Document:

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                                                                     EXHIBIT 4.2

                          HCC INSURANCE HOLDINGS, INC.

                                    as Issuer

                                       AND

                            FIRST UNION NATIONAL BANK

                                   as Trustee

                                 ---------------

                          FIRST SUPPLEMENTAL INDENTURE

                           Dated as of August 23, 2001

                                 ---------------

               Supplement to Indenture dated as of August 23, 2001

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                                Table of Contents

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                                              ARTICLE 1
                                        CREATION OF THE NOTES

Section 1.01.  Designation of Series.............................................................1
Section 1.02.  Form of Notes.....................................................................1
Section 1.03.  Limit on Amount of Series.........................................................1
Section 1.04.  Interest..........................................................................2
Section 1.05.  Certificate of Authentication.....................................................2
Section 1.06.  No Sinking Fund...................................................................2
Section 1.07.  Issuance in Global Form...........................................................2
Section 1.08.  Discharge of Indenture; Defeasance................................................2
Section 1.09.  Other Terms Of Notes..............................................................2
Section 1.10.  Additional Definitions............................................................3

                                              ARTICLE 2
                                         CONVERSION OF NOTES

Section 2.01.  Conversion Privilege..............................................................4
Section 2.02.  Exercise of Conversion Privilege..................................................5
Section 2.03.  Fractions Of Common Stock Shares..................................................5
Section 2.04.  Adjustment of Conversion Price....................................................5
Section 2.05.  Reorganization of the Company....................................................14
Section 2.06.  Notice of Adjustments of Conversion Price........................................15
Section 2.07.  Notice of Certain Corporate Action...............................................15
Section 2.08.  Company to Reserve Common Stock..................................................16
Section 2.09.  Taxes on Conversions.............................................................16
Section 2.10.  Covenant as to Common Stock......................................................16
Section 2.11.  Cancellation of Converted Securities.............................................16
Section 2.12.  Right of Holders to Convert......................................................16

                                               ARTICLE 3
                                          REDEMPTION OF NOTES

Section 3.01.  Optional Redemption by the Company...............................................17
Section 3.02.  Applicability of Article.........................................................17

                                               ARTICLE 4
                      PURCHASE OF NOTES BY THE COMPANY AT THE OPTION OF THE HOLDERS

Section 4.01.  Purchase at Option of Holders on Specified Purchase Dates........................17
Section 4.02.  Purchase at Option of Holders Upon Change of Control ............................21
Section 4.03.  Certain Article 4 Definitions....................................................23

                                                ARTICLE 5
                                            EVENTS OF DEFAULT

Section 5.01.  Additional Events Of Default.....................................................25
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Section 5.02.  Amendment........................................................................25

                                                ARTICLE 6
                                  AMENDMENTS, SUPPLEMENTS AND WAIVERS

Section 6.01.  With Consent of Holders..........................................................25

                                                ARTICLE 7
                                              MISCELLANEOUS

Section 7.01.  Application of First Supplemental Indenture......................................26
Section 7.02.  Effective Date...................................................................26
Section 7.03.  Counterparts.....................................................................26
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         FIRST SUPPLEMENTAL INDENTURE, dated as of August 23, 2001 by and
between HCC INSURANCE HOLDINGS, INC., a Delaware corporation, as issuer (the
"Company"), and FIRST UNION NATIONAL BANK, a national banking association duly
organized and existing under the laws of the United States of America, as
Trustee under the Indenture (as hereinafter defined) (the "Trustee").

                                    RECITALS

         WHEREAS, the Company and the Trustee are parties to that certain
Indenture dated as of August 23, 2001 (the "Indenture," all capitalized terms
used and not otherwise defined herein shall have the meanings set forth in the
Indenture) providing for the issuance by the Company of securities from time to
time;

         WHEREAS, the Company desires to issue a new series of Securities under
the Indenture, and has duly authorized the creation and issuance of such
Securities and the execution and delivery of this First Supplemental Indenture
to modify the Indenture and provide certain additional provisions as hereinafter
described;

         WHEREAS, the Company and the Trustee deem it advisable to enter into
this First Supplemental Indenture for the purposes of establishing the terms of
such series of Securities;

         WHEREAS, the execution and delivery of this First Supplemental
Indenture has been authorized by a Board Resolution;

         WHEREAS, concurrent with the execution hereof, the Company has
delivered an Officers' Certificate and has caused its counsel to deliver to the
Trustee an Opinion of Counsel; and

         WHEREAS, all things necessary to make this First Supplemental Indenture
a valid agreement of the Company in accordance with its terms have been done,
and the execution and delivery thereof have been in all respects duly authorized
by the parties hereto.

         NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:

         For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Notes (as hereinafter defined), as
follows:

                                   ARTICLE 1
                              CREATION OF THE NOTES

         Section 1.01. Designation of Series. Pursuant to the terms hereof and
Section 301 of the Indenture, the Company hereby creates a series of Securities
designated as the "2.00% Convertible Notes Due 2021" (the "Notes"), which Notes
shall be deemed "Securities" for all purposes under the Indenture.

         Section 1.02. Form of Notes. The Notes shall be substantially in the
form set forth in Exhibit A attached hereto, which is incorporated herein and
made part hereof. The Stated Maturity of the principal amount of the Notes shall
be September 1, 2021.

         SECTION 1.03. Limit on Amount of Series. The Notes shall not exceed
U.S. $172,500,000 in aggregate principal amount, and may, upon the execution and
delivery of this First Supplemental Indenture or from time to time thereafter,
be executed by the Company and delivered to the Trustee for

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authentication, and the Trustee shall thereupon authenticate and deliver said
Notes upon a Company Order and delivery of an Officers' Certificate and Opinion
of Counsel as contemplated by Section 303 of the Indenture.

         Section 1.04. Interest. The issue date for the Notes will be August 23,
2001. The Company shall pay interest on the aggregate principal amount of the
Notes at 2.00% per annum from August 23, 2001 until September 1, 2021. The
Company shall pay interest, semi-annually in arrears on March 1 and September 1
of each year, or if any such day is not a Business Day, on the next succeeding
Business Day, commencing on March 1, 2002 (each an "Interest Payment Date") and
such interest shall be paid to the Person in whose name the Note is registered
at the close of business on the Regular Record Date immediately preceding the
Interest Payment Date. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of issuance. The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue installments of
interest (without regard to any applicable grace periods) from time to time on
demand at the same rate to the extent lawful. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.

         Interest shall be payable at the office of the Company maintained by
the Company for such purposes in the Borough of Manhattan, City of New York,
which shall initially be an office or agency of the Trustee and may, as the
Company shall specify to the Paying Agent in writing by each Regular Record
Date, be paid either (i) by check mailed to the address of the Person entitled
thereto as it appears in the Security Register (provided that the Holder of
Notes with an aggregate principal amount in excess of $2,000,000 shall, at the
written election of such Holder, be paid by wire transfer in immediately
available funds) or (ii) by wire transfer to an account maintained by such
Person located in the United States; provided, however, that payments to the
Depositary will be made by wire transfer of immediately available funds to the
account of the Depositary or its nominee.

         Maturity, conversion, purchase by the Company at the option of the
Holder or redemption of a Note will cause interest to cease to accrue on such
Note. The Company can not reissue a Note that has matured or been converted,
purchased by the Company at the option of the Holder, redeemed or otherwise
cancelled, except for registration of transfer, exchange or replacement of such
Note.

         Section 1.05. Certificate of Authentication. The Trustee's certificate
of authentication to be borne on the Notes shall be substantially as provided in
the Form of Note attached hereto as Exhibit A.

         Section 1.06. No Sinking Fund. No sinking fund will be provided with
respect to the Notes.

         Section 1.07. Issuance in Global Form. The Notes shall be issued as one
or more Global Notes, representing the aggregate principal amount of the Notes,
and shall be deposited with the Trustee as custodian for the Depositary. The
Notes shall be registered in the name of Cede & Co., or other nominee of the
Depositary.

         Section 1.08. Discharge of Indenture; Defeasance. The Notes shall not
be subject to defeasance or covenant defeasance.

         Section 1.09. Other Terms Of Notes. The other terms of the Notes shall
be as expressly set forth in Article 2, Article 3, Article 4, Article 5 and
Article 6 hereof and Exhibit A hereto.

         The words "herein", "hereof" and "hereunder" and other words of similar
import refer to this First Supplemental Indenture as a whole and not to any
particular Article, Section or other subdivision.

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         Section 1.10. Additional Definitions. For purposes of this First
Supplemental Indenture, the following terms shall have the following
definitions:

         "CHANGE OF CONTROL" has the meaning set forth in Section 4.03(a).

         "CHANGE OF CONTROL PURCHASE PRICE" has the meaning set forth in Section
4.02(a).

         "CHANGE OF CONTROL PURCHASE DATE" has the meaning set forth in Section
4.02(a).

         "CHANGE OF CONTROL PURCHASE NOTICE" has the meaning set forth in
Section 4.02(c).

         "COMMON STOCK" means the Common Stock of the Company, par value $1.00
per share.

         "CONVERSION AGENT" means the conversion agent appointed by the Company
pursuant to Section 3 of the Global Note.

         "CONVERSION PRICE" means initially $32.00, subject to adjustment as
provided in Article 2.

         "DEPOSITARY" means The Depository Trust Company, 55 Water Street, New
York, New York.

         "EX-DIVIDEND TIME" means, with respect to any issuance or distribution
on shares of Common Stock, the first date on which the shares of Common Stock
trade regular way on the principal securities market on which the shares of
Common Stock are then traded without the right to receive such issuance or
distribution.

         "GLOBAL NOTE" means a Security that evidences all or part of the Notes
and bears the legend set forth in the Form of Note attached hereto as Exhibit A.

         "ISSUE DATE" of any Note means the date on which the Note was
originally issued or deemed issued as set forth on the face of the Note.

         "MARKET PRICE" means the average of the Sale Prices of the Common Stock
for the five Trading Day period ending on the third Business Day prior to the
applicable Purchase Date or Change of Control Purchase Date (if the third
Business Day prior to the applicable Purchase Date or Change of Control Purchase
Date is a Trading Day, or if not, then on the last Trading Day prior to such
third Business Day), appropriately adjusted to take into account the occurrence,
during the period commencing on the first of such Trading Days during such five
Trading Day period and ending on such Purchase Date or Change of Control
Purchase Date, as the case may be, of any event described in Section 2.04 or
Section 2.05.

         "PURCHASE DATE" has the meaning set forth in Section 4.01(a).

         "PURCHASE NOTICE" has the meaning set forth in Section 4.01(a)(ii).

         "PURCHASE PRICE" has the meaning set forth in Section 4.01(a).

         "REGULAR RECORD DATE" means each of February 15 and August 15 of each
year.

         "SALE PRICE" of the Common Stock on any date means the closing per
share sale price (or, if no closing sale price is reported, the average of the
bid and ask prices or, if more than one in either case, the average of the
average bid and average ask prices) on such date as reported in the composite
transactions for the principal United States securities exchange on which the
Common Stock is traded or, if the Common Stock is not listed on a United States
national or regional securities exchange, as reported by the

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National Association of Securities Dealers Automated Quotation System or the
National Quotation Bureau Incorporated. To the extent that the trading of Common
Stock regular way continues past 4:00 p.m. New York City time, the closing price
of the Common Stock shall be deemed to refer to the price at the time that is
then customary for determining the Trading Day's index levels for stocks traded
on such national securities exchange or automated quotation system.

         "TRADING DAY" means a day on which the security, the closing price of
which is being determined, (a) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter-market at the
close of business and (b) has traded at least once on the national or regional
securities exchange or association or over-the-counter market that is the
primary market for the trading of such security.

                                   ARTICLE 2
                               CONVERSION OF NOTES

         Section 2.01. Conversion Privilege. Subject to and upon compliance with
the provisions of this Article 2, at the option of the Holder thereof, any Note
or any portion of the principal amount thereof which is $1,000 or an integral
multiple of $1,000, and which has not previously been redeemed pursuant to
Article 3 hereof or purchased pursuant to Article 4 hereof, may be converted
into that number of fully paid and nonassessable shares of Common Stock (as such
shares shall then be constituted) obtained by dividing the principal amount of
the Note or portion thereof surrendered for conversion by the Conversion Price
in effect at such time, by surrender of the Note to be so converted in whole or
in part together with any required funds, in the manner provided in Section
2.02, at any time following the issuance of the Notes and prior to the close of
business on September 1, 2021.

         Holders may surrender Notes for conversion into Common Stock on any
date within a calendar quarter if, as of the last day of the preceding calendar
quarter, the Sale Price of the Common Stock for at least 20 Trading Days in a
period of 30 consecutive Trading Days ending on the last Trading Day of the
quarter is more than 120% of the Conversion Price on the last Trading Day of the
quarter. The Conversion Agent will, on behalf of the Company, determine at the
end of each quarter if the Notes are convertible and notify the Company and the
Trustee and, upon receipt of such determination each quarter, if the Notes are
convertible, the Company shall issue a press release indicating that the Notes
are convertible and publish such information on the Company's Web site.

         In addition, even if the condition in the preceding paragraph has not
been satisfied, a Holder may surrender for conversion a Note or portion of a
Note:

                  (i) if such Note or such portion thereof has been called for
         redemption pursuant to Article 3 hereof, until the close of business on
         the day that is two Business Days prior to the Redemption Date unless
         the Company defaults on payment of the Redemption Price;

                  (ii) if the Company consolidates with or merges into another
         corporation, or is a party to a binding share exchange pursuant to
         which the shares of Common Stock would be converted into cash,
         securities or other property as set forth in Section 2.05 hereof, at
         any time from and after the date which is 15 days prior to the date
         announced by the Company as the anticipated effective time of such
         transaction until 15 days after the actual date of such transaction; or

                  (iii) during any period after December 1, 2001 in which (A)
         the credit rating assigned to the Notes by Standard & Poor's Rating
         Services is below BBB-, (B) the

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         credit rating assigned to the Notes by such rating agency is suspended
         or withdrawn or (C) such rating agency is not then rating the Notes.

         A Note in respect of which a Holder has delivered a Purchase Notice or
Change of Control Purchase Notice pursuant to Section 4.01 or Section 4.02
exercising the option of such Holder to require the Company to purchase such
Note may be converted only if such notice of exercise is withdrawn in accordance
with the terms of such Section, unless the Company defaults in the payment of
the applicable Purchase Price or Change of Control Purchase Price.

         Section 2.02. Exercise of Conversion Privilege. In order to exercise
the conversion privilege, the Holder of any Note to be converted shall surrender
such Note, duly endorsed or assigned to the Company or in blank, at the
Corporate Trust Office of the Trustee, located at 5847 San Felipe, Suite 1050,
Houston, Texas 77057, Attn: Kevin M. Dobrava, accompanied by a duly signed and
completed written notice to the Company at the Corporate Trust Office that the
Holder elects to convert such Note. Notes that are surrendered for conversion
during the period from the close of business on any Regular Record Date
immediately preceding any Interest Payment Date to the opening of business on
such Interest Payment Date shall (except in the case of Notes or portions
thereof which have been called for redemption or in respect of which a Purchase
Notice or Change of Control Purchase Notice delivered by the Holder has not been
withdrawn, the conversion rights of which would terminate during the period
between such Regular Record Date and the close of business on such Interest
Payment Date) be accompanied by payment in immediately available funds or other
funds acceptable to the Company of an amount equal to the interest payable on
such Interest Payment Date on the principal amount of Notes being surrendered
for conversion; provided, however, that no such payment shall be required if
there shall exist at the time of conversion a default in the payment of interest
on the Notes. No payment or adjustment shall be made upon any conversion on
account of any interest accrued on the Notes surrendered for conversion from the
Interest Payment Date preceding the day of conversion, or on account of any
dividends on the Common Stock issued upon conversion. In addition, Holders shall
not be entitled to receive any dividends payable to holders of Common Stock as
of any Record Date before the close of business on the conversion date.

         Notes shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Notes for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of such Notes as Holders shall cease, and the Person or Persons entitled
to receive the Common Stock issuable upon conversion shall be treated for all
purposes as the record holder or holders of such Common Stock at such time. As
promptly as practicable on or after the conversion date, the Company shall issue
and shall deliver to the Trustee at its Corporate Trust Office a certificate or
certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share thereof, as
provided in Section 2.03 hereof, and the Trustee shall forward such certificate
or certificates at the addresses set forth in the written notices sent to the
Company by the Holders electing to convert their Notes.

         Section 2.03. Fractions Of Common Stock Shares. No fractional shares of
Common Stock shall be issued upon conversion of the Notes. If more than one Note
shall be surrendered for conversion at one time by the same Holder, the number
of full shares which shall be issuable upon conversion thereof shall be computed
on the basis of the aggregate principal amount of the Notes so surrendered.
Instead of any fractional share of Common Stock which would otherwise be
issuable upon conversion of any Note or Notes, the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the Sale Price on the Trading Day immediately preceding the date of
conversion.

         Section 2.04. Adjustment of Conversion Price.

         The Conversion Price shall be adjusted from time to time as follows:

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         (a) In case the Company shall, at any time or from time to time while
any of the Notes are outstanding, pay a dividend or make a distribution in
shares of Common Stock to all holders of its outstanding shares of Common Stock,
then the Conversion Price in effect at the opening of business on the date
following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution shall be reduced by multiplying such
Conversion Price by a fraction:

                  (i) the numerator of which shall be the number of shares of
         Common Stock outstanding at the close of business on the Record Date
         (as hereinafter defined) fixed for such determination; and

                  (ii) the denominator of which shall be the sum of such number
         of shares and the total number of shares constituting such dividend or
         other distribution.

         Such reduction shall become effective immediately after the opening of
business on the day following the Record Date fixed for such determination. If
any dividend or distribution of the type described in this Section 2.04(a) is
declared but not so paid or made, the Conversion Price shall again be adjusted
to the Conversion Price which would then be in effect if such dividend or
distribution had not been declared.

         (b) In case the Company shall, at any time or from time to time while
any of the Notes are outstanding, subdivide its outstanding shares of Common
Stock into a greater number of shares of Common Stock, then the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and
conversely, in case the Company shall, at any time or from time to time while
any of the Notes are outstanding, combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, then the Conversion Price in
effect at the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased.

         Such reduction or increase, as the case may be, shall become effective
immediately after the opening of business on the day following the day upon
which such subdivision or combination becomes effective.

         (c) In case the Company shall, at any time or from time to time while
any of the Notes are outstanding, issue rights or warrants (other than any
rights or warrants referred to in Section 2.04(d)) to all holders of its shares
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock (or securities convertible into shares of Common Stock) at a price per
share (or having a conversion price per share) less than the Sale Price on the
Business Day immediately preceding the date of the announcement of such issuance
(treating the conversion price per share of the securities convertible into
Common Stock as equal to (x) the sum of (i) the price for a unit of the security
convertible into Common Stock and (ii) any additional consideration initially
payable upon the conversion of such security into Common Stock divided by (y)
the number of shares of Common Stock initially underlying such convertible
security), then the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price in effect at the
opening of business on the date after such date of announcement by a fraction:

                  (i) the numerator of which shall be the number of shares of
         Common Stock outstanding on the close of business on the date of
         announcement, plus the number of shares or securities which the
         aggregate offering price of the total number of shares or securities so
         offered for subscription or purchase (or the aggregate conversion price
         of the convertible securities so offered) would purchase at such Sale
         Price of the Common Stock; and

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                  (ii) the denominator of which shall be the number of shares of
         Common Stock outstanding at the close of business on the date of
         announcement, plus the total number of additional shares of Common
         Stock so offered for subscription or purchase (or into which the
         convertible securities so offered are convertible).

         Such adjustment shall become effective immediately after the opening of
business on the day following the date of announcement of such issuance. To the
extent that shares of Common Stock (or securities convertible into shares of
Common Stock) are not delivered pursuant to such rights or warrants, upon the
expiration or termination of such rights or warrants, the Conversion Price shall
be readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made on the
basis of the delivery of only the number of shares of Common Stock (or
securities convertible into shares of Common Stock) actually delivered. In the
event that such rights or warrants are not so issued, the Conversion Price shall
again be adjusted to be the Conversion Price which would then be in effect if
the date fixed for the determination of stockholders entitled to receive such
rights or warrants had not been fixed. In determining whether any rights or
warrants entitle the holders to subscribe for or purchase shares of Common Stock
at less than such Sale Price, and in determining the aggregate offering price of
such shares of Common Stock, there shall be taken into account any consideration
received for such rights or warrants, the value of such consideration if other
than cash, to be determined by the Board of Directors.

         (d) (i) In case the Company shall, at any time or from time to time
while any of the Notes are outstanding, by dividend or otherwise, distribute to
all holders of its shares of Common Stock (including any such distribution made
in connection with a consolidation or merger in which the Company is the
continuing corporation and the Common Stock is not changed or exchanged), cash,
shares of its capital stock (other than any dividends or distributions to which
Section 2.04(a) applies), evidences of its indebtedness or other assets,
including securities, but excluding (x) any rights or warrants referred to in
Section 2.04(c), (y) dividends or distributions of stock, securities or other
property or assets (including cash) in connection with a reclassification,
change, merger, consolidation, statutory share exchange, combination, sale or
conveyance to which Section 2.05 applies and (z) dividends and distributions
paid exclusively in cash (such capital stock, evidence of its indebtedness,
cash, other assets or securities being distributed hereinafter in this Section
2.04(d) called the "distributed assets"), then, in each such case, subject to
Section 2.04(d)(iv), Section 2.04(d)(v), Section 2.04(d)(vi) and Section
2.04(d)(vii), the Conversion Price shall be reduced so that the same shall be
equal to the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the Record Date with respect to
such distribution by a fraction:

                  (A) the numerator of which shall be the Current Market Price
         of the Common Stock, less the Fair Market Value (as hereinafter
         defined) on such date of the portion of the distributed assets so
         distributed applicable to one share of Common Stock (determined on the
         basis of the number of shares of Common Stock outstanding on the Record
         Date) (determined as provided in Section 2.04(g)) on such date; and

                  (B) the denominator of which shall be such Current Market
         Price.

                  Such reduction shall become effective immediately prior to the
         opening of business on the day following the Record Date for such
         distribution. In the event that such dividend or distribution is not so
         paid or made, the Conversion Price shall again be adjusted to be the
         Conversion Price which would then be in effect if such dividend or
         distribution had not been declared.

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                  (ii) If the Board of Directors determines the Fair Market
         Value of any distribution for purposes of this Section 2.04(d) by
         reference to the actual or when issued trading market for any
         distributed assets comprising all or part of such distribution, it must
         in doing so consider the prices in such market over the same period
         (the "Reference Period") used in computing the Current Market Price
         pursuant to Section 2.04(g) to the extent possible, unless the Board of
         Directors determines in good faith that determining the Fair Market
         Value during the Reference Period would not be in the best interest of
         the Holders.

                  (iii) In the event any such distribution consists of shares of
         capital stock of, or similar equity interests in, one or more of the
         Company's Subsidiaries (a "Spin-Off"), the Fair Market Value of the
         securities to be distributed shall equal the average of the closing
         sale prices of such securities on the principal securities market on
         which such securities are traded for the five consecutive Trading Days
         commencing on and including the sixth day of trading of those
         securities after the effectiveness of the Spin-Off, and the Current
         Market Price shall be measured for the same period. In the event,
         however, that an underwritten initial public offering of the securities
         in the Spin-Off occurs simultaneously with the Spin-Off, Fair Market
         Value of the securities distributed in the Spin-Off shall mean the
         initial public offering price of such securities and the Current Market
         Price shall mean the Sale Price for the Common Stock on the same
         Trading Day.

                  (iv) Rights or warrants distributed by the Company to all
         holders of its shares of Common Stock entitling them to subscribe for
         or purchase shares of the Company's capital stock (either initially or
         under certain circumstances), which rights or warrants, until the
         occurrence of a specified event or events ("Trigger Event"), (x) are
         deemed to be transferred with such shares of Common Stock, (y) are not
         exercisable and (z) are also issued in respect of future issuances of
         shares of Common Stock, shall be deemed not to have been distributed
         for purposes of this Section 2.04(d) (and no adjustment to the
         Conversion Price under this Section 2.04(d) will be required) until the
         occurrence of the earliest Trigger Event. If such right or warrant is
         subject to subsequent events, upon the occurrence of which such right
         or warrant shall become exercisable to purchase different distributed
         assets, evidences of indebtedness or other assets, or entitle the
         holder to purchase a different number or amount of the foregoing or to
         purchase any of the foregoing at a different purchase price, then the
         occurrence of each such event shall be deemed to be the date of
         issuance and Record Date with respect to a new right or warrant (and a
         termination or expiration of the existing right or warrant without
         exercise by the holder thereof). In addition, in the event of any
         distribution (or deemed distribution) of rights or warrants, or any
         Trigger Event or other event (of the type described in the preceding
         sentence) with respect thereto, that resulted in an adjustment to the
         Conversion Price under this Section 2.04(d):

                           (A) in the case of any such rights or warrants which
                  shall all have been redeemed or repurchased without exercise
                  by any holders thereof, the Conversion Price shall be
                  readjusted upon such final redemption or repurchase to give
                  effect to such distribution or Trigger Event, as the case may
                  be, as though it were a cash distribution, equal to the per
                  share redemption or repurchase price received by a holder of
                  shares of Common Stock with respect to such rights or warrants
                  (assuming such holder had retained such rights or warrants),
                  made to all holders of shares of Common Stock as of the date
                  of such redemption or repurchase; and

                           (B) in the case of such rights or warrants which
                  shall have expired or been terminated without exercise, the
                  Conversion Price shall be readjusted as if such rights and
                  warrants had never been issued.

                                       8
<PAGE>   12

                  (v) For purposes of this Section 2.04(d) and Section 2.04(a),
         Section 2.04(b) and Section 2.04(c), any dividend or distribution to
         which this Section 2.04(d) is applicable that also includes (i) shares
         of Common Stock, (ii) a subdivision or combination of shares of Common
         Stock to which Section 2.04(b) applies or (iii) rights or warrants to
         subscribe for or purchase shares of Common Stock to which Section
         2.04(c) applies (or any combination thereof), shall be deemed instead
         to be:

                           (A) a dividend or distribution of the evidences of
                  indebtedness, assets, shares of capital stock, rights or
                  warrants, other than such shares of Common Stock, such
                  subdivision or combination or such rights or warrants to which
                  Section 2.04(a), Section 2.04(b) and Section 2.04(c) apply,
                  respectively (and any Conversion Price reduction required by
                  this Section 2.04(d) with respect to such dividend or
                  distribution shall then be made), immediately followed by

                           (B) a dividend or distribution of such shares of
                  Common Stock, such subdivision or combination or such rights
                  or warrants (and any further Conversion Price reduction
                  required by Section 2.04(a), Section 2.04(b) and Section
                  2.04(c) with respect to such dividend or distribution shall
                  then be made), except:

                                    (I) the Record Date of such dividend or
                           distribution shall be substituted as (i) "the date
                           fixed for the determination of stockholders entitled
                           to receive such dividend or other distribution," and
                           "Record Date fixed for such determination" within the
                           meaning of Section 2.04(a), (ii) "the day upon which
                           such subdivision becomes effective" and "the day upon
                           which such combination becomes effective" within the
                           meaning of Section 2.04(b), and (iii) as "the date
                           fixed for the determination of stockholders entitled
                           to receive such rights or warrants" within the
                           meaning of Section 2.04(c); and

                                    (II) any shares of Common Stock included in
                           such dividend or distribution shall not be deemed
                           "outstanding at the close of business on the date
                           fixed for such determination" within the meaning of
                           Section 2.04(a) and any reduction or increase in the
                           number of shares of Common Stock resulting from such
                           subdivision or combination shall be disregarded in
                           connection with such dividend or distribution.

                  (vi) In the event of any distribution referred to in this
         Section 2.04(d) in which (1) the Fair Market Value (as determined by
         the Board of Directors) of such distribution applicable to one share of
         Common Stock (determined as provided above) equals or exceeds the
         average of the Sale Prices of the Common Stock over the ten consecutive
         Trading Day period ending on the Record Date for such distribution or
         (2) the average of the Sale Prices of the Common Stock over the ten
         consecutive Trading Day period ending on the Record Date for such
         distribution exceeds the Fair Market Value of such distribution by less
         than $1.00, then, in each such case, in lieu of an adjustment to the
         Conversion Price, adequate provision shall be made so that each Holder
         shall have the right to receive upon conversion of a Security, in
         addition to shares of Common Stock, the kind and amount of such
         distribution such Holder would have received had such Holder converted
         such Security immediately prior to the Record Date for determining the
         shareholders entitled to receive the distribution.

                  (vii) In the event of any distribution described in Section
         2.04(d), where the Fair Market Value of such distribution per share of
         Common Stock (as determined by the Board of Directors) exceeds 10% of
         the Sale Price of a share of Common Stock on the Business Day

                                       9
<PAGE>   13

         immediately preceding the declaration date for such distribution, or in
         the event of any distribution referred to in Section 2.04(c), then, if
         the Notes are otherwise convertible pursuant to this Article 2, the
         Company will be required to give notice to the Holders of Securities at
         least 20 days prior to the Ex-Dividend Time for the distribution and,
         upon the giving of notice, the Notes may be surrendered for conversion
         at any time on and after the date that the Company gives notice to the
         Holders of such conversion right, until the close of business on the
         Business Day prior to the Ex-Dividend Time or the Company announces
         that such distribution will not take place. No adjustment to the
         Conversion Price or the ability of a Holder of a Note to convert will
         be made if the Holder will otherwise participate in such distribution
         without conversion.

         (e) In case the Company shall, at any time or from time to time while
any of the Notes are outstanding, by dividend or otherwise, distribute to all
holders of its shares of Common Stock, cash (excluding any cash that is
distributed upon a reclassification, change, merger, consolidation, statutory
share exchange, combination, sale or conveyance to which Section 2.05 applies or
as part of a distribution referred to in Section 2.04(d)), in an aggregate
amount that, combined together with:

                  (i) the aggregate amount of any other such distributions to
         all holders of shares of Common Stock made exclusively in cash within
         the 12 months preceding the date of payment of such distribution, and
         in respect of which no adjustment pursuant to this Section 2.04(e) has
         been made; and

                  (ii) the aggregate amount of any cash, plus the Fair Market
         Value (as determined by the Board of Directors) of consideration
         payable in respect of any tender offer by the Company or any of its
         Subsidiaries for all or any portion of the shares of Common Stock
         concluded within the 12 months preceding the date of such distribution,
         and in respect of which no adjustment pursuant to Section 2.04(f) has
         been made;

exceeds 10% of the product of the Current Market Price of the Common Stock on
the Record Date with respect to such distribution, times the number of shares of
Common Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, the Conversion Price shall be reduced
so that the same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the close of business on such Record Date
by a fraction:

                  (iii) the numerator of which shall be equal to the Current
         Market Price on the Record Date, less an amount equal to the quotient
         of (x) the excess of such combined amount over such 10% and (y) the
         number of shares of Common Stock outstanding on the Record Date; and

                  (iv) the denominator of which shall be equal to the Current
         Market Price on such date.

However, in the event that the then Fair Market Value (as so determined) of the
portion of cash and other securities, if any, so distributed applicable to one
share of Common Stock is equal to or greater than the Current Market Price on
the Record Date, in lieu of the foregoing adjustment, adequate provision shall
be made so that each Holder shall have the right to receive upon conversion of a
Security (or any portion thereof) the amount of cash in excess of such 10% such
Holder would have received had such Holder converted such Security (or portion
thereof) immediately prior to such Record Date. In the event that such dividend
or distribution is not so paid or made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.

         (f) In case a tender offer made by the Company or any of its
Subsidiaries for all or any portion of the shares of Common Stock shall expire
and such tender offer (as amended upon the expiration

                                       10
<PAGE>   14

thereof) shall require the payment to stockholders (based on the acceptance, up
to any maximum specified in the terms of the tender offer, of shares tendered)
of an aggregate consideration having a Fair Market Value (as determined by the
Board of Directors) that combined together with:

                  (i) the aggregate amount of the cash, plus the Fair Market
         Value (as determined by the Board of Directors), as of the expiration
         of such tender offer, of consideration payable in respect of any other
         tender offers, by the Company or any of its Subsidiaries for all or any
         portion of the shares of Common Stock expiring within the 12 months
         preceding the expiration of such tender offer and in respect of which
         no adjustment pursuant to this Section 2.04(f) has been made; and

                  (ii) the aggregate amount of any distributions to all holders
         of shares of Common Stock made exclusively in cash within 12 months
         preceding the expiration of such tender offer and in respect of which
         no adjustment pursuant to Section 2.04(e) has been made;

exceeds 10% of the product of the Current Market Price of the Common Stock as of
the last time (the "Expiration Time") tenders could have been made pursuant to
such tender offer (as it may be amended), times the number of shares of Common
Stock outstanding (including any tendered shares) on the Expiration Time (such
excess, the "Excess Amount"), then, and in each such case, immediately prior to
the opening of business on the day after the date of the Expiration Time, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on the date of the Expiration Time by a fraction:

                  (iii) the numerator of which shall be the (x) the product of
         (i) the number of shares of Common Stock outstanding (including any
         tendered shares) at the Expiration Time and (ii) the Current Market
         Price of the Common Stock at the Expiration Time, less (y) the Excess
         Amount; and

                  (iv) the denominator shall be the product of the number of
         shares of Common Stock outstanding (including any tendered shares) at
         the Expiration Time and the Current Market Price of the Common Stock at
         the Expiration Time.

         Such reduction (if any) shall become effective immediately prior to the
opening of business on the day following the Expiration Time. In the event that
the Company is obligated to purchase shares pursuant to any such tender offer,
but the Company is permanently prevented by applicable law from effecting any
such purchases or all or a portion of such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such (or such portion of the) tender offer had not been
made. If the application of this Section 2.04(f) to any tender offer would
result in an increase in the Conversion Price, no adjustment shall be made for
such tender offer under this Section 2.04(f).

         (g) For purposes of this Article 2, the following terms shall have the
meanings indicated:

         "CURRENT MARKET PRICE" on any date means the average of the daily Sale
Prices per share of Common Stock for the ten consecutive Trading Days
immediately prior to such date; provided, however, that if:

                  (i) the "ex" date (as hereinafter defined) for any event
         (other than the issuance or distribution requiring such computation)
         that requires an adjustment to the Conversion Price pursuant to Section
         2.04(a), Section 2.04(b), Section 2.04(c), Section 2.04(d), Section
         2.04(e) or Section 2.04(f) occurs during such ten consecutive Trading
         Days, the Sale Price

                                       11
<PAGE>   15

         for each Trading Day prior to the "ex" date for such other event shall
         be adjusted by dividing such Sale Price by the same fraction by which
         the Conversion Price is so required to be adjusted as a result of such
         other event;

                  (ii) the "ex" date for any event (other than the issuance or
         distribution requiring such computation) that requires an adjustment to
         the Conversion Price pursuant to Section 2.04(a), Section 2.04(b),
         Section 2.04(c), Section 2.04(d), Section 2.04(e) or Section 2.04(f)
         occurs on or after the "ex" date for the issuance or distribution
         requiring such computation and prior to the day in question, the Sale
         Price for each Trading Day on and after the "ex" date for such other
         event shall be adjusted by dividing such Sale Price by the reciprocal
         of the fraction by which the Conversion Price is so required to be
         adjusted as a result of such other event; and

                  (iii) the "ex" date for the issuance or distribution requiring
         such computation is prior to the day in question, after taking into
         account any adjustment required pursuant to clause (i) or (ii) of this
         proviso, the Sale Price for each Trading Day on or after such "ex" date
         shall be adjusted by adding thereto the amount of any cash and the Fair
         Market Value (as determined by the Board of Directors in a manner
         consistent with any determination of such value for purposes of Section
         2.04(d), Section 2.04(e) or Section 2.04(f)) of the evidences of
         indebtedness, shares of capital stock or assets being distributed
         applicable to one share of Common Stock as of the close of business on
         the day before such "ex" date.

         For purposes of any computation under Section 2.04(f), if the "ex" date
for any event (other than the tender offer requiring such computation) that
requires an adjustment to the Conversion Price pursuant to Section 2.04(a),
Section 2.04(b), Section 2.04(c), Section 2.04(d), Section 2.04(e) or Section
2.04(f) occurs on or after the Expiration Time for the tender or exchange offer
requiring such computation and prior to the day in question, the Sale Price for
each Trading Day on and after the "ex" date for such other event shall be
adjusted by dividing such Sale Price by the reciprocal of the fraction by which
the Conversion Price is so required to be adjusted as a result of such other
event. For purposes of this paragraph, the term "ex" date, when used:

                  (iv) with respect to any issuance or distribution, means the
         first date on which the shares of Common Stock trade regular way on the
         relevant exchange or in the relevant market from which the Sale Price
         was obtained without the right to receive such issuance or
         distribution;

                  (v) with respect to any subdivision or combination of shares
         of Common Stock, means the first date on which the shares of Common
         Stock trade regular way on such exchange or in such market after the
         time at which such subdivision or combination becomes effective; and

                  (vi) with respect to any tender or exchange offer, means the
         first date on which the shares of Common Stock trade regular way on
         such exchange or in such market after the Expiration Time of such
         offer.

         Notwithstanding the foregoing, whenever successive adjustments to the
Conversion Price are called for pursuant to this Section 2.04, such adjustments
shall be made to the Current Market Price as may be necessary or appropriate to
effectuate the intent of this Section 2.04 and to avoid unjust or inequitable
results as determined in good faith by the Board of Directors.

         "FAIR MARKET VALUE" shall mean the amount which a willing buyer would
pay a willing seller in an arm's length transaction (as determined by the Board
of Directors, whose determination shall be conclusive).

                                       12
<PAGE>   16

         "RECORD DATE" shall mean, with respect to any dividend, distribution or
other transaction or event in which the holders of shares of Common Stock have
the right to receive any cash, securities or other property or in which the
shares of Common Stock (or other applicable security) is exchanged for or
converted into any combination of cash, securities or other property, the date
fixed for determination of stockholders entitled to receive such cash,
securities or other property (whether such date is fixed by the Board of
Directors or by statute, contract or otherwise).

         (h) The Company shall be entitled to make such additional reductions in
the Conversion Price, in addition to those required by Section 2.04(a), Section
2.04(b), Section 2.04(c), Section 2.04(d), Section 2.04(e) or Section 2.04(f),
as shall be necessary in order that any dividend or distribution of Common
Stock, any subdivision, reclassification or combination of shares of Common
Stock or any issuance of rights or warrants referred to above shall not be
taxable to the holders of Common Stock for United States Federal income tax
purposes.

         (i) To the extent and in the manner permitted by applicable law, the
Company may from time to time reduce the Conversion Price by any amount for any
period of time. If the Conversion Price is reduced, it must be reduced the same
amount for all Holders of Notes for the same period of time. Whenever the
Conversion Price is reduced, the Company shall mail to Holders and file with the
Trustee and the Conversion Agent a notice of such reduction and shall issue a
press release in a commercially reasonable manner describing such reduction. The
Company shall mail the notice at least 20 Business Days before the date the
reduced Conversion Price takes effect. The notice shall state the reduced
Conversion Price, the period it will be in effect and the material tax and legal
ramifications of the reduced Conversion Price and such reduction shall be
irrevocable during the period designated for such reduction in such notice.

         (j) All calculations under this Section 2.04 shall be made to the
nearest cent or ten-thousandth of a share, with one-half cent and 0.00005 of a
share, respectively, being rounded upward. Notwithstanding any other provision
of this Section 2.04, the Company shall not be required to make any adjustment
of the Conversion Price unless such adjustment would require an increase or
decrease of at least 1% of such price. Any lesser adjustment shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment or adjustments so carried
forward, shall amount to an increase or decrease of at least 1% in such price.
Any adjustments under this Section 2.04 shall be made successively whenever an
event requiring such an adjustment occurs.

         (k) In any case in which this Section 2.04 shall require that any
adjustment be made effective as of or retroactively immediately following a
Record Date, the Company may elect to defer (but only for five Trading Days
following the filing of the statement referred to in Section 2.06) issuing to
the Holder of any Securities converted after such Record Date the shares of
Common Stock issuable upon such conversion over and above the shares of Common
Stock issuable upon such conversion on the basis of the Conversion Price prior
to adjustment; provided, however, that the Company shall deliver to such Holder
a due bill or other appropriate instrument evidencing such Holder's right to
receive such additional shares upon the occurrence of the event requiring such
adjustment.

         (l) In the event that at any time, as a result of an adjustment made
pursuant to this Section 2.04, the Holder of any Notes thereafter surrendered
for conversion shall become entitled to receive any shares of stock of the
Company other than shares of Common Stock into which the Securities originally
were convertible, the Conversion Price of such other shares so receivable upon
conversion of any such Security shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to Common Stock contained in subparagraphs (a) through (k) of this
Section 2.04, and the provisions of Section 2.01, Section 2.02, Section 2.03 and
Section 2.05 through

                                       13
<PAGE>   17

Section 2.12 with respect to the Common Stock shall apply on like or similar
terms to any such other shares and the determination of the Board of Directors
as to any such adjustment shall be conclusive.

(m) No adjustment shall be made pursuant to this Section 2.04(i) if (i) the
effect thereof would be to reduce the Conversion Price below the par value (if
any) of the Common Stock or (ii) if the Holders of the Notes may participate in
the transaction that would otherwise give rise to an adjustment pursuant to this
Section 2.04.

         SECTION 2.05.  Reorganization of the Company.

         If any of the following events occurs, namely:

                  (1) any reclassification or change of the outstanding Common
         Stock (other than a change in par value, or from par value to no par
         value, or from no par value to par value, or as a result of a
         subdivision or combination);

                  (2) any merger, consolidation, statutory share exchange or
         combination of the Company with another corporation as a result of
         which holders of Common Stock shall be entitled to receive stock,
         securities or other property or assets (including cash) with respect to
         or in exchange for such Common Stock; or

                  (3) any sale or conveyance of the properties and assets of the
         Company as, or substantially as, an entirety to any other corporation
         as a result of which holders of Common Stock shall be entitled to
         receive stock, securities or other property or assets (including cash)
         with respect to or in exchange for such Common Stock;

the Company or the successor or purchasing corporation, as the case may be,
shall execute with the Trustee a supplemental indenture (which shall comply with
the Trust Indenture Act as in force at the date of execution of such
supplemental indenture, if such supplemental indenture is then required to so
comply) providing that the Notes shall be convertible into the kind and amount
of shares of stock and other securities or property or assets (including cash)
which such Holder would have been entitled to receive upon such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance had such Securities been converted into Common
Stock immediately prior to such reclassification, change, merger, consolidation,
statutory share exchange, combination, sale or conveyance assuming such holder
of Common Stock did not exercise its rights of election, if any, as to the kind
or amount of securities, cash or other property receivable upon such merger,
consolidation, statutory share exchange, sale or conveyance (provided, that if
the kind or amount of securities, cash or other property receivable upon such
merger, consolidation, statutory share exchange, sale or conveyance is not the
same for each share of Common Stock in respect of which such rights of election
shall not have been exercised ("Non-Electing Share"), then for the purposes of
this Section 2.05, the kind and amount of securities, cash or other property
receivable upon such merger, consolidation, statutory share exchange, sale or
conveyance for each Non-Electing Share shall be deemed to be the kind and amount
so receivable per share by a plurality of the Non-Electing Shares). Such
supplemental indenture shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Article
2. If, in the case of any such reclassification, change, merger, consolidation,
statutory share exchange, combination, sale or conveyance, the stock or other
securities and assets receivable thereupon by a holder of Common Stock includes
shares of stock or other securities and assets of a corporation other than the
successor or purchasing corporation, as the case may be, in such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance, then such supplemental indenture shall also be
executed by such other corporation and shall contain such additional provisions
to

                                       14
<PAGE>   18

protect the interests of the Holders of the Notes as the Board of Directors
shall reasonably consider necessary by reason of the foregoing.

         The Company shall cause notice of the execution of such supplemental
indenture to be mailed to each Holder, at the address of such Holder as it
appears on the Security Register of the Security Registrar, within 20 days after
execution thereof. Failure to deliver such notice shall not affect the legality
or validity of such supplemental indenture.

         The above provisions of this Section 2.05 shall similarly apply to
successive reclassifications, mergers, consolidations, statutory share
exchanges, combinations, sales and conveyances.

         If this Section 2.05 applies to any event or occurrence, Section 2.04
shall not apply so long as such non-application is fair to the Holders.

         Section 2.06. Notice of Adjustments of Conversion Price. Whenever the
Conversion Price is adjusted as herein provided: (a) the Company shall compute
the adjusted Conversion Price in accordance with Section 2.04 hereof and shall
prepare an Officers' Certificate, one of the signatories of which shall be the
Treasurer or Chief Financial Officer of the Company, setting forth the adjusted
Conversion Price (certified by the Company's independent public accountants or
other certified public accountant) and showing in reasonable detail the facts
upon which such adjustment is based, and such certificate shall forthwith be
filed with the Trustee at each office or agency maintained for the purpose of
conversion of Securities pursuant to Section 2.03 hereof; and (b) a notice
stating that the Conversion Price has been adjusted and setting forth the
adjusted Conversion Price shall forthwith be required, and as soon as
practicable after it is required, such notice shall be given by the Company to
the Trustee and all Holders in the manner provided for in Sections 106 and 107
of the Indenture. The Trustee shall not be deemed to have notice of any change
in the Conversion Price unless and until it receives the Officers' Certificate
provided for in the foregoing clause (a) setting forth such change.

         In the event the independent public accountant, called upon to certify
the Officers' Certificate containing the adjusted Conversion Price, requires the
Trustee to agree to the calculations performed in deriving the adjusted
Conversion Price, the Trustee shall so agree only if directed in writing by the
Company to do so; it being understood and agreed that the Trustee will deliver
such letter of agreement in conclusive reliance upon the direction of the
Company and the Trustee makes no independent inquiry as to, and shall have no
obligation or liability in respect of, the validity or correctness of such
calculations.

         SECTION 2.07. Notice of Certain Corporate Action. In case: (a) the
Company shall declare a dividend or make any other distribution that would
require any adjustment pursuant to Section 2.04 hereof; or (b) the Company shall
authorize the granting to the holders of its Common Stock of rights or warrants
to subscribe for or purchase any shares of capital stock of any class or of any
other rights; or (c) of any reclassification of the Common Stock of the Company,
or any consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required, or any action by the
Company that would require a supplemental indenture pursuant to Section 2.05; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up of
the Company, then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Securities pursuant to Section 2.03
hereof, and shall cause to be mailed to all Holders at their last addresses as
they shall appear in the register for the Securities, at least 20 days prior to
the applicable record or effective date hereinafter specified, a notice (which
notice shall also be sent by release to Reuters Economic Services and Bloomberg
Business News) stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution, rights or warrants, or, if a record is
not to be taken, the date as of which the holders of Common Stock of record to
be entitled to such dividend, distribution, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, share exchange, sale,

                                       15
<PAGE>   19

conveyance, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, share exchange, sale, conveyance, transfer, dissolution,
liquidation or winding up. Neither the failure to give such notice nor any
defect therein shall affect the legality or validity of the proceedings
described in clauses (a) through (d) of this Section 2.07. If at the time the
Trustee shall not be the conversion agent, a copy of such notice shall also
forthwith be filed by the Company with the Trustee. The Company shall cause to
be filed at the Corporate Trust Office and each office or agency maintained for
the purpose of conversion of Notes pursuant to Section 305 of the Indenture, and
shall cause to be provided to all Holders in accordance with Section 106 of the
Indenture, notice of any tender offer by the Company or any Subsidiary for all
or any portion of the Common Stock at or about the time that such notice of
tender offer is provided to the public generally.

         SECTION 2.08. Company to Reserve Common Stock. The Company shall at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, for the purpose of effecting the
conversion of Notes, the full number of shares of Common Stock then issuable
upon the conversion of all outstanding Notes.

         SECTION 2.09. Taxes on Conversions. The Company will pay any and all
taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of Notes pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the Holder of the Note or Notes to be converted, and no such
issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Company the amount of any such tax, or has established to
the satisfaction of the Company that such tax has been paid.

         SECTION 2.10. Covenant as to Common Stock. The Company covenants that
all shares of Common Stock which may be issued upon conversion of Notes will
upon issue be fully paid and nonassessable and, except as provided in Section
2.09 hereof, the Company will pay all taxes, liens and charges with respect to
the issue thereof.

         The Company will endeavor promptly to comply with all Federal and state
securities laws regulating the issuance and delivery of shares of Common Stock
upon conversion of Notes, if any, and will use its best efforts to list or cause
to have quoted all such shares of Common Stock on each United States national
securities exchange or over-the-counter or other domestic market on which the
Common Stock is then listed or quoted.

         SECTION 2.11. Cancellation of Converted Securities. All Notes delivered
for conversion shall be delivered to the Trustee to be canceled by or at the
direction of the Trustee, which shall dispose of the same as provided in Section
309 of the Indenture.

         SECTION 2.12. Right of Holders to Convert. The limitations set forth in
Section 507 of the Indenture shall not apply to the right of a Holder to bring a
suit for the enforcement of such Holder's right to convert Notes pursuant to
this Article 2.

                                   ARTICLE 3
                               REDEMPTION OF NOTES

         Pursuant to Section 301(8) of the Indenture, so long as any of the
Notes are outstanding, the following provisions shall be applicable to the
Notes:

                                       16
<PAGE>   20

         SECTION 3.01. Optional Redemption by the Company. At any time on or
after September 1, 2006, the Notes may be redeemed at the option of the Company
for cash, in whole or in part, upon notice as set forth in Section 1104 of the
Indenture, at a redemption price equal to the principal amount of the Notes plus
accrued and unpaid interest on the Notes to (but excluding) the date of
redemption (the "Redemption Price"). The date of any such redemption is known as
the "Redemption Date".

         Notes called for redemption may be surrendered for conversion from the
date of notice of the redemption until the close of business on the Redemption
Date.

         If the Company redeems fewer than all of the outstanding Notes, the
Trustee will select the Notes to be redeemed in accordance with the provisions
of Section 1103 of the Indenture.

         If the Trustee selects a portion of a Holder's Notes for partial
redemption and the Holder converts a portion of the same Notes, the converted
portion will be deemed to be from the portion selected for redemption. The Notes
will be redeemed in integral multiples of $1,000 principal amount.

         In no event will any Note be redeemable before September 1, 2006. The
Company may not give notice of any redemption if the Company has defaulted in
payment of interest and the default is continuing.

SECTION 3.02 . Applicability of Article. Redemption of the Notes at the election
of the Company or otherwise, as permitted or required by any provision of the
Notes or this First Supplemental Indenture, shall be made in accordance with
such provision, Article XI of the Indenture and this Article 3.

                                   ARTICLE 4
          PURCHASE OF NOTES BY THE COMPANY AT THE OPTION OF THE HOLDERS

         So long as any of the Notes are outstanding, the following provisions
shall be applicable to the Notes:

         SECTION 4.01. Purchase at Option of Holders on Specified Purchase
Dates.

         (a) At the option of the Holder thereof, Notes shall be purchased by
the Company on September 1, 2002, September 1, 2004, September 1, 2006,
September 1, 2008, September 1, 2011 and September 1, 2016 (each, a "Purchase
Date") at a purchase price equal to the principal amount of the Notes plus
accrued and unpaid interest on the Notes to (but excluding) the applicable
Purchase Date (the "Purchase Price").

         Purchases of Notes hereunder shall be made upon:

                  (i) delivery to the Paying Agent by the Holder of a written
         notice of purchase (a "Purchase Notice") at any time from the opening
         of business on the date that is 20 Business Days prior to the
         applicable Purchase Date until the close of business on the applicable
         Purchase Date; and

                  (ii) delivery of the Notes to be purchased to the Paying Agent
         prior to, on or after the Purchase Date (together with all necessary
         endorsements) at the offices of the Paying Agent, such delivery being a
         condition to receipt by the Holder of the Purchase Price therefor;
         provided, however, that such Purchase Price shall be so paid only if
         the Notes so delivered to the Paying

                                       17
<PAGE>   21

         Agent shall conform in all respects to the description thereof in the
         related Purchase Notice, as determined by the Company.

         (b) In connection with any purchase of Notes, the Company shall mail a
written notice to each Holder at their addresses shown in the Security Register
of the Security Registrar (and to beneficial owners as required by applicable
law) on a date not less than 20 Business Days prior to each Purchase Date
setting forth the following:

                  (i) whether the Company will pay the Purchase Price of Notes
         in cash or Common Stock or any combination thereof, specifying the
         percentages of each;

                  (ii) if the Company elects to pay in Common Stock, the method
         of calculating the Market Price of the Common Stock; and

                  (iii) the procedures that Holders must follow to require the
         Company to purchase their Notes.

         (c) The Purchase Notice given by each Holder electing to have the
Company purchase some or all of the Notes held by such Holder must state:

                  (i) the certificate numbers of the Holder's Notes to be
         delivered for purchase (or, if the Notes are not certificated, such
         other identification necessary to comply with the procedures of the
         Depositary);

                  (ii) the portion of the principal amount of Notes to be
         purchased, which must be $1,000 or an integral multiple of $1,000;

                  (iii) that the Notes are to be purchased by the Company
         pursuant to the terms and conditions specified in Article 4; and

                  (iv) in the event the Company elects, pursuant to the notice
         referred to in Section 4.01(b) to pay the Purchase Price in Common
         Stock, in whole or in part, but the Purchase Price is ultimately to be
         paid to the Holder entirely in cash because any of the conditions to
         payment of the Purchase Price or portion of the Purchase Price in
         Common Stock is not satisfied prior to the close of business on the
         Purchase Date, as described below, whether the Holder elects:

                           (A) to withdraw the Purchase Notice as to some or all
                  of the Notes to which it relates, or

                           (B) to receive cash in respect of the entire Purchase
                  Price for all Notes or portions of Notes subject to such
                  Purchase Notice.

         (d) If a Holder, in such Holder's Purchase Notice and in any written
notice of withdrawal delivered by such Holder, fails to indicate such Holder's
choice with respect to the election set forth in Section 4.01(c)(iv) above, such
Holder shall be deemed to have elected to receive cash in respect of the entire
Purchase Price for all Notes subject to such Purchase Notice in the
circumstances set forth in such Section 4.01(c)(iv).

         (e) Notwithstanding anything herein to the contrary, any Holder
delivering a Purchase Notice to the Paying Agent shall have the right to
withdraw such Purchase Notice at any time prior to the close of

                                       18
<PAGE>   22

business on the Purchase Date by delivery of a written notice of withdrawal to
the Paying Agent. The notice will specify:

                  (i) the principal amount of Notes being withdrawn;

                  (ii) the certificate numbers of the Notes being withdrawn (or,
         if the Notes are not certificated, such withdrawal notice must comply
         with the procedures of the Depositary); and

                  (iii) the principal amount, if any, of the Notes that remain
         subject to the Purchase Notice (which number must be $1000 or an
         integral multiple of $1,000).

         (f) The Company may, subject to Section 4.01(h), at the Company's
option, elect to pay all or a portion of the Purchase Price of the Notes in
shares of Common Stock. The number of shares of Common Stock to be delivered in
the event of such election shall equal the quotient obtained by dividing (x) the
amount of cash to which the Holders would have been entitled had the Company
elected to pay all or such specified percentage, as the case may be, of the
Purchase Price of such Notes in cash by (y) the Market Price of a share of
Common Stock.

         The Company will not issue a fractional share of Common Stock in
payment of the Purchase Price. Instead the Company will pay cash in lieu of
fractional shares in an amount equal to the same fraction of the Market Price
per share of Common Stock. It is understood that if a Holder elects to have more
than one Note purchased, the number of shares of Common Stock shall be based on
the aggregate principal amount of Notes to be purchased.

         (g) Upon determination of the actual number of shares of Common Stock
to be issued for each $1,000 principal amount of Notes pursuant to this Section
4.01, the Company will publish such information on its web site on the World
Wide Web or through such other public medium as the Company may use at such
time.

         (h) The Company's right to exercise its election to purchase Notes
through the issuance of Common Stock pursuant to this Section 4.01 shall be
conditioned upon:

                  (i) prior to issuance of the Common Stock, listing such Common
         Stock on the principal United States securities exchange on which the
         Common Stock is traded or, if the Common Stock is not listed on a
         United States national or regional securities exchange, on the National
         Association of Securities Dealers Automated Quotation System or its
         reasonable equivalent in the United States;

                  (ii) the Company having given notice pursuant to Section
         4.01(b) of its election to purchase all or a specified percentage of
         the Notes with Common Stock as provided herein;

                  (iii) the registration of such Common Stock under the
         Securities Act, and the Exchange Act, in each case, if required;

                  (iv) any necessary qualification or registration under
         applicable securities laws or the availability of an exemption from
         such qualification and registration; and

                  (v) the receipt by the Trustee of an Officers' Certificate and
         an Opinion of Counsel each stating that (A) the terms of the issuance
         of the Common Stock are in conformity with this Indenture and (B) the
         Common Stock to be issued by the Company in payment of the Purchase
         Price in respect of Notes has been duly authorized and, when issued and
         delivered pursuant to the

                                       19
<PAGE>   23

         terms of this Indenture in payment of the Purchase Price in respect of
         the Notes, will be validly issued, fully paid and non-assessable and,
         to the best of such counsel's knowledge, free from preemptive rights,
         and, in the case of such Officers' Certificate, stating that the
         conditions (i) and (ii) above and the condition set forth in the second
         succeeding sentence have been satisfied and, in the case of such
         Opinion of Counsel, stating that the conditions (iii) and (iv) above
         has been satisfied.

         Such Officers' Certificate shall also set forth the number of shares of
Common Stock to be issued for each $1,000 principal amount of Notes and the Sale
Price of a share of Common Stock on each Trading Day during the period
commencing on the first Trading Day of the period during which the Market Price
is calculated and ending on September 1, 2002, September 1, 2004, September 1,
2006, September 1, 2008, September 1, 2011, and September 1, 2016, as the case
may be. The Company may pay the Purchase Price (or any portion thereof) in
Common Stock only if the information necessary to calculate the Market Price is
published in a daily newspaper of national circulation in the United States. If
the foregoing conditions of this Section 4.01(h) are not satisfied with respect
to a Holder or Holders prior to the close of business on the Purchase Date
whether or not the Company has elected to purchase the Notes through the
issuance of Common Stock, the Company shall pay the entire Purchase Price of the
Notes of such Holder or Holders in cash.

         Once the conditions of as described in this Section 4.01(h) have been
satisfied and the Company has given Holders notice pursuant to Section 4.01(b)
with respect to its election, the Company may not change the form or components
or percentages of components of consideration to be paid for the Notes.

         (i) The Company shall to the extent applicable: (i) comply with the
provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the
Exchange Act which may then be applicable and (ii) file the related Schedule TO
(or any successor schedule, form or report) or any other required schedule under
the Exchange Act; and (iii) otherwise comply with all applicable securities
laws.

         (j) The Company shall (i) accept for payment Notes or portions thereof
validly tendered pursuant to the Purchase Notice, (ii) deposit with the Paying
Agent (no later than 10:00 A.M. New York City time on the Purchase Date) money,
in immediately available funds, or fully paid and nonassessable shares of Common
Stock, or any combination thereof in accordance with the Company's election
under Section 4.01(b) hereof, sufficient to pay the Purchase Price of all Notes
or portions thereof so tendered and accepted and (iii) deliver, or direct the
Paying Agent to deliver, to the Trustee the Notes so accepted together with an
Officers' Certificate setting forth the Notes or portions thereof tendered to
and accepted for payment by the Company. The Paying Agent shall promptly mail or
deliver to the Holders of Notes so accepted payment in an amount equal to the
portion of the Purchase Price to be paid in cash, and deliver shares of Common
Stock sufficient to cover the portion of the Purchase Price to be paid in Common
Stock, and the Trustee shall promptly authenticate and mail or deliver to such
Holders a new Note equal in principal amount to any unpurchased portion to the
Notes surrendered; provided that each such new Note shall be issued in an
original principal amount in denominations of $1,000 and integral multiples
thereof. Any Notes not validly tendered and not accepted by the Company shall be
promptly mailed or delivered by the Company to the Holder thereof.

         (k) With respect to each Note for which a Purchase Notice has been
given, if the Paying Agent holds money sufficient to pay the Purchase Price on
the Business Day following the applicable Purchase Date, in accordance with the
terms of the Indenture, then immediately after the Purchase Date interest on
such Note will cease to accrue, whether or not such Note is delivered to the
Paying Agent. Thereafter, all other rights of the Holder shall terminate, other
than the right to receive the Purchase Price upon delivery of such Note.

                                       20
<PAGE>   24

         (l) There shall be no purchase of any Notes pursuant to this
Section 4.01 if there has occurred and is continuing an Event of Default (other
than a default in the payment of the Purchase Price). The Paying Agent will
promptly return to the respective Holders thereof any Notes: (i) with respect to
which a Purchase Notice has been withdrawn in compliance with the Indenture or
(ii) held by it during the continuance of an Event of Default (other than a
default in the payment of the Purchase Price) in which case, upon such return,
the Purchase Notice with respect thereto shall be deemed to have been withdrawn.

         Section 4.02. Purchase at Option of Holders Upon Change of Control .

         (a) Upon the occurrence of a Change of Control on or prior to September
1, 2006 (the date of such occurrence, the "Change of Control Date"), the Company
shall notify the Holders of the Notes in writing of such occurrence in
accordance with paragraph (b) below, and shall make an offer to purchase (a
"Change of Control Offer"), and shall purchase, on a Business Day (a "Change of
Control Purchase Date") that is 40 Business Days following the Change of Control
Date all of the then outstanding Notes validly tendered at a purchase price in
cash equal to the principal amount of the Notes plus accrued and unpaid interest
on the Notes to (but excluding) the Change of Control Purchase Date (the "Change
of Control Purchase Price").

         (b) Notice of a Change of Control Offer (a "Change of Control Notice")
shall be sent, by first-class mail, postage prepaid, by the Company within 15
Business Days after the Change of Control Date to the Holders of the Notes at
their addresses shown in the Security Register of the Security Registrar (and to
beneficial owners as required by applicable law) with a copy to the Trustee and
the Paying Agent (and shall also be given by release made to Reuters Economic
Services and Bloomberg Business News). The Change of Control Offer shall remain
open from the time of delivery of the Change of Control Notice for at least 15
Business Days and until 5:00 p.m., New York City time, on the Business Day prior
to the Change of Control Purchase Date. The Change of Control Notice, which
shall govern the terms of the Change of Control Offer, shall include such
disclosures as are required by law and shall state:

                  (i) briefly, the events causing a Change of Control and Change
         of Control Date;

                  (ii) the date by which the Change of Control Purchase Notice
         pursuant to this Section 4.02 must be delivered to the Paying Agent;

                  (iii) the Change of Control Purchase Price;

                  (iv) the Change of Control Purchase Date;

                  (v) the name and address of the Paying Agent and the
         Conversion Agent;

                  (vi) the Conversion Price and any adjustments thereto;

                  (vii) that Notes as to which a Change of Control Purchase
         Notice has been given may be converted if they are otherwise
         convertible pursuant to Article 2 hereof only if the Change of Control
         Purchase Notice has been withdrawn in accordance with the terms of this
         Section 4.02;

                  (viii) that Notes must be surrendered to the Paying Agent to
         collect payment;

                  (ix) that the Change of Control Purchase Price for any Note as
         to which a Change of Control Purchase Notice has been duly given and
         not withdrawn will be paid promptly following the later of the Change
         of Control Purchase Date and the time of surrender of such Note as
         described in Section 4.02(e);

                                       21
<PAGE>   25

                  (x) briefly, the procedures the Holder must follow to exercise
         rights under this Section 4.02(b); (xi) the procedures for withdrawing
         a Change of Control Notice as set forth in Section 4.02(d) hereof;

                  (xii) that, unless the Company defaults in making payment of
         such Change of Control Purchase Price, interest, if any, on Notes
         surrendered for purchase by the Company will cease to accrue on and
         after the Change of Control Purchase Date; and

                  (xiii) the CUSIP number of the Notes.

         (c) To exercise a purchase right pursuant to this Section 4.02, a
Holder shall deliver to the Paying Agent a written notice (a "Change of Control
Purchase Notice") of such Holder's exercise of such right, in accordance with
the terms and conditions set forth in the Change of Control Notice. The notice
(which must be delivered to the Paying Agent prior to the close of business on
the Change of Control Purchase Date) shall state:

                  (i) the certificate numbers of the Holder's Notes to be
         delivered for purchase (or, if the Notes are not certificated, such
         other identification necessary to comply with the procedures of the
         Depositary);

                  (ii) the portion of the principal amount of Notes to be
         purchased, which portion must be $1,000 or an integral multiple
         thereof; and

                  (iii) that such Notes shall be purchased pursuant to the terms
         and conditions specified in Article 4.

Upon receipt by the Paying Agent of a Change of Control Purchase Notice, the
Holder of the Note in respect of which such Change of Control Purchase Notice
was given shall (unless such Change of Control Purchase Notice is withdrawn)
thereafter be entitled to receive solely the Change of Control Purchase Price
with respect to such Note.

         (d) Notwithstanding anything herein to the contrary, a Holder shall
have the right to withdraw any Change of Control Purchase Notice at any time
prior to the close of business on the Change of Control Purchase Date by
delivery of a written notice of withdrawal to the Paying Agent. The notice will
specify:

                  (i) the principal amount of Notes being withdrawn;

                  (ii) the certificate numbers of the Notes being withdrawn (or,
         if the Notes are not certificated, such withdrawal notice must comply
         with the procedures of the Depositary); and

                  (iii) the principal amount, if any, of the Notes that remain
         subject to the Purchase Notice (which number must be $1000 or an
         integral multiple of $1,000).

Notes in respect of which a Change of Control Purchase Notice has been given by
the Holder thereof may not be converted into shares of Common Stock on or after
the date of the delivery of such Change of Control Purchase Notice, unless such
Change of Control Purchase Notice has first been validly withdrawn as set forth
in the foregoing paragraph, unless the Company has defaulted in the payment of
the Change of Control Purchase Price.

                                       22
<PAGE>   26

         (e) On the Change of Control Purchase Date, the Company shall (i)
accept for payment Notes or portions thereof validly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent (no later than 10:00
A.M. New York City time on the Change of Control Purchase Date) money, in
immediately available funds, sufficient to pay the Change of Control Purchase
Price of all Notes or portions thereof so tendered and accepted, (iii) deliver,
or direct the Paying Agent to deliver, to the Trustee the Notes so accepted, and
(iv) deliver to the Trustee an Officers' Certificate setting forth the Notes or
portions thereof tendered to and accepted for payment by the Company. The Paying
Agent shall promptly mail or deliver to the Holders of Notes so accepted for
payment in an amount equal to the Change of Control Purchase Price, and the
Trustee shall promptly authenticate and mail or deliver to such Holders a new
Note equal in principal amount to any unpurchased portion to the Notes
surrendered; provided that each such new Note shall be issued in an original
principal amount in denominations of $1,000 and integral multiples thereof. Any
Notes not validly tendered and not accepted by the Company shall be promptly
mailed or delivered by the Company to the Holder thereof. The Company will
publicly announce the results of the Change of Control Offer not later than the
third Business Day following the Change of Control Purchase Date.

         (f) The Company shall to the extent applicable: (i) comply with the
provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the
Exchange Act which may then be applicable and (ii) file the related Schedule TO
(or any successor schedule, form or report) or any other required schedule under
the Exchange Act; and (iii) otherwise comply with all applicable securities
laws.

         (g) With respect to each Note for which a Change of Control Purchase
Notice has been given, if the Paying Agent holds money sufficient to pay the
Change of Control Purchase Price on the Business Day following the Change of
Control Purchase Date, in accordance with the terms of the Indenture, then
immediately after the Change of Control Purchase Date, interest on the principal
amount of such Note will cease to accrue, whether or not such Note is delivered
to the Paying Agent. Thereafter, all other rights of the Holder shall terminate,
other than the right to receive the Change of Control Purchase Price upon
delivery of such Note.

         (h) There shall be no purchase of any Notes pursuant to this Section
4.02 if there has occurred and is continuing an Event of Default (other than a
default in the payment of the Change of Control Purchase Price). The Paying
Agent will promptly return to the respective Holders thereof of any Notes: (i)
with respect to which a Change of Control Purchase Notice has been withdrawn in
compliance with Section 4.02(d) or (ii) held by it during the continuance of an
Event of Default (other than a default in the payment of the Change of Control
Purchase Price) in which case, upon such return, the Change of Control Purchase
Notice with respect thereto shall be deemed to have been withdrawn.

         Section 4.03. Certain Article 4 Definitions.

         For purposes of this Article 4:

         (a) the term "Change of Control" means the occurrence of any of the
following events:

                  (i) any "person" or "group" (as such terms are used in
         Sections 13(d) and 14(d) of the Exchange Act), other than the Company
         or any of its subsidiaries, is or becomes the "beneficial owner" (as
         defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
         person or group shall be deemed to have "beneficial ownership" of all
         securities that such person or group has the right to acquire, whether
         such right is exercisable immediately or only after the passage of
         time, upon the happening of an event or otherwise), directly or
         indirectly, of more than 50% of the total voting power of all Voting
         Stock of the Company;

                                       23
<PAGE>   27

                  (ii) the Company consolidates with, or merges with or into,
         another person or sells, assigns, conveys, transfers, leases or
         otherwise disposes of, all or substantially all of its assets to any
         Person, or any Person consolidates with, or merges with or into, the
         Company, in any such event pursuant to a transaction in which the
         outstanding Voting Stock of the Company is converted into or exchanged
         for cash, securities or other property, other than any such transaction
         where the outstanding Voting Stock of the Company is converted into or
         exchanged for Voting Stock (other than Disqualified Capital Stock) of
         the surviving or transferee corporation constituting a majority of the
         outstanding shares of such Voting Stock of such surviving or transferee
         corporation immediately after giving effect to such issuance.

                  (iii) at any time during any consecutive two-year period,
         individuals who at the beginning of such period constituted the board
         of directors of the Company (together with any new directors whose
         election by such board of directors or whose nomination for election by
         the stockholders of the Company was approved by a vote of a majority of
         the directors then still in office who were either directors at the
         beginning of such period or whose election or nomination for election
         was previously so approved) cease for any reason to constitute a
         majority of the board of directors of the Company then in office; or

                  (iv) the Company is liquidated or dissolved or adopts a plan
         of liquidation;

provided, however, that a Change of Control shall not be deemed to have occurred
if (I) the Sale Price of the Common Stock for any five Trading Days within the
period of 10 consecutive Trading Days ending immediately after the later of the
Change of Control or the public announcement of the Change of Control (in the
case of a Change of Control under clause (i) above) or the period of 10
consecutive Trading Days ending immediately before the Change of Control (in the
case of a Change of Control under clauses (ii) or (iii) above) shall, in the
case of each of such five Trading Days, equal or exceed 105% of the Conversion
Price of the Notes in effect on each of such five Trading Days or (II) all of
the consideration (excluding cash payments for fractional shares and cash
payments made pursuant to dissenters' appraisal rights) in a merger or
consolidation otherwise constituting a Change of Control under clause (i) and/or
clause (ii) above consists of shares of common stock traded on a national
securities exchange or quoted on the Nasdaq National Market (or will be so
traded or quoted immediately following such merger or consolidation) and as a
result of such merger or consolidation the Notes become convertible solely into
such common stock;

         (b) the term "Voting Stock" means, with respect to any Person,
securities of any class or classes of capital stock in such Person entitling the
holders thereof to vote under ordinary circumstances in the election of members
of the board of directors or other governing body of such Person.

         (c) the term "Disqualified Capital Stock" means any capital stock of a
Person which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof, in whole or in part, on or prior to the Stated Maturity of the
Notes, for cash or securities constituting indebtedness of such Person.

                                       24
<PAGE>   28

                                   ARTICLE 5
                                EVENTS OF DEFAULT

         Section 5.01. Additional Events Of Default. Pursuant to Sections
301(16) and 501(7) of the Indenture, so long as any of the Notes are
outstanding, the following shall be an Event of Default with respect to the
Notes, in addition to the Events of Default contained in Section 501 of the
Indenture:

         (a) The Company defaults in the payment of the principal amount,
Redemption Price, Purchase Price or Change of Control Purchase Price with
respect to any Note when such becomes due and payable.

         (b) The Company defaults in payment of any accrued and unpaid interest
which default continues for 30 days.

         (c) The Company fails to convert any portion of the principal amount of
a Note in accordance with its terms following exercise by the Holder of the
right to convert such Note.

         SECTION 5.02. Amendment. Section 501 of the Indenture is hereby amended
solely with respect to a series of Securities that consists of the Notes, as
follows:

         (a) By amending paragraph (4) of Section 501 by deleting the number
"90" appearing therein and replacing it with number "60" and by adding the words
"of that series" immediately after the words "Outstanding Securities" appearing
therein.

         (b) By amending paragraph (5) of Section 501 by deleting the number
"90" appearing therein and replacing it with the number "60".

         (c) By deleting the period at the end of paragraph (7) of Section 501
and replacing it with "; or", and adding the following paragraph immediately
after paragraph (7) in Section 501:

         (8) if any event of default, as defined in any mortgage, indenture or
instrument under which there may be issued, or by which there may be secured or
evidenced, any indebtedness of the Company for money borrowed, whether such
indebtedness now exists or shall hereafter be created, shall happen and shall
result in such indebtedness in principal amount in excess of $35,000,000
becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable, and such acceleration shall not be rescinded
or annulled within a period of 30 days after there shall have been given, by
registered or certified mail, to the Company by the Trustee or to the Company
and the Trustee by the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series, a written notice specifying such event of
default and requiring the Company to cause such acceleration to be rescinded or
annulled and stating that such notice is a "Notice of Default" hereunder.

                                   ARTICLE 6
                       AMENDMENTS, SUPPLEMENTS AND WAIVERS

         SECTION 6.01. With Consent of Holders. Pursuant to Section 902 of the
Indenture, so long as any of the Notes are outstanding, without the consent of
each Holder affected, an amendment, supplement or waiver, including a waiver
pursuant to Section 513 of the Indenture, may not (in addition to the events
described in paragraphs (1) through (3) of Section 902 of the Indenture):

                                       25
<PAGE>   29

         (a) make any change that impairs or adversely affects the right to
convert any Notes into Common Stock;

         (b) impair or adversely affect the right of a Holder to institute suit
for the enforcement of any payment with respect to, or conversion of, the Notes;

         (c) make any change that adversely affects the right to require the
Company to purchase the Notes pursuant to and in accordance with Article 4
hereof; or

         (d) reduce or impair or adversely affect the right of a Holder to
receive the applicable Redemption Price set forth in Section 3.01 hereof or the
Purchase Price or Change of Control Purchase Price pursuant to Article 4 hereof.

                                   ARTICLE 7
                                  MISCELLANEOUS

         SECTION 7.01. Application of First Supplemental Indenture. Each and
every term and condition contained in this First Supplemental Indenture that
modifies, amends or supplements the terms and conditions of the Indenture shall
apply only to the Notes created hereby and not to any future series of
Securities established under the Indenture. Except as specifically amended and
supplemented by, or to the extent inconsistent with, this First Supplemental
Indenture, the Indenture shall remain in full force and effect and is hereby
ratified and confirmed.

         SECTION 7.02. Effective Date. This First Supplemental Indenture shall
be effective as of the date first above written and upon the execution and
delivery hereof by each of the parties hereto.

         SECTION 7.03. Counterparts. This First Supplemental Indenture may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.

                            [SIGNATURE PAGE FOLLOWS]

                                       26
<PAGE>   30

         IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed by their respective officers hereunto
duly authorized, all as of the day and year first above written.

                             HCC INSURANCE HOLDINGS, INC.

                             By:
                                ------------------------------------------------
                             Name:    Edward H. Ellis, Jr.
                             Title: Sr. Vice President, Chief Financial Officer

                             FIRST UNION NATIONAL BANK, as Trustee

                             By:
                                ------------------------------------------------

                             Name: Kevin M. Dobrava
                             Title: Vice President

                                       27
<PAGE>   31

                                                                       EXHIBIT A

                               [Face of Security]
                        2.00% Convertible Notes due 2021

         If the registered owner of this security is The Depository Trust
Company or a nominee thereof, the following legend is applicable: THIS SECURITY
IS IN GLOBAL FORM WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO
AND IS REGISTERED IN THE NAME OF THE DEPOSITARY (AS HEREINAFTER DEFINED) OR A
NOMINEE OF THE DEPOSITARY OR A SUCCESSOR DEPOSITARY. UNLESS AND UNTIL IT IS
EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN CERTIFICATED FORM, THIS SECURITY
MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.

         UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE
"DEPOSITARY," OR "DTC") TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY
OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE &
CO., HAS AN INTEREST HEREIN.

CUSIP No. 404132 AA 0                                               $172,500,000

         HCC INSURANCE HOLDINGS, INC., a Delaware corporation, promises to pay
to Cede & Co. or registered assigns, the principal amount of ONE HUNDRED
SEVENTY-TWO MILLION FIVE HUNDRED THOUSAND and no/100 Dollars ($172,500,000) on
September 1, 2021.

         Interest Payment Dates: March 1 and September 1, commencing March 1,
2002.

         Record Dates: February 15 and August 15

         Reference is hereby made to the further provisions of this Security set
forth on the reverse side of this Security, which further provisions shall for
all purposes have the same effect as if set forth at this place.

         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

Dated:   August 23, 2001            HCC INSURANCE HOLDINGS, INC.

                                    By:
                                       -----------------------------------------
                                    Edward H. Ellis, Jr.
                                    Sr. Vice President, Chief Financial Officer

                                      A-1
<PAGE>   32

TRUSTEE'S CERTIFICATE OF AUTHENTICATION

This is one of the Securities referred to in the within-mentioned Indenture:

FIRST UNION NATIONAL BANK, as Trustee

By:
   -----------------------------------------
         Kevin M. Dobrava
         Vice President

                                      A-2
<PAGE>   33

                               [Back of Security]
                        2.00% Convertible Notes due 2021

         Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.

         1. INTEREST. HCC Insurance Holdings, Inc., a Delaware corporation (the
"Company") promises to pay interest on the principal amount of the Notes at
2.00% per annum from August 23, 2001 until repayment in full at September 1,
2021, redemption or purchase. The Company shall pay interest, semi-annually in
arrears on March 1 and September 1 of each year, or if any such day is not a
Business Day, on the next succeeding Business Day (each an "Interest Payment
Date"), commencing on March 1, 2002. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of issuance. The Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal from time to time on demand at a rate equal to the per annum rate on
the Notes then in effect; it shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue installments of
interest (without regard to any applicable grace periods) from time to time on
demand at the same rate to the extent lawful. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.

         2. METHOD OF PAYMENT. Except as provided below, interest will be paid
(i) on the Global Notes to DTC in immediately available funds, (ii) on any
definitive Notes having an aggregate principal amount of $2,000,000 or less, by
check mailed to the Holders of such Notes; and (iii) on any definitive Notes
having an aggregate principal amount of more than $2,000,000, by wire transfer
in immediately available funds at the election of the Holders of these Notes.

         At Stated Maturity, the Company will pay interest on definitive Notes
at the Company's office or agency in New York City, which initially will be the
Corporate Trust Office of the trustee in New York City.

         Principal on definitive Notes will be payable, upon Stated Maturity or
when due, at the office or agency of the Company in New York City, maintained
for such purpose, initially the Corporate Trust Office of the Trustee in New
York City.

         Subject to the terms and conditions of the Indenture, the Company will
make payments in cash, shares of Common Stock or a combination thereof, as the
case may be, in respect of Redemption Prices, Purchase Prices, Change of Control
Purchase Prices and at Stated Maturity to Holders who surrender Notes to a
Paying Agent to collect such payments in respect of the Notes. The Company will
pay cash amounts in money of the United States that at the time of payment is
legal tender for payment of public and private debts.

         3. PAYING AGENT AND SECURITY REGISTRAR. Initially, First Union National
Bank will act as Paying Agent, Conversion Agent and Security Registrar. The
Company may appoint and change any Paying Agent, Conversion Agent, Security
Registrar or co-registrar without notice, other than notice to the Trustee,
except that the Company will maintain at least one Paying Agent in the State of
New York, City of New York, Borough of Manhattan, which shall initially be an
office or agency of the Trustee. The Company or any of its Subsidiaries or any
of their Affiliates may act as Paying Agent, Conversion Agent, Security
Registrar or co-registrar.

         4. INDENTURE. The Company issued the Notes under an Indenture, dated as
of August 23, 2001 (the "Base Indenture"), as supplemented by the First
Supplemental Indenture dated as of August 23, 2001 (the "First Supplemental
Indenture" and, together with the Base Indenture, the

                                      A-3
<PAGE>   34

"Indenture"), between the Company and First Union National Bank, as trustee (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act. The
Notes are subject to all such terms, and Holders are referred to the Indenture
and such Act for a statement of such terms. The Notes issued under the Indenture
are general unsecured obligations of the Company limited to $172,500,000 in
aggregate principal amount (including the Notes which the Company may issue
pursuant to an over-allotment option).

         5. OPTIONAL REDEMPTION. At any time on or after September 1, 2006, the
Company may redeem any portion of the Notes, in whole or in part, on at least 30
days, but no more than 60 days, notice at a Redemption Price equal to the
principal amount of the Notes or such portion thereof plus accrued and unpaid
interest on the Notes to, but excluding, the Redemption Date.

         In the event the Company redeems less than all of the outstanding
Notes, the Notes to be redeemed shall be selected by the Trustee in accordance
with Section 1103 of the Indenture. If the Trustee selects a portion of a
Holder's Notes for partial redemption and the Holder converts a portion of the
same Notes, the converted portion will be deemed to be from the portion selected
for redemption. The Company may not give notice of any redemption if the Company
has defaulted in payment of interest and the default is continuing.

         6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least
30 days but not more than 60 days before the Redemption Date to each Holder of
the Notes to be redeemed at such Holder's address of record. The Notes in
denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. In the event of a redemption of less than all of the Notes,
the Notes will be chosen for redemption by the Trustee in accordance with the
Indenture. On and after the Redemption Date, interest ceases to accrue on the
Notes or portions of them called for redemption.

         7. MANDATORY REDEMPTION. Except as set forth in paragraph 8 below, the
Company shall not be required to make mandatory redemption payments with respect
to the Notes. There are no sinking fund payments with respect to the Notes.

         8. REPURCHASE AT OPTION OF HOLDER. Subject to the terms and conditions
of the Indenture, the Company shall become obligated to purchase, at the option
of the Holder, all or any portion of the Notes held by such Holder on September
1, 2002, September 1, 2004, September 1, 2006, September 1, 2008, September 1,
2011 and September 1, 2016 (each, a "Purchase Date") at a Purchase Price equal
to the principal amount of such Notes, plus accrued and unpaid interest on the
Notes to, but excluding, the applicable Purchase Date, upon delivery of a
Purchase Notice containing the information set forth in the Indenture, at any
time from the opening of business on the date that is 20 Business Days prior to
such Purchase Date until the close of business on such Purchase Date and upon
delivery of the Notes to the Paying Agent by the Holder as set forth in the
Indenture.

         The Purchase Price may be paid, at the option of the Company, in cash
or by the issuance and delivery of shares of Common Stock, or in any combination
thereof, subject to the terms and conditions of the Indenture.

         At the option of the Holder and subject to the terms and conditions of
the Indenture, the Company shall become obligated to purchase all or a portion
of the Notes held by such Holder 40 Business Days after the occurrence of a
Change of Control of the Company occurring on or prior to September 1, 2006, for
a Change of Control Purchase Price equal to the principal amount of such Notes,
plus accrued and unpaid interest on the Notes to, but excluding, the Change of
Control Purchase Date, which Change of Control Purchase Price shall be paid in
cash.

                                      A-4
<PAGE>   35

         Holders have the right to withdraw any Purchase Notice or Change of
Control Purchase Notice, as the case may be, by delivering to the Paying Agent a
written notice of withdrawal in accordance with the provisions of the Indenture.

         If cash (and/or securities if permitted under the Indenture) sufficient
to pay the Purchase Price or Change of Control Purchase Price, as the case may
be, of all Notes or portions thereof to be purchased as of the Purchase Date or
the Change of Control Purchase Date, as the case may be, is deposited with the
Paying Agent on the Business Day following the Purchase Date or the Change of
Control Purchase Date, as the case may be, interest will cease to accrue on such
Notes (or portions thereof) immediately after such Purchase Date or Change of
Control Purchase Date, as the case may be, whether or not such Notes have been
delivered to the Paying Agent, and the Holder thereof shall have no other rights
as such (other than the right to receive the Purchase Price or Change of Control
Purchase Price, as the case may be, upon surrender of such Notes).

         9. CONVERSION. Subject to and in compliance with the provisions of the
Indenture (including, without limitation, the conditions to conversion set forth
in Section 2.01 of the First Supplemental Indenture), a Holder is entitled, at
such Holder's option, to convert the Holder's Note (or any portion of the
principal amount thereof that is $1,000 or an integral multiple $1,000), into
fully paid and nonassessable shares of Common Stock at the Conversion Price in
effect at the time of conversion.

         The Company will notify Holders of any event triggering the right to
convert the Holder's Note as specified above in accordance with the Indenture.

         A Note in respect of which a Holder has delivered a Purchase Notice or
Change of Control Purchase Notice, as the case may be, exercising the option of
such Holder to require the Company to purchase such Security may be converted
only if such Purchase Notice or Change of Control Purchase Notice, as the case
may be, is withdrawn in accordance with the terms of the Indenture.

         The initial Conversion Price is $32.00, subject to adjustment in
certain events described in the Indenture.

         To convert a Note, a Holder must (1) complete and manually sign the
conversion notice below (or complete and manually sign a facsimile of such
notice) and deliver such notice to the Conversion Agent, (2) surrender the Note
to the Conversion Agent, (3) furnish appropriate endorsements and transfer
documents if required by the Conversion Agent, the Company or the Trustee and
(4) pay any transfer or similar tax, if required.

         No fractional shares of Common Stock shall be issued upon conversion of
any Security. Instead of any fractional share of Common Stock that would
otherwise be issued upon conversion of such Security, the Company shall pay a
cash adjustment as provided in the Indenture.

         Notes that are surrendered for conversion during the period from the
close of business on any Regular Record Date immediately preceding any Interest
Payment Date to the opening of business on such Interest Payment Date shall
(except in the case of Notes or portions thereof which have been called for
redemption or in respect of which a Purchase Notice or Change of Control
Purchase Notice delivered by the Holder has not been withdrawn, the conversion
rights of which would terminate during the period between such Regular Record
Date and the close of business on such Interest Payment Date) be accompanied by
payment in immediately available funds or other funds acceptable to the Company
of an amount equal to the interest payable on such Interest Payment Date on the
principal amount of Notes being surrendered for conversion; provided, however,
that no such payment shall be required if there shall exist at the time of
conversion a default in the payment of interest on the Notes. No payment or

                                      A-5
<PAGE>   36

adjustment shall be made upon any conversion on account of any interest accrued
on the Notes surrendered for conversion from the Interest Payment Date preceding
the day of conversion, or on account of any dividends on the Common Stock issued
upon conversion. In addition, Holders shall not be entitled to receive any
dividends payable to holders of Common Stock as of any Record Date before the
close of business on the conversion date.

         If the Company (i) is a party to a consolidation, merger or binding
share exchange or (ii) reclassifies the Common Stock or (iii) conveys, transfers
or leases its properties and assets substantially as an entirety to any Person,
the right to convert a Note into shares of Common Stock may be changed into a
right to convert it into securities, cash or other assets of the Company or such
other Person, in each case in accordance with the Indenture.

         The above description of conversion of the Security is qualified by
reference to, and is subject in its entirety by, the more complete description
thereof contained in the Indenture.

         10. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form
without coupons in minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof. The transfer of Notes may be registered and Notes may
be exchanged as provided in the Indenture. The Security Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture.

         11. PERSONS DEEMED OWNERS. The registered Holder of this Note may be
treated as its owner for all purposes.

         12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions set
forth in the Indenture, (i) the First Supplemental Indenture or the Notes may be
amended with the written consent of the Holders of a majority in aggregate
principal amount of the Notes at the time outstanding and (ii) certain Defaults
may be waived with the written consent of the Holders of a majority in aggregate
principal amount of the Notes at the time outstanding. Without the consent of
any Holder of the Notes, the First Supplemental Indenture or the Notes may be
amended or supplemented to, in addition to other events more fully described in
the Indenture, cure any ambiguity, defect or inconsistency, to establish the
form or terms of the Securities to evidence the succession of another
corporation to the Company and the assumption by any such successor of the
covenants of the Company contained in the Indenture, to secure the Securities,
and to make any change that does not materially adversely affect the interests
of any Holder under the Indenture.

         13. DEFAULTS AND REMEDIES. If any Event of Default with respect to the
Notes shall occur and be continuing, the principal of all the Notes may be
declared due and payable in the manner and with the effect provided in the
Indenture.

         14. TRUSTEE DEALINGS WITH COMPANY. Subject to certain limitations
imposed by the Trust Indenture Act, the Trustee under the Indenture, in its
individual or any other capacity, may become the owner or pledgee of Notes and
may otherwise deal with and collect obligations owed to it by the Company or its
Affiliates and may otherwise deal with the Company or its Affiliates with the
same rights it would have if it were not Trustee.

         15. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or shareholder of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability including any

                                      A-6
<PAGE>   37

rights against any general partner of the Company in its capacity as general
partner. The waiver and release are part of the consideration for the issuance
of the Notes.

         16. AUTHENTICATION. This Security shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.

         17. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (=Uniform Gifts
to Minors Act).

         18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.

         19. UNCLAIMED MONEY OR SECURITIES. The Trustee and the Paying Agent
shall return to the Company upon written request any money or securities held by
them for the payment of any amount with respect to the Notes that remains
unclaimed for two years, subject to applicable unclaimed property law. After
return to the Company, Holders entitled to the money or securities must look to
the Company for payment as general creditors unless an applicable abandoned
property law designates another person.

         20. GOVERNING LAW. THE INDENTURE AND THE NOTES WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

         The Company shall furnish to any Holder upon written request and
without charge a copy of the Indenture which has in it the text of this Security
in larger type. Requests may be made to:

                                        HCC Insurance Holdings, Inc.
                                        13403 Northwest Freeway
                                        Houston, Texas  77057
                                        Attn:  Christopher L. Martin

                                      A-7
<PAGE>   38

                                 ASSIGNMENT FORM

                                 To assign this Security, fill in the form
below:

I or we assign and transfer this Security to

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                   (Insert assignee's soc. sec. or tax ID no.)

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
              (Print or type assignee's name, address and zip code)

and irrevocably appoint

______________________ agent to transfer this Security on the books of the
Company. The agent may substitute another to act for him.

--------------------------------------------------------------------------------

Date:                      Your Signature:
      ------------------                  --------------------------------------

--------------------------------------------------------------------------------
     (Sign exactly as your name appears on the other side of this Security)

                                      A-8
<PAGE>   39

                                CONVERSION NOTICE

                     To convert this Security into Common Stock of the Company,
check the box:

                                      [ ]

To convert only part of this Security, state the Principal Amount to be
converted (which must be $1,000 or an integral multiple of $1,000):

$
 -------------------------------------------------------------------------------

If you want the stock certificate made out in another person's name, fill in the
form below:

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                 (Insert other person's soc. sec. or tax ID no.)

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
            (Print or type other person's name, address and zip code)

--------------------------------------------------------------------------------

Date:                      Your Signature:
      ------------------                  --------------------------------------

--------------------------------------------------------------------------------
     (Sign exactly as your name appears on the other side of this Security)

                                      A-9<PAGE>
                                                                     Exhibit 4.1

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THIS ADJUSTMENT
WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR
TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM.

                         COMMON STOCK ADJUSTMENT WARRANT

No. AW3

             To Receive Shares of $.00001 Par Value Common Stock of

                             CONSTELLATION 3D, INC.

         THIS CERTIFIES that, for value received, The Gleneagles Fund Company II
(the "Purchaser") is entitled, upon the terms, at the times and subject to the
conditions hereinafter set forth, at any time after the expiration of the
Pricing Period (as defined herein) but prior to 5:00 p.m. New York City time on
August 20, 2006 (the "Termination Date"), to subscribe for and receive from time
to time from CONSTELLATION 3D, INC., a Delaware corporation (the "Company"), all
or any portion of an aggregate number of shares of Common Stock of the Company
determined pursuant to Section 3 hereof (the "Adjustment Shares"). The "Exercise
Price" of this Adjustment Warrant is $0. The number of shares for which this
Adjustment Warrant is exercisable shall be subject to adjustment as provided
herein. This Adjustment Warrant is being issued in connection with the Amended
and Restated Common Stock Purchase dated as of August 16, 2001 (the "Purchase
Agreement") entered into by the Company and the Purchaser. Any capitalized terms
used but not defined in this Adjustment Warrant shall have the meaning specified
in the Purchase Agreement.

1.       Title of Adjustment Warrant. Prior to the expiration hereof and subject
         ---------------------------
         to compliance with applicable laws, this Adjustment Warrant and all
         rights hereunder are transferable, in whole or in respect of the right
         to receive any part of the Adjustment Shares, at the office or agency
         of the Company by the holder hereof in person or by duly authorized
         attorney, upon surrender of this Adjustment Warrant together with (a)
         the Assignment Form annexed hereto properly endorsed, and (b) any other
         documentation reasonably necessary to satisfy the Company that such
         transfer is in compliance with all applicable securities laws.

2.       Authorization of Shares. The Company covenants that all shares of
         -----------------------
         Common Stock which may be issued upon the exercise from time to time of
         rights represented by this Adjustment Warrant will be duly authorized,
         validly issued, fully paid and nonassessable and free from all taxes,
         liens and charges in respect of the issue thereof (other than taxes in
         respect of any transfer occurring contemporaneously with such issue or
         otherwise specified herein).

<PAGE>

3.       Exercise of Adjustment Warrant for Adjustment Shares.
         ----------------------------------------------------

(a)      Definitions.
         -----------

         "Adjusted Available Period" for a particular Trading Day during the
         Pricing Period shall mean the full Trading Day less any time during
         such Trading Day that (A) the Registration Statement or any prospectus
         or prospectus supplement is not available for the sale of shares of
         Common Stock by the Purchaser, (B) trading of the Common Stock on the
         Principal Market is suspended or halted while the Principal Market is
         open for trading, (C) trading on the Principal Market in general is
         suspended or halted, and (D) the Common Stock is not listed or included
         for quotation on an Approved Market.

         "Adjusted Dollar Amount" shall mean, for any Trading Day during the
         Pricing Period the lesser of (a) $50,000 and (b) the product of (I) the
         Adjusted Volume Limit for such Trading Day and (II) 94% of the VWAP
         during the Adjusted Available Period of such Trading Day; provided,
         that the Adjusted Dollar Amount for the final Trading Day of the
         Pricing Period shall equal (I) $1,000,000 minus (II) the sum of the
         Adjusted Dollar Amounts for each prior Trading Day during the Pricing
         Period. For the avoidance of doubt, the Adjusted Dollar Amount shall be
         zero for any Trading Day on which the Adjusted Volume Limit is zero or
         on which any one or more of the events described in subsections (A),
         (B), (C) and (D) of the definition of Adjusted Available Period lasts
         for the entire duration of such Trading Day.

         "Adjusted Share Amount" for a particular Trading Day during the Pricing
         Period shall equal (a) the Adjusted Dollar Amount for such Trading Day
         divided by (b) 94% of the VWAP for such Trading Day. For the avoidance
         of doubt, the Adjusted Share Amount shall be zero for any Trading Day
         on which the Adjusted Volume Limit is zero or on which any one or more
         of the events described in subsections (A), (B), (C) and (D) of the
         definition of Adjusted Available Period lasts for the entire duration
         of such Trading Day.

         "Adjusted Volume Limit" for a particular Trading Day during the Pricing
         Period shall mean 10% of the trading volume for the Common Stock on the
         Principal Market during the Adjusted Available Period, as reported by
         Bloomberg Financial L.P. (provided, that for the purpose of determining
         the trading volume (I) individual trades of 20,000 shares or more of
         Common Stock shall not be counted and (II) all transactions other than
         bona fide, arm's length transactions between or among unaffiliated and
         unrelated persons and entities shall not be counted).

         "Approved Market" shall have the meaning given to such term in the
         Purchase Agreement.

         "Effective Date" shall have the meaning given to such term in the
         Purchase Agreement.

         "Pricing Period" shall mean the period commencing on the first to occur
         of (a) the third Trading Day following the Effective Date or (b) the
         120th calendar day following the date of this Adjustment Warrant, and
         expiring on the date on which the sum of the Adjusted

                                       2

<PAGE>

         Dollar Amounts from and including the date on which the Pricing Period
         commenced equals $1,000,000.

         "Purchased Shares" shall have the meaning given to such term in the
         Purchase Agreement.

         "Registration Statement" shall have the meaning given to such term in
         the Purchase Agreement.

         "Resale Notice" shall have the meaning given to such term in the
         Purchase Agreement.

         "Trading Day" shall have the meaning given to such term in the Purchase
         Agreement.

         "VWAP" shall have the meaning given to such term in the Purchase
         Agreement.

(b)      Adjustment Share Calculations. The number of Adjustment Shares for
         -----------------------------
         which this Adjustment Warrant is exercisable shall be determined by
         subtracting (I) the number of Initial Shares from (II) the sum of the
         Adjusted Share Amounts for each Trading Day during the Pricing Period
         (each such amount as appropriately adjusted for any stock splits,
         reverse stock splits, recapitalizations, stock dividends and other like
         events). If the result of this calculation is zero or a negative
         number, this Adjustment Warrant shall not be exercisable at all.
         Notwithstanding the forgoing, the number of Adjustment Shares for which
         this Adjustment Warrant is exercisable shall not exceed 9,200,000 minus
         the number of Purchased Shares previously issued to the Purchaser under
         the Purchase Agreement.

(c)      Exercise of Adjustment Warrant. Exercise of the rights represented by
         ------------------------------
         this Adjustment Warrant may be made at any time or times, in whole or
         in part, after the expiration of the Pricing Period and prior to 5:00
         p.m. New York City time on the Termination Date, by the surrender on
         any business day of this Adjustment Warrant and a Notice of Exercise in
         the form annexed hereto duly completed and executed, at the principal
         office of the Company (or such other office or agency of the Company as
         it may designate by notice in writing to the registered holder hereof
         at the address of such holder appearing on the books of the Company);
         whereupon the holder of this Adjustment Warrant shall be entitled to
         receive a certificate for the number of Adjustment Shares for which
         this Adjustment Warrant has been so exercised. Certificates for
         Adjustment Shares shall be delivered to the holder hereof within three
         (3) Trading Days after the date on which this Adjustment Warrant shall
         have been exercised as aforesaid. An exercise of this Adjustment
         Warrant shall be deemed for all purposes a "cashless" exercise.

(d)      Failure to Deliver Adjustment Shares. If the Company fails to deliver
         ------------------------------------
         the specified number of Adjustment Shares to the Purchaser within 10
         Trading Days of the time and at the place specified herein therefore,
         then the Purchaser may, without reducing its other rights at law or in
         equity, at any time following such 10th Trading Day (and regardless of
         whether such Adjustment Shares are subsequently delivered by the
         Company) deliver one or more written notices to the Company (each such
         notice being an "Adjustment

                                       3

<PAGE>

         Repurchase Notice") specifying a date and time not sooner than one
         Trading Day following the date of such notice on which there shall be a
         closing with respect to such Adjustment Repurchase Notice. At such
         closing, the Company shall repurchase from the Purchaser for cash all
         or such portion of the Adjustment Shares specified by the Purchaser in
         the Repurchase Notice at a per share price equal to the greater of (I)
         115% of the VWAP on the Trading Day prior to the date on which the
         Adjustment Repurchase Notice is delivered to the Company and (II) 115%
         of the VWAP on the Trading Day on which such Adjustment Shares were
         required to be delivered to the Purchaser pursuant hereto.

(e)      Failure to Register Adjustment Shares. If the Company fails to have a
         -------------------------------------
         Registration Statement covering the resale by the Purchaser of all of
         the Adjustment Shares declared effective by the SEC in accordance with
         the Registration Rights Agreement by the date which is 120 calendar
         days from the date of this Adjustment Warrant, the Purchaser may at any
         time following the expiration of the Pricing Period (regardless of
         whether such a Registration Statement is declared effective subsequent
         to such 120th day) deliver an Adjustment Repurchase Notice to the
         Company specifying a date and time not sooner than one Trading Day
         following the date of such notice on which there shall be a closing
         with respect to such Adjustment Repurchase Notice. At such closing, the
         Company shall repurchase from the Purchaser for cash this Adjustment
         Warrant at a price equal to the number of Adjustment Shares for which
         this Adjustment Warrant is exercisable following the expiration of the
         Purchase Period multiplied by the greater of (I) 115% of the VWAP on
         the Trading Day prior to the date on which the Adjustment Repurchase
         Notice is delivered to the Company and (II) 115% of the average of the
         VWAPs for each Trading Day of the Pricing Period.

(f)      Adjustments. The number of Adjustment Shares shall be appropriately
         -----------
         adjusted to reflect any stock split, reverse stock split, stock
         dividend, recapitalization or similar event so that the Purchaser
         receives the same economically equivalent value of Adjustment Shares as
         it would in the absence of such event.

(g)      Miscellaneous. The Adjustment Shares shall upon delivery to the
         -------------
         Purchaser be fully-paid, nonassessable, shares of Common Stock, and,
         provided that (I) the Purchaser has delivered a Resale Notice to the
         Company or the Company's transfer agent prior to or on the date of
         delivery of such Adjustment Shares and (II) there was an effective
         Registration Statement covering the resale of such Adjustment Shares at
         the time they were resold by the Purchaser, such Adjustment Shares
         shall be freely tradable and the certificates representing such
         Adjustment Shares shall be free of any legends or stop transfer
         restrictions.

(h)      Transfer or Resale. The Purchaser understands that the sale of the
         ------------------
         Adjustment Shares to the Purchaser has not been registered under the
         1933 Act or any state securities laws, and such shares may not be
         offered for sale, sold, assigned or transferred unless (1) subsequently
         registered thereunder pursuant to the Registration Rights Agreement or
         otherwise or (2) an exemption exists permitting such shares to be sold,
         assigned or

                                       4

<PAGE>

         transferred without such registration. Accordingly, absent such
         registration, the Adjustment Shares will be issued to the Purchaser
         with a legend to such effect.

4.       Non-Certificated Shares. In lieu of delivering physical certificates
         -----------------------
         representing the Adjustment Shares, provided the Company's transfer
         agent is participating in the Depository Trust Company ("DTC") Fast
         Automated Securities Transfer ("FAST") program, upon request of the
         Adjustment Warrant holder, the Company shall use its best efforts to
         cause its transfer agent to electronically transmit the Adjustment
         Shares to the Adjustment Warrant holder by crediting the account of the
         Adjustment Warrant holder's prime broker with DTC through its Deposit
         Withdrawal Agent Commission ("DWAC") system. The time periods for
         delivery described in the immediately preceding paragraph shall apply
         to the electronic transmittals described herein.

5.       No Fractional Shares or Scrip. No fractional shares or scrip
         -----------------------------
         representing fractional shares shall be issued upon the issuance of the
         Adjustment Shares

6.       Charges, Taxes and Expenses. Issuance of certificates for shares of
         Common Stock upon the exercise of this Adjustment Warrant shall be made
         without charge to the holder hereof for any issue or transfer tax or
         other incidental expense in respect of the issuance of such
         certificate, all of which taxes and expenses shall be paid by the
         Company, and such certificates shall be issued in the name of the
         holder of this Adjustment Warrant or in such name or names as may be
         directed by the holder of this Adjustment Warrant; provided, however,
                                                            --------  -------
         that in the event certificates for shares of Common Stock are to be
         issued in a name other than the name of the holder of this Adjustment
         Warrant, this Adjustment Warrant when surrendered for exercise shall be
         accompanied by the Assignment Form attached hereto duly executed by the
         holder hereof; and provided further, that the Company shall not be
                            ----------------
         required to pay any tax or taxes which may be payable in respect of any
         transfer involved in the issuance of any Adjustment Warrant
         certificates or any certificates for the Adjustment Shares other than
         the issuance of a Adjustment Warrant certificate to the Purchaser in
         connection with its surrender of a Adjustment Warrant certificate upon
         the exercise of less than all of the Adjustment Warrants evidenced
         thereby, and the Company shall not be required to issue or deliver such
         certificates unless or until the person or persons requesting the
         issuance thereof shall have paid to the Company the amount of such tax
         or shall have established to the satisfaction of the Company that such
         tax has been paid.

7.       Closing of Books. The Company will at no time close its shareholder
         ----------------
         books or records in any manner which interferes with the timely
         exercise of this Adjustment Warrant.

8.       No Rights as Shareholder until Exercise. Subject to Section 13 of this
         ---------------------------------------
         Adjustment Warrant and the provisions of any other written agreement
         between the Company and the Purchaser, the Purchaser shall not be
         entitled to vote or receive dividends or be deemed the holder of
         Adjustment Shares or any other securities of the Company that may at
         any time be issuable on the exercise hereof for any purpose, nor shall
         anything contained herein be construed to confer upon the Purchaser, as
         such, any of the rights of a stockholder of the Company or any right to
         vote for the election of directors or upon any

                                       5

<PAGE>

         matter submitted to stockholders at any meeting thereof, or to give or
         withhold consent to any corporate action (whether upon any
         recapitalization, issuance of stock, reclassification of stock, change
         of par value, or change of stock to no par value, consolidation,
         merger, conveyance or otherwise) or to receive notice of meetings, or
         to receive dividends or subscription rights or otherwise until the
         Adjustment Warrant shall have been exercised as provided herein.
         However, at the time of the exercise of this Adjustment Warrant
         pursuant to Section 3 hereof, the Adjustment Shares received hereunder
         shall be deemed to be issued to such holder as the record owner of such
         shares as of the close of business on the date on which this Adjustment
         Warrant shall have been exercised.

9.       Assignment and Transfer of Adjustment Warrant. This Adjustment Warrant
         ---------------------------------------------
         may be assigned in whole or in part by the surrender of this Adjustment
         Warrant and the Assignment Form annexed hereto duly executed at the
         office of the Company (or such other office or agency of the Company as
         it may designate by notice in writing to the registered holder hereof
         at the address of such holder appearing on the books of the Company);
         provided, however, that this Adjustment Warrant may not be resold or
         --------  -------
         otherwise transferred except (i) in a transaction registered under the
         Securities Act of 1933, as amended (the "Act"), or (ii) in a
         transaction pursuant to an exemption, if available, from registration
         under the Act and whereby, if requested by the Company, an opinion of
         counsel reasonably satisfactory to the Company is obtained by the
         holder of this Adjustment Warrant to the effect that the transaction is
         so exempt.

10.      Loss, Theft, Destruction or Mutilation of Adjustment Warrant. Upon
         ------------------------------------------------------------
         receipt by the Company of evidence reasonably satisfactory to it of the
         loss, theft, destruction or mutilation of any Adjustment Warrant or
         stock certificate representing the Adjustment Shares, and in case of
         loss, theft or destruction, of indemnity reasonably satisfactory to it,
         and upon reimbursement to the Company of all reasonable expenses
         incidental thereto. Upon surrender and cancellation of such Adjustment
         Warrant or stock certificate, if mutilated, the Company will make and
         deliver a new Adjustment Warrant or stock certificate of like tenor and
         dated as of such cancellation, in lieu of this Adjustment Warrant or
         stock certificate.

11.      Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
         ---------------------------------
         taking of any action or the expiration of any right required or granted
         herein shall be a Saturday, Sunday or a legal holiday, then such action
         may be taken or such right may be exercised on the next succeeding day
         not a legal holiday.

12.      Effect of Certain Events. If at any time after the date hereof there
         ------------------------
         shall be a merger or consolidation of the Company with or into, or a
         transfer of all or substantially all of the assets of the Company to,
         another entity (collectively, a "Sale or Merger Transaction"), the
         holder of this Adjustment Warrant shall have the right thereafter to
         purchase, by exercise of this Adjustment Warrant, the kind and amount
         of cash, shares and other securities and property which it would have
         owned or have been entitled to receive after the happening of such
         transaction had this Adjustment Warrant been exercised immediately
         prior thereto, subject to further adjustment as provided in Section 13.

                                       6

<PAGE>

         Notwithstanding the above, a Sale or Merger Transaction shall not be
         deemed to occur in the event the Company is the acquiring entity in
         connection with an acquisition by the Company.

13.      Adjustment of Number of Adjustment Warrant Shares. The number of and
         -------------------------------------------------
         kind of securities purchasable upon exercise of this Adjustment Warrant
         shall be subject to adjustment from time to time as follows:

(a)      Subdivisions, Combinations and other Issuances. If the Company shall at
         ----------------------------------------------
         any time after the date hereof but prior to the expiration of this
         Adjustment Warrant subdivide its outstanding securities as to which
         purchase rights under this Adjustment Warrant exist, by split-up,
         spin-off, or otherwise, or combine its outstanding securities as to
         which purchase rights under this Adjustment Warrant exist, the number
         of Adjustment Shares as to which this Adjustment Warrant is exercisable
         as of the date of such subdivision, split-up, spin-off or combination
         shall forthwith be proportionately increased in the case of a
         subdivision, or proportionately decreased in the case of a combination.

(b)      Stock Dividend. If at any time after the date hereof the Company
         --------------
         declares a dividend or other distribution on Common Stock payable in
         Common Stock or other securities or rights convertible into Common
         Stock ("Common Stock Equivalents") without payment of any consideration
         by holders of Common Stock for the additional shares of Common Stock or
         the Common Stock Equivalents (including the additional shares of Common
         Stock issuable upon exercise or conversion thereof), then the number of
         shares of Common Stock for which this Adjustment Warrant may be
         exercised shall be increased as of the record date (or the date of such
         dividend distribution if no record date is set) for determining which
         holders of Common Stock shall be entitled to receive such dividends, in
         proportion to the increase in the number of outstanding shares (and
         shares of Common Stock issuable upon conversion of all such securities
         convertible into Common Stock) of Common Stock as a result of such
         dividend.

(c)      Other Distributions. If at any time after the date hereof the Company
         -------------------
         distributes to holders of Common Stock, other than as part of its
         dissolution, liquidation or the winding up of its affairs, any shares
         of its capital stock, any evidence of indebtedness or any of its assets
         (other than Common Stock), then the number of Adjustment Shares for
         which this Adjustment Warrant is exercisable shall be increased to
         equal: (i) the number of Adjustment Shares for which this Adjustment
         Warrant is exercisable immediately prior to such event, (ii) multiplied
         by a fraction, (A) the numerator of which shall be the Fair Market
         Value (as defined below) per share of Common Stock on the record date
         for the dividend or distribution, and (B) the denominator of which
         shall be the Fair Market Value price per share of Common Stock on the
         record date for the dividend or distribution minus the amount allocable
         to one share of Common Stock of the value (as jointly determined in
         good faith by the Board of Directors of the Company and the Adjustment
         Warrant holder) of any and all such evidences of indebtedness, shares
         of capital stock, other securities or property, so distributed. In lieu
         of such change to the number of Adjustment Shares for which this
         Adjustment Warrant is exercisable, the Purchaser may elect, in its sole
         discretion, to participate in such distribution and receive the shares
         of

                                       7

<PAGE>

         capital stock, evidence of indebtedness or other assets on an "as
         exercised" basis as if the Adjustment Warrant had been exercised in
         full for Adjustment Shares as of the record date for such distribution,
         without regard to the restrictions contained in Section 14.

         For purposes of this Adjustment Warrant, "Fair Market Value" shall
         equal the 10 Trading Day average closing trading price of the Common
         Stock on the Principal Market for the 10 Trading Days preceding the
         date of determination or, if the Common Stock is not listed or admitted
         to trading on any Principal Market, the average of the closing bid and
         asked prices on the over-the-counter market as furnished by any New
         York Stock Exchange member firm reasonably selected from time to time
         by the Company for that purpose and reasonably acceptable to the
         Holder, or, if the Common Stock is not listed or admitted to trading on
         the Principal Market or traded over-the-counter and the average price
         cannot be determined as contemplated above, the Fair Market Value of
         the Common Stock shall be as reasonably determined in good faith by the
         Company's Board of Directors with the concurrence of the Holder.

(d)      Merger. The Company will not merge or consolidate with or into any
         ------
         other corporation, or sell or otherwise transfer its property, assets
         and business substantially as an entirety to another corporation,
         unless the corporation resulting from such merger or consolidation (if
         not the Company), or such transferee corporation, as the case may be,
         shall expressly assume in writing the due and punctual performance and
         observance of each and every covenant and condition of this Adjustment
         Warrant to be performed and observed by the Company.

(e)      Reclassification, etc. If at any time after the date hereof there shall
         ---------------------
         be a reorganization or reclassification of the securities as to which
         purchase rights under this Adjustment Warrant exist into the same or a
         different number of securities of any other class or classes, then the
         Adjustment Warrant Holder shall thereafter be entitled to receive upon
         exercise of this Adjustment Warrant, during the period specified
         herein, the number of shares or other securities or property resulting
         from such reorganization or reclassification, which would have been
         received by the Adjustment Warrant Holder for the shares of stock
         subject to this Adjustment Warrant had this Adjustment Warrant at such
         time been exercised.

14.      9.99% Limitation.
         ----------------

(a)      Notwithstanding anything to the contrary contained herein, the number
         of shares of Common Stock that may be acquired by the holder upon
         exercise pursuant to the terms hereof shall not exceed a number that,
         when added to the total number of shares of Common Stock deemed
         beneficially owned by such holder (other than by virtue of the
         ownership of securities or rights to acquire securities (including the
         Warrants) that have limitations on the holder's right to convert,
         exercise or purchase similar to the limitation set forth herein),
         together with all shares of Common Stock deemed beneficially owned
         (other than by virtue of the ownership of securities or rights to
         acquire securities that have limitations on the right to convert,
         exercise or purchase similar to the limitation set forth herein) by the
         holder's "affiliates" (as defined Rule 144 of the Act) ("Aggregation

                                       8

<PAGE>

         Parties") that would be aggregated for purposes of determining whether
         a group under Section 13(d) of the Securities Exchange Act of 1934, as
         amended, exists, would exceed 9.99% of the total issued and outstanding
         shares of the Company's Common Stock (the "Restricted Ownership
         Percentage"). Each holder shall have the right (w) at any time and from
         time to time to reduce its Restricted Ownership Percentage immediately
         upon notice to the Company and (x) at any time and from time to time,
         to increase its Restricted Ownership Percentage immediately in the
         event of the announcement as pending or planned of an event of:

                  (i) any consolidation or merger of the Company with or into
         any other corporation or other entity or person (whether or not the
         Company is the surviving corporation), or any other corporate
         reorganization or transaction or series of related transactions in
         which in excess of 50% of the Company's voting power is transferred
         through a merger, consolidation, tender offer or similar transaction,

                  (ii) any person (as defined in Section 13(d) of the Exchange
         Act), together with its affiliates and associates (as such terms are
         defined in Rule 405 under the 1933 Act), beneficially owns or is deemed
         to beneficially own (as described in Rule 13d-3 under the Exchange Act
         without regard to the 60-day exercise period) in excess of 50% of the
         Company's voting power,

                  (iii) there is a replacement of more than one-half of the
         members of the Company's Board of Directors which is not approved by
         those individuals who are members of the Company's Board of Directors
         on the date thereof, in one or a series of related transactions, or

                  (iv) a sale or transfer of all or substantially all of the
         assets of the Company, determined on a consolidated basis.

(b)      The holder covenants at all times on each day (each such day being
         referred to as a "Covenant Day") as follows: During the balance of such
         Covenant Day and the succeeding sixty-one (61) days (the balance of
         such Covenant Day and the succeeding 61 days being referred to as the
         "Covenant Period") such holder will not acquire shares of Common Stock
         pursuant to any right (including the exercise of the Adjustment
         Warrant) existing at the commencement of the Covenant Period to the
         extent the number of shares so acquired by such holder and its
         Aggregation Parties (ignoring all dispositions) would exceed:

         (x)  the Restricted Ownership Percentage of the total number of shares
              of Common Stock outstanding at the commencement of the Covenant
              Period,

         minus
         -----

         (y)  the number of shares of Common Stock owned by such holder and its
              Aggregation Parties at the commencement of the Covenant Period.

                                       9

<PAGE>

                  A new and independent covenant will be deemed to be given by
         the holder as of each moment of each Covenant Day. No covenant will
         terminate, diminish or modify any other covenant. The holder agrees to
         comply with each such covenant. This Section 14 controls in the case of
         any conflict with any other provision of the Transaction Documents.

                  The Company's obligation to issue shares of Common Stock which
         would exceed such limits referred to in this Section 14 shall be
         suspended to the extent necessary until such time, if any, as shares of
         Common Stock may be issued in compliance with such restrictions.

15.      Miscellaneous.
         -------------

(a)      Choice Of Law; Venue; Jurisdiction. THE PROVISIONS OF THIS ADJUSTMENT
         ----------------------------------
         WARRANT SHALL BE CONSTRUED AND SHALL BE GIVEN EFFECT IN ALL RESPECTS AS
         IF IT HAD BEEN ISSUED AND DELIVERED BY THE COMPANY ON THE DATE HEREOF.
         THIS ADJUSTMENT WARRANT SHALL BE BINDING UPON ANY SUCCESSORS OR ASSIGNS
         OF THE COMPANY. THIS ADJUSTMENT WARRANT WILL BE CONSTRUED AND ENFORCED
         IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK,
         EXCEPT FOR MATTERS ARISING UNDER THE ACT, WITHOUT REFERENCE TO
         PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES CONSENTS TO THE
         EXCLUSIVE JURISDICTION OF THE U.S. DISTRICT COURT SITTING IN THE STATE
         OF CITY OF NEW YORK IN THE STATE OF NEW YORK IN CONNECTION WITH ANY
         DISPUTE ARISING UNDER THIS ADJUSTMENT WARRANT AND HEREBY WAIVES, TO THE
         MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION
         BASED ON FORUM NON CONVENIENS, TO THE BRINGING OF ANY SUCH PROCEEDING
                  --------------------
         IN SUCH JURISDICTION. EACH PARTY HEREBY AGREES THAT IF THE OTHER PARTY
         TO THIS ADJUSTMENT WARRANT OBTAINS A JUDGMENT AGAINST IT IN SUCH A
         PROCEEDING, THE PARTY WHICH OBTAINED SUCH JUDGMENT MAY ENFORCE SAME BY
         SUMMARY JUDGMENT IN THE COURTS OF ANY COUNTRY HAVING JURISDICTION OVER
         THE PARTY AGAINST WHOM SUCH JUDGMENT WAS OBTAINED, AND EACH PARTY
         HEREBY WAIVES ANY DEFENSES AVAILABLE TO IT UNDER LOCAL LAW AND AGREES
         TO THE ENFORCEMENT OF SUCH A JUDGMENT. EACH PARTY TO THIS ADJUSTMENT
         WARRANT IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH
         PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
         MAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS IN ACCORDANCE WITH
         SECTION 15(C). NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO
         SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. EACH PARTY WAIVES
         ITS RIGHT TO A TRIAL BY JURY.

(b)      Modification and Waiver. This Adjustment Warrant and any provisions
         -----------------------
         hereof may be changed, waived, discharged or terminated only by an
         instrument in writing signed by the

                                       10

<PAGE>

         party against which enforcement of the same is sought. Any amendment
         effected in accordance with this paragraph shall be binding upon the
         Purchaser, each future holder of this Adjustment Warrant and the
         Company. No waivers of, or exceptions to, any term, condition or
         provision of this Adjustment 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.

(c)      Notices. Any notice, request or other document required or permitted to
         -------
         be given or delivered to the Purchaser or future holders hereof or the
         Company shall be personally delivered or shall be sent by certified or
         registered mail, postage prepaid, to the Purchaser or each such holder
         at its address as shown on the books of the Company or to the Company
         at the address set forth in the Purchase Agreement. All notices under
         this Adjustment Warrant shall be deemed to have been given when
         received.

         A party may from time to time change the address to which notices to it
         are to be delivered or mailed hereunder by notice in accordance with
         the provisions of this Section 15(c).

(d)      Severability. Whenever possible, each provision of this Adjustment
         ------------
         Warrant shall be interpreted in such manner as to be effective and
         valid under applicable law, but if any provision of this Adjustment
         Warrant is held to be invalid, illegal or unenforceable in any respect
         under any applicable law or rule in any jurisdiction, such invalidity,
         illegality or unenforceability shall not affect the validity, legality
         or enforceability of any other provision of this Adjustment Warrant in
         such jurisdiction or affect the validity, legality or enforceability of
         any provision in any other jurisdiction, but this Adjustment Warrant
         shall be reformed, construed and enforced in such jurisdiction as if
         such invalid, illegal or unenforceable provision had never been
         contained herein.

(e)      No Impairment. The Company will not, by amendment of its Certificate 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 of this Adjustment Warrant, but will at
         all times in good faith assist in the carrying out of all such terms
         and in the taking of all such action as may be necessary or appropriate
         in order to protect the rights of the Adjustment Warrant holder against
         impairment. Without limiting the generality of the foregoing, the
         Company (a) will not increase the par value of any Adjustment Shares
         above the amount payable therefor on such exercise, and (b) will take
         all such action as may be reasonably necessary or appropriate in order
         that the Company may validly and legally issue fully paid and
         nonassessable Adjustment Shares on the exercise of this Adjustment
         Warrant.

                                       11

<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Adjustment Warrant to
be executed by its officer thereunto duly authorized.

Dated: August 16, 2001

                                               CONSTELLATION 3D, INC.

                                               By: /s/Leonardo Berezowsky
                                                  ------------------------------
                                                  Name:  Leonardo Berezowsky
                                                  Title: Chief Financial Officer

                                       12

<PAGE>

                               NOTICE OF EXERCISE
                               ------------------

To:  CONSTELLATION 3D, INC.

(1)  The undersigned  hereby elects to receive          shares of Common Stock
                                               --------
of CONSTELLATION  3D, INC.  pursuant to the terms of the attached Adjustment
Warrant in a "cashless" exercise.

(2)  Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:

                                       -------------------------------
                                                    (Name)

                                       -------------------------------

                                       -------------------------------
                                                  (Address)

(3)  Please issue a new Adjustment Warrant for the unexercised portion of the
attached Adjustment Warrant in the name of the undersigned or in such other name
as is specified below:

                           Other Name:
                                       -----------------------

                                        -----------------------------------
                                                      (Name)

--------------------                    -----------------------------------
      (Date)                                       (Signature)

                                        -----------------------------------
                                                    (Address)

<PAGE>

                                 ASSIGNMENT FORM

              (To assign the foregoing Adjustment Warrant, execute
                   this form and supply required information.
            Do not use this form to exercise the Adjustment Warrant.)

         FOR VALUE RECEIVED, the foregoing Adjustment Warrant of Constellation
3D, Inc. and all rights evidenced thereby are hereby assigned to

                                                whose address is
-----------------------------------------------

---------------------------------------------------------------.

---------------------------------------------------------------

                                                     Dated:                ,
                                                             --------------

                           Holder's Signature:
                                                -----------------------------
                           Holder's Address:
                                                -----------------------------

                                                -----------------------------

Signature Guaranteed:
                       -------------------------------------------

NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Adjustment Warrant, without alteration or enlargement
or any change whatsoever, and must be guaranteed by a bank or trust company.
Officers of corporations and those acting in an fiduciary or other
representative capacity should file proper evidence of authority to assign the
foregoing Adjustment Warrant.

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