any other investment in, any other Person (including, without limitation, a Subsidiary), or purchase or own any futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or otherwise transfer any cash, property or other assets to any Subsidiary, or permit any of its Subsidiaries to do any of the foregoing, other than in connection with (i) the Interferon Acquisition, (ii) an acquisition of, or investment in, the assets or capital stock of any other Person by the Company or any of its Subsidiaries for consideration consisting solely of shares of Common Stock that are not subject to any repurchase, retirement or redemption obligation of the Company or any of its Subsidiaries (a "Stock Acquisition") and (iii) the contribution by the Company to its Belgian Subsidiary of not more than $25,000 in the aggregate for the payment of ordinary course business expenses (the "Belgian Contribution"). (f) Restrictions on Asset Sales and Purchases. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to convey, sell, lease or sublease, transfer or otherwise dispose of, whether in one transaction or a series of related transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired (or agree to do any of the foregoing), other than, so long as no event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing at the time of such sale, (i) sales of Intellectual Property, (ii) sales of Inventory in the ordinary course of business (iii) or as otherwise expressly permitted under this Debenture. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to purchase or otherwise acquire, whether in one transaction or a series of related transactions, all or substantially all of the assets of any Person (or any division thereof), other than in connection with (A) the Interferon Acquisition, (B) the incurrence of Acquisition Indebtedness to the extent permitted hereunder, (C) a Qualified Inventory Financing, (D) a Qualified Mortgage Financing or (E) a Stock Acquisition. (g) Cash Collateral. (i) Unless and until such time as the Company shall have made cash collateral payments in respect of the entire Outstanding Principal Amount of this Debenture, together with accrued and unpaid interest thereon, the Company shall make cash collateral payments in accordance with this Section 25(g) in respect of a portion of the Outstanding Principal Amount of this Debenture, together with accrued and unpaid interest thereon, in cash and/or Common Stock (as provided in Section 25(g)(ii) and (iii)) as follows: (A) on each Biweekly Revenue Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the product derived by multiplying (i) .5 by (ii) the Company Consolidated Revenues for the period commencing on the date of the immediately preceding Biweekly Revenue Cash Collateral Date (or the Original Issuance Date, in the case of the first Biweekly Revenue Cash Collateral Date) through the Business Day immediately preceding the applicable Biweekly Revenue Cash Collateral Date; (B) on each Monthly Revenue Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the greater of (i) the product derived by multiplying (a) .1 by (b) the portion of the Outstanding Principal Amount of all Debentures and accrued and unpaid interest thereon for which cash collateral payments have not been made under Section 25(g) as of March 31, 2004 and (ii) the product derived by multiplying (a) .5 by (b) the Company Consolidated Revenues for the period commencing on the date of the immediately preceding Monthly Revenue Cash Collateral Date (or April 1, 2004, in the case of the first Monthly Revenue Cash Collateral Date) through the Business Day immediately preceding the applicable Monthly Revenue Cash Collateral Date; (C) on the First Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the sum of (i) $400,000 and (ii) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the First Revenue Milestone Measuring Period exceeds the First Revenue Milestone Target; (D) on the Second Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the excess, if any, of (i) the sum of (a) $750,000 and (b) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the Second Revenue Milestone Measuring Period exceeds the Second Revenue Milestone Target, over (ii) the cumulative amount of cash collateral payments (including the dollar value attributed to any such payments made in the form of Repayment Shares in accordance with the provisions of Section 25(g)(iii)) that have been made by the Company prior to the Second Revenue Milestone Cash Collateral Date pursuant to Sections 25(g)(i)(A) and 25(g)(i)(C) hereof; (E) on the Third Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the excess, if any, of (i) the sum of (a) $1,500,000 and (b) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the Third Revenue Milestone Measuring Period exceeds the Third Revenue Milestone Target, over (ii) the cumulative amount of cash collateral payments (including the dollar value attributed to any such payments made in the form of Repayment Shares in accordance with the provisions of Section 25(g)(iii)) that have been made by the Company prior to the Third Revenue Milestone Cash Collateral Date pursuant to Sections 25(g)(i)(A), 25(g)(i)(C) and 25(g)(i)(D) hereof; (F) on the Qualified Inventory Financing Date, subject to Section 28(d), the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount an amount equal to $2,000,000.00; and (G) on the Qualified Mortgage Financing Date, subject to Section 28(c), the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to $1,500,000.00. (ii) On each Cash Collateral Date (and any date for which a cash collateral payment is required under this Section 25), the Company shall irrevocably deposit, or cause to be irrevocably deposited into the Cash Collateral Account, the portion of the total Outstanding Principal Amount of all Debentures and accrued and unpaid interest thereon for which cash collateral payments are required to be made in accordance with Section 25(g)(i) (or any other provision of Section 25 requiring cash collateral payments), subject to Section 25(g)(iii), in cash in U.S. Dollars to secure payment of the principal of, premium, if any, penalties, if any, and interest due on the outstanding Debentures, pursuant to the Account Control Agreement and such other written agreements and other arrangements satisfactory to the holders of 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date then outstanding, which shall, among other things, confirm that the funds deposited in the Cash Collateral Account and the proceeds of any letter of credit issued shall be subject to a perfected first priority security interest in favor of the Agent for the benefit of the holders of Debentures. (iii) Notwithstanding anything in Section 25(g)(ii) hereof, but subject to Sections 11 and 26 hereof, (A) on each Cash Collateral Date relating to a cash collateral payment under Section 25(g)(i)(A), the Company shall make a payment by way of delivery of 25,000 fully paid and nonassessable shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction and pro rata among all holders of Debentures) and (B) on each Cash Collateral Date relating to a cash collateral payment under Section 25(g)(i)(B), the Company shall make a payment by way of delivery of 50,000 fully paid and nonassessable shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction and pro rata among all holders of Debentures), in each case delivered to the holder in lieu of cash for such amount (it being understood and agreed that (x) the remaining balance of such payments, if any, shall be paid in cash in accordance with Section 25(g)(ii) above and (y) irrespective of whether the value of the shares of Common Stock payable under clauses (A) or (B) of this Section 25(g)(iii) exceeds the amount otherwise due under Section 25(g)(i)(A) or Section 25(g)(i)(B), as applicable, the Company shall issue the full amount of the 25,000 or 50,000 shares of Common Stock, as applicable, on the applicable Cash Collateral Date and the value of the additional shares of Common Stock, if any, delivered to the holder that exceed the amount required to be paid under the applicable subsection of this Section 25(g) shall be deemed to be a permitted prepayment of this Debenture as provided in the final sentence of this Section 25(g)(iii)) represented by duly executed stock certificates registered in the name of the holder or its designee (the "Repayment Shares") (or, in the case of a public resale of such Repayment Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The DTC Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system) with each Repayment Share being ascribed a valued for purposes of this Section 25(g)(iii) equal to the product derived by multiplying (A) .825 by (B) the arithmetic average of Weighted Average Prices of the Common Stock on the five consecutive Business Days ending on and including the Business Day immediately preceding the applicable Cash Collateral Date (the "Equity Collateral Conversion Rate") provided, however, that (x) in no event may the Company pay any portion of a cash collateral payment obligation in Repayment Shares if a Registration Statement is not then effective and available for the resale of all of the Repayment Shares on the applicable Cash Collateral Date or each date which is within 10 Business Days prior to such Cash Collateral Date, in which case the full amount of such payments shall instead be made in cash in accordance with Section 25(g)(ii) and (y) in the event the Company does not have a sufficient number of Repayment Shares reserved and available for issuance pursuant to this Section 25(g)(iii), the Company shall issue the maximum number of Repayment Shares that are available for issuance, pro rata among all holders of Debentures, and the balance of such payment shall instead be made in cash in accordance with Section 25(g)(ii) hereof. Cash collateral payments validly made in the form of Repayment Shares under this Section 25(g)(iii) shall be deemed prepayments of (i) first, accrued and unpaid interest on the Outstanding Principal Amount of this Debenture and (ii) second, Outstanding Principal Amount of this Debenture. (iv) The Company covenants and agrees that it shall make all calculations, including, without limitation, all calculations of Company Consolidated Revenues, necessary to determine the amounts to be paid from time to time under this Section 25(g) in strict accordance with the terms of this Agreement. The Company further covenants and agrees that it shall prepare and publish its quarterly and annual earnings releases and quarterly and annual reports filed with the SEC with sufficient detail so that the holder of this Debenture shall be able to determine and verify solely from the information contained therein the amount of Company Consolidated Revenues used to calculate amounts to be paid from time to time under this Section 25(g) and to reconcile the amount of Company Consolidated Revenues with the amounts actually paid under this Section 25(g). If any holder of Debentures disputes any calculations of Company Consolidated Revenues set forth in or omitted from any public release or SEC filing that covers any period relevant for the determinations required under this Section 25(g), such holder shall deliver written notice to the Company within ten Business Days of the publication of such release or SEC filing, describing in reasonable detail the basis for such dispute (and the Company shall promptly deliver such notice to all other holders). If the Company and the disputing holder(s) of Debentures are unable to resolve any such dispute within two Business Days of the Company's receipt of notice thereof, the Company shall within two (2) Business Days submit the disputed matters to the Company's independent, outside accountant. The Company shall cause the accountant to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such accountant's determination, as the case may be, shall be binding upon all parties absent manifest error. The Company shall bear all costs, fees and expenses of the accountant in rendering any such determinations. (v) On each Cash Collateral Date, the Company covenants and agrees to execute and deliver a completed Cash Collateral Accounting Certificate in the form attached hereto as Exhibit C (the "Cash Collateral Certificate") by facsimile and first class mail to the Person designated on the form of Cash Collateral Certificate (or such other Person or Persons as the holders of not less than 60% of the then Outstanding Principal Amount of Debentures may designate in writing to the Company), which shall be certified to each holder of Debentures as true and correct by the Chief Executive Officer or Chief Financial Officer of the Company. THE COMPANY ACKNOWLEDGES AND AGREES THAT IN NO EVENT SHALL IT OR ANY PERSON ON THE COMPANY'S BEHALF DELIVER ANY CASH COLLATERAL CERTIFICATE TO ANY HOLDER OF DEBENTURES WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF SUCH HOLDER. (vi) All payments by the Company pursuant to this Section 25(g), whether in the form of cash or Repayment Shares, shall be made pro rata among all Debentures. (vii) Notwithstanding anything herein to the contrary, the Company shall not be obligated to make any collateral payments, or deliver any Cash Collateral Certificates, pursuant to this Section 25(g) (whether in cash or in shares of Common Stock) on any Biweekly Revenue Cash Collateral Date, Monthly Revenue Cash Collateral Date, the First Revenue Milestone Cash Collateral Date, the Second Revenue Milestone Cash Collateral Date, or the Third Revenue Milestone Cash Collateral Date to the extent that the balance in the Cash Collateral Account (as defined in the Securities Purchase Agreement) is not less than $1,300,000. (viii) the Holder agrees that, in the event of any unauthorized distributions (as defined below) from the Cash Collateral Account, the principal amounts of the Debentures will be reduced by the amount of such unauthorized distributions; the allocation of such reduction to the PL Debentures to be made pro rata. An unauthorized distribution would be any distribution other than as permitted under the PL Debentures or the related agreements. (h) Conflicts. In the event there is any conflict among provisions of this Section 25 as to the amount of any cash collateral payment required to be paid by the Company into the Cash Collateral Account, the provision requiring the Company to pay the greater amount shall in all instances control. 26. Limitation on Number of Conversion Shares. The Company (1) shall not be obligated to issue Conversion Shares upon conversion of this Debenture, (2) shall not be permitted to issue Interest Shares (but instead shall make Cash Interest Payments), (3) shall not be permitted to issue Repayment Shares (but instead shall make cash collateral payments in cash), (4) shall not be permitted to make a Company Conversion, and (5) shall not be permitted to issue conversion shares, interest shares, repayment shares, or warrant shares in connection with the Previously-Issued Securities (as defined in the Securities Purchase Agreement), in each case to the extent that the issuance of such shares of Common Stock would cause the Company to exceed that number of shares of Common Stock which the Company may issue under this Debenture (the "Exchange Cap") without breaching the Company's obligations under the rules or regulations of the Principal Market, except that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the Principal Market (or any successor rule or regulation) for issuances of Common Stock in excess of such amount. Until such approval is obtained, the holder of this Debenture shall not be issued, upon conversion or redemption of, or as interest under, this Debenture, shares of Common Stock in an amount greater than the difference between (i) the product of (x) the Exchange Cap amount multiplied by (y) a fraction, the numerator of which is the aggregate principal amount of Debentures issued to such Holder pursuant to the Securities Purchase Agreement and the denominator of which is the aggregate principal amount of all the Debentures issued to all Debenture holders pursuant to the Securities Purchase Agreement and (ii) the sum of (A) the aggregate number of Interest Shares and Repayment Shares and shares issued in connection with a Company Conversion issued to the holder of this Debenture (and all predecessor holders) as of the date of such conversion plus (B) the aggregate number of shares of Common Stock issued to the holder of this Debenture (and all predecessor holders) upon the exercise of any Warrants held by such holder (and all predecessor holders) as of the date of such conversion plus (C) the aggregate number of shares of Common Stock issued to the holder of this Debenture (and all predecessor holders) pursuant to the Previously-Issued Securities (such difference, the "Cap Allocation Amount"). If at any time when the Holder shall deliver a Conversion Notice pursuant to Section 4 hereof the Company shall be prohibited pursuant to the provisions of this Section 26 from issuing all or any portion of the Conversion Shares issuable pursuant to such Conversion Notice, then the Company shall pay in immediately available funds to the holder of this Debenture within two (2) Business Days of the date of delivery of such Conversion Notice, an amount in cash equal to the product of (X) the number of shares of Common Stock which could not be issued by virtue of the limitations contained in this Section 26 multiplied by (Y) the average of the Weighted Average Price of the Common Stock on each of the five (5) trading days ending on the third trading day immediately preceding the date the date of delivery of such Conversion Notice. The Outstanding Principal Amount of this Debenture shall be reduced by an amount equal to the Outstanding Principal Amount of this Debenture designated in the Conversion Notice that could not be converted by virtue of the limitations set forth in this Section 26 and for which the Company has made payment pursuant to the immediately preceding sentence. 27. Taxes. (a) The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered holder thereof) and other similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of Debentures; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Stock or other securities or property in a name other than that of the registered holder of this Debenture to be converted and such holder shall pay such amount, if any, to cover any applicable transfer or similar tax. (b) The Company shall be permitted to withhold from any amounts payable to a Debenture holder or a holder of Common Stock any taxes required by law to be withheld from such amount. If the Company shall be required to withhold or deduct any tax, levy or other governmental charge, excluding (A) net income taxes, franchise taxes, or taxes imposed on or measured by net income (or overall gross receipts, to the extent such tax is imposed in lieu of a tax on net income by a jurisdiction that does not impose any tax based on or measured by net income) on any Debenture holder by the jurisdiction in which such Debenture holder is organized or any other jurisdiction in which such Debenture holder would be subject to tax without regard to the transactions contemplated hereby and (B) U.S. Federal withholding taxes (unless such U.S. Federal withholding taxes would not be imposed but for a change in or amendment to the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations or any other administrative authority thereunder or any tax treaty or the release or promulgation of any judicial decision relating thereto, in each case, on or after the date such Debenture holder acquires a Debenture (each, a "Change in Law")) (all such non-excluded taxes, levies or other governmental charges, "Taxes") from any payment of interest, or any accrual of original issue discount (if applicable), for U.S. Federal income tax purposes made hereunder or under any Debenture to or for the benefit of any Debenture holder, then (A) the amount payable shall be increased by the amount necessary so that after making all required deductions and withholdings (including deductions and withholdings with respect to additional amounts payable under this Section 27(b)) such Debenture holder shall receive an amount equal to the amount it would have received if no such deduction or withholding of Taxes had been required, (B) the Company shall make such deduction or withholding and (C) the Company shall pay the full amount deducted to the appropriate governmental authority in accordance with applicable law. If any Debenture holder is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Debenture Holder"), it shall deliver to the Company two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming complete exemption from U.S. Federal withholding tax under an income tax treaty), or any successor form; (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form; (C) in the case of a Non-U.S. Debenture Holder claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code, with respect to payments of "portfolio interest," U.S. Internal Revenue Service Form W-8BEN (certifying as to beneficial ownership), or any successor form, and a certificate in form and substance reasonably acceptable to the Company representing that such Non-U.S. Debenture Holder is not a "bank" for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Company and is not a "controlled foreign corporation" related to the Company (within the meaning of Section 864(d)(4) of the Code); or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Debenture Holder's entitlement to a complete exemption from U.S. Federal withholding tax, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Debenture Holder claiming complete exemption from U.S. Federal withholding tax on payments of interest (or of original issue discount, if applicable) for U.S. Federal income tax purposes by the Company under the Debentures. Each Debenture holder and each holder of common stock that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Equity Holder") also shall deliver to the Company, to the extent legally able to do so, with respect to payments of dividends for U.S. Federal income tax purposes by the Company, if applicable, two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming a reduction of U.S. Federal withholding tax under an applicable income tax treaty, if any), or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form, or (C) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Equity Holder's entitlement to an exemption from, or a reduction of, U.S. Federal withholding tax on payments of dividends for U.S. Federal income tax purposes by the Company, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Equity Holder. In addition, each Debenture holder and each holder of Common Stock that is not otherwise exempt from "back-up withholding" shall deliver to the Company two properly completed and duly executed copies of either (A) U.S. Internal Revenue Service Form W-8BEN, or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI, or any successor form, (C) U.S. Internal Revenue Service Form W-9, or any successor form, or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service, as applicable, in each case indicating that such Debenture holder or holder of Common Stock is not subject to "back-up withholding" for U.S. Federal income tax purposes. The forms and other documents required to be delivered pursuant to this Section 27(b) shall be delivered (A) on or prior to the Original Issuance Date and (B) from time to time thereafter if within ten (10) Business Days after receipt of a written request therefor by the Company. In addition, each Debenture holder and each holder of Common Stock shall promptly notify the Company at any time it determines that it is no longer in a position to provide any previously delivered (or requested) form, document or certificate to the Company, including as a result in whole or in part from a Change in Law; provided, however, that the failure to provide such notice shall not affect any Debenture holder's right to any additional amounts hereunder. (c) Notwithstanding anything to the contrary in Section 27(b) above, the Company shall not be required to pay any additional amount to any Debenture holder pursuant to the preceding paragraph to the extent the Tax in respect of which such additional amount would otherwise be payable would not have been imposed but for the failure of such Debenture holder to comply with its obligations under such paragraph; provided, however, that the failure to provide the applicable form, document or certificate pursuant to the preceding paragraph as provided in the notice required by the preceding paragraph resulting in whole or in part from a Change in Law shall not affect such Debenture holder's right to any additional amounts hereunder. 28. Security. (a) The Debentures shall be secured to the extent and in the manner provided in the Security Agreement. (b) The Company acknowledges and agrees that all amounts deposited in the Cash Collateral Account (a) shall constitute Collateral for all obligations of the Company under the Debentures (the "Obligations"). At any time during the continuance of an Event of Default, the Agent may require the Cash Collateral Account Bank to transfer all amounts held in the Cash Collateral Account to the Agent for application to the Obligations pursuant to the terms of the Debentures. (c) In the event that the Company desires to enter into the Qualified Mortgage Financing, the holder, by its acceptance of this Debenture, agrees to cause the Agent to enter into a written agreement, reasonably satisfactory to the Agent, providing that, upon the consummation of the Qualified Mortgage Financing and the Company making the deposit into the Cash Collateral Account of not less than $1,500,000 in cash in accordance with Sections 25(g)(i)(G) and 25(g)(ii), the Agent shall release its Lien on the Acquisition Buildings and shall execute and deliver to the Company or to the provider of such financing or the purchaser of the Acquisition Buildings such release or reconveyance instruments and such other documents as shall be reasonably necessary to release the Lien of the Agent on the Acquisition Buildings pursuant to the Mortgages, in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. (d) In the event that the Company desires to enter into the Qualified Inventory Financing, the holder, by its acceptance of this Debenture, agrees to cause the Agent to enter into a written agreement, reasonably satisfactory to the Agent, providing that, upon the consummation of the Qualified Inventory Financing and the deposit into the Cash Collateral Account of not less than $2,000,000 in cash in accordance with Sections 25(g)(i)(F) and 25(g)(ii), the Agent shall release its Lien on the Inventory and shall execute and deliver to the Company or to the provider of such financing such UCC3 Amendments (or authorizations to file the same) and such other documents as shall be reasonably necessary to release the Lien of the Agent on the Inventory pursuant to the Security Agreement, in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. (e) If at any time the Company shall have deposited into the Cash Collateral Account an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the holder, by its acceptance of this Debenture, agrees to release, or cause the Agent to release, its Lien on all Collateral, other than the Cash Collateral Account, and shall execute and deliver to the Company (or cause the Agent to execute and deliver to the Company) such release or reconveyance instruments and such other documents as shall be reasonably necessary to release the Liens on the Collateral (other than the Cash Collateral Account) in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: October 6, 2005 HEMISPHERX BIOPHARMA, INC. By: s/ ------------------------------- Name: Title: Print Address: Telephone: Facsimile: ATTEST - ------------------------------ Name: Title: EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 7% SENIOR SECURED CONVERTIBLE DEBENTURE DUE JUNE 30, 2007 The undersigned, as Holder of the 7% Senior Secured Convertible Debenture Due June 30, 2007 of HEMISPHERX BIOPHARMA, INC. (the "Company"), No. _, in the outstanding principal amount of $_______ (the "Debenture"), hereby elects to convert $_______ of the outstanding principal amount of the Debenture (as well as accrued and unpaid interest) into shares of Common Stock, par value $0.001 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: --------------------------------------------------- Principal Amount of Debentures to be converted: Accrued Interest to be converted: ------------------------------------------ Installment Date to which the amount to be converted relates: Tax ID Number (If applicable): ------------------------------------------- Please confirm the following information: Conversion Price:_______________________ Number of shares of Common Stock to be issued: Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES ____ No ____ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: ------------------------------ 2469: Address: _________________________________________ Telephone Number: ________________________________ Facsimile Number: ---------------------------------- Authorization: ------------------------------------ By: ------------------------------------------- Title: ---------------------------------------- Dated: Account Number (if electronic book entry transfer): Transaction Code Number (if electronic book entry transfer): [NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT] ACKNOWLEDGMENT The Company hereby acknowledges this Conversion Notice and hereby directs Continental Stock Transfer & Trust Company to issue the above indicated number of shares of Common Stock in accordance with the Irrevocable Transfer Agent Instructions dated January 26, 2004 (as amended on October 24, 2005) from the Company and acknowledged and agreed to by Continental Stock Transfer & Trust Company. HEMISPHERX BIOPHARMA, INC. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Account Control Agreement...................................................2 Acquiring Entity............................................................16 Act.........................................................................2 Agent.......................................................................3 Approved Stock Plan.........................................................3 ASE.........................................................................3 Bloomberg...................................................................3 Business Day................................................................3 Cap Allocation Amount.......................................................41 Cash Collateral Account.....................................................3 Cash Collateral Account Bank................................................3 Cash Collateral Certificate.................................................40 Cash Interest Payment.......................................................1 Cash Transaction..........................................................3,17 Change of Control...........................................................17 Change of Control Redemption Price..........................................16 Closing Sale Price.........................................................3,7 Collateral..................................................................4 Common Stock..............................................................4,46 Common Stock Deemed Outstanding.............................................4 Company...............................................................1,46, 55 Conversion Date.............................................................9 Conversion Failure..........................................................4 Conversion Notice...........................................................8 Conversion Price............................................................4 Conversion Rate.............................................................8 Convertible Securities......................................................4 Debenture.................................................................1,46 Debenture Delivery Date.....................................................9 Debenture Register..........................................................2 Debentures..................................................................1 Default Conversion Price....................................................4 Default Interest............................................................2 Dilutive Issuance...........................................................12 DTC.........................................................................9 Events of Default...........................................................19 Exchange Act................................................................25 Exchange Cap................................................................40 Fixed Conversion Price......................................................4 Holder......................................................................1 Indebtedness................................................................21 Intellectual Property.......................................................4 Interest Payment Date.......................................................1 Interest Payments...........................................................1 Interferon Acquisition......................................................4 Letters of Credit...........................................................5 Mandatory Conversion........................................................7 Mandatory Conversion Date...................................................8 Mandatory Conversion Measuring Period.......................................7 Mandatory Conversion Notice.................................................7 Maturity Date...............................................................1 Maturity Date Mandatory Redemption..........................................11 Maturity Date Redemption Price..............................................11 Mortgage....................................................................5 NASDAQ......................................................................5 New Securities Issuance Price...............................................2 Notice of Change of Control.................................................16 Notice of Redemption Upon Change of Control..............................16,17 NYSE........................................................................5 Options.....................................................................5 Organic Change..............................................................15 Original Issuance Date......................................................5 Outstanding Principal Amount................................................5 Person......................................................................5 Principal Market............................................................5 Quarterly Period............................................................5 Registration Rights Agreement...............................................5 Rule 144....................................................................25 SEC.........................................................................5 Securities Agreement........................................................6 Securities Purchase Agreement...............................................6 Share Delivery Date.........................................................8 Strategic Financing.........................................................6 Transaction Documents.......................................................6 Transfer Agent..............................................................8 Valuation Event.............................................................14 Warrants....................................................................6 Weighted Average Price.....................................................6,7 EXHIBIT A Subordination Provisions Section 1. Definitions. As used herein, the following terms shall have the following meanings: "Borrower" shall mean [Hemispherx][applicable Subsidiary of Hemispherx]. "Hemispherx" shall mean Hemispherx Biopharma, Inc., a corporation duly organized and existing under the laws of the State of Delaware. "Loan Documents" shall mean any agreement executed in connection with the issuance of the Senior Debt, in each case as amended, supplemented or otherwise modified from time to time. "Obligations" shall mean the obligations of the Borrower now or hereafter existing in favor of the holders of the Senior Debt, whether for principal, interest (including interest accruing subsequent to the filing of any petition initiating any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings relating to the Borrower), fees, expenses or otherwise. "Senior Debt" shall mean the Borrower's 7% Senior Secured Convertible Debentures due June 30, 2007. "Subordinated Creditor" shall mean . ---------------- "Subordinated Debt" shall mean all indebtedness of the Borrower now or hereafter existing in favor of the Subordinated Creditor, whether created directly or acquired by assignment or otherwise, all interest thereon and all fees, premiums and other amounts payable in respect thereof. "Subordinated Loan Documents" shall mean the instruments and agreements to which the Borrower is a party evidencing or relating to any Subordinated Debt. Section 2. Agreement to Subordinate. Each of the Subordinated Creditor, Hemispherx and the Borrower agrees that the Subordinated Debt is and shall be subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of the Obligations. Section 3. Restrictions on Payment of the Subordinated Debt. ------------------------------------------------- (a) The Subordinated Creditor may receive, and the Borrower may pay, interest on the Subordinated Debt evidenced by the Subordinated Loan Documents, in the stated amounts and on the stated dates of payment thereof as set forth in the Subordinated Loan Documents, provided, however, that no such payments shall be received or made at any time during which an Event of Default (as defined in the Senior Debt) shall have occurred and be continuing on any Senior Debt. (b) In the event of any dissolution, winding up, liquidation, arrangement or reorganization relating to Hemispherx or the Borrower, in any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of Hemispherx or the Borrower, any payment or distribution of any kind (whether in cash, securities or other property) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to the holders of the Senior Debt for application (in the case of cash) to, or as collateral (in the case of securities or other non-cash property) for, the payment or prepayment of the Obligations until the Obligations shall have been paid in full. (c) All payments or distributions upon or with respect to the Subordinated Debt which are received by the Subordinated Creditor contrary to these subordination provisions shall be received in trust for the benefit of the holders of the Senior Debt for the ratable benefit of such holders, shall be segregated from other funds and property held by the Subordinated Creditor and shall be forthwith paid over to the holders of the Senior Debt for the ratable benefit of such holders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of securities or other non-cash property) for the payment or prepayment of the Obligations until the Obligations shall have been paid in full. Section 4. Obligations Unconditional. ------------------------- (a) All rights and interests of the holders of the Senior Debt hereunder, and all agreements and obligations of the Subordinated Creditor, Hemispherx and the Borrower hereunder, shall remain in full force and effect irrespective of: (i) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto, (ii) any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any Loan Document, (iii) any exchange or release of, or non-perfection of any lien on or security interest in, any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Hemispherx or the Borrower in respect of the Obligations or the Subordinated Creditor, Hemispherx or the Borrower in respect of these subordination provisions. (b) These subordination provisions shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the holders of the Senior Debt upon the insolvency, bankruptcy or reorganization of Hemispherx or the Borrower or otherwise, all as though such payment had not been made. Section 5. Waivers. Each of the Subordinated Creditor, Hemispherx and the Borrower waives (i) promptness and diligence, (ii) notice of acceptance and notice of the incurrence of any Obligation by Hemispherx or the Borrower, (iii) notice of any actions taken by the holders of the Senior Debt, Hemispherx or the Borrower under any Loan Document or any other agreement or instrument relating thereto, (iv) all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of the Obligations or of the obligations of the Subordinated Creditor, Hemispherx and the Borrower under these subordination provisions, the omission of or delay in which, but for the provisions of this Section 5, might constitute grounds for relieving the Subordinated Creditor, Hemispherx or the Borrower of its obligations under these subordination provisions and (v) any requirement that the holders of the Senior Debt protect, secure, perfect or insure any security interest or other lien or any property subject thereto or exhaust any right to take any action against Hemispherx or the Borrower or any other person. Section 6. Subrogation. No payment or distribution to the holders of the Senior Debt pursuant to these subordination provisions shall entitle the Subordinated Creditor to exercise any rights of subrogation in respect thereof until the Obligations shall have been satisfied in full. Section 7. Miscellaneous. ------------- (a) Each of the Subordinated Creditor, Hemispherx and the Borrower will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and other documents, and take all further action that the holders of the Senior Debt may reasonably request in order to reflect the subordination provisions set forth herein. (b) These subordination provisions shall be governed by and construed in accordance with the law of the State of New York without regard to principles of conflicts of law or choice of law (other than section 5-1401 of the New York General Obligations Law). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with these subordination provisions shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to these subordination provisions. EXHIBIT B Inventory EXHIBIT C FORM OF CASH COLLATERAL CERTIFICATE IN NO EVENT SHALL THIS CERTIFICATE BE DELIVERED BY OR ON BEHALF OF THE COMPANY TO ANY HOLDER OF DEBENTURES WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF SUCH HOLDER. CERTIFICATE TO BE DELIVERED ONLY TO THE RECIPIENT DESIGNATED BELOW. To: Eleazer Klein, Esq. Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Telephone: (212) 756-2000 Facsimile: (212) 593-5955 The undersigned, the duly elected [Chief Executive Officer/Chief Financial Officer] of HEMISPHERX BIOPHARMA, INC. (the "Company"), hereby certifies to the holders of the 7% Senior Secured Convertible Debentures Due June 30, 2007 of the Company (the "Debentures") pursuant to Section 25(g)(v) of the Debentures, that the following information is true and correct in all respects (capitalized terms used in this certificate and not defined herein shall have the meanings ascribed to them in the Debentures): Cash Collateral Date: . ------------------------ Qualified Inventory Financing Date (if applicable): . ------------------ Qualified Mortgage Financing Date (if applicable): . ------------------ Amount of Cash Collateral Payment: $ . ------------------------------- Amount of Cash Collateral Payment Made in Cash: $ . ------------------ Aggregate Dollar Value of Cash Collateral Payments Made in Repayment Shares (if applicable): $ . ------------- Aggregate Number of Repayment Shares Issued (if applicable): . -------- Equity Collateral Conversion Rate (if applicable): . ------------------ Company Consolidated Revenues for the relevant period (if applicable): $ . - ------------------- Aggregate Amount of Cash Collateral Payments Made Prior to this Cash Collateral Date:$ . -------------- IN WITNESS WHEREOF, the undersigned has executed this certificate as of this day of , 200 . ---------- ------------ - ------------------------------ EX-99.13 OTH CONTRCT 5 rexh_104.txt Exhibit 10.4 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES. No. $ ------- ---------- HEMISPHERX BIOPHARMA, INC. SERIES C 7% SENIOR SECURED CONVERTIBLE DEBENTURE DUE JUNE 30, 2007 THIS DEBENTURE (this "Debenture") is one of a duly authorized issue of replacement Debentures of HEMISPHERX BIOPHARMA, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), now designated as its 7% Senior Secured Convertible Debentures Due June 30, 2007. The Debenture is one of a series of debentures that amend and replace a series of 6% Senior Convertible Debentures due January 31, 2006, originally in an aggregate principal amount of up to Two Million U.S. Dollars (U.S. $2,000,000) (the "Debentures"). The Debenture and the Series A and Series B 7% Senior Secured Convertible Debentures Due June 30, 2007 are pari passu and the designation of series is for identification purposes only. FOR VALUE RECEIVED, the Company promises to pay to , the holder hereof, or its registered assigns (the "Holder"),the principal sum of Dollars($____) when due, whether on June 30, 2007 (subject to extension as provided herein, the "Maturity Date") or on any Installment Date with respect to the Installment Amount due on such Installment Date (each, as defined herein), and to pay interest ("Interest Payments") on the Outstanding Principal Amount at the rate of 7% per annum which shall be cumulative, accrue, but not compound, daily from the date of issuance of this Debenture and be due and payable in arrears on the first day of each Quarterly Period commencing with the Quarterly Period immediately following the date of issuance of this Debenture (each, an "Interest Payment Date"). If the Maturity Date is not a Business Day, then the Maturity Date shall be deemed to be the Business Day immediately following such date. If an Interest Payment Date is not a Business Day, then the Interest Payment shall be due and payable on the Business Day immediately following such Interest Payment Date. Subject to the limitations in Sections 11 and 26, interest shall be payable by the issuance of shares of Common Stock ("Interest Shares") to the Holder or, at the option of the Company, in cash (the "Cash Interest Payment"); provided, however, that the Company may not make Cash Interest Payments and interest payments shall be payable in Interest Shares unless the Company provides written notice to each holder of Debentures at least five Business Days prior to the applicable Interest Payment Date that such Interest Payments shall be made in cash. Interest Shares shall be paid in a number of fully paid and nonassessable shares (rounded up or down to the nearest whole share) of Common Stock equal to the quotient of (1) the amount of the Interest Payment due on the applicable Interest Payment Date divided by (2) ninety-five percent (95%) of the arithmetic average of the Closing Sale Price of the Common Stock on the five consecutive Business Days ending on and including the third Business Day immediately preceding the applicable Interest Payment Date (the "Interest Share Conversion Rate"); provided, further; that in no event may the Company issue more than an aggregate of 40,000 shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction), pro rata among all holders of Debentures, in respect of any single Interest Payment (it being understood that the balance of each such Interest Payment shall be paid in the form of a Cash Interest Payment). Notwithstanding the foregoing, the Company shall be required to make a Cash Interest Payment on any Interest Payment Date if (a) any event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing on the Interest Payment Date or any date which is within 10 Business Days prior to the Interest Payment Date, unless otherwise consented to in writing by the holder of the Debenture entitled to receive such Interest Payment or (b) from and after the time that any Registration Statement (as defined in the Registration Rights Agreement, the "Registration Statement") is required to be effective, such Registration Statement is not then effective and available for the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) on the Interest Payment Date or each date which is within 10 Business Days prior to the Interest Payment Date. Any accrued and unpaid interest which is not paid within five (5) Business Days of the Interest Payment Date on which such payment of interest was due shall bear interest at the rate of 14.0% per annum from such Interest Payment Date until the same is paid in full (or, if less, the maximum interest rate then permitted by applicable law) (the "Default Interest"). Interest Payments and payments of principal will be paid only to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"). This Debenture is subject to the following additional provisions: 1. Exchange. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different denominations, as requested by the Holder surrendering the same. No service charge will be charged to the Holder for such registration transfer or exchange. 2. Transfers. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the United States only in compliance with the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws. Prior to due presentment for transfer of this Debenture, the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not this Debenture is overdue, and the Company shall not be affected by notice to the contrary. 3. Definitions. For purposes of this Debenture, the location of defined terms in this Debenture is set forth on the Index of Terms attached hereto and the following terms shall have the following meanings: "Account Control Agreement" shall have the meaning ascribed thereto in the Securities Purchase Agreement. "Agent" shall mean Portside Growth & Opportunity Fund, in its capacity as collateral agent for the holders of Debentures, and any successor in such capacity. "Approved Stock Plan shall mean any employee benefit plan, stock incentive plan or other similar plan or arrangement which has been approved by the Board of Directors of the Company or any authorized committee thereof, pursuant to which the Company's securities may be issued to any employee, officer, consultant or director for services provided to the Company. "ASE" shall mean The American Stock Exchange. --- "Bloomberg" shall mean Bloomberg Financial Markets or any other similar financial reporting service as may be selected from time to time by the Company and the holders of not less than 60% of the then Outstanding Principal Amount of Debentures issued on the Original Issuance Date. "Business Day" shall mean any day other than Saturday, Sunday or any other day on which commercial banks in The City of New York are authorized or required by law to remain closed. "Cash Collateral Account" shall mean the account maintained by the Company at the Cash Collateral Account Bank, in the name of Portside Growth & Opportunity Fund ("Portside") and subject to the control of Portside pursuant to the Account Control Agreement, together with any successor account designated by Portside. The Cash Collateral Account referred to herein is the same account being used for all debentures of the Company, including replacement debentures, originally issued to Portside and Leonardo L.P. (collectively "PL Debentures"). "Cash Collateral Account Bank" shall mean the financial institution designated as the Cash Collateral Account Bank under the Account Control Agreement. "Cash Transaction" shall mean any Organic Change with a third party on an arm's length basis pursuant to which the holders of the Common Stock are to receive consideration consisting solely of cash. "Closing Sale Price" shall mean, for any security as of any date, the last closing trade price for such security on the Principal Market as reported by Bloomberg, or if the Principal Market begins to operate on an extended hours basis, and does not designate the closing trade price, then the last trade price at 4:00 p.m., New York City Time, as reported by Bloomberg, or if the foregoing do not apply, the last closing trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the last closing ask price of such security as reported by Bloomberg, or, if no last closing ask price is reported for such security by Bloomberg, the average of the highest bid price and the lowest ask price of any market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Closing Sale Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(e)(iii) below. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. "Collateral" shall mean all of the property and assets, other than Intellectual Property, and all interests therein and proceeds thereof now owned or hereafter acquired by the Company, any of its Subsidiaries and any other Person upon which a Lien is granted or purported to be granted by such Person as security for all or any part of the obligations of the Company under the Debentures. "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company. "Common Stock Deemed Outstanding" shall mean, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 6(a)(i) and 6(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any shares of Common Stock owned or held by or for the account of the Company or issuable upon conversion of the Debentures or exercise of the Warrants. "Conversion Failure" shall mean that for any reason the Holder has not received all of the shares of Common Stock to which the Holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture. "Conversion Price" shall mean (A) as of any Conversion Date or other date of determination (other than with respect to an Installment Amount on an Installment Date pursuant to a Company Conversion (as defined in Section 24 (a)), the Fixed Conversion Price, and (B) with respect to any Installment Amount on an Installment Date pursuant to a Company Conversion, at the option of the Holder, either the Fixed Conversion Price or the Company Conversion Price (as defined in Section 24(d)), each in effect as of such date and subject to adjustment as provided herein. "Convertible Securities" shall mean any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. "Default Conversion Price" shall mean the lower of (a) the Conversion Price then in effect and (b) 95% of the lowest Closing Sale Price during the three (3) trading days ending on and including the Conversion Date or other date of determination. "Fixed Conversion Price" shall mean as of any Conversion Date or other date of determination $2.08, subject to adjustment as provided in Section 6, Anti-dilution Adjustments to Conversion Price. "Intellectual Property" means all trademarks, trade names, trade dress, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, technology licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights. "Interferon Acquisition" shall mean the acquisition of certain assets and technology of Interferon Sciences, Inc. ("Interferon") pursuant to asset purchase agreements, dated as of March 11, 2003, between the Company and Interferon, a true and complete copy of which has been delivered by the Company to each initial holder of Debentures in accordance with the Securities Purchase Agreement. "Letters of Credit" shall mean the irrevocable standby letters of credit in the aggregate stated amount of $1,000,000 issued by banks acceptable to the Agent and naming the Agent as beneficiary, and any letters of credit issued in substitution or replacement thereof, in accordance with the Securities Purchase Agreement. "Mortgage" shall mean each mortgage, deed of trust or deed to secure debt, made by the Company in favor of the Agent and recorded against each real property location acquired by the Company from Interferon pursuant to the Interferon Acquisition. "NASDAQ" shall mean The Nasdaq National Market, The Nasdaq Small Cap Market or the ASE. "NYSE" shall mean The New York Stock Exchange, Inc. ---- "Options" shall mean any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Original Issuance Date" shall mean July 13, 2004, the first date on which any Debentures have been issued pursuant to the Securities Purchase Agreement. "Outstanding Principal Amount" shall mean the principal sum outstanding from time to time under this Debenture. "Person" shall mean an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Principal Market" shall mean the ASE, or if the Common Stock is not traded on the ASE, then the principal securities exchange or trading market for the Common Stock. "Quarterly Period" shall mean each of the following periods: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30, the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31. "Registration Rights Agreement" shall mean that certain registration rights agreement between the Company and the initial holders of the Debentures relating to the filing of a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants, as such agreement may be amended from time to time as provided in such agreement. "SEC" shall mean the United States Securities and Exchange Commission. "Securities Purchase Agreement" shall mean that certain securities purchase agreement between the Company and the initial holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Security Agreement" shall mean that certain third amended and restated security agreement made by the Company in favor of the Agent for the benefit of all holders of the Debentures, as such agreement may be amended from time to time as provided in such agreement. "Strategic Financing" shall mean the issuance of Common Stock or Options in connection with any acquisition by the Company, by whatever means, of any business, assets or technologies, or to any strategic investor, vendor, customer, lease or similar arrangement, the primary purpose of which is not to raise equity capital; provided that the aggregate number of shares of Common Stock which the Company may issue pursuant to this definition shall not exceed (i) 25% of the total outstanding equity on the Original Issuance Date in connection with any one or more related issuances to strategic investors, vendors, customers, lessors or similar parties or (ii) 40% of the total outstanding equity on the Original Issuance Date in connection with all issuances to strategic investors, vendors, customers, lessors or similar parties (in each case, subject to adjustment for stock splits, stock dividends, stock combinations and similar transactions). "Subsidiary" shall mean, as to any Person, any entity in which such Person, directly or indirectly, owns 30% or more of the capital stock or other equity or similar interests or owns capital stock or holds an equity or similar interest which ownership entitles such Person to elect 30% or more of the board of directors or similar governing body of such entity. "Transaction Documents" shall have the meaning ascribed thereto in the Securities Purchase Agreement. "Warrants" shall mean the warrants to purchase shares of Common Stock issued by the Company pursuant to the Securities Purchase Agreement. "Weighted Average Price" shall mean, for any security as of any date, the dollar volume-weighted average price per share for such security on the Principal Market during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg through its "Volume at Price" function or, if the foregoing does not apply, the dollar volume-weighted average price per share of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of no less than 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If the Company and the holders of the Debentures are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(e)(iii) with the term "Weighted Average Price" being substituted for the term "Closing Sale Price." All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. 4.Conversion. The Holder of this Debenture shall have the following conversion rights: a) Holder's Right to Convert. Subject to Sections 11 and 26, at any time or times until 5:00 p.m., New York City Time, on the Business Day prior to the Maturity Date this Debenture is convertible, at the option of the Holder hereof, into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) at the Conversion Rate (as defined below). The Holder hereof may convert a portion of the Outstanding Principal Amount of this Debenture if such portion is an integral multiple of $1,000. If this Debenture remains outstanding on the Maturity Date, then this Debenture shall be redeemed by the Company in accordance with Section 5(a). Notwithstanding anything herein to the contrary, concurrent with each delivery of Conversion Shares to a holder pursuant to this Debenture, the Company shall pay (in Interest Shares, only if all terms, conditions and requirements set forth in this Debenture concerning payment of interest in the form of Interest Shares are satisfied, or cash as determined by the Company) to such holder all accrued and unpaid interest on the Outstanding Principal Amount then being converted from the last date on which interest had been paid on such Outstanding Principal Amount through the Conversion Date. b) Company's Right to Mandatory Conversion. Subject to Sections 11 and 26 hereof, if at any time from and after the Original Issuance Date the Weighted Average Price of the Common Stock shall exceed 175% of the Conversion Price for any 25 consecutive trading days (the "Mandatory Conversion Measuring Period"), the Company may deliver on or before the second (2nd) Business Day following the end of the Mandatory Conversion Measuring Period a written notice to all, but not less than all, of the Holders and the Transfer Agent (as defined in Section 4(e)(i)) (the "Mandatory Conversion Notice"), indicating that the Company is requiring each Holder to convert the then Outstanding Principal Amount of such Holder's Debenture plus accrued and unpaid interest thereon to the date fixed for conversion into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 4(d) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below); provided, however, that the Company may not require such conversion if (i) an Event of Default shall have occurred at any time on or prior to the Mandatory Conversion Date and shall have not been cured to the reasonable satisfaction of the holder of this Debenture, (ii) an event shall have occurred and be continuing at any time on or prior to the Mandatory Conversion Date which with the passage of time and the failure to cure would result in an Event of Default, (iii) either (A) any Registration Statement is not effective and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement or (B) there has been any Grace Period, in either case on any trading day during the period beginning on the first day of the Mandatory Conversion Measuring Period and ending on the Mandatory Conversion Date or (iv) there has been a public announcement of a pending, proposed or intended Change of Control, unless such pending, proposed or intended Change of Control has been terminated, abandoned or consummated and the Company has publicly announced such termination, abandonment or consummation of such Change of Control (a "Mandatory Conversion"). The Company shall send the Mandatory Conversion Notice by facsimile and overnight courier to each Holder and shall indicate (X) the date fixed for conversion, which shall be not less than fifteen (15) days nor more than thirty (30) days after each Holder's receipt of the Mandatory Conversion Notice (the "Mandatory Conversion Date"), (Y) the Conversion Price and (Z) the number of shares of Common Stock to be issued to such Holder as of the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the mechanics of conversion set forth in Section 4(e) shall apply, to the extent applicable, as if the Company and the Transfer Agent had received from each Holder on the Mandatory Conversion Date a Conversion Notice (as defined below) with respect to the entire Outstanding Principal Amount of the Debenture and the interest accrued and unpaid thereon as of the Mandatory Conversion Date. Promptly following the Mandatory Conversion Date, the Holder shall surrender its Debenture to the Company or the Transfer Agent. c) Partial Conversion of Debenture. If this Debenture is converted in part, the remaining portion of this Debenture not so converted shall remain entitled to the conversion rights provided herein. d) Conversion Price for Holder Converted Shares. The Outstanding Principal Amount of this Debenture that is converted into shares of Common Stock shall be convertible into the number of shares of Common Stock which results from application of the following formula: P ---------------- Conversion Price P = Outstanding Principal Amount of this Debenture submitted for conversion The number of shares of Common Stock into which this Debenture hereto may be converted pursuant to the foregoing formula is hereafter referred to as the "Conversion Rate." e) Mechanics of Conversion. The conversion of this Debenture shall be conducted in the following manner: i. Holder's Delivery Requirements. To convert this Debenture (in whole or in part) into full shares of Common Stock on any date, the Holder shall (A) transmit by facsimile (or otherwise physically deliver), for receipt on or prior to 5:00 p.m., New York City Time, on such date, a copy of a properly completed notice of conversion executed by the Holder in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and the Company's designated transfer agent (the "Transfer Agent") and (B) surrender this Debenture to a common carrier for delivery to the Company as soon as practicable following such date. ii. Company's Response. Upon receipt by the Company of a copy of a Conversion Notice, the Company shall (A) as soon as practicable, but in any event within two (2) Business Days, send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder and the Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein and (B) then, on or before the second (2nd) Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date"), (x) issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled, or (y) in the case of a public resale of such Conversion Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system. If the specified principal amount submitted for conversion is less than the then Outstanding Principal Amount of this Debenture, then the Company shall, as soon as practicable using reasonable best efforts, and in no event later than five Business Days after receipt of the Debenture (the "Debenture Delivery Date") and at its own expense, issue and deliver to the holder a new Debenture representing the Outstanding Principal Amount not converted. The effective date of conversion (the "Conversion Date") shall be deemed to be the date on which the Company receives by facsimile the Conversion Notice, and the Person or Persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. iii. Dispute Resolution. In the case of a dispute as to the determination of the Closing Sale Price, the Weighted Average Price, the Conversion Price or the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed determinations or arithmetic calculations to the Holder via facsimile within two (2) Business Days of receipt of the Holder's Conversion Notice or other date of determination. If the Holder and the Company are unable to agree upon the determination of the Closing Sale Price, the Weighted Average Price, the Conversion Price or arithmetic calculation of the Conversion Rate within two (2) Business Days of such disputed determination or arithmetic calculation being transmitted to the Holder, then the Company shall within two (2) Business Days submit via facsimile (A) the disputed determination of the Closing Sale Price, the Weighted Average Price or the Conversion Price, as applicable, to an independent, reputable investment bank selected by the Company and approved by the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding or (B) the disputed determination of the Conversion Price, the Weighted Average Price or the Conversion Price, as applicable, or the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent manifest error. iv. Company's Failure to Timely Convert. A) If (x) within five (5) Business Days after the Company's receipt of the facsimile copy of a Conversion Notice the Company has failed to issue and deliver a certificate to a Holder or credit the Holder's designee's balance account with DTC, in accordance with Section 4(e) hereof for the number of shares of Common Stock to which the Holder is entitled upon the Holder's conversion of this Debenture or (y) within five (5) Business Days of the Company's receipt of this Debenture the Company has failed to issue and deliver a Debenture representing the principal amount of this Debenture not so converted, then in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof), the Company shall pay additional damages to such holder for each day after the Share Delivery Date that such conversion is not timely effected and/or each day after the Debenture Delivery Date that this Debenture is not delivered in an amount equal to 0.05% of the product of (I) the sum of the number of shares of Common Stock not issued to the holder on or prior to the Share Delivery Date and to which such holder is entitled as set forth in the applicable Conversion Notice and, in the event the Company has failed to deliver a Debenture to the holder on or prior to the Debenture Delivery Date, the number of shares of Common Stock issuable upon conversion of this Debenture as of the Debenture Delivery Date and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date, in the case of the failure to deliver Common Stock, or the Debenture Delivery Date, in the case of failure to deliver a Debenture. The foregoing notwithstanding, the damages set forth in this Section 4(e)(iv) shall be stayed with respect to the number of shares of Common Stock for which there is a good faith dispute being resolved pursuant to Section 4(e)(iii), pending the resolution of such dispute. (B) If for any reason a holder has not received all of the shares of Common Stock to which such holder is entitled prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Debenture, then the Holder, upon written notice to the Company, with a copy to the Transfer Agent, may void its Conversion Notice; provided that the voiding of the Holder's Conversion Notice shall not affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 4(e)(iv)(A) or otherwise. f) No Fractional Shares. The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. g) Release of Funds from Segregated Account. Notwithstanding anything herein to the contrary, if at any time and from time to time, the balance of the funds remaining in the Segregated Account (as defined in the Securities Purchase Agreement), if any, that were paid into the Segregated Account by the initial holder of this Debenture, as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement, exceeds the then Outstanding Principal Amount of this Debenture, together with accrued interest thereon and so long as no Event of Default, or event that with notice or lapse of time would constitute an Event of Default, has occurred and is continuing, the holder agrees, by its acceptance of this Debenture, to distribute promptly to the Company an amount in cash equal to such excess from the Segregated Account established by the initial holder of this Debenture, or, if advised in writing by the Company, to use such excess to remit payment for any obligation under this Debenture to the holder of this Debenture. If for any reason any portion of the funds held in the Segregated Account established by the initial holder of this Debenture are not paid to the Company in accordance with the terms of the Securities Purchase Agreement and the Outstanding Principal Amount on this Debenture, together with accrued and unpaid interest thereon, becomes due and payable either at maturity or upon acceleration or demand upon an Event of Default, the Company and the holder, by its acceptance of this Debenture, agree that the funds held in the Segregated Account shall be released to the holder of this Debenture and shall be deemed to constitute a partial payment of the Outstanding Principal Amount of this Debenture together with accrued interest thereon then due in an amount equal to the funds in the Segregated Account. All such payments from the Segregated Account shall be deemed to be payments of (i) first, accrued and unpaid interest on the Outstanding Principal Amount of this Debenture and (ii) second, Outstanding Principal Amount of this Debenture. h) Application of Conversion Amounts. Subject to the final sentence of Section 24(b), any portion of this Debenture that the Holder elects to convert in accordance with this Section 4 shall be deducted, at the option of the Holder (as set forth in the applicable Conversion Notice), either (x) from the Installment Amount relating to the latest Installment Date (i.e., the Installment Date nearest to the Maturity Date) with respect to which Installment Amounts remain outstanding or (y) from the Installment Amount relating to the nearest Installment Date (i.e., nearest to the Installment Date that has not yet occurred). 5. Redemption. a) Mandatory Redemption at Maturity. If this Debenture remains outstanding on the Maturity Date, the Company shall redeem (a "Maturity Date Mandatory Redemption") the Outstanding Principal Amount of this Debenture that is not subject to a Conversion Notice for an amount in cash (the "Maturity Date Redemption Price") equal to the Outstanding Principal Amount of the Debenture not converted into shares of Common Stock pursuant to a Conversion Notice, plus accrued and unpaid interest thereon. The Maturity Date Redemption Price shall be paid on the Maturity Date to the Holder by wire transfer of immediately available funds to an account designated in writing by such Holder. Promptly following payment of the Maturity Date Redemption Price, the Holder shall surrender this Debenture to the Company. b) Payment Failures If the Company fails to make any payment of a Maturity Date Redemption Price, then in addition to any remedy the Holder may have under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, until the Maturity Date Redemption Price is paid in full, (x) the Maturity Date Redemption Price payable in respect of such unpaid Maturity Date Redemption Price shall bear interest at the rate of 1.5% per month, prorated for partial months, and (y) the Holder shall have the option to require the Company to convert any or all of the Outstanding Principal Amount of this Debenture subject to redemption and for which the Maturity Date Redemption Price (together with any interest thereon) has not been paid into a number of shares of Common Stock equal to the quotient of the Maturity Date Redemption Price (together with any interest thereon) divided by the Default Conversion Price. 6. Anti-dilution Adjustments to Conversion Price. The Conversion Price will be subject to adjustment from time to time as provided in this Section 6 at all times prior to, but not after, the date on which cash collateral payments have been made pursuant to Section 25 in an amount equal to the entire Outstanding Principal Amount, together with accrued and unpaid interest on all Debentures outstanding: a) Anti-dilution Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after January 26, 2004 and prior to the twelve (12) month anniversary of Original Issuance Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock: (v) deemed to have been issued by the Company in connection with an Approved Stock Plan; (w) deemed to have been issued upon issuance of the Debentures and the debentures issued on January 26, 2004, pursuant to the Securities Purchase Agreement or the Warrants, or issued upon conversion of the Debentures and the debentures issued on January 26, 2004, pursuant to the Securities Purchase Agreement or exercise of the Warrants; (x) issued upon exercise of Options or Convertible Securities which are outstanding on the date immediately preceding January 26, 2004, provided that (except with regard to the Previously-Issued Securities (as defined in the Securities Purchase Agreement)) such issuance of shares of Common Stock upon exercise of such Options or Convertible Securities is made pursuant to the terms of such Options or Convertible Securities in effect on the date immediately preceding January 26, 2004, such Options or Convertible Securities are not amended after the date immediately preceding January 26, 2004, other than with respect to Options originally issued pursuant to an Approved Stock Plan and the purchase or exercise price provided for in any such Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any such Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock does not change at any time after January 26, 2004; (y) issued to the public pursuant to an underwritten offering registered pursuant to the Securities Act (but in all events excluding offerings pursuant to "equity lines" or similar products); and (z) issued pursuant to a Strategic Financing ((v) through (z) collectively "Excluded Issuances")) for a consideration per share (the "New Securities Issuance Price") less than the Conversion Price in effect immediately prior to such time (each such sale or issuance, a "Dilutive Issuance"), then concurrent with such Dilutive Issuance, the Conversion Price then in effect (or the initial Conversion Price in case such Dilutive Issuance occurs prior to the issuance of this Debenture) shall be reduced to an amount equal to the New Securities Issuance Price. If and whenever on or after the twelve (12) month anniversary of the Original Issuance Date and prior to the Maturity Date, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (but excluding shares of Common Stock issued or deemed to have been issued pursuant to any Excluded Issuance) in a Dilutive Issuance, then concurrent with such Dilutive Issuance, the Conversion Price then in effect (or the initial Conversion Price in case such Dilutive Issuance occurs prior to the issuance of this Debenture) shall be reduced to a price (rounded to the nearest cent) equal to the product of (A) the Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price in effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the Conversion Price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For purposes of determining the adjusted Conversion Price under this Section 6(a), the following shall be applicable: i. Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 6(a)(i), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities. ii. Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 6(a)(ii), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale. iii. Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 6(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of the Debentures are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect. iv. Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then solely for purposes of this Section 6, the Options will be deemed to have been issued for a consideration of $0.01. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the Closing Sale Prices of such securities during the ten (10) consecutive trading days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company. v. Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision (or the initial Conversion Price in case such Dilutive Issuance occurs prior to the issuance of this Debenture) will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares and the Conversion Price in effect immediately prior to such combination will be proportionately increased. (c) Holder's Right of Alternative Conversion Price Following Issuance of Convertible Securities. If the Company issues or sells any Options or Convertible Securities after the Original Issuance Date that are convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to a fixed price (each of the formulations for such variable price being herein referred to as, the "Variable Price"), the Company shall provide written notice thereof via facsimile and overnight courier to the Holder (the "Variable Notice") on the date of issuance of such Convertible Securities or Options. From and after the date the Company issues any such Convertible Securities or Options with a Variable Price, but only for so long as such Convertible Securities or Options are outstanding, the Holder shall have the right, but not the obligation, in its sole discretion to substitute the Variable Price for the Conversion Price upon conversion of any Debentures held by it by designating in the Conversion Notice delivered upon conversion of such Debentures that solely for purposes of such conversion the Holder is relying on the Variable Price rather than the Conversion Price then in effect. The Holder's election to rely on a Variable Price for a particular conversion of Debentures shall not obligate the Holder to rely on a Variable Price for any future conversions of Debentures. (d) Other Events. If any event occurs of the type contemplated by the provisions of this Section 6 in a private transaction (the primary purpose of which is to raise equity capital) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features other than pursuant to an Excluded Issuance), then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Debentures; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 6. (e) Notices. ------- Promptly following any adjustment of the Conversion Price pursuant to this Section 6, the Company will give written notice thereof to the Holder, setting forth in reasonable detail, and certifying, the calculation of such adjustment. In the case of a dispute as to the determination of such adjustment, then such dispute shall be resolved in accordance with the procedures set forth in Section 4(e)(iii). The Company will give written notice to the Holder at least ten (10) Business Days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined in Section 7(a)), dissolution or liquidation, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. The Company will also give written notice to the Holder at least ten (10) Business Days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. 7. Other Rights. ------------ (a) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any (i) sale of all or substantially all of the Company's assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor, or, if applicable, the parent of the successor, resulting from such Organic Change (in each case, the "Acquiring Entity") a written agreement to deliver to each holder of Outstanding Principal Amount of the Debentures in exchange for such securities, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Debentures, and reasonably satisfactory to the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date then outstanding; provided that the new security of the Acquiring Entity shall not be required to be of rank equal to the Debenture if the issuance of a security of such rank is not permitted by, or is inconsistent with, any agreement or instrument to which the Acquiring Entity is a party or any security of the Acquiring Entity that is outstanding, upon the consummation of the Organic Change. Prior to the consummation of any other Organic Change, the Company shall make appropriate provision to insure that each of the holders of the Debentures will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Debentures such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of shares of Common Stock which would have been acquirable and receivable upon the conversion of such holder's Debentures as of the date of such Organic Change (without taking into account any limitations or restrictions on the convertibility of the Debentures). (b) Optional Redemption at Holder's Election Upon Change of Control. In addition to the rights of the holders of Debentures under this Debenture, the Securities Purchase Agreement and the Registration Rights Agreement, upon a Change of Control (as defined below) of the Company each holder of Debentures shall have the right, at such holder's option, to require the Company to redeem all or a portion of such holder's Debentures at a price equal to 100% of the Outstanding Principal Amount of such Debentures plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Change of Control and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures on the date of consummation of the Change of Control ("Change of Control Redemption Price"). No sooner than 20 Business Days nor later than 10 Business Days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier (a "Notice of Change of Control") to each holder of Debentures. At any time during the period beginning after receipt of a Notice of Change of Control (or, in the event a Notice of Change of Control is not delivered at least 10 Business Days prior to a Change of Control, at any time on or after the date which is 10 Business Days prior to a Change of Control) and ending on the date one (1) Business Day prior to such Change of Control, any holder of the Debentures then outstanding may require the Company to redeem all or a portion of the holder's Debentures then outstanding by delivering written notice thereof via facsimile and overnight courier (a "Notice of Redemption Upon Change of Control") to the Company, which Notice of Redemption Upon Change of Control shall indicate (i) the principal amount of the Debentures that such holder is submitting for redemption, and (ii) the applicable Change of Control Redemption Price, as calculated pursuant to this Section 7(b). Upon the Company's receipt of a Notice(s) of Redemption Upon Change of Control from any holder of Debentures, the Company shall promptly, but in no event later than two (2) Business Days following such receipt, notify each holder of Debentures by facsimile of the Company's receipt of such Notice(s) of Redemption Upon Change of Control. The Company shall deliver to the holder of each Debenture who has delivered a Notice of Redemption upon Change of Control, the applicable Change of Control Redemption Price simultaneously with the consummation of the Change of Control provided that a holder's Debentures shall have been so delivered to the Company. For purposes of this Section 7(b), "Change of Control" shall mean (i) the consolidation, merger or other business combination of the Company with or into another Person (other than (A) a consolidation, merger or other business combination in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company), (ii) the sale or transfer of all or substantially all of the Company's assets, or (iii) a tender or exchange offer made to and accepted by the holders of more than 50% of the aggregate voting power of the outstanding Common Stock. (c) Optional Redemption At the Company's Election Upon Cash Transaction. At any time or times on or after the date the Company publicly discloses a pending, proposed or intended Cash Transaction, the Company shall have the right, in its sole discretion, to require that all, but not less than all, of the Outstanding Principal Amount of this Debenture be redeemed ("Cash Transaction Redemption Election") at a price equal to 100% of the Outstanding Principal Amount of this Debenture plus the product of (1) 1.75 and (2) the dollar amount of all Interest Payments scheduled to be paid following the consummation of the Cash Transaction and on or prior to the Maturity Date on the total Outstanding Principal Amount of the Debentures redeemed on the date of consummation of the Cash Transaction (the "Cash Transaction Redemption Price"). The Company shall exercise its right to make a Cash Transaction Redemption Election by providing each holder of Debentures written notice ("Notice of Cash Transaction Redemption") by facsimile or overnight courier, after the public disclosure of a proposed, pending or intended Cash Transaction and at least ten (10) Business Days prior to the date of consummation of the Cash Transaction ("Cash Transaction Election Redemption Date"), which Cash Transaction Election Redemption Date shall be the date of the consummation of the Cash Transaction. The Notice of Cash Transaction Redemption shall indicate the anticipated Cash Transaction Election Redemption Date. If the Company has exercised its right of Cash Transaction Redemption Election then the Outstanding Principal Amount of the Debenture at the time of the consummation of the Cash Transaction shall be redeemed on the Cash Transaction Election Redemption Date by payment by or on behalf of the Company to each holder of Debentures of the applicable Cash Transaction Redemption Price concurrent with the closing of the Cash Transaction. All holders of Debentures shall thereupon, if the Cash Transaction Redemption Price has been paid, except as specifically set forth herein, in the Securities Purchase Agreement or in the Registration Rights Agreement, cease to have any rights with respect to the Debentures and within two (2) Business Days after the Cash Transaction Election Redemption Date, or such earlier date as the Company and holders of no less then 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date mutually agree, shall surrender all Debentures to the Company. (d) Right to Convert on an Organic Change or Change of Control or Agreement of the Parties. In addition to the foregoing, following the announcement of any Change of Control or other Organic Change following which the Company is not the surviving entity or otherwise upon the mutual agreement of the Company and holders of at least 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date, the Holder shall continue pursuant to Section 4(a) hereof to have the right to convert the Outstanding Principal Amount of this Debenture at the then prevailing Conversion Rate until the Debenture is redeemed or otherwise converted pursuant to this Section 7. 8. Reservation of Stock Issuable Upon Conversion. The Company shall, so long as any of the Debentures are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversions of the Debentures, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Debentures then outstanding; provided that the number of shares of Common Stock so reserved shall at no time prior to the date on which cash collateral payments have been made pursuant to Section 25 in an amount equal to the entire Outstanding Principal Amount, together with accrued and unpaid interest on all Debentures outstanding be less than 135% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion) and the maximum number of Interest Shares issuable over the full term of the Debentures (assuming the Company paid the maximum amount of interest permitted to be paid in Interest Shares over the full term of the Debentures) and after such time 100% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all of the Debentures (without regard to any limitations on conversion). 9. No Reissuance of Debentures. No Debentures acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such Debentures shall be retired. No additional Debentures (other than the Debentures issued pursuant to the Securities Purchase Agreement) shall be authorized or issued without the consent of the holders of at least 60% of the Outstanding Principal Amount of the Debentures issued on the Original Issuance Date. 10. No Impairment. The Company shall not intentionally take any action which would impair the rights and privileges of the Debentures set forth herein or the Holders thereof. 11. Limitation on Beneficial Ownership. The Company shall not effect and shall have no obligation to effect any conversion of Debentures, and no holder of Debentures shall have the right to convert any Debentures, to the extent that after giving effect to such conversion, the beneficial owner of such shares (together with such Person's affiliates) would have acquired, through conversion of Debentures or otherwise, beneficial ownership of a number of shares of Common Stock that exceeds 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by a Person and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Debentures with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted Debentures beneficially owned by such Person or any of its affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Person or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 11, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 11, in determining the number of outstanding shares of Common Stock, a holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's most recent Form 10-Q, Form 10-K or other public filing with the SEC, as the case may be, (2) a more recent public announcement by the Company, or (3) any other notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written request of the Holder, the Company shall promptly, but in no event later than two (2) Business Days following the receipt of such notice, confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to conversions of Debentures by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. 12. Obligations Absolute. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place and rate, and in the manner, herein prescribed. 13. Waivers of Demand, Etc. The Company hereby expressly waives (to the extent permitted by applicable law) demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and will be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 14. Replacement Debentures. In the event that any Holder notifies the Company that its Debenture(s) have been lost, stolen or destroyed, replacement Debenture(s) identical in all respects to the original Debenture(s) (except for registration number and Outstanding Principal Amount, if different than that shown on the original Debenture(s)) shall be issued by the Company to the Holder, provided that the Holder executes and delivers to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such Debenture(s). 14A. Payment of Expenses. The Company agrees to pay all reasonable expenses, including reasonable attorneys' fees, which may be incurred by the Holder in successfully enforcing the provisions of this Debenture and/or successfully collecting any amount due under this Debenture, the Securities Purchase Agreement, the Security Agreement, the Account Control Agreement (as defined in the Securities Purchase Agreement), the Warrants, the Registration Rights Agreement or any other Transaction Document. 15. Defaults. The following shall constitute "Events of Default": -------- (a) Any Event of Default under any other Debenture; or (b) The suspension from trading or failure of the Common Stock to be listed on NASDAQ, the ASE or the NYSE for more than an aggregate of ten (10) trading days in any 365-day period; or (c) Any money judgment (including any arbitration award, but only if reduced to a judgment), writ or warrant of attachment, or similar process in excess of Two Hundred and Fifty Thousand Dollars ($250,000) in the aggregate, net of any applicable insurance coverage, shall be entered or filed against the Company, its Subsidiaries or any of their properties or other assets and which shall remain unpaid, unvacated, unbonded and unstayed for a period of seventy-five (75) days; or (d) The Company shall default in the payment when due (including, without limitation, the Company's failure to pay any redemption payments or amounts hereunder) of (i) interest on this Debenture, and such default shall continue for thirty (30) calendar days after the due date thereof, or (ii) the Outstanding Principal Amount of this Debenture; or (e) Any of the representations or warranties made by the Company herein (including any Cash Collateral Certificate delivered under Section 25(g)(iii)), in the Securities Purchase Agreement, the Warrants, the Security Agreement, the Account Control Agreement, any Mortgage, the Registration Rights Agreement or any other Transaction Document shall be untrue in any material respect at the time made and such condition (to the extent capable of being cured) shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such condition; and such breach of representations and warranties, singly or in the aggregate, would have a Material Adverse Effect or materially impair the ability of the Company to perform or satisfy its obligations to the Holder pursuant to the Transaction Documents; or (f) The Company shall fail to perform or observe in any material respect any material covenant or agreement in the Securities Purchase Agreement, the Security Agreement, the Warrants, any Mortgage, the Account Control Agreement, the Registration Rights Agreement, this Debenture or any other Transaction Document, including, without limitation, (i) the failure to honor any Conversion Notice and deliver shares pursuant thereto, and such failure shall continue uncured for a period of ten (10) Business Days after notice from the Holder of such failure or (ii) the failure by the Company to comply with its obligations under Section 25(g) hereof, including, without limitation, (A) the obligation to disclose sufficient and timely information in its public filings with the SEC for the holder to verify and reconcile Company Consolidated Revenues for the relevant periods, as required by Section 25(g)(iv) hereof, (B) the obligation to make payments timely as and when due and in the form of cash and/or Repayment Shares as provided thereunder, (C) the failure of the Company to deliver timely a completed Cash Collateral Certificate in the manner required by Section 25(g)(v) hereof and (D) the delivery by or on behalf of the Company of any Cash Collateral Certificate to any holder of Debentures without the express prior written consent of such holder; or (g) The Company shall (i) become insolvent; (ii) admit in writing its inability to pay its debts generally as they mature; (iii) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (iv) apply for or consent to the appointment of a trustee, liquidator or receiver for it or for a substantial part of its property or business; or (h) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or (i) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; or (j) The Company shall fail to pay any debt for borrowed money or other similar obligation or liability ("Indebtedness") (excluding Indebtedness evidenced by the Debentures, Subordinated Indebtedness and Pari Passu Indebtedness) of the Company, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), in an outstanding principal amount equal to or in excess of One Million Dollars ($1,000,000), singly or in the aggregate and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or any such Indebtedness of the Company shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (k) The Company shall fail to make any payment of principal in respect of Subordinated Indebtedness or Pari Passu Indebtedness or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Subordinated Indebtedness or Pari Passu Indebtedness, or any such Subordinated Indebtedness or Pari Passu Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (l) Bankruptcy, reorganization, insolvency or liquidation proceedings or other similar proceedings, or relief under any bankruptcy law or any similar law for the relief of debt shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit to any material allegations of, or default in answering a petition filed in any such proceeding; or (m) Unless the Company shall have made cash collateral payments in an amount equal to the entire Outstanding Principal Amount of all Debentures, together with accrued and unpaid interest thereon, in accordance with Section 25(g), the Registration Statement (as defined in the Registration Rights Agreement) is not declared effective by the SEC and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement pursuant to the terms of the Registration Rights Agreement) required to be included in such Registration Statement on or before July 26, 2004; or (n) the Security Agreement, any Mortgage (as defined in the Securities Purchase Agreement) or any other security document, after delivery thereof pursuant to the Securities Purchase Agreement, shall for any reason fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority lien in favor of the agent for the benefit of the holders of Debentures on any collateral purported to be covered thereby; or (o) the Cash Collateral Account Bank shall fail to comply with any of the terms of the Account Control Agreement; (p) at any time required to be in full force and effect under the Securities Purchase Agreement, the Letters of Credit shall for any reason cease to be in full force and effect other than in accordance with their express terms or any issuer of any of the Letters of Credit shall fail to maintain a Minimum Rating (as defined in the Securities Purchase Agreement) or fail to perform its obligations thereunder or shall, in writing, repudiate the Letter of Credit issued by it or deny that its obligations thereunder are valid, binding and enforceable, and such failure shall continue uncured for a period of fifteen (15) days after notice from the Holder of such failure; (q) the report of the Company's auditors on the Company's consolidated audited financial statements for the year ended December 31, 2003 shall have contained any going concern qualification; or (r) any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any material facility of the Company or any of its Subsidiaries. Unless an Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default), upon the occurrence of an Event of Default, and for so long as such Event of Default shall be continuing, at the option of and on notice by the Holder to the Company in writing and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any other instruments contained to the contrary notwithstanding to the extent permitted by applicable law (provided, however, that upon the occurrence of any Event of Default described in subsection (g), (h) or (l) above, without any notice to the Company or any act by the Holder or the Agent, this Debenture shall become due and payable automatically and immediately, without presentment, demand, protest or notice of any kind, all of which are expressly waived by the Company, anything herein or in any other instrument contained to the contrary notwithstanding to the extent permitted by applicable law), and the Holder may immediately, and without expiration of any further period of grace, enforce any and all of the Holder's rights and remedies provided herein, or under the Security Agreement, the Mortgages, the Account Control Agreement and the Letters of Credit or any other rights or remedies afforded by law. In such event this Debenture shall be redeemed at a redemption price equal to 100% of the Outstanding Principal Amount of the Debenture, plus accrued and unpaid interest on this Debenture. In addition to the foregoing, upon an Event of Default, the rate of interest on this Debenture, shall, to the maximum extent of the law, be permanently increased by two percent (2%) per annum (i.e., from 7% to 9% per annum) commencing on the first day of the thirty (30) day period (or part thereof) following the Event of Default; and, solely in the case of an Event of Default triggered by a Conversion Failure, an additional two percent (2%) per annum commencing on the first day of each of the second and third such thirty (30) day periods (or part thereof); and an additional one percent (1%) on the first day of each consecutive thirty (30) day period (or part thereof) thereafter until this Debenture has been duly converted or redeemed as herein provided; provided that in no event shall the rate of interest exceed the lower of 20% or the highest rate permitted by applicable law. The Company shall within one (1) Business Day notify each Holder of Debentures upon becoming aware of the occurrence of any Event of Default (whether or not waived by any other Holder of Debentures) or of any action taken by any Holder of Debentures with respect to the occurrence of any Event of Default. 16. Savings Clause. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 17. Entire Agreement. This Debenture and the agreements referred to in this Debenture constitute the full and entire understanding and agreement between the Company and the Holder with respect to the subject hereof. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 18. Assignment, Etc. The Holder may, subject to compliance with the Securities Purchase Agreement and to applicable federal and state securities laws, transfer or assign this Debenture or any portion thereof and may pledge, encumber or transfer its rights or interest in and to this Debenture or any part hereof, provided, that such transfer or assignment of this Debenture does not result in more than ten (10) holders of the total Outstanding Principal Amount of all Debentures and any such part or portion of this Debenture constitutes at least 10% of the Outstanding Principal Amount or such lesser amount if such transfer involves the entire Outstanding Principal Amount then held by such transferor. Any such transfer or assignment shall only be effective upon the Company's receipt of written notice thereof. Each such assignee, transferee and pledgee shall have all of the rights of the Holder under this Debenture. The Company agrees that, subject to compliance with the Securities Purchase Agreement, after receipt by the Company of written notice of assignment from the Holder and the Holder's assignee, all principal, interest and other amounts which are then, and thereafter become, due under this Debenture shall be paid to such assignee, transferee or pledgee at the place of payment designated in such notice. This Debenture shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and registered assigns. 19. No Waiver. No failure on the part of the Holder to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to the Holder or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Holder from time to time. 20. Notices. Unless otherwise provided herein, any notices, consents, waivers or other communications required or permitted to be given under the terms of this Debenture must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Hemispherx Biopharma, Inc. 1617 JFK Boulevard Suite 660 Philadelphia, PA 19103 Telephone: (215) 998-8000 Facsimile: (215) 998-1739 Attention: Chief Executive Officer With a copy to: Ransom W. Etheridge, Esq. 2610 Potters Road Suite 200 Virginia Beach, VA 23452 Telephone: (757-486-0599 Facsimile: (757) 486-0792 If to a holder, to its address and facsimile number set forth on the Schedule of Buyers attached to the Securities Purchase Agreement, with copies to such holder's representatives as set forth on the Schedule of Buyers, or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 21. Miscellaneous. Whenever the sense of this Debenture requires, words in the singular shall be deemed to include the plural and words in the plural shall be deemed to include the singular. Paragraph headings are for convenience only and shall not affect the meaning of this document. 22. Choice of Law and Venue; Waiver of Jury Trial. THIS DEBENTURE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with this Debenture shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in Section 20 (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to this Debenture. 23. Rule 144. With a view to making available to the Holder the benefits of Rule 144 promulgated under the Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit the Holder to sell the underlying stock of the Company issuable upon conversion or exercise of the Debentures and the Warrants to the public without registration, the Company agrees to use its reasonable best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) furnish to any Holder, promptly upon request, a written statement by the Company (provided true at the time) that it has complied with the applicable reporting and filing requirements of the Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and copies of such other reports and documents (if any) so filed by the Company as may be reasonably requested to permit any such Holder to take advantage of any rule or regulation of the SEC permitting the selling of any such securities without registration. 24. Company Installment Conversion or Redemption. -------------------------------------------- (a) General. On each Installment Date (unless waived by the Holder), the Company shall pay to the Holder of this Note the Installment Amount as of such Installment Date by the combination of any of the following, but subject to and in accordance with the terms of this Section 24, (i) requiring the conversion of a portion of the applicable Installment Amount, in whole or in part, in accordance with this Section 24 but subject to the satisfaction of the Conditions to Company Conversion (as defined below) (a "Company Conversion"), and/or (ii) redeeming the applicable Installment Amount, in whole or in part, in accordance with this Section 24 (a "Company Redemption"); provided that all of the outstanding applicable Installment Amount as of each such Installment Date must be converted and/or redeemed by the Company on the applicable Installment Date, subject to the provisions of this Section 24. On or prior to the date which is at least 2 Trading Days prior to each Installment Measuring Period, the Company shall deliver written notice to the Holder (each, a "Company Installment Notice"), which Company Installment Notice shall state (i) the portion, if any, of the applicable Installment Amount which the Company elects to convert pursuant to a Company Conversion, which amount when added to the Company Redemption Amount must equal the applicable Installment Amount (the "Company Conversion Amount"), (ii) the portion, if any, of the applicable Installment Amount which the Company elects to redeem pursuant to a Company Redemption (the "Company Redemption Amount"), which amount when added to the Company Conversion Amount must equal the applicable Installment Amount, and (iii) if the Company has elected, in whole or in part, a Company Conversion, then the Company Installment Notice shall certify that the Conditions to Company Conversion are satisfied as of the date of the Company Installment Notice. If the Company does not deliver a Company Installment Notice in accordance with this Section 24(a), then the "Company Redemption Amount" and the "Company Conversion Amount" with respect to such Installment Date shall be in such amounts and proportions as the Holder shall designate in writing to the Company in its sole discretion and the Company shall be deemed to have delivered a Company Installment Notice setting forth such amounts. Each Company Installment Notice shall be irrevocable. Except as expressly provided in this Section 24(a), the Company shall redeem and convert the applicable Installment Amount of this Debenture pursuant to this Section 24 and the corresponding Installment Amounts of the other Debentures pursuant to the corresponding provisions of the other Debentures in the same ratio of the Installment Amount being redeemed and converted hereunder. The Company Redemption Amount (whether set forth in the Company Installment Notice or by operation of this Section 24) shall be redeemed in accordance with Section 24(b), and the Company Conversion Amount shall be converted in accordance with Section 24(c). (b) Mechanics of Company Redemption. If the Company elects, or is deemed to have elected, a Company Redemption in accordance with Section 24(a), then the Company Redemption Amount, if any, which is to be paid to the Holder on the applicable Installment Date shall be redeemed by the Company on such Installment Date, and the Company shall pay to the Holder on such Installment Date, by wire transfer of immediately available funds, an amount in cash (the "Company Installment Redemption Price") equal to the sum of 100% of the Company Redemption Amount. Notwithstanding anything to the contrary in this Section 24(b), but subject to Sections 11 and 26, until the Company Installment Redemption Price (together with any interest thereon) is paid in full, the Company Redemption Amount (together with any interest thereon permitted hereunder to be paid by the Company in Common Stock) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 4. (c) Mechanics of Company Conversion. Subject to Sections 11 and 26 and Section 24(e), if the Company delivers a Company Installment Notice and elects or is deemed to have elected, in whole or in part, a Company Conversion in accordance with Section 24(a), then the applicable Company Conversion Amount, if any, which remains outstanding shall be converted as of the applicable Installment Date by converting on such Installment Date such Company Conversion Amount as if the Holder had delivered a Conversion Notice pursuant to Section 4 with respect to such Company Conversion Amount on such Installment Date but without the Holder being required to actually deliver such Conversion Notice; provided that the Conditions to Company Conversion are satisfied (or waived in writing by the Holder) on such Installment Date. If the Conditions to Company Conversion are not satisfied (or waived in writing by the Holder) on such Installment Date, then at the option of the Holder designated in writing to the Company, the Holder may require the Company to do any one or more of the following: (i) the Company shall redeem all or any part designated by the Holder of the unconverted Company Conversion Amount (such designated amount is referred to as the "First Redemption Amount") on such Installment Date and the Company shall pay to the Holder on such Installment Date, by wire transfer of immediately available funds, an amount in cash equal to such First Redemption Amount, or (ii) the Company Conversion shall be null and void with respect to all or any part designated by the Holder of the unconverted Company Conversion Amount and the Holder shall be entitled to all the rights of a holder of this Note with respect to such amount of the Company Conversion Amount. If the Company fails to redeem any First Redemption Amount on the applicable Installment Date by payment of such amount on the applicable Installment Date, then the Holder shall have the rights set forth in Section 24(b) as if the Company failed to pay the applicable Company Redemption Price and all other rights under this Note (including, without limitation, such failure constituting an Event of Default described in Section 15(d)). In the event the Holder delivers a Conversion Notice to the Company after the earlier of the date which is 10 days prior to the applicable Installment Date and the Holder's receipt of the Company Installment Notice in respect of such Installment Date in which the Company elects or is deemed to have elected a Company Redemption, the Principal amount specified in such Conversion Notice shall be deducted (1) first, from the Principal represented by the Company Redemption Amount and then (2) second, in accordance with Section 4(e)(h). (d) Conditions to Company Conversion. For purposes of this Section 24, "Conditions to Company Conversion" means (i) during the period beginning on the Original Issuance Date and ending on and including the applicable Installment Date, the Company shall have delivered shares of Common Stock upon any conversion of Conversion Amounts on a timely basis as set forth in Section 4(e)(ii) and analogous provisions under the other Debentures, and shall have delivered shares of Common Stock upon exercise of any Warrants on a timely basis as set forth in Section 2(a) of the Warrants; (ii) on each day during the period beginning on the Original Issuance Date and ending on and including the applicable Installment Date, the Common Stock shall be listed on the Principal Market and delisting or suspension of the Common Stock by such market or exchange shall not have been threatened either (A) in writing by such market or exchange or (B) by falling below the minimum listing maintenance requirements of such market or exchange for the Common Stock; (iii) during the period beginning on the Original Issuance Date and ending on and including the applicable Installment Date, there shall not have occurred either (x) the public announcement of a pending, proposed or intended Change of Control which has not been abandoned, terminated or consummated or (y) an Event of Default; (iv) during the period beginning on the date which is the Original Issuance Date and ending on and including the applicable Installment Date, there shall not have occurred an event that with the passage of time or giving of notice, and assuming it were not cured, would constitute an Event of Default; (v) on each day of the period beginning on the date of delivery of a Company Installment Notice with respect to an Installment Date and ending on the applicable Installment Date either (x) the Registration Statement or Registration Statements required pursuant to the Registration Rights Agreement shall be effective and available for the resale of all of the Registrable Securities in accordance with and to the extent required by the terms of the Registration Rights Agreement or (y) all shares of Common Stock issuable upon conversion of the Debentures and shares of Common Stock issuable upon exercise of the Warrants shall be eligible for sale without restriction (other than any restriction arising under applicable federal or state securities laws as a result of the holder of such securities being an Affiliate of the Company) and without the need for registration under any applicable federal or state securities laws; (vi) on each day of the period beginning on the applicable Installment Date and ending thirty Trading Days thereafter either (x) the Registration Statements required pursuant to the Registration Rights Agreement shall be expected to be effective and available for the resale of at least all of the Registrable Securities in accordance with and to the extent required by the terms of the Registration Rights Agreement or (y) all shares of Common Stock issuable upon conversion of the Debentures and shares of Common Stock issuable upon exercise of the Warrants shall be eligible for sale without restriction (other than any restriction arising under applicable federal or state securities laws as a result of the holder of such securities states as an Affiliate of the Company) and without the need for registration under any applicable federal or state securities laws; and (vii) the Company otherwise shall have been in material compliance with and shall not have breached, in any material respect, any provision, covenant, representation or warranty of the Securities Purchase Agreement, any of the Warrants, any of the Debentures or any of the other Transaction Documents. (e) Certain Definitions. For purposes of this Section 24, the following capitalized terms shall have the following meanings: (i) "Company Conversion Price" means, with respect to any Company Conversion, that price which shall be computed as 95% of the arithmetic average of the Weighted Average Price of the Common Stock on each trading day in the Installment Measuring Period. (ii) "Installment Amount" means, with respect to any Installment Date, the Outstanding Principal Amount of this Debenture as of the Installment Date divided by the number of full months between the Installment Date and June 30, 2007. In the event the Holder shall sell or otherwise transfer any portion of this Debenture, the transferee shall be allocated a pro rata portion of the Installment Amount. (iii) "Installment Date" means each monthly anniversary of the Original Issuance Date, commencing on January 1, 2007. (iv) "Installment Measuring Period" means, with respect to an Installment Date, the 10-day trading day period commencing on and including the eleventh trading day immediately preceding such Installment Date and ending on and including the trading day immediately preceding such Installment Date. 25. Rank; Covenants; Cash Collateral. -------------------------------- (a) Definitions. For purposes of this Section 25, the following terms shall have the following meanings: (i) "Acquisition Buildings" shall mean the buildings being purchased by the Company in connection with the Interferon Acquisition and located at 783 Jersey Avenue, 5 Jules Lane, New Brunswick Middlesex Co., New Jersey. (ii) "Acquisition Indebtedness" shall mean any Indebtedness incurred, assumed or guaranteed by the Company or any of its Subsidiaries in respect of the purchase price for, or in connection with the purchase of, any assets, business or securities (an "Acquired Business") acquired by the Company or any of its Subsidiaries, other than Indebtedness incurred, assumed or guaranteed in connection with the Interferon Acquisition. (iii)"Acquisition Multiple" shall mean, subject in all respects to the final sentence of Section 25(b)(i) hereof, (i) in the event the Acquired Business is not a Qualified Competitor, three times the EBITDA of the Acquired Business or (ii) in the event the Acquired Business is a Qualified Competitor, four times the EBITDA of the Acquired Business; provided, however, that if prior to the closing of the acquisition of any Acquired Business under subsections (i) or (ii) of this definition, the Company has not been furnished with financial statements of such Acquired Business that have been audited by a nationally recognized auditing firm, the Acquisition Multiple shall be two and one half (2 1/2) times the EBITDA of the Acquired Business. (iv) "Biweekly Revenue Cash Collateral Date" shall mean the 15th and last calendar day of each month during the Initial Cash Collateral Period. If any Biweekly Revenue Cash Collateral Date is not a Business Day, then the Biweekly Revenue Cash Collateral Date shall be the Business Day immediately following such Biweekly Revenue Cash Collateral Date. (v) "Cash Collateral Date" shall mean each Biweekly Revenue Cash Collateral Date, Monthly Revenue Cash Collateral Date, the First Revenue Milestone Cash Collateral Date, the Second Revenue Milestone Cash Collateral Date, the Third Revenue Milestone Cash Collateral Date, the Qualified Inventory Financing Date and the Qualified Mortgage Financing Date. (vi) "Company Consolidated Revenues" shall mean the aggregate amount of all cash collected by the Company and its Subsidiaries, including, without limitation, cash proceeds from the sales of inventory, cash collections of accounts receivable, cash collections of licensing fees, cash proceeds from the issuance of all Indebtedness (excluding cash received for the purchase of the Debentures), but excluding cash received from (a) the issuance of any equity or equity linked securities of the Company, (b) the Qualified Mortgage Financing and (c) the Qualified Inventory Financing. (vii)"EBITDA" shall mean (1) the earnings before interest, income taxes, depreciation and amortization of the Acquired Business for the twelve (12) full months immediately preceding the closing date in respect of the purchase of the Acquired Business less (2) any capital expenditures of the Acquired Business during such period. (viii) "First Revenue Milestone Cash Collateral Date" shall mean March 31, 2004. (ix) "First Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the First Revenue Milestone Cash Collateral Date. (x) "First Revenue Milestone Target" shall mean $800,000.00. (xi) "Initial Cash Collateral Period" shall mean the period commencing on and including April 15, 2004 and ending on and including April 29, 2005. (xii)"Inventory" shall mean, with respect to any Person, all goods and merchandise of such Person, including, without limitation, all raw materials, work-in-process, packaging, supplies, materials and finished goods of every nature used or usable in connection with the shipping, storing, advertising or sale of such goods and merchandise, whether now owned or hereafter acquired, and all such other property the sale or other disposition of which would give rise to an account receivable, including, without limitation, all of the items listed on Exhibit B to this Debenture. (xiii) "Lien" shall mean any mortgage, deed of trust, pledge, lien (statutory or otherwise), security interest, charge or other encumbrance or security or preferential arrangement of any nature, including, without limitation, any conditional sale or title retention arrangement, any capitalized lease and any assignment, deposit arrangement or financing lease intended as, or having the effect of, security. (xiv)"Monthly Revenue Cash Collateral Date" shall mean the 30th calendar day of each month during the Secondary Cash Collateral Period (except for the month of January 2005, which shall be the 31st calendar day of such month and the month of February, which shall be the 28th calendar day of such month). If any Monthly Revenue Cash Collateral Date is not a Business Day, then the Monthly Revenue Cash Collateral Date shall be the Business Day immediately following such Monthly Revenue Cash Collateral Date. (xv) "Pari Passu Indebtedness" shall mean Indebtedness that is made expressly "pari passu" in right of payment with the Debentures in an aggregate of (i) up to an aggregate principal amount of $5,000,000 of Indebtedness, (ii) up to an additional aggregate principal amount of $5,000,000 of Indebtedness incurred at any time after the eighteen (18) month anniversary of the Original Issuance Date, provided that in order to incur any Pari Passu Indebtedness pursuant to this clause (ii) the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the twenty consecutive trading day period prior to the incurrence of any such Pari Passu Indebtedness under this clause (ii) must equal or exceed 150% of the Conversion Price then in effect, (iii) up to an additional aggregate principal amount of $4,000,000 of Indebtedness incurred any time after the Outstanding Principal Amount of all Debentures is less than $1,000,000; provided, that in order to incur any Pari Passu Indebtedness under this clause (iii) the arithmetic average of the Weighted Average Price of the Common Stock on each trading day during the twenty consecutive trading day period prior to the incurrence of any such Pari Passu Indebtedness under this clause (iii) must equal or exceed 150% of the Conversion Price then in effect (iv) Acquisition Indebtedness, and (v) any other indebtedness of the Company which the Company and the holders of more than 60% of the then Outstanding Principal Amount of the Debentures issued on the Original Issuance Date may hereafter from time to time expressly and specifically agree in writing shall constitute Pari Passu Indebtedness. (xvi) "Permitted Liens" shall mean: (A) Liens securing all obligations under the Debentures and the agreements and instruments entered into in connection therewith; (B) the Qualified Mortgage; (C) the Qualified Inventory Liens; (D) Liens on any Intellectual Property of the Company or any of its Subsidiaries; and (E) Liens securing all obligations under the Company's Series A and Series B 7% Senior Secured Convertible Debentures Due June 30, 2007 and the agreements and instruments entered into in connection therewith. (xvii) "Qualified Competitor" shall mean an Acquired Business that is competitive with and in the same business with a business of the Company or any of its Subsidiaries, where the Company's Board of Directors determines, in its reasonable judgment, that substantially all overhead expenses of the Acquired Business during the trailing twelve months immediately preceding the acquisition of such Acquired Business are duplicative with overhead expenses of the Company or any of such Subsidiaries and such duplicative expenses will be eliminated within six (6) months immediately following the purchase of the Acquired Business. (xviii) "Qualified Indebtedness" shall mean Pari Passu Indebtedness that is not evidenced by any certificate, instrument, note or other agreement that, directly or indirectly, permits or requires such Indebtedness to be convertible into or exercisable or exchangeable for Common Stock (other than Options that may be issued by the Company to the holder(s) of such Indebtedness, the value of which does not exceed 10% of the principal amount of Indebtedness so incurred, as determined using the Black-Scholes valuation methodology). (xix)"Qualified Inventory Financing" shall mean a single financing arrangement pursuant to which the Company and/or its Subsidiaries obtains financing solely through the granting of Liens on Inventory that yield total net unrestricted cash proceeds to the Company at the time of the creation of such Liens of not less than $2,000,000.00. (xx) "Qualified Inventory Financing Date" shall mean the date on which the Qualified Inventory Financing is consummated. (xxi)"Qualified Inventory Liens" shall mean Liens on Inventory that are created or imposed solely in connection with a Qualified Inventory Financing. (xxii) "Qualified Mortgage" shall mean a mortgage on the Acquisition Buildings that is created or imposed solely in connection with a Qualified Mortgage Financing. (xxiii) "Qualified Mortgage Financing" shall mean a single financing arrangement pursuant to which the Company either (i) obtains financing solely through the granting of Liens on the Acquisition Buildings or (ii) sells the Acquisition Building, in each case in a transaction that yields total net unrestricted cash proceeds to the Company at the time of the creation of such Liens or at the time of such sale, as applicable, of not less than $1,500,000.00. (xxiv) "Qualified Mortgage Financing Date" shall mean the date on which the Qualified Mortgage Financing is consummated. (xxv)"Secondary Cash Collateral Period" shall mean the period commencing on and including April 30, 2005 and ending on and including the Maturity Date. (xxvi) "Second Revenue Milestone Cash Collateral Date" shall mean June 30, 2004; provided that if such day is not a Business Day, then the Second Revenue Milestone Cash Collateral Date shall be the Business Day immediately following the Second Revenue Milestone Cash Collateral Date. (xxvii) "Second Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the Second Revenue Milestone Cash Collateral Date. (xxviii) "Second Revenue Milestone Target" shall mean $1,500,000.00. (xxix) "Third Revenue Milestone Cash Collateral Date" shall mean December 31 2004; provided that if such day is not a Business Day, then the Third Revenue Milestone Cash Collateral Date shall be the Business Day immediately following the Third Revenue Milestone Cash Collateral Date. (xxx)"Third Revenue Milestone Measuring Period" shall mean the period commencing on January 1, 2004 and ending on the Third Revenue Milestone Cash Collateral Date. (xxxi) "Third Revenue Milestone Target" shall mean $3,000,000.00. (b) Incurrence of Indebtedness. -------------------------- i. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (A) the Indebtedness evidenced by the Debentures which shall rank ratably and equally with each other, (B) Pari Passu Indebtedness that is not secured by any assets of the Company or any of its Subsidiaries and that does not provide at any time for the payment of any principal thereon until at least 91 days after the Maturity Date of the Debentures (except for the payment of principal on Qualified Indebtedness to the extent permitted under Section 25(e)(ii)), (C) Indebtedness represented by trade payables incurred by the Company in the ordinary course of business, (D) Indebtedness incurred in connection with a Qualified Inventory Financing, provided that the proceeds of such Qualified Inventory Financing are applied to make cash collateral payments on the Debentures in the manner provided in Section 25(g)(i)(F) hereof, (E) Indebtedness incurred in connection with a Qualified Mortgage Financing, provided that the proceeds of such Qualified Mortgage Financing are applied to make cash collateral payments on the Debentures in the manner provided in Section 25(g)(i)(G) hereof, (F) Indebtedness that is not secured by any assets or property of the Company or any of its Subsidiaries, is made expressly subordinate in right of payment to the Debentures and that does not provide at any time for the payment of any principal thereon until at least 91 days after the Maturity Date of the Debentures ("Subordinated Indebtedness") pursuant to a subordination agreement containing the provisions attached hereto as Exhibit A executed and delivered by the Company and any holder of Subordinated Indebtedness to each holder of Debentures as a condition to the incurrence of such Indebtedness, (G) Indebtedness incurred, assumed or guaranteed in connection with the Interferon Acquisition, and (H) Indebtedness relating to the Company's Series A and/or B 7% Senior Secured Convertible Debentures Due June 30, 2007. Notwithstanding anything herein to the contrary, no Qualified Indebtedness may be incurred (but excluding Acquisition Indebtedness) unless as a condition to the incurrence of such Indebtedness, the Company shall have made cash collateral payments in an aggregate amount of Outstanding Principal Amount of all Debentures as of the date of the incurrence of such Indebtedness (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to fifty percent (50%) of the principal amount of the Indebtedness so incurred or an amount as otherwise required by this Section 25 (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). The Company shall file with the SEC on Form 8-K true and complete copies of the financial statements of an Acquired Business for which the purchase price is paid or payable in cash and/or cash equivalents and/or Indebtedness indicating thereon, among other things, the items comprising the EBITDA of the Acquired Business and contemporaneously therewith, but in no event prior to the filing of such Form 8-K, deliver a copy of such financial statements to each holder of Debentures; provided, however, that, notwithstanding anything herein to the contrary, if the Company does not file with the SEC financial statements of any Acquired Business for which the purchase price is paid or payable in cash and/or cash equivalents and/or Indebtedness in the time and manner provided herein, then the Acquisition Multiple with respect to such Acquired Business shall be deemed zero (0) and the Company shall not be entitled to acquire such Acquired Business unless as a condition thereto, the Company shall have contemporaneously with the closing of the acquisition of such Acquired Business made a cash collateral payment on the Outstanding Principal Amount of the Debentures then outstanding (pro rata among all holders of Debentures) in an amount equal to 100% of the aggregate cash, cash equivalents and Acquisition Indebtedness incurred in connection with the acquisition of such Acquired Business in accordance with Section 25(g)(ii) hereunder (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). ii. Notwithstanding the foregoing, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), no Pari Passu Indebtedness or Subordinated Indebtedness may be incurred, directly or indirectly, by the Company or any of its Subsidiaries if during the period commencing on the tenth (10th) Business Day (or in the case of clause (ii) of the definition of Pari Passu Indebtedness, the twentieth (20th) Business Day) immediately preceding the incurrence of any such Pari Passu Indebtedness or Subordinated Indebtedness and ending on and including the date on which any such Pari Passu Indebtedness or Subordinated Indebtedness is incurred (A) an event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing, (B) any Registration Statement that is required to be effective pursuant to the Registration Rights Agreement is not effective and available for the sale of at least all of the Registrable Securities (as defined in the Registration Rights Agreement) required to be included in such Registration Statement pursuant to the terms of the Registration Rights Agreement or (C) there has been any Grace Period (as such term is defined in the Registration Rights Agreement). iii. If at any time when any of the Debentures are outstanding and cash collateral payments shall not have been made in an amount equal to the entire Outstanding Principal Amount of the Debentures, together with accrued interest thereon, in accordance with Section 25(g)(ii), the Company shall purchase any Acquired Business, whether in one or a series of transactions, for an amount of aggregate consideration (whenever paid in the form of cash, cash equivalents or Acquisition Indebtedness) that exceeds the Acquisition Multiple for such Acquired Business, (such excess amount, the "Excess Permitted Aggregate Consideration"), the Company shall, simultaneous with the closing of the purchase of the Acquired Business, make cash collateral payments in respect of an aggregate Outstanding Principal Amount of the Debentures (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to one hundred percent (100%) of the Excess Permitted Aggregate Consideration (or if such amount exceeds the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon, then an amount equal to the remaining Outstanding Principal Amount on all outstanding Debentures together with the accrued and unpaid interest thereon). (c) Restricted Payments. Notwithstanding anything herein to the contrary, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or marketable securities, including, without limitation, Common Stock (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness of the Company or any of its Subsidiaries, whether by way of payment in respect of principal of (or premium, if any) or interest on, such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness or otherwise; provided, however, that, so long as no event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing, on the date any of the following payments is due or is otherwise made and subject to the terms and conditions of any subordination agreement entered into in connection with the issuance of any Subordinated Indebtedness as provided herein, the Company may, without regard to the foregoing limitation: (i) pay in cash scheduled interest payments, in each case in the manner set forth in the original documentation governing such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness, at an annual rate not to exceed (A) 10% per annum, if such interest rate is fixed, or (B) the prime rate plus two percent (2%), if such interest rate is floating, of such Pari Passu Indebtedness, Qualified Mortgage Financing, Qualified Inventory Financing or Subordinated Indebtedness, and (ii) make any principal payments when due on any Qualified Indebtedness at any time prior to the two-year anniversary of the Original Issuance Date; provided, however, that the Company may not make any such principal payments unless as a condition to each time any such Qualified Indebtedness is incurred, other than Acquisition Indebtedness, (including each time any Qualified Indebtedness is incurred under a revolving credit facility or otherwise), the Company shall have made cash collateral payments in an aggregate amount of Outstanding Principal Amount of all Debentures then outstanding at the time such Qualified Indebtedness was incurred (pro rata among all holders of Debentures) in accordance with Section 25(g)(ii) hereof equal to fifty percent (50%) of the principal amount of the Qualified Indebtedness so incurred, it being understood and agreed that, for the avoidance of doubt, if the Company has not satisfied its cash collateral payment obligations under Section 25(g)(ii) in connection with the incurrence of any such Qualified Indebtedness, the Company may not make any of the principal payments otherwise permitted under this subsection (ii). (d) Restrictions on Liens. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien upon or with respect to any of its assets or properties, whether now owned or hereafter acquired; file or suffer to exist under the Uniform Commercial Code or any similar law or statute of any jurisdiction, a financing statement (or the equivalent thereof) that names it or any of its Subsidiaries as debtor; sign or suffer to exist any security agreement authorizing any secured party thereunder to file such financing statement (or the equivalent thereof); sell any of its property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable) with recourse to it or any of its Subsidiaries or assign or otherwise transfer, or permit any of its Subsidiaries to assign or otherwise transfer, any account or other right to receive income; other than, as to all of the above, Permitted Liens; (e) Restricted Investments. ---------------------- (xxxii) Except as provided in Section 4(v) of the Securities Purchase Agreement and except for cash held by the Company's Belgian Subsidiary in connection with the Belgian Contribution, so long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to, directly or indirectly, deposit or hold any cash, securities, certificates of deposit, investments or other funds or cash equivalent in any account for which the Agent has not executed an account control agreement and obtained a perfected first priority security interest thereover. (xxxiii) So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not, directly or indirectly, make or commit or agree to make any loan, advance, guarantee of obligations, other extension of credit or capital contributions to, or hold or invest in or commit or agree to hold or invest in, or purchase or otherwise acquire or commit or agree to purchase or otherwise acquire any shares of the capital stock, bonds, notes, debentures or other securities of, or make or commit or agree to make any other investment in, any other Person (including, without limitation, a Subsidiary), or purchase or own any futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or otherwise transfer any cash, property or other assets to any Subsidiary, or permit any of its Subsidiaries to do any of the foregoing, other than in connection with (i) the Interferon Acquisition, (ii) an acquisition of, or investment in, the assets or capital stock of any other Person by the Company or any of its Subsidiaries for consideration consisting solely of shares of Common Stock that are not subject to any repurchase, retirement or redemption obligation of the Company or any of its Subsidiaries (a "Stock Acquisition") and (iii) the contribution by the Company to its Belgian Subsidiary of not more than $25,000 in the aggregate for the payment of ordinary course business expenses (the "Belgian Contribution"). (f) Restrictions on Asset Sales and Purchases. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to convey, sell, lease or sublease, transfer or otherwise dispose of, whether in one transaction or a series of related transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired (or agree to do any of the foregoing), other than, so long as no event constituting an Event of Default or an event that with the passage of time and without being cured would constitute an Event of Default, has occurred and is continuing at the time of such sale, (i) sales of Intellectual Property, (ii) sales of Inventory in the ordinary course of business (iii) or as otherwise expressly permitted under this Debenture. So long as any of the Debentures are outstanding and cash collateral payments have not been made in an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the Company shall not and shall not permit any of its Subsidiaries to purchase or otherwise acquire, whether in one transaction or a series of related transactions, all or substantially all of the assets of any Person (or any division thereof), other than in connection with (A) the Interferon Acquisition, (B) the incurrence of Acquisition Indebtedness to the extent permitted hereunder, (C) a Qualified Inventory Financing, (D) a Qualified Mortgage Financing or (E) a Stock Acquisition. (g) Cash Collateral. --------------- i. Unless and until such time as the Company shall have made cash collateral payments in respect of the entire Outstanding Principal Amount of this Debenture, together with accrued and unpaid interest thereon, the Company shall make cash collateral payments in accordance with this Section 25(g) in respect of a portion of the Outstanding Principal Amount of this Debenture, together with accrued and unpaid interest thereon, in cash and/or Common Stock (as provided in Section 25(g)(ii) and (iii)) as follows: (A) on each Biweekly Revenue Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the product derived by multiplying (i) .5 by (ii) the Company Consolidated Revenues for the period commencing on the date of the immediately preceding Biweekly Revenue Cash Collateral Date (or the Original Issuance Date, in the case of the first Biweekly Revenue Cash Collateral Date) through the Business Day immediately preceding the applicable Biweekly Revenue Cash Collateral Date; (B) on each Monthly Revenue Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the greater of (i) the product derived by multiplying (a) .1 by (b) the portion of the Outstanding Principal Amount of all Debentures and accrued and unpaid interest thereon for which cash collateral payments have not been made under Section 25(g) as of March 31, 2004 and (ii) the product derived by multiplying (a) .5 by (b) the Company Consolidated Revenues for the period commencing on the date of the immediately preceding Monthly Revenue Cash Collateral Date (or April 1, 2004, in the case of the first Monthly Revenue Cash Collateral Date) through the Business Day immediately preceding the applicable Monthly Revenue Cash Collateral Date; (C) on the First Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the sum of (i) $400,000 and (ii) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the First Revenue Milestone Measuring Period exceeds the First Revenue Milestone Target; (D) on the Second Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the excess, if any, of (i) the sum of (a) $750,000 and (b) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the Second Revenue Milestone Measuring Period exceeds the Second Revenue Milestone Target, over (ii) the cumulative amount of cash collateral payments (including the dollar value attributed to any such payments made in the form of Repayment Shares in accordance with the provisions of Section 25(g)(iii)) that have been made by the Company prior to the Second Revenue Milestone Cash Collateral Date pursuant to Sections 25(g)(i)(A) and 25(g)(i)(C) hereof; (E) on the Third Revenue Milestone Cash Collateral Date, the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to the excess, if any, of (i) the sum of (a) $1,500,000 and (b) the product derived by multiplying (X) .8 by (Y) the amount, if any, by which the Company Consolidated Revenues during the Third Revenue Milestone Measuring Period exceeds the Third Revenue Milestone Target, over (ii) the cumulative amount of cash collateral payments (including the dollar value attributed to any such payments made in the form of Repayment Shares in accordance with the provisions of Section 25(g)(iii)) that have been made by the Company prior to the Third Revenue Milestone Cash Collateral Date pursuant to Sections 25(g)(i)(A), 25(g)(i)(C) and 25(g)(i)(D) hereof; (F) on the Qualified Inventory Financing Date, subject to Section 28(d), the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount an amount equal to $2,000,000.00; and (G) on the Qualified Mortgage Financing Date, subject to Section 28(c), the Company shall make cash collateral payments in respect of the Outstanding Principal Amount of all Debentures, together with accrued interest thereon, in an amount equal to $1,500,000.00. ii. On each Cash Collateral Date (and any date for which a cash collateral payment is required under this Section 25), the Company shall irrevocably deposit, or cause to be irrevocably deposited into the Cash Collateral Account, the portion of the total Outstanding Principal Amount of all Debentures and accrued and unpaid interest thereon for which cash collateral payments are required to be made in accordance with Section 25(g)(i) (or any other provision of Section 25 requiring cash collateral payments), subject to Section 25(g)(iii), in cash in U.S. Dollars to secure payment of the principal of, premium, if any, penalties, if any, and interest due on the outstanding Debentures, pursuant to the Account Control Agreement and such other written agreements and other arrangements satisfactory to the holders of 60% of the Outstanding Principal Amount of all Debentures issued on the Original Issuance Date then outstanding, which shall, among other things, confirm that the funds deposited in the Cash Collateral Account and the proceeds of any letter of credit issued shall be subject to a perfected first priority security interest in favor of the Agent for the benefit of the holders of Debentures. iii. Notwithstanding anything in Section 25(g)(ii) hereof, but subject to Sections 11 and 26 hereof, (A) on each Cash Collateral Date relating to a cash collateral payment under Section 25(g)(i)(A), the Company shall make a payment by way of delivery of 25,000 fully paid and nonassessable shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction and pro rata among all holders of Debentures) and (B) on each Cash Collateral Date relating to a cash collateral payment under Section 25(g)(i)(B), the Company shall make a payment by way of delivery of 50,000 fully paid and nonassessable shares of Common Stock (as equitably adjusted for any stock dividend, stock split or other similar transaction and pro rata among all holders of Debentures), in each case delivered to the holder in lieu of cash for such amount (it being understood and agreed that (x) the remaining balance of such payments, if any, shall be paid in cash in accordance with Section 25(g)(ii) above and (y) irrespective of whether the value of the shares of Common Stock payable under clauses (A) or (B) of this Section 25(g)(iii) exceeds the amount otherwise due under Section 25(g)(i)(A) or Section 25(g)(i)(B), as applicable, the Company shall issue the full amount of the 25,000 or 50,000 shares of Common Stock, as applicable, on the applicable Cash Collateral Date and the value of the additional shares of Common Stock, if any, delivered to the holder that exceed the amount required to be paid under the applicable subsection of this Section 25(g) shall be deemed to be a permitted prepayment of this Debenture as provided in the final sentence of this Section 25(g)(iii)) represented by duly executed stock certificates registered in the name of the holder or its designee (the "Repayment Shares") (or, in the case of a public resale of such Repayment Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The DTC Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, upon the request of the holder, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's designee's balance account with DTC through its Deposit Withdrawal Agent Commission system) with each Repayment Share being ascribed a valued for purposes of this Section 25(g)(iii) equal to the product derived by multiplying (A) .825 by (B) the arithmetic average of Weighted Average Prices of the Common Stock on the five consecutive Business Days ending on and including the Business Day immediately preceding the applicable Cash Collateral Date (the "Equity Collateral Conversion Rate") provided, however, that (x) in no event may the Company pay any portion of a cash -------- ------- collateral payment obligation in Repayment Shares if a Registration Statement is not then effective and available for the resale of all of the Repayment Shares on the applicable Cash Collateral Date or each date which is within 10 Business Days prior to such Cash Collateral Date, in which case the full amount of such payments shall instead be made in cash in accordance with Section 25(g)(ii) and (y) in the event the Company does not have a sufficient number of Repayment Shares reserved and available for issuance pursuant to this Section 25(g)(iii), the Company shall issue the maximum number of Repayment Shares that are available for issuance, pro rata among all holders of Debentures, and the balance of such payment shall instead be made in cash in accordance with Section 25(g)(ii) hereof. Cash collateral payments validly made in the form of Repayment Shares under this Section 25(g)(iii) shall be deemed prepayments of (i) first, accrued and unpaid interest on the Outstanding Principal Amount of this Debenture and (ii) second, Outstanding Principal Amount of this Debenture. iv. The Company covenants and agrees that it shall make all calculations, including, without limitation, all calculations of Company Consolidated Revenues, necessary to determine the amounts to be paid from time to time under this Section 25(g) in strict accordance with the terms of this Agreement. The Company further covenants and agrees that it shall prepare and publish its quarterly and annual earnings releases and quarterly and annual reports filed with the SEC with sufficient detail so that the holder of this Debenture shall be able to determine and verify solely from the information contained therein the amount of Company Consolidated Revenues used to calculate amounts to be paid from time to time under this Section 25(g) and to reconcile the amount of Company Consolidated Revenues with the amounts actually paid under this Section 25(g). If any holder of Debentures disputes any calculations of Company Consolidated Revenues set forth in or omitted from any public release or SEC filing that covers any period relevant for the determinations required under this Section 25(g), such holder shall deliver written notice to the Company within ten Business Days of the publication of such release or SEC filing, describing in reasonable detail the basis for such dispute (and the Company shall promptly deliver such notice to all other holders). If the Company and the disputing holder(s) of Debentures are unable to resolve any such dispute within two Business Days of the Company's receipt of notice thereof, the Company shall within two (2) Business Days submit the disputed matters to the Company's independent, outside accountant. The Company shall cause the accountant to perform the determinations or calculations and notify the Company and the holders of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such accountant's determination, as the case may be, shall be binding upon all parties absent manifest error. The Company shall bear all costs, fees and expenses of the accountant in rendering any such determinations. v. On each Cash Collateral Date, the Company covenants and agrees to execute and deliver a completed Cash Collateral Accounting Certificate in the form attached hereto as Exhibit C (the "Cash Collateral Certificate") by facsimile and first class mail to the Person designated on the form of Cash Collateral Certificate (or such other Person or Persons as the holders of not less than 60% of the then Outstanding Principal Amount of Debentures may designate in writing to the Company), which shall be certified to each holder of Debentures as true and correct by the Chief Executive Officer or Chief Financial Officer of the Company. THE COMPANY ACKNOWLEDGES AND AGREES THAT IN NO EVENT SHALL IT OR ANY PERSON ON THE COMPANY'S BEHALF DELIVER ANY CASH COLLATERAL CERTIFICATE TO ANY HOLDER OF DEBENTURES WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF SUCH HOLDER. vi. All payments by the Company pursuant to this Section 25(g), whether in the form of cash or Repayment Shares, shall be made pro rata among all Debentures. vii. Notwithstanding anything herein to the contrary, the Company shall not be obligated to make any collateral payments, or deliver any Cash Collateral Certificates, pursuant to this Section 25(g) (whether in cash or in shares of Common Stock) on any Biweekly Revenue Cash Collateral Date, Monthly Revenue Cash Collateral Date, the First Revenue Milestone Cash Collateral Date, the Second Revenue Milestone Cash Collateral Date, or the Third Revenue Milestone Cash Collateral Date to the extent that the balance in the Cash Collateral Account (as defined in the Securities Purchase Agreement) is not less than $1,300,000. (viii) the Holder agrees that, in the event of any unauthorized distributions (as defined below) from the Cash Collateral Account, the principal amounts of the Debentures will be reduced by the amount of such unauthorized distributions; the allocation of such reduction to the PL Debentures to be made pro rata. An unauthorized distribution would be any distribution other than as permitted under the PL Debentures or the related agreements. (h) Conflicts. In the event there is any conflict among provisions of this Section 25 as to the amount of any cash collateral payment required to be paid by the Company into the Cash Collateral Account, the provision requiring the Company to pay the greater amount shall in all instances control. 26. Limitation on Number of Conversion Shares. The Company (1) shall not be obligated to issue Conversion Shares upon conversion of this Debenture, (2) shall not be permitted to issue Interest Shares (but instead shall make Cash Interest Payments), (3) shall not be permitted to issue Repayment Shares (but instead shall make cash collateral payments in cash), (4) shall not be permitted to make a Company Conversion, and (5) shall not be permitted to issue conversion shares, interest shares, repayment shares, or warrant shares in connection with the Previously-Issued Securities (as defined in the Securities Purchase Agreement), in each case to the extent that the issuance of such shares of Common Stock would cause the Company to exceed that number of shares of Common Stock which the Company may issue under this Debenture (the "Exchange Cap") without breaching the Company's obligations under the rules or regulations of the Principal Market, except that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the Principal Market (or any successor rule or regulation) for issuances of Common Stock in excess of such amount. Until such approval is obtained, the holder of this Debenture shall not be issued, upon conversion or redemption of, or as interest under, this Debenture, shares of Common Stock in an amount greater than the difference between (i) the product of (x) the Exchange Cap amount multiplied by (y) a fraction, the numerator of which is the aggregate principal amount of Debentures issued to such Holder pursuant to the Securities Purchase Agreement and the denominator of which is the aggregate principal amount of all the Debentures issued to all Debenture holders pursuant to the Securities Purchase Agreement and (ii) the sum of (A) the aggregate number of Interest Shares and Repayment Shares and shares issued in connection with a Company Conversion issued to the holder of this Debenture (and all predecessor holders) as of the date of such conversion plus (B) the aggregate number of shares of Common Stock issued to the holder of this Debenture (and all predecessor holders) upon the exercise of any Warrants held by such holder (and all predecessor holders) as of the date of such conversion plus (C) the aggregate number of shares of Common Stock issued to the holder of this Debenture (and all predecessor holders) pursuant to the Previously-Issued Securities (such difference, the "Cap Allocation Amount"). If at any time when the Holder shall deliver a Conversion Notice pursuant to Section 4 hereof the Company shall be prohibited pursuant to the provisions of this Section 26 from issuing all or any portion of the Conversion Shares issuable pursuant to such Conversion Notice, then the Company shall pay in immediately available funds to the holder of this Debenture within two (2) Business Days of the date of delivery of such Conversion Notice, an amount in cash equal to the product of (X) the number of shares of Common Stock which could not be issued by virtue of the limitations contained in this Section 26 multiplied by (Y) the average of the Weighted Average Price of the Common Stock on each of the five (5) trading days ending on the third trading day immediately preceding the date the date of delivery of such Conversion Notice. The Outstanding Principal Amount of this Debenture shall be reduced by an amount equal to the Outstanding Principal Amount of this Debenture designated in the Conversion Notice that could not be converted by virtue of the limitations set forth in this Section 26 and for which the Company has made payment pursuant to the immediately preceding sentence. 27. Taxes. ----- (a) The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered holder thereof) and other similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of Debentures; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Stock or other securities or property in a name other than that of the registered holder of this Debenture to be converted and such holder shall pay such amount, if any, to cover any applicable transfer or similar tax. (b) The Company shall be permitted to withhold from any amounts payable to a Debenture holder or a holder of Common Stock any taxes required by law to be withheld from such amount. If the Company shall be required to withhold or deduct any tax, levy or other governmental charge, excluding (A) net income taxes, franchise taxes, or taxes imposed on or measured by net income (or overall gross receipts, to the extent such tax is imposed in lieu of a tax on net income by a jurisdiction that does not impose any tax based on or measured by net income) on any Debenture holder by the jurisdiction in which such Debenture holder is organized or any other jurisdiction in which such Debenture holder would be subject to tax without regard to the transactions contemplated hereby and (B) U.S. Federal withholding taxes (unless such U.S. Federal withholding taxes would not be imposed but for a change in or amendment to the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations or any other administrative authority thereunder or any tax treaty or the release or promulgation of any judicial decision relating thereto, in each case, on or after the date such Debenture holder acquires a Debenture (each, a "Change in Law")) (all such non-excluded taxes, levies or other governmental charges, "Taxes") from any payment of interest, or any accrual of original issue discount (if applicable), for U.S. Federal income tax purposes made hereunder or under any Debenture to or for the benefit of any Debenture holder, then (A) the amount payable shall be increased by the amount necessary so that after making all required deductions and withholdings (including deductions and withholdings with respect to additional amounts payable under this Section 27(b)) such Debenture holder shall receive an amount equal to the amount it would have received if no such deduction or withholding of Taxes had been required, (B) the Company shall make such deduction or withholding and (C) the Company shall pay the full amount deducted to the appropriate governmental authority in accordance with applicable law. If any Debenture holder is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Debenture Holder"), it shall deliver to the Company two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming complete exemption from U.S. Federal withholding tax under an income tax treaty), or any successor form; (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form; (C) in the case of a Non-U.S. Debenture Holder claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code, with respect to payments of "portfolio interest," U.S. Internal Revenue Service Form W-8BEN (certifying as to beneficial ownership), or any successor form, and a certificate in form and substance reasonably acceptable to the Company representing that such Non-U.S. Debenture Holder is not a "bank" for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Company and is not a "controlled foreign corporation" related to the Company (within the meaning of Section 864(d)(4) of the Code); or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Debenture Holder's entitlement to a complete exemption from U.S. Federal withholding tax, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Debenture Holder claiming complete exemption from U.S. Federal withholding tax on payments of interest (or of original issue discount, if applicable) for U.S. Federal income tax purposes by the Company under the Debentures. Each Debenture holder and each holder of common stock that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each a "Non-U.S. Equity Holder") also shall deliver to the Company, to the extent legally able to do so, with respect to payments of dividends for U.S. Federal income tax purposes by the Company, if applicable, two copies of either (A) U.S. Internal Revenue Service Form W-8BEN (claiming a reduction of U.S. Federal withholding tax under an applicable income tax treaty, if any), or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form, or (C) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such Non-U.S. Equity Holder's entitlement to an exemption from, or a reduction of, U.S. Federal withholding tax on payments of dividends for U.S. Federal income tax purposes by the Company, as applicable, in all cases such forms and other documents being properly completed and duly executed by such Non-U.S. Equity Holder. In addition, each Debenture holder and each holder of Common Stock that is not otherwise exempt from "back-up withholding" shall deliver to the Company two properly completed and duly executed copies of either (A) U.S. Internal Revenue Service Form W-8BEN, or any successor form, (B) U.S. Internal Revenue Service Form W-8ECI, or any successor form, (C) U.S. Internal Revenue Service Form W-9, or any successor form, or (D) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service, as applicable, in each case indicating that such Debenture holder or holder of Common Stock is not subject to "back-up withholding" for U.S. Federal income tax purposes. The forms and other documents required to be delivered pursuant to this Section 27(b) shall be delivered (A) on or prior to the Original Issuance Date and (B) from time to time thereafter if within ten (10) Business Days after receipt of a written request therefor by the Company. In addition, each Debenture holder and each holder of Common Stock shall promptly notify the Company at any time it determines that it is no longer in a position to provide any previously delivered (or requested) form, document or certificate to the Company, including as a result in whole or in part from a Change in Law; provided, however, that the failure to provide such notice shall not affect any Debenture holder's right to any additional amounts hereunder. (c) Notwithstanding anything to the contrary in Section 27(b) above, the Company shall not be required to pay any additional amount to any Debenture holder pursuant to the preceding paragraph to the extent the Tax in respect of which such additional amount would otherwise be payable would not have been imposed but for the failure of such Debenture holder to comply with its obligations under such paragraph; provided, however, that the failure to provide the applicable form, document or certificate pursuant to the preceding paragraph as provided in the notice required by the preceding paragraph resulting in whole or in part from a Change in Law shall not affect such Debenture holder's right to any additional amounts hereunder. 28. Security. -------- (a) The Debentures shall be secured to the extent and in the manner provided in the Security Agreement. (b) The Company acknowledges and agrees that all amounts deposited in the Cash Collateral Account (a) shall constitute Collateral for all obligations of the Company under the Debentures (the "Obligations"). At any time during the continuance of an Event of Default, the Agent may require the Cash Collateral Account Bank to transfer all amounts held in the Cash Collateral Account to the Agent for application to the Obligations pursuant to the terms of the Debentures. (c) In the event that the Company desires to enter into the Qualified Mortgage Financing, the holder, by its acceptance of this Debenture, agrees to cause the Agent to enter into a written agreement, reasonably satisfactory to the Agent, providing that, upon the consummation of the Qualified Mortgage Financing and the Company making the deposit into the Cash Collateral Account of not less than $1,500,000 in cash in accordance with Sections 25(g)(i)(G) and 25(g)(ii), the Agent shall release its Lien on the Acquisition Buildings and shall execute and deliver to the Company or to the provider of such financing or the purchaser of the Acquisition Buildings such release or reconveyance instruments and such other documents as shall be reasonably necessary to release the Lien of the Agent on the Acquisition Buildings pursuant to the Mortgages, in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. (d) In the event that the Company desires to enter into the Qualified Inventory Financing, the holder, by its acceptance of this Debenture, agrees to cause the Agent to enter into a written agreement, reasonably satisfactory to the Agent, providing that, upon the consummation of the Qualified Inventory Financing and the deposit into the Cash Collateral Account of not less than $2,000,000 in cash in accordance with Sections 25(g)(i)(F) and 25(g)(ii), the Agent shall release its Lien on the Inventory and shall execute and deliver to the Company or to the provider of such financing such UCC3 Amendments (or authorizations to file the same) and such other documents as shall be reasonably necessary to release the Lien of the Agent on the Inventory pursuant to the Security Agreement, in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. (e) If at any time the Company shall have deposited into the Cash Collateral Account an amount equal to the entire Outstanding Principal Amount and accrued and unpaid interest on all Debentures pursuant to Section 25(g), the holder, by its acceptance of this Debenture, agrees to release, or cause the Agent to release, its Lien on all Collateral, other than the Cash Collateral Account, and shall execute and deliver to the Company (or cause the Agent to execute and deliver to the Company) such release or reconveyance instruments and such other documents as shall be reasonably necessary to release the Liens on the Collateral (other than the Cash Collateral Account) in each case at the sole cost and expense of the Company and without any warranty or representation by, or recourse to, the Agent or the holder of this Debenture. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: October 6, 2005 HEMISPHERX BIOPHARMA, INC. By: s/ -------------------- Name: Title: Print Address: Telephone: Facsimile: ATTEST - ------------------------------ Name: Title: EXHIBIT I (To be Executed by Registered Holder in order to Convert Debenture) CONVERSION NOTICE FOR 7% SENIOR SECURED CONVERTIBLE DEBENTURE DUE JUNE 30, 2007 The undersigned, as Holder of the 7% Senior Secured Convertible Debenture Due June 30, 2007 of HEMISPHERX BIOPHARMA, INC. (the "Company"), No. _, in the outstanding principal amount of $_______ (the "Debenture"), hereby elects to convert $_______ of the outstanding principal amount of the Debenture (as well as accrued and unpaid interest) into shares of Common Stock, par value $0.001 per share (the "Common Stock"), of the Company according to the conditions of the Debenture, as of the date written below. Date of Conversion: -------------------------------------------------- Principal Amount of Debentures to be converted: Accrued Interest to be converted: ------------------------------------ Installment Date to which the amount to be converted relates: Tax ID Number (If applicable): -------------------------------------- Please confirm the following information: Conversion Price: ---------------------------------------------------- Number of shares of Common Stock to be issued: ----------------------- Is the Variable Price being relied on pursuant to Section 6(c) of the Debenture? (check one) YES No ------ ------ Please issue the Common Stock into which the Debentures are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address: Issue to: ----------------------------------------------- 2557: Address: ------------------------------------------------- Telephone Number: --------------------------------------- Facsimile Number: --------------------------------------- Authorization: ------------------------------------------ By: ----------------------------------------------------- Title: -------------------------------------------------- Dated: Account Number (if electronic book entry transfer): Transaction Code Number (if electronic book entry transfer): [NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT] ACKNOWLEDGMENT The Company hereby acknowledges this Conversion Notice and hereby directs Continental Stock Transfer & Trust Company to issue the above indicated number of shares of Common Stock in accordance with the Irrevocable Transfer Agent Instructions dated January 26, 2004 (as amended on October 24, 2005) from the Company and acknowledged and agreed to by Continental Stock Transfer & Trust Company. HEMISPHERX BIOPHARMA, INC. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Account Control Agreement...................................................3 Acquiring Entity............................................................16 Act.........................................................................3 Agent.......................................................................3 Approved Stock Plan.........................................................3 ASE.........................................................................3 Bloomberg...................................................................3 Business Day................................................................3 Cap Allocation Amount.......................................................42 Cash Collateral Account.....................................................3 Cash Collateral Account Bank................................................3 Cash Collateral Certificate.................................................41 Cash Interest Payment.......................................................1 Cash Transaction...........................................................3,18 Change of Control...........................................................17 Change of Control Redemption Price..........................................17 Closing Sale Price..........................................................4,7 Collateral..................................................................4 Common Stock...............................................................4,48 Common Stock Deemed Outstanding.............................................4 Company.................................................................1,48,57 Conversion Date.............................................................9 Conversion Failure..........................................................4 Conversion Notice...........................................................9 Conversion Price............................................................4 Conversion Rate.............................................................8 Convertible Securities......................................................4 Debenture..................................................................1,48 Debenture Delivery Date.....................................................9 Debenture Register..........................................................2 Debentures..................................................................1 Default Conversion Price....................................................5 Default Interest............................................................2 Dilutive Issuance...........................................................12 DTC.........................................................................9 Events of Default...........................................................20 Exchange Act................................................................26 Exchange Cap................................................................42 Fixed Conversion Price......................................................5 Holder......................................................................1 Indebtedness................................................................21 Intellectual Property.......................................................5 Interest Payment Date.......................................................1 Interest Payments...........................................................1 Interferon Acquisition......................................................5 Letters of Credit...........................................................5 Mandatory Conversion........................................................8 Mandatory Conversion Date...................................................8 Mandatory Conversion Measuring Period.......................................7 Mandatory Conversion Notice.................................................7 Maturity Date...............................................................1 Maturity Date Mandatory Redemption..........................................11 Maturity Date Redemption Price..............................................11 Mortgage....................................................................5 NASDAQ......................................................................5 New Securities Issuance Price...............................................12 Notice of Change of Control.................................................17 Notice of Redemption Upon Change of Control.................................17 NYSE........................................................................5 Options.....................................................................5 Organic Change..............................................................16 Original Issuance Date......................................................5 Outstanding Principal Amount................................................5 Person......................................................................5 Principal Market............................................................5 Quarterly Period............................................................6 Registration Rights Agreement...............................................6 Rule 144....................................................................26 SEC.........................................................................6 Securities Agreement........................................................6 Securities Purchase Agreement...............................................6 Share Delivery Date.........................................................9 Strategic Financing.........................................................6 Transaction Documents.......................................................6 Transfer Agent..............................................................9 Valuation Event.............................................................14 Warrants....................................................................6 Weighted Average Price......................................................6,7 EXHIBIT A Subordination Provisions Section 1. Definitions. As used herein, the following terms shall have the following meanings: "Borrower" shall mean [Hemispherx][applicable Subsidiary of Hemispherx]. "Hemispherx" shall mean Hemispherx Biopharma, Inc., a corporation duly organized and existing under the laws of the State of Delaware. "Loan Documents" shall mean any agreement executed in connection with the issuance of the Senior Debt, in each case as amended, supplemented or otherwise modified from time to time. "Obligations" shall mean the obligations of the Borrower now or hereafter existing in favor of the holders of the Senior Debt, whether for principal, interest (including interest accruing subsequent to the filing of any petition initiating any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings relating to the Borrower), fees, expenses or otherwise. "Senior Debt" shall mean the Borrower's 7% Senior Secured Convertible Debentures due "Subordinated Creditor" shall mean . ---------------- "Subordinated Debt" shall mean all indebtedness of the Borrower now or hereafter existing in favor of the Subordinated Creditor, whether created directly or acquired by assignment or otherwise, all interest thereon and all fees, premiums and other amounts payable in respect thereof. "Subordinated Loan Documents" shall mean the instruments and agreements to which the Borrower is a party evidencing or relating to any Subordinated Debt. Section 2. Agreement to Subordinate. Each of the Subordinated Creditor, Hemispherx and the Borrower agrees that the Subordinated Debt is and shall be subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of the Obligations. Section 3. Restrictions on Payment of the Subordinated Debt. (a) The Subordinated Creditor may receive, and the Borrower may pay, interest on the Subordinated Debt evidenced by the Subordinated Loan Documents, in the stated amounts and on the stated dates of payment thereof as set forth in the Subordinated Loan Documents, provided, however, that no such payments shall be received or made at any time during which an Event of Default (as defined in the Senior Debt) shall have occurred and be continuing on any Senior Debt. (b) In the event of any dissolution, winding up, liquidation, arrangement or reorganization relating to Hemispherx or the Borrower, in any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of Hemispherx or the Borrower, any payment or distribution of any kind (whether in cash, securities or other property) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to the holders of the Senior Debt for application (in the case of cash) to, or as collateral (in the case of securities or other non-cash property) for, the payment or prepayment of the Obligations until the Obligations shall have been paid in full. (c) All payments or distributions upon or with respect to the Subordinated Debt which are received by the Subordinated Creditor contrary to these subordination provisions shall be received in trust for the benefit of the holders of the Senior Debt for the ratable benefit of such holders, shall be segregated from other funds and property held by the Subordinated Creditor and shall be forthwith paid over to the holders of the Senior Debt for the ratable benefit of such holders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of securities or other non-cash property) for the payment or prepayment of the Obligations until the Obligations shall have been paid in full. Section 4. Obligations Unconditional. (a) All rights and interests of the holders of the Senior Debt hereunder, and all agreements and obligations of the Subordinated Creditor, Hemispherx and the Borrower hereunder, shall remain in full force and effect irrespective of: (i) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto, (ii) any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any Loan Document, (iii) any exchange or release of, or non-perfection of any lien on or security interest in, any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Hemispherx or the Borrower in respect of the Obligations or the Subordinated Creditor, Hemispherx or the Borrower in respect of these subordination provisions. (b) These subordination provisions shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the holders of the Senior Debt upon the insolvency, bankruptcy or reorganization of Hemispherx or the Borrower or otherwise, all as though such payment had not been made. Section 5. Waivers. Each of the Subordinated Creditor, Hemispherx and the Borrower waives (i) promptness and diligence, (ii) notice of acceptance and notice of the incurrence of any Obligation by Hemispherx or the Borrower, (iii) notice of any actions taken by the holders of the Senior Debt, Hemispherx or the Borrower under any Loan Document or any other agreement or instrument relating thereto, (iv) all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of the Obligations or of the obligations of the Subordinated Creditor, Hemispherx and the Borrower under these subordination provisions, the omission of or delay in which, but for the provisions of this Section 5, might constitute grounds for relieving the Subordinated Creditor, Hemispherx or the Borrower of its obligations under these subordination provisions and (v) any requirement that the holders of the Senior Debt protect, secure, perfect or insure any security interest or other lien or any property subject thereto or exhaust any right to take any action against Hemispherx or the Borrower or any other person. Section 6. Subrogation. No payment or distribution to the holders of the Senior Debt pursuant to these subordination provisions shall entitle the Subordinated Creditor to exercise any rights of subrogation in respect thereof until the Obligations shall have been satisfied in full. Section 7. Miscellaneous. (a) Each of the Subordinated Creditor, Hemispherx and the Borrower will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and other documents, and take all further action that the holders of the Senior Debt may reasonably request in order to reflect the subordination provisions set forth herein. (b) These subordination provisions shall be governed by and construed in accordance with the law of the State of New York without regard to principles of conflicts of law or choice of law (other than section 5-1401 of the New York General Obligations Law). The parties hereto hereby agree that all actions or proceedings arising directly or indirectly from or in connection with these subordination provisions shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties hereto consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed as provided in (and service so made shall be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. The parties hereto hereby waive any right to a jury trial in connection with any litigation pursuant to these subordination provisions. EXHIBIT B Inventory EXHIBIT C FORM OF CASH COLLATERAL CERTIFICATE IN NO EVENT SHALL THIS CERTIFICATE BE DELIVERED BY OR ON BEHALF OF THE COMPANY TO ANY HOLDER OF DEBENTURES WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF SUCH HOLDER. CERTIFICATE TO BE DELIVERED ONLY TO THE RECIPIENT DESIGNATED BELOW. To: Eleazer Klein, Esq. Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Telephone: (212) 756-2000 Facsimile: (212) 593-5955 The undersigned, the duly elected [Chief Executive Officer/Chief Financial Officer] of HEMISPHERX BIOPHARMA, INC. (the "Company"), hereby certifies to the holders of the 7% Senior Secured Convertible Debentures Due June 30, 2007 of the Company (the "Debentures") pursuant to Section 25(g)(v) of the Debentures, that the following information is true and correct in all respects (capitalized terms used in this certificate and not defined herein shall have the meanings ascribed to them in the Debentures): Cash Collateral Date : . ------------------------ Qualified Inventory Financing Date (if applicable): . ---------------- Qualified Mortgage Financing Date (if applicable): . ---------------- Amount of Cash Collateral Payment: $ . ------------------------------- Amount of Cash Collateral Payment Made in Cash: $ . ------------------ Aggregate Dollar Value of Cash Collateral Payments Made in Repayment Shares (if applicable): $ . ------------- Aggregate Number of Repayment Shares Issued (if applicable): . ------- Equity Collateral Conversion Rate (if applicable): . ----------------- Company Consolidated Revenues for the relevant period (if applicable): $ . - -------------- Aggregate Amount of Cash Collateral Payments Made Prior to this Cash Collateral Date:$ . ------------------- IN WITNESS WHEREOF, the undersigned has executed this certificate as of this day of , 200 . ------- ----------- - ------------------------ HEMISPHERX BIOPHARMA, INC. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ EX-99.13 OTH CONTRCT 6 rexh_105.txt Exhibit 10.5 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES. HEMISPHERX BIOPHARMA, INC. WARRANT TO PURCHASE COMMON STOCK Warrant No.: 05-10-0[___] Number of Shares: ------------------------- (subject to adjustment) Date of Issuance: October 6, 2005 HEMISPHERX BIOPHARMA,INC.,a Delaware corporation(the "Company"),hereby certifies that, for Ten United States Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [ ] , the registered holder hereof or its permitted assigns, is entitled, subject to the terms and conditions set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M., New York City Time, on the Expiration Date (as defined herein) [ ] fully paid nonassessable shares of Common Stock (as defined herein) of the Company at the Warrant Exercise Price per share provided in Section 1(b) below. Notwithstanding the foregoing, the Company shall not effect the exercise of this Warrant and no holder of this Warrant shall have the right to exercise this Warrant to the extent that after giving effect to such exercise, such Person (together with such Person's affiliates), would have acquired, through exercise of this Warrant or otherwise, beneficial ownership of a number of shares of Common Stock that, when added to the number of shares of Common Stock beneficially owned by such Person (together with such Person's affiliates), exceeds 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such exercise. For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Person and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Person and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person and its affiliates (including, without limitation, any convertible notes, debentures or preferred stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. Upon the written request of any holder, the Company shall promptly, but in no event later than two (2) Business Days following the receipt of such notice, confirm in writing to any such holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the exercise of Warrants (as defined below) by such holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was last reported. Section 1. a. AMENDMENT AGREEMENT. This Warrant (as defined herein) is one of a series of Warrants issued pursuant to Section 2(a) of that certain Amendment Agreement with an effective date as of October 6, 2005, among the Company and the Persons referred to therein, as such agreement may be amended from time to time as provided in such agreement (the "Amendment Agreement"). b. DEFINITIONS. The location of definitions used in this Warrant is set forth on the Index of Terms attached hereto and the following words and terms as used in this Warrant shall have the following meanings: (i) "Additional Investment Rights" means the Additional Investment Rights issued pursuant to the Securities Purchase Agreement, dated as of January 26, 2004 among the Company and the Persons referred to therein, as such agreement may be amended from time to time as provided in such agreement (the "Securities Purchase Agreement"). (ii) "Approved Stock Plan" means any employee benefit plan, stock incentive plan or other similar plan or arrangement which has been approved by the Board of Directors of the Company or a duly authorized committee thereof, pursuant to which the Company's securities may be issued to any employee, consultant, officer or director for services provided to the Company. (iii) "Bloomberg" means Bloomberg Financial Markets or any other similar financial reporting service as may be selected from time to time by the Company and the holders of the Warrants representing not less than 60% of the shares of Common Stock issuable upon exercise of all Warrants issued on the Original Issuance Date then outstanding. (iv) "Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed. (v) "Closing Sale Price" means, for any security as of any date, the last closing trade price for such security on the Principal Market as reported by Bloomberg, or if the Principal Market begins to operate on an extended hours basis, and does not designate the closing trade price, then the last trade price at 4:00 p.m., New York City Time, as reported by Bloomberg, or if the foregoing do not apply, the last closing trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the last closing ask price of such security as reported by Bloomberg, or, if no last closing ask price is reported for such security by Bloomberg, the average of the highest bid price and the lowest ask price of any market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Closing Sale Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of the Warrants representing at least 60% of the shares of Common Stock obtainable upon exercise of all Warrants issued on the Original Issuance Date then outstanding. If the Company and the holders of the Warrants are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(a) below. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. All fees and expenses of such determinations shall be borne solely by the Company. (vi) "Common Stock" means (i) the Company's common stock, par value $0.001 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. (vii) "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 8(b)(i) and 8(b)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any shares of Common Stock owned or held by or for the account of the Company or issuable upon exercise of the Warrants. (viii) "Convertible Debentures" means all of the Company's 7% Senior Secured Convertible Debentures Due June 30, 2007 issued as replacement debentures that amend and replace the Company's 6% Senior Convertible Debentures due October 31, 2005 and January 31, 2006 originally issued pursuant to the Securities Purchase Agreement or pursuant to the Additional Investment Rights. (ix) "Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock. (x) "Expiration Date" means October 6, 2009 or, if such date does not fall on a Business Day or on a day on which trading takes place on the Principal Market, then the next Business Day. (xi) Intentionally Omitted (xii) "Option" means any rights, warrants or options to subscribe for or purchase or otherwise acquire Common Stock or Convertible Securities. (xiii) "Original Issuance Date" means the first date on which any Warrants have been issued pursuant to the Amendment Agreement. (xiv) "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (xv) "Principal Market" means The American Stock Exchange ("Amex") or if the Common Stock is not traded on Amex then the principal securities exchange or trading market for the Common Stock. (xvi) "Registration Rights Agreement" means that registration rights agreement dated January 26, 2004 by and among the Company and the Persons referred to therein, as such agreement may be amended from time to time as provided in such agreement, and as modified by the Amendment Agreement. (xvii) Intentionally Omitted (xviii) "Securities Act" means the Securities Act of 1933, as amended. -------------- (xix) "Strategic Financing" shall mean the issuance of Common Stock or Options in connection with any acquisition by the Company, by whatever means, of any business, assets or technologies, or to any strategic investor, vendor, customer, lease or similar arrangement, the primary purpose of which is not to raise equity capital, provided that the aggregate number of shares of Common Stock which the Company may issue pursuant to this definition shall not exceed (i) 25% of the total outstanding equity on the Warrant Date in connection with any one or more related issuances to strategic investors, vendors, customers, lessors or similar parties or (ii) 40% of the total outstanding equity on the Warrant Date in connection with all issuances to strategic investors, vendors, customers, lessors or similar parties (in each case, subject to adjustment for stock splits, stock dividends, stock combination and similar transactions). (xx) "Warrant" means the warrants to purchase shares of Common Stock issued pursuant to the Amendment Agreement and all warrants issued in exchange, transfer or replacement thereof. (xxi) "Warrant Exercise Price" shall be equal to $2.50, subject to further adjustment as provided in Section 8, Adjustment of Warrant Exercise Price and Number of Shares. (xxii) "Warrant Shares" means all shares of Common Stock issuable upon exercise of the Warrants. (xxiii) "Weighted Average Price" shall mean, for any security as of any date, the dollar volume-weighted average price per share for such security on the Principal Market during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg through its "Volume at Price" function or, if the foregoing does not apply, the dollar volume-weighted average price per share of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30 a.m., New York City Time, and ending at 4:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by the Pink Sheets LLC. If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of the Warrants representing at least 60% of the shares of Common Stock obtainable upon exercise of the Warrants issued on the Original Issuance Date then outstanding. If the Company and the holders of the Warrants are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(a) below with the term "Weighted Average Price" being substituted for the term "Closing Sale Price." All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period. All fees and expenses of such determinations shall be borne solely by the Company. Section 2. EXERCISE OF WARRANT. a. Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, in whole or in part, at any time on any Business Day on or after the opening of business on the date hereof and prior to 5:00 P.M., New York City Time, on the Expiration Date by (i) delivery of a written notice, in the form of the subscription notice attached as EXHIBIT A hereto or a reasonable facsimile thereof (the "Exercise Notice"), to the Company and the Company's designated transfer agent (the "Transfer Agent"), of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii)(A) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "Aggregate Exercise Price") in cash or delivery of a certified check or bank draft payable to the order of the Company or wire transfer of immediately available funds or (B) by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section 2(e)), and (iii) the surrender of this Warrant or a copy of this Warrant (provided it is accompanied by an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) to a common carrier for overnight delivery to the Company or by delivery of a facsimile copy of this Warrant to the Company as soon as practicable following such date; provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer and the provisions of Section 7 shall be applicable. In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), the Company shall on the second (2nd) Business Day (the "Warrant Share Delivery Date") following the date of its receipt of the Exercise Notice, the Aggregate Exercise Price (or notice of Cashless Exercise) and the original or a copy of this Warrant (provided it is accompanied by an indemnification undertaking or other form of security reasonably satisfactory to the Company with respect to this Warrant in the case of its loss, theft or destruction) (collectively, the "Exercise Delivery Documents"), (A) in the case of a public resale of such Warrant Shares in accordance with the provisions of the Irrevocable Transfer Agent Instructions, provided the Transfer Agent is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and, if required by DTC, the holder provides a customary representation letter to DTC, at the holder's request, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's or its designee's balance account with DTC through its Deposit Withdrawal Agent Commission system or (B) issue and deliver to the address as specified in the Exercise Notice, a certificate or certificates in such denominations as may be requested by the holder in the Exercise Notice, registered in the name of the holder or its designee, for the number of shares of Common Stock to which the holder shall be entitled upon such exercise. Upon delivery of the Exercise Delivery Documents, the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of this Warrant as required by clause (iii) above or the certificates evidencing such Warrant Shares. In the case of a dispute as to the determination of the Warrant Exercise Price, the Closing Sale Price of a security or the arithmetic calculation of the number of Warrant Shares, the Company shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within two (2) Business Days of receipt of the holder's Exercise Notice. If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price, the Closing Sale Price or arithmetic calculation of the number of Warrant Shares within one (1) Business Day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via facsimile (i) the disputed determination of the Warrant Exercise Price or the Closing Sale Price to an independent, reputable investment banking firm selected jointly by the Company and the holder or (ii) the disputed arithmetic calculation of the number of Warrant Shares to its independent, outside accountant. The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment banking firm's or accountant's determination or calculation, as the case may be, shall be deemed conclusive absent manifest error. b. Unless the rights represented by this Warrant shall have expired or shall have been fully exercised (without regard to any limitation on exercise hereunder), the Company shall, as soon as practicable using reasonable best efforts and in no event later than five (5) Business Days after its receipt of the Exercise Delivery Documents (the "Warrant Delivery Date") and at its own expense, issue a new Warrant identical in all respects to this Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable (without regard to any limitation on exercise hereunder) immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which such Warrant is exercised. c. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock issued upon exercise of this Warrant shall be rounded up or down to the nearest whole number. d. If the Company shall fail for any reason or for no reason to issue to the holder within five (5) Business Days of receipt of the Exercise Delivery Documents, a certificate for the number of shares of Common Stock to which the holder is entitled or to credit the holder's designee's balance account with DTC, in accordance with Section 2 hereof, for such number of shares of Common Stock to which the holder is entitled upon the holder's exercise of this Warrant, the Company shall, in addition to any other remedies under this Warrant or the Securities Purchase Agreement or otherwise available to such holder, including any indemnification under Section 8 of the Securities Purchase Agreement, pay as additional damages in cash to such holder on each day after the Warrant Share Delivery Date such exercise is not timely effected in an amount equal to 0.05% multiplied by the product of (I) the sum of the number of shares of Common Stock not issued to the holder on or prior to the Warrant Share Delivery Date and to which such holder is entitled under the holder's Exercise Notice and (II) the excess of the Closing Sale Price of the Common Stock on the Warrant Share Delivery Date over the Warrant Exercise Price then in effect. The foregoing notwithstanding, the damages set forth in this Section 2(d) shall be stayed with respect to the number of shares of Common Stock for which there is a good faith dispute being resolved pursuant to, and within the time periods provided for in, Section 2(a), pending the resolution of such dispute. e. Notwithstanding anything contained herein to the contrary, if at any time during the two (2) Business Day period immediately preceding the holder's delivery of an Exercise Notice, a Registration Statement (as defined in the Registration Rights Agreement) covering the Warrant Shares that are the subject of the Exercise Notice (the "Unavailable Warrant Shares") is not available for the resale of such Unavailable Warrant Shares, the holder of this Warrant may, at its election exercised in its sole discretion, exercise this Warrant as to any or all of such Unavailable Warrant Shares and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the "Net Number" of shares of Common Stock determined according to the following formula (a "Cashless Exercise"): Net Number = (A x B) - (A x C) --------------------- B For purposes of the foregoing formula: A= the total number of shares with respect to which this Warrant is then being exercised. B= the Closing Sale Price of the Common Stock on the trading day immediately preceding the date of the Exercise Notice. C= the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise. Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and agrees as follows: a. This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued. b. All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance and payment hereof in accordance with the terms hereof, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by or through the Company with respect to the issue thereof. c. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least 135% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant (without regard to any limitation on exercise hereunder)and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. d. The Company shall promptly use its best efforts to secure the listing of the shares of Common Stock issuable upon exercise of this Warrant (without regard to any limitation on exercise hereunder) upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall use its best efforts to maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant (without regard to any limitation on exercise hereunder); and the Company shall use its best efforts to so list on each national securities exchange or automated quotation system, as the case may be, and shall use its best efforts to maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant (without regard to any limitation on exercise hereunder) if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. e. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant and (iii) will not take any action which results in any adjustment of the Warrant Exercise Price if the total number of shares of Common Stock issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation and available for the purpose of issue upon such exercise. f. This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. Section 4. TAXES. a. The Company shall pay any and all documentary, stamp, transfer and other similar taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Stock or other securities or property in a name other than that of the registered holder of this Warrant to be exercised and such holder shall pay such amount, if any, to cover any applicable transfer or similar tax. b. The Company and the Company's transfer agent shall be permitted to withhold from any amounts payable to a registered holder of this Warrant or any holder of Warrant Shares any taxes required by law to be withheld from such amounts. c. Notwithstanding any other provision of this Agreement or any other Transaction Document, any assignee or transferee shall agree that the Company and the Company's transfer agent shall be permitted to withhold from any amounts payable to such assignee or transferee any taxes required by law to be withheld from such amounts. Unless exempt from the obligation to do so, each assignee or transferee shall execute and deliver to the Company or the Company's transfer agent, as applicable, two properly completed and duly executed copies of either (i) U.S. Internal Revenue Service Form W-8BEN, or any successor form, (ii) U.S. Internal Revenue Service Form W-8ECI, or any successor form, (iii) U.S. Internal Revenue Service Form W-9, or any successor form, or (iv) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service, as applicable, in each case, indicating that such assignee or transferee is not subject to "back-up withholding" for U.S. Federal income tax purposes. Each assignee or transferee that does not deliver such forms pursuant to the preceding sentence shall have the burden of proving to the Company's reasonable satisfaction that it is exempt from such requirement or the Company and the Company's transfer agent shall be entitled to withhold as provided in the first sentence hereof. In addition, each assignee or transferee that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (each, a "Non-U.S. Assignee or Transferee") shall deliver to the Company and the Company's transfer agent, to the extent legally able to do so, with respect to payments of dividends by the Company for U.S. Federal income tax purposes, if applicable, two properly completed and duly executed copies of either (i) U.S. Internal Revenue Service Form W-8BEN (claiming a reduction of U.S. Federal withholding tax under an applicable income tax treaty, if any), or any successor form, (ii) U.S. Internal Revenue Service Form W-8ECI (claiming complete exemption from U.S. Federal withholding tax because the income is effectively connected with a U.S. trade or business), or any successor form, or (iii) other applicable form, certificate or document prescribed by the U.S. Internal Revenue Service certifying as to such assignee's or transferee's entitlement to an exemption from, or a reduction of, U.S. Federal withholding tax on payments of dividends by the Company for U.S. Federal income tax purposes. Each Non-U.S. Assignee or Transferee that does not deliver a form or other document claiming a complete exemption from U.S. Federal withholding tax shall have the burden of proving to the Company's reasonable satisfaction that it is completely exempt from such tax or the Company and the Company's transfer agent shall be entitled to withhold as provided in the second sentence of this Section 4(c). The forms and other documents required to be delivered pursuant to this Section 4 shall be properly completed and duly executed and shall be delivered on or prior to the date of such assignment or transfer, and from time to time thereafter if requested by the Company or the Company's transfer agent. In addition, each assignee and transferee shall deliver such forms and other documents promptly upon the obsolescence or invalidity of any form or documents previously delivered by such assignee or transferee. Each assignee and transferee shall promptly notify the Company and the Company's transfer agent at any time it determines that it is no longer in a position to provide any previously delivered form, document or certificate to the Company and the Company's transfer agent (or any form of certification adopted by the U.S. taxing authorities for such purpose). Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he, she, or it is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the acceptance hereof, represents and warrants that it is acquiring this Warrant, and the Warrant Shares for its own account for investment only and not with a view towards, or for sale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "Accredited Investor"). Section 7. OWNERSHIP AND TRANSFER. a. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. b. This Warrant and all rights hereunder shall be assignable and transferable by the holder hereof without the consent of the Company upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit B hereto) at the principal executive offices of the Company (or such other office or agency of the Company as it may designate in writing to the holder hereof); provided, that (x) either (i) the Warrant shall have been registered under the Securities Act or (ii) the Company first shall have been furnished with an opinion of counsel, in a form reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Securities Act and (y) such transfer or assignment of this Warrant does not result in more than ten (10) holders of all outstanding Warrants and any such part or portion of this Warrant constitutes at least 10% of the number of Warrant Shares issuable upon exercise of all outstanding Warrants (subject to appropriate adjustment for stock splits, stock dividends, combinations, recapitalizations and other similar transactions) or such lesser number if such transfer involves all of the Warrant Shares represented by the Warrants then held by such transferor. c. The Company is obligated to register the Warrant Shares for resale under the Securities Act pursuant to the Registration Rights Agreement. The shares of Common Stock issuable upon exercise of this Warrant shall constitute Registrable Securities (as such term is defined in the Registration Rights Agreement). Each holder of this Warrant shall be entitled to all of the benefits afforded to a holder of any such Registrable Securities under the Registration Rights Agreement and such holder, by its acceptance of this Warrant, agrees and shall agree to be bound by and to comply with the terms and conditions of the Registration Rights Agreement applicable to such holder as a holder of such Registrable Securities. Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES. The Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: a. ADJUSTMENT OF WARRANT EXERCISE PRICE. If and whenever on or after the Warrant Date and prior to the twelve (12) month anniversary of the Warrant Date, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock (i) issued or deemed to have been issued by the Company in connection with an Approved Stock Plan, (ii) issued or deemed to have been issued upon exercise of the Warrants or the Additional Investment Rights or issued upon the issuance or conversion of the Convertible Debentures; (iii) issued upon exercise of Options or Convertible Securities which are outstanding on the date immediately preceding the Warrant Date, provided that (except with regard to the Previously-Issued Securities (as defined in the Securities Purchase Agreement)) such issuance of shares of Common Stock upon exercise of such Options or Convertible Securities is made pursuant to the terms of such Options or Convertible Securities in effect on the date immediately preceding the Warrant Date and such Options or Convertible Securities are not amended after the date immediately preceding the Warrant Date other than with respect to Options originally issued pursuant to an Approved Stock Plan, (iv) issued pursuant to a Strategic Financing; (v) issued to the public pursuant to an underwritten offering registered pursuant to the Securities Act (but in all events excluding offerings pursuant to "equity lines" or similar products) or issued pursuant to the July 8, 2005 Common Stock Purchase Agreement with Fusion Capital Fund II LLC ((i) through (vi) collectively, "Excluded Issuances")) for a consideration per share (the "New Issuance Price") less than the Warrant Exercise Price in effect immediately prior to such issuance or sale (each such sale or issuance, a "Dilutive Issuance"), then concurrent with such issue or sale, the Warrant Exercise Price then in effect shall be reduced to a price (subject to Section 8(f)) equal to the New Issuance Price; provided, however, that in no event shall the Warrant Exercise Price be less than $2.00 (subject to adjustments for stock splits, stock dividends, stock combinations, reclassifications, reorganizations and similar events). If and whenever on or after the twelve (12) month anniversary of the Warrant Date and prior to the Expiration Date, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock issued or deemed to be issued pursuant to any Excluded Issuance) in a Dilutive Issuance, then concurrent with such issue or sale, the Warrant Exercise Price then in effect shall be reduced to a price (rounded to the nearest cent) equal to the product of (x) the Warrant Exercise Price in effect immediately prior to such issuance or sale and (y) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Warrant Exercise Price in effect immediately prior to such Dilutive Issuance by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (II) the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying the (I) the Warrant Exercise Price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance; provided, however, that in no event shall the Warrant Exercise Price be less than $2.00 (subject to adjustments for stock splits, stock dividends, stock combinations, reclassifications, reorganizations and similar events). b. EFFECT ON WARRANT EXERCISE PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable: (i) ISSUANCE OF OPTIONS. If the Company in any manner grants any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of any such Option is less than the Warrant Exercise Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 8(b)(i), the "lowest price per share for which one share of Common Stock is issuable upon exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of any such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities. (ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Warrant Exercise Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 8(b)(ii), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Convertible Security and upon conversion, exchange or exercise of such Convertible Security. No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale. (iii) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Warrant Exercise Price in effect at the time of such change shall be adjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of shares of Common Stock acquirable hereunder shall be correspondingly readjusted. For purposes of this Section 8(b)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon conversion, exchange or exercise thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect. c. HOLDER'S RIGHT OF ALTERNATIVE WARRANT EXERCISE PRICE FOLLOWING ISSUANCE OF CONVERTIBLE SECURITIES. If the Company issues or sells any Options or Convertible Securities after the Closing Date that are convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to a fixed price (each of the formulations for such variable price being herein referred to as, the "Variable Price"), the Company shall provide written notice thereof via facsimile and overnight courier to the holder of this Warrant (the "Variable Notice") on the date of issuance of such Convertible Securities or Options. From and after the date the Company issues any such Convertible Securities or Options with a Variable Price, but only for so long as such Convertible Securities or Options are outstanding, the holder shall have the right, but not the obligation, in its sole discretion to substitute the Variable Price for the Warrant Exercise Price upon exercise of this Warrant by designating in the Exercise Notice delivered upon exercise of this Warrant that solely for purposes of such exercise the holder is relying on the Variable Price rather than the Warrant Exercise Price then in effect. The holder's election to rely on a Variable Price for a particular exercise of this Warrant shall not obligate the holder to rely on a Variable Price for any future exercises of this Warrant. d. EFFECT ON WARRANT EXERCISE PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the following shall be applicable: (i) CALCULATION OF CONSIDERATION RECEIVED. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then, solely for the purposes of this Section 8, the Options will be deemed to have been issued for a consideration of $0.01. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the Closing Sale Price of such securities on the date of receipt of such securities. If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined by the Company and the holders of Warrants representing at least 60% of the shares of Common Stock obtainable upon exercise of all Warrants issued on the Original Issuance Date then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the holders of the Warrants representing at least 60% of the shares of Common Stock obtainable upon exercise of all Warrants issued on the Original Issuance Date then outstanding. The determination of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company. (ii) RECORD DATE. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. If after the occurrence of such record date the transaction or event for which such record date was set is abandoned or terminated, then any adjustments resulting from this Section 8(d)(ii) as it relates to such terminated or abandoned transaction or event shall be reversed as if such record date had never occurred. e. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES UPON SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. Any adjustment under this Section 8(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. f. CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 8 in a private transaction (the primary purpose of which is to raise equity capital) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features other than pursuant to an Excluded Issuance), then the Company's Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided that no such adjustment will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8. g. NOTICES. (i) Promptly following any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment. The Company (at the Company's expense), if there shall be a disagreement among the Company and holders of Warrants representing at least 60% of the shares of Common Stock obtainable upon exercise of all Warrants issued on the Original Issuance Date then outstanding, shall retain independent public accountants of recognized national standing selected by the Board of Directors of the Company to make any computation required in connection with adjustments under this Warrant, and a certificate signed by such firm absent manifest error shall be conclusive evidence of the correctness of such adjustment, which shall be binding on the holder and the Company. (ii) The Company will give written notice to the holder of this Warrant at least ten (10) Business Days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined below), dissolution or liquidation, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. (iii) The Company will also give written notice to the holder of this Warrant at least ten (10) Business Days prior to the date on which any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any consolidation or merger involving the Company and any other Person, any transaction or series of transactions in which more than 50% of the voting securities of the Company are transferred to another Person, or any transfer, sale or other disposition of all or substantially all the assets of the Company to any other Person (each, an "Organic Change"), dissolution or liquidation will take place, provided that the Company need not in any case provide such notice prior to the time such information is made known to the public. h. ADJUSTMENT. No adjustment in the Warrant Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $.01 in such price; provided, however, that any adjustments which by reason of this sentence are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. Section 9. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking or other form of security reasonably acceptable to the Company (or in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed. Notwithstanding the foregoing, if this Warrant is lost by, stolen from or destroyed by the original holder hereof, the affidavit of such original holder setting forth the circumstances of such loss, theft or destruction shall be accepted as satisfactory evidence thereof, and no indemnification bond or other security shall be required by the Company as a condition to the execution and delivery by the Company of a new Warrant to such original holder other than such original holder's unsecured written agreement to indemnify the Company solely for losses actually incurred by the Company as a direct consequence of the loss, theft or destruction of the Warrant. Section 10. NOTICE. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. If notice is to be sent to the Company, the holder shall use its reasonable best efforts to provide additional copies to the individuals listed below; provided, however, that the failure of such holder to send such additional copies shall in no way limit the effectiveness of any notice sent to the Company to the attention of Chief Executive Officer as provided for below. The addresses and facsimile numbers for such communications shall be: If to the Company: Hemispherx Biopharma, Inc. One Penn Center 1617 JFK Boulevard, Suite 660 Philadelphia, PA 19103 Telephone: 215-988-0080 Facsimile: 215 988-1739 Attention: Chief Executive Officer With a copy to: Ransom W. Etheridge, Esq. 2610 Potters Road Suite 200 Virginia Beach, VA 23452 Telephone: 757-486-0599 Facsimile: 757-486-0792 If to the Transfer Agent: Continental Stock Transfer & Trust Company 2 Broadway New York, NY 10004 Telephone: (212) 509-4000 Facsimile: (212) 509-5150 If to a holder of this Warrant, to it at the address and facsimile number set forth on the Schedule of Buyers to the Securities Purchase Agreement, with copies to such holder's representatives as set forth on such Schedule of Buyers, or at such other address and facsimile as shall be delivered to the Company upon the issuance or transfer of this Warrant. Each party shall provide five days' prior written notice to the other party of any change in address or facsimile number. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. Section 11. AMENDMENTS. This Warrant and any term hereof may be amended, changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against which enforcement of such amendment, change, waiver, discharge or termination is sought and shall be binding on such party's or holder's assignees and transferees; provided, however, that any such amendment, change, waiver, discharge or termination that adversely impacts the holders of any of the Warrants other than this Warrant may be made only if the Company has obtained the written consent of the holders of Warrants representing at least 60% of the shares of Common Stock issuable upon exercise of all of the Warrants issued on the Original Issuance Date then outstanding; provided, further, that no such action may increase the Warrant Exercise Price or decrease the number of shares or class of stock issuable upon exercise of any Warrants without the written consent of the holder of such Warrant. No waivers of any term, condition or provision of this Warrant in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such term, condition or provision. Section 12. DATE. The date of this Warrant is October 6, 2005 (the "Warrant Date"). This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7(c) shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. Section 13. LIMITATION ON NUMBER OF WARRANT SHARES. The Company shall not be obligated to issue Warrant Shares upon exercise of this Warrant to the extent that the issuance of such shares of Common Stock would cause the Company to exceed that number of shares of Common Stock which the Company may issue upon exercise of this Warrant (the "Exchange Cap") without breaching the Company's obligations under the rules or regulations of the Principal Market, except that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the Principal Market (or any successor rule or regulation) for issuances of Common Stock in excess of such amount. Until such approval is obtained, the holder of this Warrant shall not be issued, upon exercise of this Warrant, Warrant Shares in an amount which as of the date of such exercise would exceed such holder's Cap Allocation Amount (as such term is defined in the Convertible Debenture). If at any time when the holder delivers an Exercise Notice pursuant to Section 2 hereof the Company shall be prohibited pursuant to the provisions of this Section 13 from issuing any Warrant Shares, then the Company shall pay in immediately available funds to the holder of this Warrant within two (2) Business Days of the date of delivery of such Exercise Notice, an amount in cash equal to the product of (X) the number of shares of Common Stock which could not be issued by virtue of the limitations contained in this Section 13 multiplied by (Y) the excess of (1) the average of the Closing Sale Prices of the Common Stock on each of the five (5) trading days ending on the third trading day immediately preceding the date such prohibition arises over (2) the Warrant Exercise Price then in effect. The number of shares issuable upon exercise of this Warrant shall be reduced for each share for which the Company makes a cash payment pursuant to the preceding sentence. Section 14. Judicial Proceedings. Any legal action, suit or proceeding brought against the Company with respect to this Warrant may be brought in any federal court of the Southern District of New York or any state court located in New York County, State of New York, and by execution and delivery of this Warrant, the Company hereby irrevocably and unconditionally waives any claim (by way of motion, as a defense or otherwise) of improper venue, that it is not subject personally to the jurisdiction of such court, that such courts are an inconvenient forum or that this Warrant or the subject matter may not be enforced in or by such court. The Company hereby irrevocably and unconditionally consents to the service of process of any of the aforementioned courts in any such action, suit or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, at its address set forth or provided for in Section 10, such service to become effective 10 days after such mailing. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or commence legal proceedings or otherwise proceed against any other party in any other jurisdiction to enforce judgments obtained in any action, suit or proceeding brought pursuant to this Section. The Company irrevocably submits to the exclusive jurisdiction of the aforementioned courts in such action, suit or proceeding Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporate laws of the State of New York shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. [* * * *] [SIGNATURE PAGE TO WARRANT] IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by as of the 6th day of October, 2005. HEMISPHERX BIOPHARMA, INC. By: s/ ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- EXHIBIT A TO WARRANT EXERCISE NOTICE TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT HEMISPHERX BIOPHARMA, INC. The undersigned holder hereby exercises the right to purchase of -------------- the shares of Common Stock ("Warrant Shares") of HEMISPHERX BIOPHARMA, INC., a Delaware corporation (the "Company"), evidenced by the attached Warrant (the "Warrant"). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant. 1. Form of Warrant Exercise Price. The Holder intends that payment of the Warrant Exercise Price shall be made as: "Cash Exercise" with respect to Warrant Shares; and/or ------ --------- "Cashless Exercise" with respect to Warrant Shares ------ --------- (to the extent permitted by the terms of the Warrant). 2. Variable Price. Is the Variable Price being relied on pursuant to Section 8(c) of the Warrant? (check one) YES ____ No ____ 3. Payment of Warrant Exercise Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the sum of $ to the Company in accordance with the terms of ------------ the Warrant. 4. Delivery of Warrant Shares. The holder of this warrant has sold or will sell the shares of common stock issuable pursuant to this Notice pursuant to a registration statement or an exemption from registration under the Securities Act of 1933, as amended. 5. Private Placement Representations. The holder of this Warrant confirms the continuing validity of, and reaffirms as of the date hereof, its representations and warranties set forth in Section 6 of the Warrant. Date: , --------------- -- ---- -------------------------------- -------------------------------- Name of Registered Holder Tax ID of Registered Holder (if applicable) By: -------------------------------- Name: -------------------------------- Title: -------------------------------- ACKNOWLEDGMENT The Company hereby acknowledges this Exercise Notice and hereby directs Continental Stock Transfer & Trust Company to issue the above indicated number of shares of Common Stock in accordance with the Irrevocable Transfer Agent Instructions dated January 26, 2004 (as amended on October 21, 2005) from the Company and acknowledged and agreed to by Continental Stock Transfer & Trust Company. HEMISPHERX BIOPHARMA, INC. By: --------------------------------- Name: Title: EXHIBIT B TO WARRANT FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of HEMISPHERX BIOPHARMA, INC., a Delaware corporation, represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises. Dated: , 200 ----------- - By: -------------------------------------- Its: -------------------------------------- Witness: -------------------------------- Signature -------------------------------- Title -------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----