<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-28034
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CardioTech International, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3186647
- - --------------------------- ----------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
78 E Olympia Avenue, Woburn, Massachusetts 01801
- - ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 933-4772
--------------
11 State Street, Woburn, Massachusetts
----------------------------------------------
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's class of Common Stock as of
November 12, 1998 was 4,272,916. No shares were held in treasury.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1998, and March 31, 1998 3
Condensed Consolidated Statements of Operations
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended
September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K
Signatures 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, 1998 March 31, 1998
-------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,458,392 $ 2,226,691
Accounts Receivables--Trade 21,997 58,707
Accounts Receivables--Other 433,328 328,318
Prepaid Expenses 92,125 26,502
----------- -----------
Total Current Assets 2,005,842 2,640,218
Property and Equipment, net 226,972 187,654
Other non-current assets 220,888 211,766
----------- -----------
Total Assets $ 2,453,702 $3,039,638
=========== ===========
Liabilities and Stockholders Equity
Current Liabilities:
Accounts Payables $ 192,132 $161,243
Accrued Expenses 326,978 435,296
----------- -----------
Total Current Liabilities 519,110 596,539
Long Term Obligations
7% convertible senior notes due 2003 1,718,608 1,660,000
10% convertible subordinated notes due 2000 430,001
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued or outstanding
Common Stock, $.01 par value; 20,000,000
shares authorized, 4,272,916 issued and
outstanding at both September 30, 1998 and
March 31, 1998, respectively 42,729 42,729
Additional Paid in Capital 8,232,579 8,232,579
Accumulated Deficit (8,491,478) (7,495,630)
Cumulative Translation Adjustment 2,153 3,421
----------- -----------
Total Stockholders' Equity (214,017) 783,099
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,453,702 $ 3,039,638
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Research Revenue $ 245,337 $ 234,480 $ 523,680 $ 320,062
Operating Expenses
Research and Development 464,006 354,802 949,418 657,767
Selling, General and Administrative 266,246 277,512 510,421 529,881
-------------- ------------- -------------- --------------
Total Operating Expenses 730,252 632,314 1,459,839 1,187,648
Other Income and Expenses
Interest Expense (64,574) -- (104,292) --
Interest Income 20,796 22,761 44,603 49,916
-------------- ------------- -------------- --------------
(43,778) 22,761 (59,689) 49,916
Net Loss $ (528,693) $ (375,073) $ (995,848) $ (817,670)
============== ============= ============== ==============
Net Loss Per Common Share $ (0.12) $ (0.09) $ (0.23) $ (0.19)
Basic and Diluted ============== ============= ============== ==============
Basic and Diluted
Weighted Average Number of
Shares Outstanding 4,272,916 4,272,916 4,272,916 4,272,916
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (995,848) $ (817,670)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Interest paid by issuance of convertible
senior notes 58,608 --
Depreciation and Amortization 49,481 30,614
Changes in Assets and Liabilities
Accounts receivable (68,300) (189,566)
Prepaid expenses (65,623) (3,632)
Accounts payable 30,889 68,044
Accrued expenses (108,318) 11,647
----------- -----------
Net cash flows from operating activities (1,099,111) (900,563)
=========== ===========
Cash flows from investing activities:
Increase in non-current assets (28,713) --
Purchase of property, plant and equipment (67,440) (12,847)
----------- -----------
Net cash flows from Investing activities (96,153) (12,847)
=========== ===========
Cash flows from financing activities:
Issuance of notes payable 430,001 --
----------- -----------
Net cash flow from financing activities 430,001 --
=========== ===========
Effect of exchange rate changes on cash (3,036) (6,569)
=========== ===========
Net increase in cash and cash equivalent (768,299) (919,979)
Cash and cash equivalent at beginning of period 2,226,691 2,346,366
----------- -----------
Cash and cash equivalents at end of period $ 1,458,392 $ 1,426,387
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by CardioTech International, Inc. ("the Company" or "CardioTech"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make the
information presented not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year. It is suggested that these statements be read in conjunction with
the Company's Consolidated Financial Statements and its notes thereto, for the
year ended March 31, 1998, included in the Company's Annual Report to
shareholders.
2. Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income." This Statement
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. This Statement requires the classification of
items of comprehensive income by their nature in a financial statement and the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. Financial statements for prior periods have been restated.
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $(528,693) $(375,073) $(995,848) $(817,670)
Other comprehensive expense, net of tax:
Currency translation adjustment 18 (2,130) (1,276) (6,569)
--------- --------- --------- ---------
Total other comprehensive expense 18 (2,130) (1,276) (6,569)
--------- --------- --------- ---------
Total other comprehensive income $(528,675) $(377,203) $(997,124) $(824,239)
========= ========= ========= =========
</TABLE>
3. The Company computes basic and diluted earnings/loss per share ("EPS") in
accordance with Statement of Financial Accountings Standards No. 128, "Earnings
Per Share", which the Company adopted on October 1, 1997. Basic earnings/loss
per share is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings/loss per share is based upon the weighted
average number of common shares outstanding during the period plus additional
weighted average common equivalent shares outstanding during the period. Common
equivalent shares result from the assumed exercise of outstanding stock options
and warrants, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method. Common
equivalent shares have been excluded from the computation of diluted loss per
share for all periods presented, as their effect would have been anti-dilutive.
6
<PAGE>
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
------- ------- ------- -------
In thousands, except for the per share data
BASIC AND DILUTED EPS
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)............................................ $ (529) $ (375) $ (996) $ (818)
------- ------- ------- -------
Denominator:
Common shares outstanding................................... 4,273 4,273 4,273 4,273
------- ------- ------- -------
Basic and Diluted EPS............................................. $ (0.12) $ (0.09) $ (0.23) $ (0.19)
------- ------- ------- -------
</TABLE>
Options to purchase 1,045,201 and 917,146 shares of common stock outstanding
during the periods ended September 30, 1998 and 1997, respectively, were
excluded from the calculation of diluted earnings per share because the effect
of their inclusion would have been anti-dilutive.
4. SUBSEQUENT EVENT
On November 12, 1998, the Company amended its Note Purchase Agreement
("NPA") dated March 31, 1998 between the Company and Dresdner Kleinwort Benson
Private Equity Partners LP ("DKB") and issued 500,000 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") to DKB for
consideration of $500,000. The sale of the Series A Preferred Stock resulted
from the Company's achievement of a milestone set forth in the NPA. The Series A
Preferred Stock will accrue dividends from the closing date at a rate of 10.0%
per annum, payable quarterly in arrears. Dividend payments will accrue quarterly
unless DKB elects to receive the dividends in cash. At any time DKB may convert
the Series A Preferred Stock in whole or part, plus accrued and unpaid
dividends, into shares of Common Stock at the conversion price of $1.818 per
share. The conversion price is subject to a weighted anti-dilution adjustment.
The Series A Preferred Stock is redeemable in cash prior to maturity, in
whole or part at the Company's option, at 104% of the original cost of such
shares, plus accumulated and unpaid dividends, in the first year (decreasing by
1% in each of the following years), upon at least 15 business days notice.
Should the Company elect to redeem the Series A Preferred Stock in the first
year, DKB may elect to convert the Series A Preferred Stock to shares of Common
Stock at a conversion price equal to .87 (increasing in each of the following
years) times the lower of (i) the conversion price or (ii) the market price.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
CardioTech synthesizes, designs and manufactures medical-grade
polymers, particularly polyurethanes that it believes are useful in the
development of vascular graft technology and other implantable medical devices
because they can be synthesized to exhibit compatibility with human blood and
tissue. CardioTech is using proprietary manufacturing technology to develop and
fabricate small bore synthetic vascular grafts made of ChronoFlex(R), a family
of polyurethanes that has been demonstrated to be biodurable, blood and tissue
compatible and non-toxic.
In addition to the graft research and development program, since 1990
CardioTech has been engaged in various internal programs and joint venture
programs with corporate partners and internal programs for the development and
sale of ChronoFlex and other proprietary biomaterials for use in medical devices
manufactured by third parties. This activity has generated research revenues for
CardioTech.
As CardioTech is now focusing most of its research and development
resources on the vascular graft program, period to period comparisons of changes
in research revenues are not necessarily indicative of results to be expected
for any future period.
CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Woburn, Massachusetts and
Brymbo, Wrexham, United Kingdom. CardioTech was spun off by PolyMedica
Industries, Inc. (PMI) in June, 1996.
8
<PAGE>
Results of Operations:
Comparison for the Three Months Ended September 30, 1998 and 1997.
Research revenues for the quarter ended September 30, 1998 were
$245,337, compared to $234,480 for the quarter ended September 30, 1997, an
increase of $10,857, or 4.6%. This increase was primarily generated by an
increase in royalty income of $29,000 from Bard Access Systems, offset by
lower sales of research biomaterials of $17,000.
Research and development expenses for the quarter ended September 30,
1998 were $464,006, compared to $354,802 for the quarter ended September 30,
1997, an increase of $109,204, or 30.8%. This was principally the result of
increased research and development expenses related to the clinical trial
activities of the Company's vascular access graft in Europe ($67,000), increased
travel costs associated with these trials ($10,000), and increased selling costs
($32,000).
Selling, general and administrative expenses for the quarter ended
September 30, 1998 were $266,246, compared to $277,512 for the quarter ended
September 30, 1997 a decrease of $11,266 or 4.1%. This decrease was primarily
due to lower outside consultant and service charges ($14,500), lower annual
report costs ($12,200), offset by increased advertising expense ($3,000),
increased maintenance expenses ($4,500), increased travel expenses ($4,000) and
increased salary expense ($5,000).
Other income and expenses for the quarter ended September 30, 1998 were
expenses of $43,778, compared to income of $22,761 for the quarter ended
September 30, 1997. The increase in expenses primarily resulted from interest
expenses of $64,574 on outstanding loans. Interest expense for the quarter ended
September 30, 1997 was partially offset by interest income of $20,796 during the
period. In the quarter ended September 30, 1997, the Company's other income
consisted of earned interest income of $22,761.
Comparison for the Six Months Ended September 30, 1998 and 1997.
Research revenues for the six months ended September 30, 1998 were
$523,680, compared to $320,062 for the six months ended September 30, 1997, an
increase of $203,618, or 63.6%. This increase was primarily generated by higher
research revenues earned under research grants from the National Institute of
Health ("NIH")($106,000), higher sales of medical grade polyurethanes ($34,000),
and increased earned royalty income ($66,600).
Research and development expenses for the six months ended September
30, 1998 were $949,418, compared to $657,767 for the six months ended September
30, 1997, an increase of $291,651, or 44.3%. This increase was principally due
to increased costs related to the Company's vascular access graft clinical
trials in Europe ($190,000), increased travel costs associated with clinical
trials ($17,400), and increased salary and benefit expenses ($71,800).
Selling, general and administrative expenses for the six months ended
September 30, 1998 were $510,421, compared to $529,881 for the comparable period
last year, a decrease of $19,460 or 3.7%. This decrease was primarily due to
lower outside consultant ($22,500), lower annual report costs ($12,200), and
lower travel costs ($6,600). These expense decreases were partially offset by
higher salary costs ($14,700) and increased maintenance costs ($4,000).
Other income and expenses for the six months ended September 30, 1998
were expenses of $59,689, compared to income of $49,916 for the six months ended
September 30, 1997. The increase in expenses primarily resulted from interest
expenses of $104,292 on outstanding loans. Interest expense for the six months
ended September 30, 1998 was partially offset by interest income of $44,603
during the period. In the six months ended September 30, 1997, the Company's
other income consisted of earned interest income of $49,916.
9
<PAGE>
Liquidity and Capital Resources
The Company used $1,099,111 to fund operations during the six months
ended September 30, 1998, compared to $900,563 for the six months ended
September 30, 1997. The principal uses of funds for the six months ended
September 30, 1998 were a net loss of $995,848, increases in accounts receivable
of $68,300 relating to trade customers, increases in prepaid expenses of $65,623
and the pay down of accrued expenses of $108,318. These increases were partially
offset by increases in accounts payable of $30,889.
CardioTech's future growth will depend on its ability to raise capital
to support research and development activities and to commercialize its vascular
graft technology. To date, CardioTech has not generated revenues from the sale
of vascular grafts, although it has received a minor amount of research revenues
relating to its other biomaterial sales and from the NIH to support graft
research. Since inception, funding has come from PMI, 7% Senior Convertible
Notes (the "Senior Notes") with a face value of $1,660,000 issued on March 31,
1998, and a 10% convertible loan from Freemedic in the amount of (GBP) 252,942,
(approximately $420,000). CardioTech expects to continue to incur operating
losses unless and until product sales and/or royalty payments generate
sufficient revenue to fund its continuing operations.
CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. CardioTech's capital requirements depend on numerous factors,
including but not limited to, the progress of its research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any intellectual property rights, competing
technological and market developments, changes in CardioTech's development of
commercialization activities and arrangements, and the purchase of additional
facilities and capital equipment.
CardioTech is currently conducting its operations with approximately
$1,458,000 in cash. CardioTech estimates such amount will be sufficient to fund
its working capital and research and development activities through June 1999.
However, CardioTech's spending level may increase depending on the Company's
ability to raise additional capital.
Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTech's business through March 31, 1996, PMI
funded approximately $4.0 million in operating losses to support CardioTech's
research activities. Future expenditures for product development, especially
relating to outside testing and clinical trials, are discretionary and,
accordingly, can be adjusted based on the availability of cash.
CardioTech will seek to obtain additional funds through public or
private equity or debt financing, collaborative arrangements, or from other
sources. There can be no assurance that additional financing will be available
at all or on acceptable terms to permit successful commercialization of
CardioTech's technology and products. If adequate funds are not available,
CardioTech may be required to curtail significantly one or more of its research
and development programs, or obtain funds through arrangements with
collaborative partners or others that may require CardioTech to relinquish
rights to certain of its technologies, product candidates or products.
Subsequent Event
On November 12, 1998, the Company issued 500,000 shares of Series A
Convertible Preferred Stock to Dresdner Kleinwort Benson Private Equity
Partners LP. See note 4 of the notes to condensed consolidated financial
statements.
Exchange Listing
The Company's common stock is currently listed on the American Stock
Exchange ("AMEX") under the symbol "CTE." However, there can be no assurance
that these shares will not be delisted by the AMEX. The determination by AMEX to
delist a company is not based on a precise mathematical formula, but rather on a
review of all relevant facts and circumstances in light of the AMEX's policies.
The AMEX will normally consider delisting securities of a company which (i) has
stockholders' equity of less than $2,000,000 if such company has sustained
losses from continuing operations and/or net losses in two of its three most
recent fiscal years; or (ii) has sustained losses which are so substantial to
its overall operations or its existing financial resources, or if its financial
condition has become so impaired that it appears questionable, in the opinion of
the AMEX, as to whether such company will be able to continue operations and/or
meet its obligations as they mature. As of September 30, 1998, the Company had
stockholders' equity of negative $214,017, and had losses in all three of its
most recent fiscal years. If the Company is unable to increase its stockholders'
equity and its net losses continue, the Company may be delisted. The Company is
attempting to increase its stockholders' equity through the private placement of
its equity securities, which include the recently consummated private placement
of $500,000 of Series A Convertible Preferred Stock to DKB described in note 4
of the notes to the condensed consolidated financial statements. However, these
financing activities may not provide the Company with sufficient stockholders'
equity to avoid being delisted. Failure of the Company to maintain the listing
of its Common Stock on AMEX will constitute an event of default under the Senior
Notes and entitle DKB to demand immediate payment of the Senior Notes, as well
as result in the dividends payable under the Series A Convertible Preferred
Stock increasing from 10% to 13%. Upon such a default, actions taken by DKB may
result in a default under the Freemedic convertible loan. At this time, the
Company is unable to repay such indebtedness.
10
<PAGE>
Forward Looking Statements
The Company believes that this Form 10-Q contains forward-looking
statements that are subject to certain risks and uncertainties. These forward-
looking statements include statements regarding the sufficiency of the Company's
liquidity and capital and the Company's intention to sell equity to raise its
stockholders' equty. Such statements are based on management's current
expectations and are subject to a number of factors that could cause actual
results to differ materially from the forward-looking statements. The Company
cautions investors that there can be no assurance that actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements, as a result of various factors including but
not limited to the following: the Company's ability to obtain financing (with or
without the sale of equity) to support its working capital needs on acceptable
terms, the Company's ability to avoid the delisting of its Common Stock, the
timely development of products by the Company, intense competition related to
the development of synthetic grafts and difficulties inherent in developing
synthetic grafts. As a result, the Company's further development involves an
high degree of risks. For further information, refer to the more specific risks
and uncertainties discussed throughout this report.
ChronoFlex(R) is a registered trademark of PolyMedica Corporation that has
-------------
been licensed to CardioTech.
Year 2000 Compliance
The Year 2000 Issue refers to potential problems with computer systems
or any equipment with computer chips or software that use dates where the date
has been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating the date sensitive software
which uses only two digits to represent the year may recognize a date using 00
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar business activities.
The Company has conducted a review of its information systems to
determine the extent of any Year 2000 problem. Based on such review, the Company
does not currently believe that it has material exposure to the Year 2000 Issue
with respect to its own information systems, since its core existing business
information systems correctly define the year 2000.
The Company is in the process of contacting its major customers in an
effort to determine the extent to which the Company may be vulnerable to those
parties' failure to timely correct their own Year 2000 problems. To date, the
Company is unaware of any situations of noncompliance that would materially
adversely affect its operations or financial condition. There can be no
assurance, however, that instances of noncompliance which could have a material
adverse effect on the Company's operations or financial condition will not be
identified; that the systems of other companies with which the Company transacts
business will be corrected on a timely basis; or that a failure by such entities
to correct a Year 2000 problem or a correction which is incompatible with the
Company's information systems would not have a material adverse effect on the
Company's operations or financial condition.
11
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On November 12, 1998, the Company issued 500,000 shares of Series A
Convertible Preferred Stock to DKB. The Series A Preferred Stock has superior
liquidation rights and dividend rights than the Common Stock. The Series A
Preferred Stock will accrue dividends from the closing date at a rate of 10.0%
per annum, payable quarterly in arrears and in preference to any payments made
on any other equity securities of the Company. Dividend payments will accrue
quarterly unless DKB elects to receive the dividends in cash. Upon the
occurrence of certain triggering events, including a change of control of the
Company, the delisting of its Common Stock or a default under the Senior Notes,
the dividend rate will increase to 13%. In the event of any liquidation or
winding up of the Company, funds available for distribution will be paid first
to the holders of the Series A Convertible Preferred Stock in preference to any
payments made on any other equity securities of the Company.
The series A Convertible Preferred stock is not entitled to vote, except on
matters required by law. DKB may convert the Series A Preferred Stock, in whole
or in part, plus accrued and unpaid dividends, into shares of Common Stock (the
"Shares") at the conversion price at any time prior to maturity, upon ten days
notice. The conversion price is $1.818 and 275,027 shares of Common Stock will
initially be issuable upon conversion of the Series A Preferred Stock. The
conversion price is subject to a weighted average anti-dilution adjustment.
The Series A Convertible Preferred Stock is redeemable in cash prior to
maturity, in whole or in part, at the Company's option at 104% of the origin,
plus accumulated and unpaid dividends, in the first year (decreasing by 1% in
each of the following years), upon at least 15 business days notice. Should the
Company elect to redeem the Series A Convertible Preferred Stock in the first
year, DKB may elect to convert the Series A Convertible Preferred Stock to
shares of Common Stock at a conversion price equal to .87 (increasing in each of
the following years) times the lower of (i) the conversion price or (ii) the
market price.
The Series A Preferred Stock were issued to DKB in reliance upon an
exemption from the registration provisions of the Securities Act of 1933, as
amended, set forth in Section 4(2) thereof relative to sales by an issuer not
involving any public offering. DKB has been granted certain registration rights
for the resale of the shares which may be issued upon conversion of the Series A
Preferred Stock.
Item 4. Submission of Matters to a Vote of Security Holders
On September 3, 1998, the Company held its annual meeting of its
stockholders. The following matters were voted on at that meeting:
1. The election of Michael Barretti as a class II director.
2. The ratification of the sale of up to $2,500,000 principal amount of 7%
senior convertible notes to Dresdner, Kleinwort Benson Private Equity
Partners, LP.
3. The ratification of the appointment of PricewaterhouseCoopers as auditors
for the Company for the fiscal year ending March 31, 1999.
The following chart shows the number of votes cast for or against, as well
as the number of abstentions and board non-votes, at to each matter voted on at
the special meeting:
<TABLE>
<CAPTION>
Broker
Matter For Against Abstain Non-votes
------ --- ------- ------- ---------
<S> <C> <C> <C> <C>
Election of Mr. Barretti 3,920,455 148,630 n/a n/a
Ratification of Sales of 7% Senior Convertible Notes 2,798,454 42,270 15,892 1,407,840
Appointment of Pricewaterhousecoopers 4,051,113 4,674 13,298 n/a
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 3.1 Certificate of Vote of Directors Establishing a
Class or Series of Stock for Series A Preferred
Stock
Exhibit 10.1 Amendment, dated as of November 12, 1998, to Note
Purchase Agreement and Registration Rights
Agreement.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDIOTECH INTERNATIONAL, INC.
/s/ Michael Szycher
---------------------------------------------
Michael Szycher, Ph.D.
Chairman and Chief Executive Officer
/s/ John E. Mattern
-----------------------------------------------
John E. Mattern
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
Dated: November 16, 1998
13
<PAGE>
Exhibit Index
Exhibit 3.1 Certificate of Vote of Directors Establishing a
Class or Series of Stock for Series A Preferred
Stock
Exhibit 10.1 Amendment, dated as of November 12, 1998, to Note
Purchase Agreement and Registration Rights
Agreement.
Exhibit 27 Financial Data Schedule
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A CLASS OR
SERIES OF STOCKS
FOR
SERIES A PREFERRED STOCK
FEDERAL IDENTIFICATION
NO.
-------------------
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A CLASS OR SERIES OF STOCK
(GENERAL LAWS, CHAPTER 156B, SECTION 26)
We, Michael Szycher , President
----------------------------------------------------------------
and John Mattern , Clerk
----------------------------------------------------------------
of CardioTech International, Inc. ,
----------------------------------------------------------------
located at: 78E Olympia Avenue, Woburn, MA 01801 ,
--------------------------------------------------------
(Street Address of corporation in Massachusetts)
do hereby certify that a meeting of the directors of the corporation held on
November 9, 1998, the following vote establishing and designating a class or
series of stock and determining the relative rights and preferences thereof was
duly adopted:
See continuation Sheets 1-21
Attached Hereto
<PAGE>
1. Number, Designation and Rank.
----------------------------
(a) This series shall consist of 500,000 preferred shares in
the Corporation and shall be designated the Series A Convertible Preferred Stock
("Series A Preferred Stock").
------------------------
(b) The Series A Preferred Stock shall, with respect to
dividend rights and rights on Liquidation rank prior to all classes or series of
equity securities of the Corporation, including the Common Stock.
2. Dividends.
---------
(a) The holders of Series A Preferred Stock shall be entitled
to receive, out of funds legally available for that purpose, with respect to
each share of Series A Preferred Stock, before any dividends or other
distributions shall be declared and paid or set aside for the Common Stock or
any other class or series of stock of the Corporation ranking on a parity with
or junior to the Series A Preferred Stock with respect to dividends, dividends
at the Applicable Dividend Rate on the sum of (x) the Original Cost of such
share of Series A Preferred Stock plus (y) all accumulated and unpaid dividends
thereon deferred in accordance with Section 2(c)). Subject to Section 2(c), such
dividends shall be paid in cash quarterly in arrears on each March 30, June 30,
September 30 and December 30 (unless such day is not a Business Day, in which
event on the next succeeding Business Day) (each a "Dividend Payment Date") and
---------------------
shall be calculated on the basis of a year of 360 days comprised of twelve
30-day months. All cash payments of dividends with respect to the Series A
Preferred Stock shall be made in such coin or currency of the United States of
America as at the time of payment shall be legal tender therein for the payment
of public and private debts.
(b) Dividends shall accrue and compound on a quarterly basis
at the Applicable Dividend Rate regardless of whether the Board has declared a
dividend payment or whether there are any profits, surplus or other funds of the
Corporation legally available for dividends. Any dividend which accrues pursuant
to this Section 2 shall be classified as "accumulated dividends" and shall
remain "accumulated and unpaid dividends" until paid or otherwise canceled
pursuant to this Certificate of Vote of Directors Establishing a Class or Series
of Stock. Dividends on each share of Series A Preferred Stock shall accrue
pursuant to this Section 2 from and including the Original Issuance Date to and
including the date such share is redeemed in full or such share is fully
converted into Common Stock pursuant to Section 5 below. The dividends payable
with respect to the Series A Preferred Stock shall be paid to the holders of
shares of the Series A Preferred Stock as they appear on the stock records of
the Corporation on the applicable Dividend Payment Date.
(c) Unless the Requisite Series A Stockholders, at their
option and in their sole discretion, require the Corporation to make payment in
cash of such dividend payable on a Dividend Payment Date with respect to the
outstanding shares of Series A Preferred Stock, such dividends shall not be paid
in cash but shall continue to accrue in accordance with this Section 2 and shall
not otherwise be paid in cash as a dividend pursuant to Section 2(a) on a later
Dividend Payment Date without the prior written consent of the Requisite Series
A Stockholders. The Requisite Series A Stockholders shall give irrevocable
written notice to the Corporation of their
<PAGE>
election to defer such cash payment of dividends not less than 5 Business Days
nor more than 60 Business Days prior to the applicable Dividend Payment Date.
(d) Except as otherwise approved by the Requisite Series A
Stockholders, so long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not pay or declare or set apart for payment
any dividend or make any other distribution or other payment on or with respect
to the Common Stock or any class or series of stock of the Corporation ranking
on a parity with or junior to the Series A Preferred Stock with respect to
dividends or redeem, repurchase or otherwise acquire any such stock unless the
Corporation has paid, or at the same time pays in cash, all accumulated and
unpaid dividends on the Series A Preferred Stock pursuant to this Section 2 that
have accrued through the date of such action.
(e) Except as otherwise provided herein, if at any time the
Corporation pays less than the total amount of accumulated and unpaid dividends
with respect to the Series A Preferred Stock, such payment shall be distributed
ratably among the holders of the Series A Preferred Stock based upon the number
of shares of the Series A Preferred Stock held by each such holder.
(f) After payment of all dividends owing to holders of Series
A Preferred Stock, such holders shall not participate in dividends thereafter
paid on the Common Stock.
3. Liquidation. Upon a Liquidation, after payment or provision for
-----------
payment of the debts and other liabilities of the Corporation, the holders of
Series A Preferred Stock shall be entitled to receive, out of the remaining
assets of the Corporation available for distribution to its stockholders with
respect to each share of Series A Preferred Stock, an amount equal to the
Liquidation Amount of such share before any distribution shall be made to the
holders of the Common Stock or any other class of capital stock of the
Corporation ranking junior to the Series A Preferred Stock. If upon any
Liquidation the assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of Series A Preferred
Stock the full Liquidation Amount to which they shall be entitled, the holders
of Series A Preferred Stock shall share in any distribution of assets in
accordance with such full Liquidation Amount (pro rata in accordance with the
total Liquidation Amount that each such holders would have received had there
been such sufficient assets). After the payment of the full Liquidation Amount
to the holders of Series A Preferred Stock, such holders shall have no claim to
any remaining assets of the Corporation, if any.
4. Mandatory and Optional Redemption.
---------------------------------
(a) Any redemption effected in accordance with this Section 4
shall occur at the following redemption prices (expressed in percentages of the
then Applicable Redemption Amount) (the "Redemption Price"), in each case, plus
----------------
accumulated and unpaid dividends with respect thereto from (but not including)
the most recent Dividend Payment Date to the redemption date (assuming solely
for this purpose that dividends accrue on a daily basis at the Applicable
Dividend Rate), payable solely in cash to the holder of a share of Series A
Preferred Stock.
If redeemed:
-2-
<PAGE>
Year Redemption
---- Percentage
----------
Prior to November 12, 1999 104%
On or after November 12, 1999 and prior to November 12, 2000 104%
On or after November 12, 2000 and prior to November 12, 2001 103%
On or after November 12, 2001 and prior to November 12, 2002 102%
On or after November 12, 2002 and prior to November 12, 2003 101%
On or after November 12, 2003 100%
As used herein, "Redemption Amount" means, with respect to each share of Series
-----------------
A Preferred Stock, the sum of (x) the Original Cost of such share plus (y) all
accumulated and unpaid dividends with respect thereto to (and including) the
most recent Dividend Payment Date.
(b) In the event a Change of Control shall have occurred, the
Corporation shall be obligated to, at the option and sole discretion of each
holder of shares of Series A Preferred Stock, (x) redeem such shares of Series A
Preferred Stock as such holder elects immediately at the then applicable
Redemption Price, plus accumulated and unpaid dividends with respect thereto
from (but not including) the most recent Dividend Payment Date to the redemption
date (assuming solely for this purpose that dividends accrue on a daily basis at
the Applicable Dividend Rate), payable in cash, or (y) convert such shares of
Series A Preferred Stock as such holder elects immediately into shares of Common
Stock in accordance with Section 5 hereof.
(c) The shares of Series A Preferred Stock may be redeemed on
any Business Day after the Original Issuance Date at the option of the
Corporation at the then applicable Redemption Price, plus accumulated and unpaid
dividends with respect thereto from (but not including) the most recent Dividend
Payment Date to the redemption date (assuming solely for this purpose that
dividends accrue on a daily basis at the Applicable Dividend Rate), payable in
cash; provided that the Corporation shall not redeem less than 100,000 shares of
--------
Series A Preferred Stock (or any multiple of 100,000 shares in excess thereof)
unless it is redeeming all shares of Series A Preferred Stock then outstanding.
Notwithstanding the immediately preceding sentence, the Corporation shall not
have the right to redeem any shares of Series A Preferred Stock unless the
Corporation also elects to redeem on the Redemption Date, as nearly as is
possible, the same proportionate amount of the aggregate number of shares of
Series A Preferred Stock held by each holder of shares of Series A Preferred
Stock. The date established for any redemption pursuant to this Section 4(c) is
referred to herein as the "Redemption Date".
---------------
(d) At least 15 Business Days but not more than 30 Business
Days prior to a Redemption Date for any redemption made pursuant to Section
4(c), the Corporation shall provide written notice of such redemption (a
"Redemption Notice") to the holders of the shares of Series A Preferred Stock
-----------------
indicating that the Corporation shall redeem the shares of Series A Preferred
Stock. Such notice shall call upon the holder to surrender to the Corporation on
the Redemption Date, at the place or places designated in such notice, the
certificate or certificates
-3-
<PAGE>
representing shares of Series A Preferred Stock to be redeemed, held by such
holder, free and clear of any encumbrances. Such surrendered certificate or
certificates shall be canceled.
(e) The Redemption Notice shall also specify the number of
shares of Series A Preferred Stock to be redeemed, the Redemption Date, the
Redemption Price, the place or places of payment, that payment will be made upon
presentation and surrender of each shares of Series A Preferred Stock, that
dividends accumulated and unpaid from (but not including) the most recent
Dividend Payment Date to the Redemption Date (assuming solely for this purpose
that dividends accrue on a daily basis at the Applicable Dividend Rate) will be
paid as specified in said notice, that on and after said date dividends will
cease to accumulate. Such Redemption Notice shall also state the current
Conversion Price and the date on which the right to convert the shares of Series
A Preferred Stock or portions thereof into Common Stock will expire.
(f) If a Redemption Notice has been given as above provided,
the applicable Redemption Price specified in Section 4(a) hereof relating to
such redemption shall become due and payable on the on the date and at the place
stated in such notice, together dividends accumulated and unpaid from (but not
including) the most recent Dividend Payment Date to the Redemption Date
(assuming solely for this purpose that dividends accrue on a daily basis at the
Applicable Dividend Rate), and on and after said date (unless the Corporation
shall default in the payment of such shares of Series A Preferred Stock to be
redeemed at the applicable Redemption Price, together with such dividends
accumulated and unpaid to said date) dividends on the shares of Series A
Preferred Stock specified in the Redemption Notice shall cease to accumulate,
and the holders of such shares of Series A Preferred Stock shall have no right
in respect of such shares except the right to receive the Redemption Price and
the accumulated and unpaid dividends to Redemption Date. On presentation and
surrender of the certificate for shares of Series A Preferred Stock to be
redeemed at a place of payment specified in the Redemption Notice, such shares
shall be paid and redeemed by the Corporation at the Redemption Price, together
with any dividends accumulated and unpaid thereon from (but not including) the
most recent Dividend Payment Date to the Redemption Date (assuming solely for
this purpose that dividends accrue on a daily basis at the Applicable Dividend
Rate) and the Corporation shall issue to the holder a new certificate with
respect to any shares of Series A Preferred Stock represented by the surrendered
certificate to the extent such shares have not otherwise been redeemed. If any
shares of Series A Preferred Stock are called for redemption but shall not be so
paid upon surrender thereof for redemption, such shares shall, until paid or
duly provided for, accumulate dividends from the Redemption Date at the rate
provided for herein.
(g) Notwithstanding any other provisions contained in this
Certificate of Vote of Directors Establishing a Class or Series of Stock to the
contrary, if any redemption of shares of Series A Preferred Stock occurs on or
prior to December 30, 1998, then each reference in this Section 4 to "the most
recent Dividend Payment Date" shall be deemed instead to refer to "the Original
Issuance Date".
5. Conversion.
----------
-4-
<PAGE>
(a) Generally. Subject to the provisions of this Section 5 and
Section 6, each holder of each share of Series A Preferred Stock shall have the
right, on any Business Day, at such holder's option, to convert such share into
the number of fully paid and non-assessable shares of Common Stock equal to the
quotient obtained by dividing (A) the sum of (x) the Original Cost of such share
plus (y) all accumulated and unpaid dividends with respect thereto to the date
of conversion by (B) the Conversion Price (as defined below), as last adjusted
and then in effect; provided that any such conversion occurring (I) on a date
--------
after receipt of a Redemption Notice and on or prior to the redemption which is
the subject of such notice or (II) upon a Change of Control or (III) following
the commencement of a Non-Consensual Tender Offer, shall be into that number of
shares of Common Stock equal to the quotient obtained by dividing (x) the
Redemption Price which would be applicable if such shares of Series A Preferred
Stock were redeemed, rather than converted, on the Conversion Date (plus any
dividends accumulated and unpaid with respect thereto from (but not including)
the most recent Dividend Payment Date (or the Original Issuance Date if no
Dividend Payment Date has occurred) to the Conversion Date (assuming solely for
this purpose that dividends accrue on a daily basis at the Applicable Dividend
Rate)) divided by (y) the product of (1) the applicable Redemption Conversion
Factor corresponding to the date upon which the Redemption Date (or the Change
of Control or a Consensual Tender Offer) occurs (as set forth below) and (2) the
lesser of the Conversion Price (as last adjusted an then in effect), the Market
Price (determined as of the Conversion Date) of the Common Stock and (if
applicable) the Non-Consensual Tender Offer Price.
Year Redemption
---- Conversion
Factor
----------
On or prior to March 31, 2000 0.87
After March 31, 2000 and on or prior to March 31, 2001 0.89
After March 31, 2001 and on or prior to March 31, 2002 0.93
After March 31, 2002 and on or prior to March 31, 2003 0.96
After March 31, 2003 1.00
The conversion price per share at which shares of Common Stock shall be issuable
upon conversion of each share of Series A Preferred Stock (the "Conversion
----------
Price") shall initially be equal to $1.818. The Conversion Price shall be
- - -----
subject to adjustment from time to time pursuant to Section 6. Notwithstanding
any call for redemption pursuant to Section 4, the right to convert shares so
called for redemption shall terminate at the close of business on the Business
Day immediately preceding the Redemption Date unless the Corporation shall
default in making the exchange and payment of any amount payable upon such
exchange.
(b) Exercise Procedure.
-5-
<PAGE>
(i) In order to exercise the conversion privilege, a holder of
shares of the Series A Preferred Stock shall provide prior written notice of
such exercise at least 10 Business Days, but not more then 60 Business Days,
prior to such conversion; provided that only one Business Day's prior written
notice shall be required if the Corporation has delivered a Notice of Redemption
to the holders of shares of the Series A Preferred Stock or if a Non-Consensual
Tender Offer has commenced. The date established for any such conversion
pursuant to this Section 5 is referred to herein as the "Conversion Date." On or
---------------
prior to the Conversion Date, the holder of shares of the Series A Preferred
Stock to be converted shall surrender the certificate or certificates
representing such shares of Series A Preferred Stock at the office of the
Corporation, duly endorsed or assigned in blank. Unless the shares issuable on
conversion are to be issued in the same name as the name in which shares of
Series A Preferred Stock are registered, each share surrendered for conversion
shall be accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder of shares of the Series A Preferred
Stock to be converted or by such holder's duly authorized attorney and an amount
sufficient to pay any transfer or similar tax. Each conversion shall be deemed
to have been effected immediately prior to the close of business on the
Conversion Date.
(ii) On the Conversion Date, the Corporation shall issue and
shall deliver to such holder of shares of the Series A Preferred Stock being
converted, or on such holder's written order to such holder's transferee, a
certificate or certificates for the whole number of shares of Common Stock
issuable upon the conversion of such shares and the Corporation shall issue such
holder a new certificate with respect to the unconverted shares of Series A
Preferred Stock.
(iii) The person in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder of record of the shares of Common
Stock represented thereby at such time on such date.
(iv) All shares of Common Stock delivered upon conversion of
shares of Series A Preferred Stock will upon delivery be duly and validly issued
and fully paid and non-assessable, free of all liens and charges and not subject
to any preemptive rights. Upon the surrender of shares of Series A Preferred
Stock, the shares of Series A Preferred Stock surrendered for conversion shall
no longer be deemed to be outstanding and all rights of a holder of shares of
the Series A Preferred Stock with respect thereto shall immediately terminate
except the right to receive the Common Stock and other amounts, including
accumulated and unpaid dividends payable pursuant to this Section 5.
(c) Effect of Election.
(i) Upon delivery to the Corporation by a holder of shares of
the Series A Preferred Stock of a notice of election to convert, the right of
the Corporation to redeem the shares of Series A Preferred Stock which are to be
converted shall terminate, regardless of whether a notice of redemption has been
issued.
-6-
<PAGE>
(ii) From and after the date of delivery of a notice of
election to convert, shares of Series A Preferred Stock to be converted
shall participate equally and ratably with the holders of shares of Common
Stock in all dividends paid on the Common Stock as if such shares of Series
A Preferred Stock had been converted to shares of Common Stock at the time
of such delivery.
(d) Issuance of Shares.
(i) The Corporation shall at all times reserve and keep
available, free from preemptive rights, such number of its authorized but
unissued shares of Common Stock as shall be required for the purpose of
effecting conversions of shares of Series A Preferred Stock.
(ii) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon conversion of shares of
Series A Preferred Stock, the Corporation shall comply with all applicable
federal and state laws and regulations, and all rules of the AMEX (or such
other national securities exchange upon which the Common Stock is listed)
which require action to be taken by the Corporation, and the Corporation
shall use its reasonable commercial efforts to assist the holders of shares
of the Series A Preferred Stock in complying with any such laws,
regulations and rules. If the issuance of the number of shares of Common
Stock to be issued pursuant to the conversion of shares of Series A
Preferred Stock would require the prior approval of the stockholders of the
Corporation in accordance with the rules of the AMEX (or, if the Common
Stock is not then listed on the AMEX, such other national securities
exchange upon which the Common Stock is listed), then the Corporation shall
only be obligated to issue such number of shares of Common Stock as would
not require such stockholder approval, and in lieu of issuance of the
balance of such number of shares of Common Stock otherwise issuable to the
holders of shares of the Series A Preferred Stock, the Corporation shall
pay the holders of shares of the Series A Preferred Stock an amount in cash
equal to the product of (x) the amount of such balance of shares otherwise
issuable to the holders of shares of the Series A Preferred Stock and (y)
the greater of the Market Price (determined as of the Conversion Date) of
the Common Stock and (if applicable) the Non-Consensual Tender Offer Price.
It is understood that as long as the Common Stock remains listed on the
AMEX, the Corporation shall only be obligated to issue 854,582 (as
presently constituted and subject to subsequent adjustments for stock
splits, dividends, reverse stock split and the like) shares of Common Stock
pursuant to the limitations set forth in the preceding sentence, except to
the extent such limitations are not applicable.
(e) Taxes on Conversion. The Corporation will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on conversion of any part of the
principal amount of shares of Series A Preferred Stock pursuant hereto; provided
--------
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issue or delivery of shares of Common
Stock in a name other than that of the holder of shares of the Series A
Preferred Stock to be
-7-
<PAGE>
converted and no such issue or delivery shall be made unless and until the
person requesting such issue or delivery has paid to the Corporation the amount
of any such tax or has established, to the satisfaction of the Corporation, that
such tax has been paid.
(f) No Fractions of Common Stock to Be Issued. In connection with
the conversion of shares of Series A Preferred Stock all such shares surrendered
by the holder thereof (of any Affiliate of such holder) shall be aggregated and
no fractions of shares of Common Stock shall be issued upon conversion of such
shares, but in lieu thereof the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Market Price determined as of the Conversion Date.
6. Anti-Dilution. Except as otherwise provided in Section 6(n) below, the
-------------
Conversion Price shall be subject to adjustment from time to time as set forth
in this Section 6.
(a) Stock Dividends, Subdivisions and Combinations. If and
whenever the Corporation subsequent to the Original Issuance Date:
(i) declares a dividend upon, or makes any distribution
in respect of, any of its capital stock, payable in shares of Common Stock,
Convertible Securities or Stock Purchase Rights, or
(ii) subdivides its outstanding shares of Common Stock
into a larger number of shares of Common Stock, or
(iii) combines its outstanding shares of Common Stock into
a smaller number of shares of Common Stock,
then the Conversion Price shall be adjusted to that price determined by
multiplying the Conversion Price in effect immediately prior to such event by a
fraction (A) the numerator of which shall be the total number of outstanding
shares of Common Stock immediately prior to such event, and (B) the denominator
of which shall be the total number of outstanding shares of Common Stock
immediately after such event, treating as outstanding all shares of Common Stock
issuable upon conversions or exchanges of such Convertible Securities and
exercises of such Stock Purchase Rights.
(b) Issuance of Additional Shares of Common Stock. If and whenever
the Corporation subsequent to the date hereof shall issue or sell any shares of
Common Stock (except as otherwise provided in the last paragraph of this Section
6(b)), for a consideration less than the greater of (x) the Conversion Price and
(y) the Market Price per share (determined, in each case, as of the date
specified in the next succeeding paragraph), the Conversion Price upon each such
issuance or sale shall be adjusted to the lower of the prices calculated
pursuant to the following clauses (i) and (ii) of this Section 6(b) and shall be
determined by:
(i) DIVIDING (A) an amount equal to the sum of (1) the
number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the Conversion Price in effect as of the date
specified in the next succeeding paragraph plus
-8-
<PAGE>
(2) the aggregate consideration, if any, received by the Corporation upon
such issue or sale, by (B) the total number of shares of Common Stock
outstanding immediately after such issue or sale; and
(ii) MULTIPLYING the Conversion Price in effect as of the
date specified in the next succeeding paragraph by a fraction the numerator
of which is (A) the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied by the
Market Price per share of Common Stock immediately prior to such issue or
sale plus (2) the aggregate consideration, if any, received by the
Corporation upon such issue or sale, divided by (B) the total number of
shares of Common Stock outstanding immediately after such issue or sale,
and the denominator of which is the Market Price per share of Common Stock
immediately prior to such issue or sale.
For purposes of this Section 6(b), the date as of which the Conversion
Price and the date as of which the Market Price shall be determined shall be the
earlier of (i) the date on which the Corporation shall enter into a firm
contract for the issuance of such shares of Common Stock and (ii) the date of
actual issuance of such shares of Common Stock.
No adjustment of the Conversion Price shall be made under this Section
6(b) upon the issuance of any shares of Common Stock which are (i) distributed
to holders of Common Stock pursuant to a stock dividend or subdivision for which
an adjustment is provided under Section 6(a) or (ii) issued pursuant to the
exercise of any Stock Purchase Rights or pursuant to the conversion or exchange
of any Convertible Securities to the extent that an adjustment shall previously
have been made upon the issuance of such Stock Purchase Rights or Convertible
Securities pursuant to Sections 6(a), (c) or (d).
(c) Issuance of Stock Purchase Rights. If and whenever the Corporation
subsequent to the date hereof shall issue or sell any Stock Purchase Rights and
the consideration per share for which shares of Common Stock may at any time
thereafter be issuable upon exercise thereof (or, in the case of Stock Purchase
Rights exercisable for the purchase of Convertible Securities, upon the
subsequent conversion or exchange of such Convertible Securities) shall be less
than the greater of (x) the Conversion Price and (y) the Market Price per share
(determined, in each case, as of the date specified in the next succeeding
paragraph), the Conversion Price upon each such issuance or sale shall be
adjusted as provided in Section 6(b) on the basis that the maximum number of
shares of Common Stock ever issuable upon exercise of such Stock Purchase Rights
(or upon conversion or exchange of such Convertible Securities following such
exercise) shall be deemed to have been issued as of the date of the
determination of the Conversion Price or the Market Price, as applicable,
specified in the next succeeding paragraph. No adjustment of the Conversion
Price shall be made under Section 6(b) upon the issuance of any shares of Common
Stock which are issued pursuant to the exercise, conversion or exchange of any
Stock Purchase Rights if any adjustment shall previously have been made upon the
issuance of any such Stock Purchase Rights as herein provided.
For the purposes of this Section 6(c), the date as of which the
Conversion Price and the date as of which the Market Price shall be determined
shall be the earlier of (i) the date
-9-
<PAGE>
on which the Corporation shall enter into a firm contract for the issuance of
such Stock Purchase Rights and (ii) the date of actual issuance of such Stock
Purchase Rights.
(d) Issuance of Convertible Securities. If and whenever the
Corporation subsequent to the date hereof shall issue or sell any Convertible
Securities (except as otherwise provided in the last paragraph of this Section
6(d)) and the consideration per share for which shares of Common Stock may at
any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the greater of (x) the Conversion Price and (y)
the Market Price per share (determined, in each case, as of the date specified
in the next succeeding paragraph), the Conversion Price upon each such issuance
or sale shall be adjusted as provided in Section 6(b) on the basis that the
maximum number of shares of Common Stock ever necessary to effect the conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued as of the date of the determination of the Conversion Price or the Market
Price, as applicable, specified in the next succeeding paragraph.
For the purposes of this Section 6(d), the date as of which the
Conversion Price and the date as of which the Market Price shall be determined
shall be the earlier of (i) the date on which the Corporation shall enter into a
firm contract for the issuance of such Convertible Securities and (ii) the date
of actual issuance of such Convertible Securities.
No adjustment of the Conversion Price shall be made under this
Section 6(d) upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any Stock Purchase Rights to the extent that an
adjustment shall previously have been made upon the issuance of such Stock
Purchase Rights pursuant to Section 6(c).
(e) Minimum Adjustment. If any adjustment of the Conversion Price
pursuant to this Section 6 shall result in an adjustment of less than $.0001, no
such adjustment shall be made, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall amount
to $.0001; provided that upon any adjustment of the Conversion Price resulting
--------
from (i) the declaration of a dividend upon, or the making of any distribution
in respect of, any stock of the Corporation payable in Common Stock, Stock
Purchase Rights or Convertible Securities or (ii) the reclassification by
subdivision, combination or otherwise, of the Common Stock into a greater or
smaller number of shares, the foregoing figure of $.0001 per share (or such
figure as last adjusted) shall be proportionately adjusted, and provided,
further, that upon the conversion of shares of Series A Preferred Stock, the
Corporation shall make all necessary adjustments (to the nearest .0001 of a
cent) not theretofore made to the Conversion Price up to and including the date
upon which shares of Series A Preferred Stock are converted.
(f) Readjustment of Conversion Price. Upon each change in (i) the
purchase price payable for any Stock Purchase Rights or Convertible Securities
referred to in Section 6(c) or (d), (ii) the consideration, if any, payable upon
exercise of such Stock Purchase Rights or upon the conversion or exchange of
such Convertible Securities or (iii) the number of shares of Common Stock
issuable upon the exercise of such Stock Purchase Rights or the rate at which
such Convertible Securities are convertible into or exchangeable for shares of
Common Stock, the
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Conversion Price in effect at the time of such event shall forthwith be
readjusted to the Conversion Price which would have been in effect at such time
had such Stock Purchase Rights or Convertible Securities provided for such
changed purchase price, consideration, number of shares of Common Stock so
issuable or conversion rate, as the case may be, at the time initially granted,
issued or sold. On the expiration of any Stock Purchase Rights not exercised or
of any right to convert or exchange under any Convertible Securities not
exercised, the Conversion Price then in effect shall forthwith be increased to
the Conversion Price which would have been in effect at the time of such
expiration had such Stock Purchase Rights or Convertible Securities never been
issued. No readjustment of the Conversion Price pursuant to this Section 6(f)
shall (i) increase the Conversion Price by an amount in excess of the adjustment
originally made to the Conversion Price in respect of the issue, sale or grant
of the applicable Stock Purchase Rights or Convertible Securities or (ii)
require any adjustment to the amount paid or number of shares of Common Stock
received by any Person upon any conversion of shares of Series A Preferred Stock
prior to the date upon which such readjustment to the Conversion Price shall
occur.
(g) Reorganization, Reclassification or Recapitalization of the
Corporation. If and whenever subsequent to the date hereof the Corporation shall
effect (i) any reorganization or reclassification or recapitalization of the
capital stock of the Corporation (other than in the cases referred to in Section
6(a)), (ii) any consolidation or merger of the Corporation with or into another
Person, (iii) the sale, transfer or other disposition of the property, assets or
business of the Corporation as an entirety or substantially as an entirety or
(iv) any other transaction (or any other event shall occur) as a result of which
holders of Common Stock become entitled to receive any shares of stock or other
securities and/or property (including, without limitation, cash, but excluding
any cash dividend that is paid out of the earnings or surplus of the Corporation
legally available therefor) with respect to or in exchange for the Common Stock
of the Corporation, there shall thereafter be deliverable upon the conversion of
shares of Series A Preferred Stock or any portion thereof (in lieu of or in
addition to the Common Stock theretofore deliverable, as appropriate) the
highest number of shares of stock or other securities and/or the greatest amount
of property (including, without limitation, cash) to which the holder of the
number of shares of Common Stock which would otherwise have been deliverable
upon the conversion of shares of Series A Preferred Stock or any portion thereof
at the time would have been entitled upon such reorganization or
reclassification or recapitalization of capital stock, consolidation, merger,
sale, transfer, disposition or other transaction or upon the occurrence of such
other event, and at the same aggregate Conversion Price.
Prior to and as a condition of the consummation of any transaction
or event described in the preceding sentence, the Corporation shall make
equitable, written adjustments in the application of the provisions herein set
forth satisfactory to the Requisite Series A Stockholders so that the provisions
set forth herein shall thereafter be applicable, as nearly as possible, in
relation to any shares of stock or other securities or other property thereafter
deliverable upon conversion of shares of Series A Preferred Stock. Any such
adjustment shall be made by and set forth in an agreement of the Corporation
and/or the successor entity, as applicable, for the benefit of and in form and
substance acceptable to the Requisite Series A Stockholders, which agreement
shall bind each such entity and shall be accompanied by a favorable opinion of
the regular outside counsel to the Corporation (or such other firm as is
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<PAGE>
reasonably acceptable to the Requisite Series A Stockholders) as to the
enforceability of such agreement and as to such other matters as such holders
may reasonably request.
References in this Certificate of Vote of Directors Establishing a
Class or Series of Stock to shares of Common Stock issuable upon conversion of
shares of Series A Preferred Stock shall be deemed to include shares of Common
Stock and shares (other than Common Stock) and any other securities of the
Corporation or of any other Person which the holders of shares of Series A
Preferred Stock at any time shall be entitled to receive upon the conversion or
partial conversion of shares of Series A Preferred Stock, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Common Stock (or such other
shares or securities).
(h) Other Dilutive Events. If any other transaction or event
(other than those explicitly referred to in this Section 6), including, without
limitation, distributions of property or assets of the Corporation or its
affiliates to Persons other than holders of Common Stock, shall occur as to
which the other provisions of this Section 6 are not strictly applicable but the
failure to make any adjustment to the Conversion Price or to any of the other
terms of the shares of Series A Preferred Stock would not fairly protect the
conversion rights and other rights represented by shares of Series A Preferred
Stock in accordance with the essential intent and principles hereof, then, and
as a condition to the consummation of any such transaction or event, and in each
such case, the Corporation shall appoint a firm of independent certified public
accountants of recognized national standing (which may be the regular auditors
of the Corporation), which shall give its opinion as to the adjustment, if any,
on a basis consistent with the essential intent and principles established in
this Section 6, necessary to preserve, without dilution, the rights represented
by the shares of Series A Preferred Stock. The certificate of any such firm of
accountants shall be conclusive evidence of the correctness of any computation
made under this Section 6. The Corporation shall pay the fees and expenses of
such firm of accountants in connection with any such opinion. Upon receipt of
such opinion, the Corporation will promptly mail a copy thereof to the holders
of the shares of Series A Preferred Stock and shall make the adjustments
described therein.
(i) Determination of Consideration. For purposes of this Section
6, the consideration received or receivable by the Corporation for the issuance,
sale, grant or assumption of shares of Common Stock, Stock Purchase Rights or
Convertible Securities, irrespective of the accounting treatment of such
consideration, shall be valued and determined as follows:
(i) Cash Payment. In the case of cash, the net amount
received by the Corporation after deduction of any accrued interest or
dividends, any expenses paid or incurred and any underwriting commissions
or concessions paid or allowed by the Corporation in connection with such
issue or sale.
(ii) Non-Cash Payment. In the case of consideration
other than cash, the Fair Value thereof or, if less, in the case of any
security, the Market Price of such
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<PAGE>
security, if applicable (in any case as of the date immediately preceding the
issuance, sale or grant in question).
(iii) Certain Allocations. If shares of Common Stock, Stock Purchase
Rights and/or Convertible Securities are issued or sold together with other
securities or other assets of the Corporation for a consideration which covers
more than one of the foregoing categories of securities and assets, the
consideration received or receivable (computed as provided in clauses (i) and
(ii) of this Section 6(i)) shall be allocable to such shares of Common Stock,
Stock Purchase Rights and/or Convertible Securities as reasonably determined in
good faith by the Board of Directors of the Corporation (provided such
--------
allocation is set forth in a written resolution and a certified copy thereof is
furnished to the holders of the shares of Series A Preferred Stock promptly (but
in any event within 10 days) following its adoption).
(iv) Dividends in Securities. If the Corporation shall declare a
dividend or make any other distribution upon any stock of the Corporation
payable in shares of Common Stock, Convertible Securities or Stock Purchase
Rights, such shares of Common Stock, Convertible Securities or Stock Purchase
Rights, as the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
(v) Stock Purchase Rights and Convertible Securities. The
consideration for which shares of Common Stock shall be deemed to be issued upon
the issuance or sale of any Stock Purchase Rights or Convertible Securities
shall be determined by dividing (A) the total consideration, if any, received by
the Corporation as consideration for the Stock Purchase Rights or the
Convertible Securities, as the case may be, plus the minimum aggregate amount of
additional consideration, if any, ever payable to the Corporation upon the
exercise of such Stock Purchase Rights or upon the conversion or exchange of
such Convertible Securities, as the case may be, in each case after deducting
any accrued interest or dividends, any expenses paid or incurred and any
underwriting commissions or concessions paid or allowed by the Corporation in
connection with such issue or sale; by (B) the maximum number of shares of
Common Stock ever issuable upon the exercise of such Stock Purchase Rights or
upon the conversion or exchange of such Convertible Securities.
(vi) Merger, Consolidation or Sale of Assets. If any shares of
Common Stock, Convertible Securities or Stock Purchase Rights are issued in
connection with any merger or consolidation of which the Corporation is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the Fair Value of such portion of the assets and business of the non-
surviving corporation as shall be attributable to such Common Stock, Convertible
Securities or Stock Purchase Rights, as the case may be. In the event of (a) any
merger or consolidation of which the Corporation is not the surviving
corporation or (b) the sale, transfer or other disposition of the property,
assets or business of the Corporation as an entirety or substantially as an
entirety for stock or other securities of any other Person, the Corporation
shall be deemed to have issued the number
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<PAGE>
of shares of its Common Stock for stock or securities of the surviving
corporation or such other Person computed on the basis of the actual
exchange ratio on which the transaction was predicated and for a
consideration equal to the Fair Value on the date of such transaction of
such stock or securities of the surviving corporation or such other Person,
and if any such calculation results in adjustment of the Conversion Price,
the determination of the number of shares of Common Stock issuable upon
conversion of shares of Series A Preferred Stock immediately prior to such
merger, consolidation or sale, for the purposes of Section 6(g), shall be
made after giving effect to such adjustment of the Conversion Price.
(j) Record Date. If the Corporation shall take a record of the
holders of the Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in Common Stock, Convertible Securities
or Stock Purchase Rights or (ii) to subscribe for or purchase Common Stock,
Convertible Securities or Stock Purchase Rights, then all references in this
Section 6 to the date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be, shall be deemed to be references
to such record date.
(k) Shares Outstanding. The number of shares of Common Stock
deemed to be outstanding at any given time shall not include shares of Common
Stock held by the Corporation or any Subsidiary of the Corporation.
(l) Maximum Conversion Price. At no time shall the Conversion
Price exceed the initial Conversion Price set forth in Section 5(a) hereof
except as a result of an adjustment thereto pursuant to Section 6(a)(iii) or
6(g).
(m) Application. All subdivisions of this Section 6 are
intended to operate independently of one another. If a transaction or an event
occurs that requires the application of more than one subdivision, all
applicable subdivisions shall be given independent effect.
(n) No Adjustments Under Certain Circumstances. Anything
herein to the contrary notwithstanding, no adjustment to the Conversion Price
shall be made in the case of:
(i) any issuance of shares of Common Stock (or
Other Securities) upon the conversion of shares of Series A Preferred Stock
in accordance with the terms of this Certificate of Vote of Directors
Establishing a Class or Series of Stock; or
(ii) any issuance of the Senior Notes or shares of
Common Stock (or Other Securities) upon the exercise in whole or part of
principal, premium (if any) or interest in the Senior Notes; or
(iii) (A) the granting by the Corporation of Stock
Purchase Rights to the officers, employees, directors and consultants of
the Corporation or any Subsidiary pursuant to any qualified or non-
qualified stock option plan or agreement, stock purchase plan or agreement,
stock restriction agreement, employee stock ownership plan (ESOP),
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<PAGE>
consulting agreement, or such other options, issuance, arrangements,
agreements or plans approved by the Board of Directors of the Corporation
and (B) the issuance of shares of Common Stock pursuant to the exercise of
such Stock Purchase Rights; provided that the aggregate number of shares of
--------
Common Stock to which this clause (ii) shall apply shall not exceed
1,061,029 (such number to be appropriately adjusted for stock splits, stock
dividends, combinations and similar events); or
(iv) up to 427,292 shares of Common Stock issued after
March 31, 1998 (such number to be appropriately adjusted for stock splits,
stock dividends, combinations and similar events) (w) solely in
consideration for the acquisition (whether by merger or otherwise) by the
Corporation of all or substantially all of the capital stock or assets of
any other entity or business organization, (x) solely in consideration for
the grant by or to the Corporation of marketing rights, distribution
rights, license rights or similar rights granted by or to the Corporation
in consideration of the exchange of proprietary technology, whether of the
Corporation or any other entity, (y) to equipment leasing companies in
connection with any equipment leasing arrangements to which the Corporation
is a party or (z) for working capital or other corporate purposes; provided
that in the case of each of clauses (w), (x), (y) or (z), such issuance has
been approved by a majority of the members of the Board of Directors.
(o) Waiver. In the event that the Requisite Series A Stockholders
consent in writing to limit, or waive in its entirety, any anti-dilution
adjustment to which the holders of shares of Series A Preferred Stock would
otherwise be entitled hereunder, the Corporation shall not be required to make
any adjustment whatsoever with respect to shares of Series A Preferred Stock in
excess of such limit or at all, as the terms of such consent may dictate.
(p) Adjustments to Conversion Price. As promptly as practicable (but
in any event not later than five days) after the occurrence of any event
requiring any adjustment under this Section 6 to the Conversion Price (or to the
number or kind of securities or other property deliverable upon the conversion
of shares of Series A Preferred Stock), the Corporation shall, at its expense,
mail to the holders of shares of Series A Preferred Stock either (i) an
Officers' Certificate or (ii) a certificate signed by a firm of independent
certified public accountants of recognized national standing (which may be the
regular auditors of the Corporation), setting forth in reasonable detail the
events requiring the adjustment and the method by which such adjustment was
calculated and specifying the adjusted Conversion Price and the number of shares
of Common Stock issuable upon conversion of shares of Series A Preferred Stock
after giving effect to such adjustment. The certificate of any such firm of
accountants shall be conclusive evidence of the correctness of any computation
made under this Section 6.
(q) Extraordinary Corporate Events. If and whenever the Corporation
subsequent to the date hereof shall propose to (i) pay any dividend payable in
stock to the holders of shares of Common Stock or to make any other distribution
to the holders of shares of Common Stock, (ii) offer to the holders of shares of
Common Stock rights to subscribe for or purchase any additional shares of any
class of stock or any other rights or options or (iii) effect any
reclassification of the Common Stock (other than a reclassification involving
merely the
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<PAGE>
subdivision or combination of outstanding shares of Common Stock), (iv) engage
in any reorganization or recapitalization or any consolidation or merger (other
than a merger in which no distribution of securities or other property is to be
made to holders of shares of Common Stock), (v) consummate any sale, transfer or
other disposition of its property, assets and business as an entirety or
substantially as an entirety, (vi) effect any other transaction which might
require an adjustment to the Conversion Price (or to the number or kind of
securities or other property deliverable upon the conversion of shares of Series
A Preferred Stock), including, without limitation, any transaction of the kind
described in Section 6(g) or (vii) commence or effect a Liquidation, then, in
each such case, the Corporation shall mail to the holders of shares of Series A
Preferred Stock an Officers' Certificate giving notice of such proposed action,
specifying (A) the date on which the stock transfer books of the Corporation
shall close, or a record shall be taken, for determining the holders of Common
Stock entitled to receive such stock dividends or other distribution or such
rights or options, or the date on which such reclassification, reorganization,
recapitalization, consolidation, merger, sale, transfer, other disposition,
transaction, liquidation, dissolution or winding up shall take place or
commence, as the case may be, and (B) the date as of which it is expected that
holders of Common Stock of record shall be entitled to receive securities or
other property deliverable upon such action, if any such date is to be fixed.
Such Officers' Certificate shall be mailed in the case of any action covered by
clause (i) or (ii) above, at least 30 days prior to the record date for
determining holders of Common Stock for purposes of receiving such payment or
offer, and, in any other case, at least 30 days prior to the date upon which
such action takes place and 20 days prior to any record date to determine
holders of Common Stock entitled to receive such securities or other property.
(r) Effect of Failure. Failure to give any certificate or
notice, or any defect in any certificate or notice required under this Section 6
shall not affect the legality or validity of the adjustment of the Conversion
Price or the number of shares of Common Stock issuable upon conversion of shares
of Series A Preferred Stock.
(s) Anti-dilution Provisions in Other Securities. If the
Corporation issues any Stock Purchase Rights or Convertible Securities or other
securities containing provisions protecting the holder or holders thereof
against dilution in any manner more favorable to such holder or holders thereof
than those set forth in shares of Series A Preferred Stock, such provisions (or
any more favorable portion thereof) shall be deemed to be incorporated herein as
if fully set forth in shares of Series A Preferred Stock and, to the extent
inconsistent with any provision of shares of Series A Preferred Stock, shall be
deemed to be substituted therefor.
7. Voting Rights. The holders of shares of Series A Preferred Stock shall
-------------
not be entitled to any voting rights except as otherwise provided by law.
8. Definitions.
-----------
(a) As used herein, the following terms shall have the
following meanings:
"Affiliate" shall mean, with respect to any Person, (a) a
---------
director, officer, member or general partner of such Person or any Person
identified in clause (c) below, (b) a spouse, parent, sibling or descendant of
such Person (or a spouse, parent, sibling or descendant of any
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<PAGE>
director or executive officer of such Person) and (c) any other Person that
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with such Person. For the purpose of
the above definition, the term "control" (including, with correlative meaning,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise.
"Applicable Dividend Rate" shall mean 10% per annum; provided
------------------------
that upon the occurrence of a Trigger Event and until the satisfactory
termination or cure of such Trigger Event (as reasonably determined by the
Requisite Series A Stockholders), "Applicable Dividend Rate" shall mean the
lesser of (x) 13% per annum and (y) the maximum dividend rate allowed to be
received by an applicable holder of a share of Series A Preferred Stock
(together with other amounts payable to such holder with respect to such share)
under applicable law.
"Business Day" shall mean any day other than a Saturday,
------------
Sunday or other day which shall be in Boston, Massachusetts or New York, New
York a legal holiday or a day on which banking institutions therein are
authorized by law to close.
"Board" shall mean the board of directors of the Corporation.
-----
"Change of Control of the Corporation" shall mean the
------------------------------------
occurrence of any of the following: (i) any Person or any group, acquires fifty
percent (50%) or more of the outstanding Common Stock; or assets of the
Corporation or its Subsidiaries representing more than fifty percent (50%) of
the consolidated earning power of the Corporation and its Subsidiaries, other
than as a result of a Non-Consensual Tender Offer; (ii) the sale or transfer in
one or more transactions of thirty percent (30%) or more of the assets of the
Corporation and its Subsidiaries (other than in the ordinary course of business
or to the extent such assets are replaced with other assets of equal or better
value and function); (iii) Michael Szycher ceases to be Chief Executive Officer
of the Corporation as a result of a termination of his employment by the
Corporation; or (iv) the consummation of the sale of any Strategic Assets, such
that the Corporation is no longer able to pursue the business described in the
Form 10-K. For purposes of this definition, the term "group" shall have the same
meaning as defined in Section 13(d)(3) of the Exchange Act, to the extent the
members of any such group would be required to file a Schedule 13D (or an
amendment thereto) with the Securities and Exchange Commission with respect to
an acquisition of the type referred to in clause (i) of this definition
(assuming that the Common Stock is registered under the Exchange Act).
"Common Stock" shall mean the Common Stock, $0.01 par value,
------------
of the Corporation as constituted on the Original Issuance Date and any stock
into which such Common Stock shall have been changed or any stock resulting from
any reclassification of such Common Stock.
"Convertible Securities" shall mean evidences of indebtedness,
----------------------
shares (including, without limitation, Preferred Shares) of stock or other
securities which are convertible into or
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exchangeable for, with or without payment of additional consideration, shares of
Common Stock, either immediately or upon the arrival of a specified date or the
happening of a specified event.
"Debt" shall have the same meaning herein as in the Note Purchase
----
Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Fair Value" shall mean the fair value of the appropriate security,
----------
property, assets, business or entity as determined by an independent investment
banking firm of recognized national standing selected by the Corporation and
satisfactory to the Requisite Series A Stockholders, provided that the fair
--------
value of the security, property, assets, business or entity, as the case may be,
in question shall be determined without, in the case of any such securities,
applying a discount for any lack of liquidity thereof, but otherwise in each
case in accordance with generally accepted financial practice. Such
determination shall be set forth in writing, and the Corporation shall,
immediately following such determination, mail a copy thereof to the holders of
the Series A Preferred Stock. The determination so made shall be conclusive and
binding on the Corporation and such holder or holders. The Corporation shall pay
all of the expenses incurred in connection with any such determination,
including, without limitation, the expenses of the independent investment
banking firm engaged to make such determination. If the Corporation shall not
have selected such investment banking firm within 10 days after the occurrence
of the event giving rise to the need therefor, then the Requisite Series A
Stockholders may select such investment banking firm.
"Liquidation" shall mean any voluntary or involuntary liquidation,
-----------
dissolution or winding up of the affairs of the Corporation, other than any
dissolution, liquidation or winding up in connection with any reincorporation of
the Corporation in another jurisdiction.
"Liquidation Amount" shall mean, as to each share of Series A
------------------
Preferred Stock, the sum of (x) the Original Cost with respect thereto plus (y)
all accumulated and unpaid dividends thereon to the date of payment of such
Liquidation Amount to the holders of shares of Series A Preferred Stock thereof.
"Market Price" of any security as of any date herein specified shall
------------
be (a) if such security is listed or admitted for trading on any national
securities exchange, the average closing sale price of such security over the
prior ten (10) trading days, or the average of the closing bid and asked prices
thereof if no such sale occurred, in each case as officially reported on the
principal securities exchange on which such security is listed, or (b) if not
reported as described in clause (a), the average of the closing bid and asked
prices of such security over the prior ten (10) trading days in the over-the-
counter market as shown by the National Association of Securities Dealers, Inc.
Automated Quotation System, or any similar system of automated dissemination of
quotations of securities prices then in common use, if so quoted, as reported by
any member firm of the New York Stock Exchange selected by the Corporation, or
(c) if not quoted as described in clause (b), the average of the closing bid and
asked prices for such security over the prior ten (10) trading days as reported
by the National Quotation Bureau Incorporated or any similar successor
organization, as reported by any member firm of the New York Stock Exchange
selected by the Corporation. If such security is quoted on a national
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<PAGE>
securities or central market system in lieu of a market or quotation system
described above, the closing price shall be determined in the manner set forth
in clause (a) of the preceding sentence if actual transactions are reported and
in the manner set forth in clause (b) of the preceding sentence if bid and asked
prices are reported but actual transactions are not.
"Non-Consensual Tender Offer" shall mean an occurrence where any
---------------------------
person shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), or shall have filed a registration statement under the Securities
Act with respect to a tender offer or exchange offer to purchase any Common
Stock such that, upon consummation of such offer, such person or a "group" (as
such term is defined under the Exchange Act) of which such person is a member
shall have acquired beneficial ownership (as such term is defined in Rule 13d-3
of the Exchange Act), or the right to acquire beneficial ownership of 50% or
more of the then outstanding Common Stock, unless the Board shall have
unanimously recommended to the shareholders of the Corporation to accept such
tender offer or exchange offer in accordance with Section 14d-9 of the Exchange
Act.
"Non-Consensual Tender Offer Price" shall mean the initial price per
---------------------------------
share of Common Stock offered to be paid to holders of such shares which tender
such shares pursuant to a Non-Consensual Tender Offer as disclosed in the
applicable Schedule 14d-1 filed with the Securities and Exchange Commission with
respect thereto.
"Note Purchase Agreement" shall mean the Note Purchase Agreement dated
-----------------------
March 31, 1998 between the Corporation and certain other signatories thereto, as
amended from time to time.
"Officers' Certificate" shall mean a certificate signed on behalf of
---------------------
the Corporation by its President or one of its Vice Presidents and its Chief
Financial Officer or its Treasurer.
"Original Cost" shall mean $1.00 per share of Series A Preferred
-------------
Stock.
"Original Issuance Date" shall mean the date of original issuance of
----------------------
the first share of Series A Preferred Stock pursuant to this Certificate of Vote
of Directors Establishing a Class or Series of Stock.
"Person" shall be construed broadly and shall include without
------
limitation an individual, a partnership, a corporation, an association, a joint
stock company, a limited liability company, a trust, a joint venture, and
unincorporated organization and a governmental authority.
"Preferred Shares", as applied to any Person, shall mean shares of
----------------
such Person which shall be entitled to preference or priority over any other
shares of such Person in respect of either the payment of dividends or the
distribution of assets upon liquidation.
"Requisite Series A Stockholders" shall mean, as of any date of
-------------------------------
determination, the holders of a majority of the then outstanding shares of
Series A Preferred Stock.
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"Senior Notes" shall mean the 7% Convertible Senior Notes of
------------
the Corporation (including any such notes issued in respect of interest payable
with respect thereto).
"Stock Purchase Rights" shall mean any warrants, options or
---------------------
other rights to subscribe for, purchase or otherwise acquire any shares of
Common Stock or any Convertible Securities, either immediately or upon the
arrival of a specified date or the happening of a specified event.
"Strategic Assets" shall mean patents or other intellectual
----------------
property of the Corporation that are essential to the development or manufacture
of the Corporation's prospective products, as such products are described in the
Corporation's Form 10-K for the fiscal year ended March 31, 1997 (the "Form
10-K").
"Subsidiary" of any Person shall mean any other Person (i)
----------
whose securities having a majority of the general voting power in electing the
board of directors or equivalent governing body of such other Person (excluding
securities entitled to vote only upon the failure to pay dividends thereon or
the occurrence of other contingencies) are, at the time as of which any
determination is being made, owned by such Person either directly or indirectly
through one or more other entities constituting subsidiaries or (ii) more than a
50% interest in the profits or capital of whom is, at the time as of which any
determination is being made, owned by such Person either directly or indirectly
through one or more other entities constituting subsidiaries.
"Trigger Event" shall mean any one or more of the following
-------------
events (whether it shall be voluntary or involuntary or be effected by operation
of law or pursuant to any judgment, decree, or order of any court or any order,
rule or regulation of any administrative or governmental body):
(i) default in the payment of any interest upon any
Senior Note as and when the same shall become due and payable, and
continuance of such default for a period of five (5) days; or
(ii) failure in the payment of any dividend with
respect to the shares of Series A Preferred Stock to the extent such
payment is required to be made in cash and the Applicable Dividend Payment
Date, and the continuance of such failure to pay for a period of five (5)
days; or
(iii) default in the payment of all or any part of
the principal, or any premium, on any Senior Note as and when the same
shall become due and payable, either at maturity, upon any redemption, by
declaration or otherwise; or
(iv) failure in the redemption of any shares of
Series A Preferred Stock when required to be redeemed in accordance with
the terms of this Certificate of Vote of Directors Establishing a Class or
Series of Stock;
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(v) failure on the part of the Corporation due to observe or
perform the covenants set forth in Sections 8.5(c), 8.5(g), 8.5(j) and 8.5(m) of
the Note Purchase Agreement in accordance with their terms; or
(vi) failure on the part of the Corporation duly to observe or
perform any other of the covenants or agreements on the part of the Corporation
contained in the Senior Notes or in the Note Purchase Agreement, for a period of
twenty-five (25) days after the date on which written notice specifying such
failure, stating that such notice is a "Notice of Default" and demanding that
the Corporation remedy the same, shall have been given by registered or
certified mail, return receipt requested, to the Corporation by the Requisite
Series A Stockholders;
(vii) the breach of any representation or warranty of the Corporation
in the Note Purchase Agreement in any material respect, provided that written
notice specifying such breach, specifying that such notice is a "Notice of
Default", shall have been given by registered or certified mail, return receipt
requested, to the Corporation by the Requisite Series A Stockholders; or
(viii) there shall have occurred an Event of Default (as such term is
defined in the Loan and Option Agreement dated April 1, 1998, among Freemedic,
the Corporation's Subsidiary and the Corporation, without giving effect to any
waiver thereof);
(ix) there shall have occurred with respect to any issue or issues
of Debt of the Corporation and/or any Subsidiary exceeding $100,000 in principal
amount, an event of default beyond the applicable period of grace with respect
thereto, which would permit the holders of such Debt to declare such Debt to be
due and payable prior to the maturity thereof; or
(x) the Corporation or any Subsidiary shall fail to discharge any
final judgment not covered by insurance (from which no further appeal may be
taken) in excess of $25,000 and such judgment shall remain in force,
undischarged, unsatisfied, unstayed and unbonded for more than thirty (30) days;
or
(xi) a court having jurisdiction in the premises shall enter a
decree or order for relief in respect of the Corporation or any Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Corporation or any
Subsidiary or for all or substantially all of the property of the Corporation or
any Subsidiary or ordering the winding up or liquidation of the affairs of the
Corporation or any Subsidiary, and such decree or order shall remain unstayed
and in effect for a period of sixty (60) consecutive days; or
(xii) the Corporation or any Subsidiary shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such
-21-
<PAGE>
law, or consent to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of the Corporation or any Subsidiary or for all or substantially
all of the property of the Corporation or any Subsidiary, or the
Corporation or any Subsidiary shall make any general assignment for the
benefit of creditors; or
(xiii) default by the Corporation in conversion of shares of
Series A Preferred Stock in accordance herewith and continuance of such
default for a period of five (5) days after the occurrence of such default;
or
(xiv) failure on the part of each of the Corporation's
officers and directors who hold Common Stock to vote in favor of the
election of the designee of the holders of a majority of the outstanding
shares of Series A Preferred Stock to the Board of Directors.
(b) Capitalized terms used in this Certificate of Vote of Directors
Establishing a Class or Series of Stock but not otherwise defined herein shall
have the same meanings herein as in the Note Purchase Agreement.
-22-
<PAGE>
SIGNED UNDER THE PENALTIES OF PERJURY, this 9th day of November, 1998.
/s/ Michael Szycher, Ph.D. , President
- - ----------------------------------------------------------------
/s/ John E. Mattern , Clerk
- - ----------------------------------------------------------------
-23-
<PAGE>
EXHIBIT 10.1
AMENDMENT, dated as of November 12, 1998 to the NOTE PURCHASE
AGREEMENT (the "Purchase Agreement") and the REGISTRATION RIGHTS AGREEMENT (the
------------------
"Registration Rights Agreement"), each dated as of March 31, 1998 between
-----------------------------
CARDIOTECH INTERNATIONAL, INC., a Massachusetts corporation (the "Company") and
-------
DRESDNER KLEINWORT BENSON PRIVATE EQUITY PARTNERS LP, a Delaware limited
partnership (the "Purchaser").
---------
WHEREAS, on March 31, 1998, pursuant to the Purchase
Agreement, the Purchaser purchased $1,660,000 aggregate principal amount of the
Company's 7% Convertible Senior Notes due March 31, 2003 (the "Notes");
-----
WHEREAS, pursuant to Section 1.1(b) of the Purchase Agreement
the Purchaser agreed to purchase, and the Company agreed to issue, up to an
additional $840,000 aggregate principal amount of Notes upon satisfaction of
certain conditions, or the occurrence of certain events, as referred to therein;
WHEREAS, the Company has executed binding agreements with
three research sites (in addition to Freemedic PLC) for clinical trials of the
Company MyoLink Peripheral Graft as contemplated by Section 1.1(b)(ii) of the
Purchase Agreement;
WHEREAS, in lieu of the Purchaser's additional purchase of
$500,000 aggregate principal amount Notes as contemplated by Section 1.1(b)(ii)
of the Purchase Agreement, the Company and the Purchaser desire that the
Purchaser purchase 500,000 shares of a newly created Series A Convertible
Preferred Stock of the Company (the "Series A Preferred Stock");
------------------------
WHEREAS, the conditions for the purchase of additional Notes
pursuant to Sections 1.1(b)(i) and 1.1(b)(iii) of the Purchase Agreement have
not been satisfied and are no longer applicable;
WHEREAS, in order to effect the Purchaser's purchase of such
Series A Preferred Stock and to make related changes to the Purchase Agreement,
the parties desire to amend the Purchase Agreement upon the terms set forth
below;
WHEREAS, in connection with the execution of the Purchase
Agreement, the Company and the Purchaser entered into the Registration Rights
Agreement to set forth the rights of the Purchaser in connection with public
offerings and sales of Common Stock of the Company;
-2-
<PAGE>
WHEREAS, in connection with the amendment to the Purchase
Agreement, the parties also desire to amend and restate each of the Notes issued
to the Company (including the Notes issued in respect of interest payments on
the initial Note issued to the Company) in order to effect certain technical and
typographical corrections thereto; and
WHEREAS, in connection with the amendment to the Purchase
Agreement, the parties also desire to amend the Registration Rights Agreement
upon the terms set forth below;
ACCORDINGLY, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the parties hereto hereby agree as follows:
Section 1. Amendment to Sections 1.1(b) and (c) of the Purchase Agreement.
--------------------------------------------------------------
Sections 1.1(b) and (c) of the Purchase Agreement are hereby
amended and restated in its entirety as follows:
"(b) At a Closing to be held after the Initial Closing, the
Company shall issue and sell to the Purchaser, and the Purchaser shall purchase
from the Company, 500,000 shares of Series A Preferred Stock, if the Company or
its Subsidiary shall have executed binding agreements with three research sites
(in addition to Freemedic PLC) for clinical trials of the Company's MyoLink
Peripheral Graft, which agreements are in form and substance reasonably
satisfactory to the holders of a majority of the then outstanding aggregate
principal amount of the Note.
The Closing hereunder with respect to the issuance and sale of
shares of Series A Preferred Stock pursuant to this Section 1.1(b) shall be
--------------
subject to the satisfaction or waiver of the applicable conditions set forth in
this Section 1.1(b), and to the delivery by the Company to the Purchaser of an
--------------
SBA Letter (and accompanying forms as required therein), and shall take place on
a date mutually agreed to by the Purchaser and the Company. Any shares of Series
A Preferred Stock issued pursuant to this Section 1.1(b) shall have the rights,
--------------
preferences, privileges and restrictions set forth in the Certificate of Vote of
Directors Establishing a Class or Series of Stocks for such Series A Preferred
Stock attached as Exhibit B hereto.
---------
(c) The closings with respect to the issuance and sale of (x)
the Notes pursuant to Section 1.1(a) or (y) the shares of Series A Preferred
--------------
Stock pursuant to Section 1.1(b) (each, a "Closing") shall take place at the
-------------- -------
offices of O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New
York or via facsimile. At each Closing, the Company shall deliver to the
Purchaser one or more certificates representing the Notes or the Series A
Preferred Stock (as the case may be) being purchased by the Purchaser at such
Closing, registered in the name of the Purchaser, against receipt of the
purchase price therefor. The purchase price for any Notes purchased hereunder
shall be equal to the aggregate principal amount of any such Notes being
purchased. The purchase price for any shares of Series A Preferred Stock
purchased hereunder shall be equal to $1.00 per share. Any such purchase price
with respect to the Notes or the shares of Series A Preferred Stock shall be
payable by wire transfer of immediately available funds to the Company (or by
such payment to a bank and account number previously notified by
-3-
<PAGE>
the Company in writing to the Purchaser)."
Section 2. Amendments to Recitals and Sections 1.2, 2.2, 2.3, 2.4, 2.20,
-------------------------------------------------------------
3.2, 8.3 and 8.5 of the Purchase Agreement.
- - ------------------------------------------
(a) The first paragraph of the recitals of the Agreement is
hereby amended by adding immediately after the reference therein to "notes" the
following additional words: "or shares of Series A Preferred Stock".
(b) Each of Sections 1.2, 2.2(b), 2.2(c), 2.4, 2.20, 3.2(a),
3.2(b) and 8.4(a) of the Purchase Agreement is hereby amended by adding
immediately after each reference therein to "Purchased Notes" the following
additional words: "and the Purchased Shares".
(c) Section 3.2(e) of the Purchase Agreement is hereby amended
by adding immediately after each reference therein to "Notes" the following
additional words: "and the shares of Series A Preferred Stock".
(d) Each of Sections 2.3, 8.3(a) and 8.5(j) of the Purchase
Agreement is hereby amended by adding immediately after each reference therein
to "Purchased Notes" the following additional words: "or the Purchased Shares".
(e) Section 8.3(a) of the Purchase Agreement is hereby amended
by deleting the reference therein to "the holders of a majority of the then
outstanding principal amount of the Notes (the "Requisite Holders")" in its
-----------------
entirety, and replacing it with the following words: "the Requisite Holders".
(f) Section 8.5(i) of the Purchase Agreement is hereby amended
by adding immediately after the reference therein to "Notes" the following
additional words: "or the shares of Series A Preferred Stock".
Section 3. Amendments to Section 8.5 of the Purchase Agreement.
---------------------------------------------------
(a) The first paragraph of Section 8.5 of the Purchase
Agreement is hereby amended and restated in its entirety as follows:
"As long as the Purchasers hold the Requisite Securities, the
Company shall not, without the prior written consent of the Requisite Holders:"
(b) Section 8.5(j) of the Purchase Agreement is hereby amended
by adding immediately after the reference therein to "superior to the Common
Stock" the following additional words: "other than the Purchased Shares".
Section 4. Amendment to Section 9.4 of the Purchase Agreement.
--------------------------------------------------
The second sentence of Section 9.4 of the Purchase Agreement
is hereby amended and restated in its entirety as follows:
-4-
<PAGE>
"Upon any Transfer of the Purchased Notes, the Purchased
Shares or the Reserved Common Shares, the transferee shall be bound by, and
entitled to the benefits of, this Agreement with respect to such transferred
Notes or shares in the same manner as the transferring Purchaser."
Section 5. Amendment to Section 9.7 of the Purchase Agreement.
--------------------------------------------------
Section 9.7 of the Purchase Agreement is hereby amended and
restated in its entirety as follows:
"The terms and provisions of this Agreement may not be
modified or amended, nor may any of the provisions hereof be waived, temporarily
or permanently, except pursuant to a written instrument executed by the Company
and the Requisite Holders."
Section 6. Amendments to Exhibit A of the Purchase Agreement.
-------------------------------------------------
(a) Exhibit A of the Purchase Agreement is hereby amended to
add the following definitions thereto (in appropriate alphabetical order):
"Purchased Shares" means the shares of Series A Preferred
----------------
Stock purchased by the Purchaser pursuant to the terms of this Agreement.
"Requisite Securities" means an amount of Purchased Notes
--------------------
and/or Purchased Shares representing at least 10% of the Common Stock
Equivalents with respect to the Purchased Notes or the Purchased Shares issued
pursuant to this Agreement.
"Series A Preferred Stock" means the Series A Preferred Stock,
------------------------
par value $[.01] per share, of the Company.
(b) Exhibit A of the Purchase Agreement is hereby amended by
deleting in its entirety the definition of "Requisite Holders" set forth
-----------------
therein, and replacing it with the following definition:
"Requisite Holders" means the holders of a majority of the
-----------------
Common Stock Equivalents with respect to the Purchased Notes or the Purchased
Shares then outstanding.
(c) The definition of "Common Equivalents" set forth in
------------------
Exhibit A of the Purchase Agreement is hereby amended by adding immediately
after the reference therein to "Purchased Note" the following additional words:
"or a Purchased Share".
(d) The definition of "Documents" set forth in Exhibit A of
---------
the Purchase Agreement is hereby amended by adding immediately after the
reference therein to "this Agreement" the following additional words: ", the
Amendment to this Agreement dated as of November 12, 1998, the Purchased
Shares,".
-5-
<PAGE>
(e) The definition of "Documents" set forth in Exhibit A of
---------
the Purchase Agreement is hereby amended by adding immediately after the
reference therein to "the Initial Closing" the following additional words:" or
any Closing after the Initial Closing".
(f) The definition of "Reserved Common Shares" set forth in
----------------------
Exhibit A of the Purchase Agreement is hereby amended by adding immediately
after the reference therein to "Purchased Notes" the following additional words:
"or the Purchased Shares".
(g) The definition of "Restricted Securities" set forth in
---------------------
Exhibit A of the Purchase Agreement is hereby amended by adding immediately
after the reference therein to "Purchased Notes" the following additional words:
", the Purchased Shares".
Section 7. Addition of Exhibit B of the Purchase Agreement.
-----------------------------------------------
The Certificate of Vote of Directors Establishing a Class or
Series of Stock with respect to the Series A Preferred Stock, in the form
attached to this Amendment, is hereby added as a new Exhibit B to the Purchase
---------
Agreement.
Section 8. Amendment And Restatement of the Notes.
--------------------------------------
Each of the Notes issued on March 31, 1998, June 30, 1998 and
September 30, 1998 is hereby amended and restated in the forms attached hereto.
The Purchaser shall deliver each of the original Notes to the Company for
cancellation, and the Company shall execute and deliver to the Purchaser
replacement Notes in exchange therefor in the forms attached hereto.
Section 9. Reaffirmation of Representations and Warranties in the Purchase
---------------------------------------------------------------
Agreement.
- - ---------
(a) The Company hereby reaffirms to the Purchase that each of
the representations and warranties set forth in Sections 2.1, 2.2, 2.3 and 2.20
of the Purchase Agreement, as amended by the terms of this Amendment, is true
and correct as of the date hereof.
(b) The Purchaser hereby reaffirms to the Company that each of
the representations and warranties set forth in Section 3.1 and 3.2 of the
Purchase Agreement, as amended by the terms of this Amendment, is true and
correct as of the date hereof.
Section 10. No Event of Default.
-------------------
The Company hereby represents and warrants to the Purchaser
that, as of the date hereof, no Event of Default (as defined in the Purchase
Agreement) has occurred and is continuing.
Section 11. Research Agreements.
-------------------
The Company hereby represents and warrants to the Purchaser
that attached hereto are true and complete copies of three binding agreements
executed by the Company (or
-6-
<PAGE>
one of its Subsidiaries) with a research site with respect to clinical trials of
the Company's MyoLink Peripheral Graft.
Section 12. Amendments to Section 1 of the Registration Rights Agreement.
------------------------------------------------------------
(a) The definition of "Investors" set forth as Section 1(d) of
---------
the Registration Rights Agreement is hereby amended by adding immediately after
the reference therein to "Purchased Notes" the following additional words:
"or the Purchased Shares".
(b) The definition of "Restricted Securities" set forth as
---------------------
Section 1(l) of the Registration Rights Agreement is hereby amended by adding
immediately after each reference therein to "Purchased Notes" the following
additional words: "or the Purchased Shares".
(c) Section 1 of the Registration Rights Agreement is hereby
amended to add the following definitions thereto (in appropriate alphabetical
order):
"Purchased Notes" shall have the meaning ascribed thereto in
---------------
the Note Purchase Agreement.
"Purchased Shares" shall have the meaning ascribed thereto in
----------------
the Note Purchase Agreement.
Section 13. Fees.
----
The Company will pay, and hold the Purchaser harmless against
all Liability for the payment of, (i) all reasonable costs and other expenses
incurred from time to time by the Company in connection with the Company's
performance of and compliance with all agreements and conditions contained in
this Amendment and the Purchase Agreement, as amended hereby, on its part to be
performed or complied with (including the reasonable costs and expenses of
counsel incurred in connection with the review and preparation of the
Documents), (ii) the actual, out-of-pocket costs and expenses incurred by the
Purchaser at or prior to the date hereof in connection with the transactions
contemplated hereby, including fees and charges of O'Sullivan Graev & Karabell,
LLP (counsel to the Purchaser), in connection with the purchase and ownership of
the Purchased Shares, (iii) the reasonable costs and expenses (including fees
and expenses of counsel) incurred by the Purchaser in connection with any
amendment or waiver of, or enforcement of, any Document relating to the
transactions contemplated hereby, and (iv) the reasonable fees and expenses
incurred by the Purchaser in any filing with any Governmental Authority with
respect to its investment in the Company or in any other filing with any
Governmental Authority with respect to the Company that mentions the Purchaser.
Section 14. Ratification.
------------
Each of the Purchase Agreement and the Registration Rights
Agreement, as amended hereby, is ratified by each of the parties hereto and
shall remain in full force and effect in accordance with its terms as so
amended. The amendments set forth above are not a consent to any waiver or
modification of any other terms or conditions of the Purchase Agreement or the
-7-
<PAGE>
Registration Rights Agreement or any of the instruments or documents referred to
in the Purchase Agreement or the Registration Rights Agreement and shall not
prejudice any right or rights which the parties thereto may now or hereafter
have under or in connection with the Purchase Agreement or the Registration
Rights Agreement or any of the instruments or documents referred to therein.
Section 15. Governing Law; Waiver of Jury Trial.
-----------------------------------
(a) All questions concerning the construction, interpretation
and validity of this Amendment shall be governed by and construed and enforced
in accordance with the domestic laws of the State of New York, without giving
effect to any choice or conflict of law provision or rule (whether in the State
of New York or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York. In furtherance of the
foregoing, the internal law of the State of New York will control the
interpretation and construction of this Amendment, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily or necessarily apply.
(b) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY
(RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR
PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS
AMENDMENT OR ANY DOCUMENTS RELATED HERETO.
Section 16. References.
----------
Each reference to "hereof", "hereunder", "herein" and "hereby"
and each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Purchase Agreement or the Registration
Rights Agreement (as the case may be) shall, after this Amendment is executed by
the parties hereto, refer to the Purchase Agreement or the Registration Rights
Agreement (as the case may be) as amended hereby. All references to sections
contained in the Purchase Agreement or the Registration Rights Agreement (as the
case may be) shall, after this Amendment is executed by the parties hereto,
refer to such sections as amended hereby.
Section 17. Certain Defined Terms.
---------------------
Capitalized terms used herein but not otherwise defined shall
have the same meanings as defined in the Purchase Agreement.
-8-
<PAGE>
Section 18. Descriptive Headings.
--------------------
The title of and the section and paragraph headings in this
Amendment are for convenience of reference only and shall not govern or affect
the interpretation of any of the terms or provisions of this Amendment.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first above written.
CARDIOTECH INTERNATIONAL, INC.
By: /s/ Michael Szycher
--------------------------------
Name: Michael Szycher
Title: Chief Executive Officer
DRESDNER KLEINWORT BENSON
PRIVATE EQUITY PARTNERS LP
By: Dresdner Kleinwort Benson
Private Equity Manager,
LLC, its general partner
By: /s/ Jonathan Walker
--------------------------------
Name: Jonathan Walker
Title: Authorized Person
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<PAGE>
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<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,458,392
<SECURITIES> 0
<RECEIVABLES> 455,325
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<CURRENT-ASSETS> 2,005,842
<PP&E> 226,972
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0
0
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<OTHER-SE> (256,746)
<TOTAL-LIABILITY-AND-EQUITY> 2,453,702
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