SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
--------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
JULY 10, 1998
Date of Report
(Date of earliest event reported)
--------------
ADVANCED TISSUE SCIENCES, INC.
(Exact name of registrant as specified in its charter)
--------------
Delaware 0-016607 14-1701513
-------- -------- ----------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File No.) Identification No.)
10933 North Torrey Pines Road, La Jolla, California 92037
--------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 450-5730
<PAGE>
Item 5. Other Events
On July 10, 1998, Advanced Tissue Sciences, Inc. (the "Company") completed a
private placement of $25 million of Series B Convertible Preferred Stock (the
"Series B Preferred Stock") to a group of investors (the "Investors"). Subject
to adjustment in certain events, the Series B Preferred Stock is convertible
into Common Stock of the Company at $4.77 per share (the "Conversion Price").
The Conversion Price will be increased by one-half the amount by which the
market price of the Common Stock on the date of conversion exceeds $7.96 per
share. Conversely, should the average daily trading price (as defined in the
agreements) prior to a conversion be equal to or below $3.58 per share, the
Conversion Price will be equal to such average daily trading price.
The Series B Preferred Stock accrues dividends at 5% per annum. Dividends are
payable quarterly in Common Stock or cash at the option of the Company. To the
extent not previously converted, the Series B Preferred Stock is, at the
election of the Company, redeemable at par value plus accrued dividends or
convertible into Common Stock three years from the date of issuance subject to
extension in certain circumstances. The Series B Preferred Stock is redeemable
at the option of the holders upon the occurrence of certain events. The Common
Stock issuable upon conversion of the Series B Preferred Stock will be
registered for resale under the Securities Act of 1933.
Under the terms of the private placement and subject to certain conditions, the
Company has the option to sell an additional $25 million of the Series B
Preferred Stock in the first quarter of 1999 to the Investors. Conditions to
the Company's option include having the Common Stock issuable on conversion
registered and that the Common Stock must be trading above $5.49 per share,
among others. The Investors participating in the private placement were advised
by the Promethean Investment Group L.L.C. The terms of the private placement
are more fully described in the Certificate of Designations, Preferences and
Rights of Series B Convertible Preferred Stock, and the Securities Purchase
Agreement and Registration Rights Agreement between the Company and the
Investors which are attached hereto as exhibits and are incorporated herein by
reference.
Separately, the Company reported that it has extended its existing equity line
to February 2000. Under the equity line, the Company could receive up to $50
million from the sale of Common Stock to an investor group. Drawings under the
equity line are at the Company's discretion. The Company originally entered
into an investment agreement for the equity line in February 1996. The decision
to draw any funds under the equity line remains at the Company's sole
discretion. Under the provisions of the equity line and subject to applicable
rules and regulations, the Company can obtain up to $15 million at any one time
through the sale of Common Stock. Any sales against the equity line will be at
a five percent discount to the average low sales prices of the Company's Common
Stock over a specified period of time as determined by market volume at the time
of the draw. The Company's ability to draw under the equity line is subject to
certain conditions including, but not limited to, registration of the shares, a
minimum trading price per share, and certain limitations on the number of shares
of Common Stock held by the investment group at any point in time. The
agreement to extend the equity line is set forth in Amendment No. 2 to the
Investment Agreement between the Company and Hatteras Partners, L.P. (formerly
Ramius Haterras Partners, L.P.) which is attached hereto as an exhibit and is
also incorporated herein by reference.
The foregoing summary is qualified in its entirety by reference to the exhibits
attached hereto.
2
<PAGE>
Item 7. Exhibits
Exhibit
Number Description
------- -----------
3.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Advanced Tissue Sciences, Inc.
4.1 Amendment No. 2 to Investment Agreement between Advanced Tissue
Sciences, Inc. and Hatteras Partners, L.P. (formerly Ramius
Hatteras Partners, L.P.) dated July 10, 1998
10.1 Securities Purchase Agreement by and among Advanced Tissue Sciences,
Inc. and the Investors dated July 10, 1998
10.2 Registration Rights Agreement by and among Advanced Tissue Sciences,
Inc. and the Investors dated July 10, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ADVANCED TISSUE SCIENCES, INC.
Date: July 15, 1998 By: /s/ Arthur J. Benvenuto
--------------------------
Arthur J. Benvenuto
Chairman and
Chief Executive Officer
Exhibit 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
ADVANCED TISSUE SCIENCES, INC.
Advanced Tissue Sciences, Inc. (the "COMPANY"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred upon the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Company at a meeting duly held adopted resolutions
(i) authorizing a series of the Company's previously authorized preferred stock,
par value $.01 per share, and (ii) providing for the designations, preferences
and relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of 1,000 shares of Series B Convertible
Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 1,000 shares of
Series B Convertible Preferred Stock (the "PREFERRED SHARES"), par value $.01
per share, which shall have the following powers, designations, preferences and
other special rights:
(1) Dividends. The Preferred Shares shall bear dividends
---------
("DIVIDENDS") at a rate of 5.0% per annum, which shall be cumulative, accrue
daily from the Issuance Date (as defined below) and be payable on the first day
of each Calendar Quarter (as defined below) beginning on the earlier of (a) the
first day of the Calendar Quarter immediately following the date on which the
Registration Statement (as defined below) is declared effective by the SEC (as
defined below) and (b) January 1, 1999 (each a "DIVIDEND DATE"). If a Dividend
Date is not a Business Day (as defined below) then the Dividend shall be due and
payable on the Business Day immediately following the Dividend Date. Dividends
shall be payable in shares of Common Stock or, at the option of the Company, in
cash, provided that the Dividends which accrued during any period shall be
payable in cash only if the Company provides written notice ("DIVIDEND ELECTION
NOTICE") to each holder of Preferred Shares at least 6 business days prior to
the Dividend Date. Dividends to be paid in shares of Common Stock shall be paid
in a number of fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 2(h)) of Common Stock equal to the quotient of
(a) the accrued and unpaid Dividends and (b) the Market Price (as defined below)
on the applicable Dividend Date. Notwithstanding the foregoing and to the
extent it may lawfully do so, the Company shall not be entitled to pay Dividends
in shares of Common Stock and shall be required to pay such Dividends in cash if
<PAGE>
(a) any event constituting a Triggering Event (as defined in Section 3(d)), or
an event that with the passage of time would constitute a Triggering Event if
not cured, has occurred and is continuing on the date of the Company's Dividend
Election Notice or on the Dividend Date, unless otherwise consented to in
writing by the holder of Preferred Shares entitled to receive such Dividend or
(b) the Registration Statement (as defined below) has not been declared
effective by the Securities and Exchange Commission (the "SEC") on or before the
Dividend Date. Any accrued and unpaid dividends which are not paid within five
(5) Business Days of such accrued and unpaid dividends' Dividend Date shall bear
interest at the rate of 18.0% per annum from such Dividend Date until the same
is paid (the "DEFAULT INTEREST").
(2) Holder's Conversion of Preferred Shares. A holder of
---------------------------------------
Preferred Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, par value $.01 per
share (the "COMMON STOCK"), on the following terms and conditions:
(a) Conversion Right. Subject to Section 2(j), at any time
----------------
or times on or after the Issuance Date (as defined below), any holder of
Preferred Shares shall be entitled to convert any whole number of Preferred
Shares into fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 2(h)) of Common Stock, at the Conversion Rate
(as defined below); provided, however, that in no event shall any holder be
entitled to convert Preferred Shares in excess of that number of Preferred
Shares which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of the Preferred Shares with respect to which the determination of
such proviso is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (i) conversion of the remaining, nonconverted
Preferred Shares beneficially owned by the holder and its affiliates, and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company (including, without limitation, any warrants) subject
to a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the holder and its affiliates. Except as set forth
in the preceding sentence, for purposes of this Section 2(a), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. The holder may waive the foregoing
limitations by written notice to the Company upon not less than 61 days prior
notice (with such waiver taking effect only upon the expiration of such 61 day
notice period).
(b) Conversion Rate. The number of shares of Common Stock
---------------
issuable upon conversion of each of the Preferred Shares pursuant to Sections
(2)(a) and 2(g) and Section 5 shall be determined according to the following
formula (the "CONVERSION RATE"):
-2-
<PAGE>
Conversion Amount
-----------------
Conversion Price
For purposes of this Certificate of Designations, the following terms shall
have the following meanings:
(i) "CONVERSION PRICE" means, on a per share basis, as
of the Conversion Date (as defined below) or other date of determination (other
than the Maturity Date (as defined in Section 2(g)) of the applicable Preferred
Shares (A) prior to an Offering (I) if the Floating Conversion Price is less
than or equal to 90% of the Initial Market Price, the Floating Conversion Price,
(II) if the Floating Conversion Price is greater than 90% of the Initial Market
Price and less than 200% of the Initial Market Price, 120% of the Initial Market
Price, or (III) if the Floating Conversion Price is greater than or equal to
200% of the Initial Market Price, the Profit-Sharing Conversion Price and (B)
after an Offering (I) if the Floating Conversion Price is less than or equal to
120% of the Initial Market Price, the Floating Conversion Price (II) if the
Floating Conversion Price is greater than 120% of the Initial Market Price and
less than 200% of the Initial Market Price, 120% of the Initial Market Price, or
(III) if the Floating Conversion Price is greater than or equal to 200% of the
Initial Market Price, the Profit-Sharing Conversion Price; provided that on any
Conversion Date which is the Maturity Date for such Preferred Share, the
Conversion Price shall mean the average of the Average Daily Trading Prices of
the Common Stock for the 20 consecutive trading days immediately preceding such
Maturity Date;
(ii) "FLOATING CONVERSION PRICE" means, as of any date
of determination, the average of the 15 lowest Average Daily Trading Prices
during the 45 consecutive trading days immediately preceding such date of
determination;
(iii) "PROFIT-SHARING CONVERSION PRICE" means, as of any
date of determination, the amount determined according to the following formula:
Profit-Sharing Conversion Price = (1.2 x IMP) + ADTP-(2 x IMP)
--------------
2
where: IMP = Initial Market Price on each Conversion Date
ADTP = The Average Daily Trading Price on each
Conversion Date
(iv) "CONVERSION AMOUNT" means, on a per share basis,
the sum of (A) the Additional Amount and (B) $50,000;
(v) "ADDITIONAL AMOUNT" means, on a per share basis, the
sum of (A) unpaid Default Interest through the date of determination plus (B)
the result of the following formula: (.050)(N/365)($50,000);
-3-
<PAGE>
(vi) "MARKET PRICE" means, with respect to any security
for any date, the average of the Average Daily Trading Prices for such security
during the five consecutive trading days immediately preceding such date of
determination;
(vii) "INITIAL MARKET PRICE" means, with respect to any
Preferred Share the Market Price on (I) in the case of Preferred Shares issued
on the Initial Issuance Date, the second trading day immediately following the
Initial Closing Date, or (II) in the case of Preferred Shares issued after the
Initial Issuance Date, the Issuance Date of such Preferred Share, subject in
each case to adjustment as provided herein;
(viii) "OFFERING" means any (A) draw down or receipt of
proceeds under an equity line or (B) equity financing, debt financing with an
equity component or issuance of any equity securities of the Company or any
Subsidiary or securities convertible or exchangeable into, or for equity
securities of the Company or any Subsidiary (including debt securities with an
equity component) in which the Company receives, individually or in the
aggregate, proceeds of at least $2,500,000. An Offering shall not include (i) a
loan from a commercial bank, (ii) any transaction involving the Company's
issuances of securities (A) as consideration in a merger or consolidation, (B)
in connection with any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or (C) as consideration for
the acquisition of a business, product or license or other assets by the
Company, (iii) the issuance of Common Stock in a firm commitment, underwritten
public offering with net proceeds of at least $10,000,000, (iv) the issuance of
securities upon exercise or conversion of the Company's options, warrants or
other convertible securities outstanding as of the date hereof, (v) the grant of
additional options or warrants, or the issuance of additional securities, under
any Approved Stock Plan, (vi) issuances of Preferred Shares or shares of Common
Stock upon conversion of Preferred Shares or (vii) the issuance of securities of
the Company to Smith & Nephew on or after January 1, 2000 pursuant to the terms
of the Dermagraft Joint Venture Agreement with Smith & Nephew in effect on the
Initial Issuance Date;
(ix) "N" means the number of days from, but excluding,
the last Dividend Date with respect to which dividends, along with any Default
Interest, has been paid by the Company on the applicable Preferred Share through
and including the Conversion Date or the Maturity Date for the Preferred Shares
for which conversion and/or redemption is being elected, as the case may be;
(x) "ISSUANCE DATE" means, with respect to each
Preferred Share, the date of issuance of the applicable Preferred Share;
(xi) "INITIAL ISSUANCE DATE" means the first date on
which any Preferred Shares are issued by the Company;
-4-
<PAGE>
(xii) "BUSINESS DAY" means any day other than Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law to remain closed;
(xiii) "CALENDAR QUARTER" means, each of the period
beginning on and including January 1 and ending on and including March 31, the
period beginning on and including April 1 and ending on and including June 30,
the period beginning on and including July 1 and ending on and including
September 30, and the period beginning on and including October 1 and ending on
and including December 31;
(xiv) "SECURITIES PURCHASE AGREEMENT" means that certain
securities purchase agreement between the Company and the initial holders of the
Preferred Shares;
(xv) "REGISTRATION RIGHTS AGREEMENT" means that certain
registration rights agreement between the Company and the initial holders of the
Preferred Shares relating to the filing of a registration statement covering the
resale of the Conversion Shares;
(xvi) "CONVERSION SHARES" means shares of Common Stock
issuable upon conversion of Preferred Shares and any shares of Common Stock
issuable as payment of Dividends or Registration Delay Payments (as defined in
the Registration Rights Agreement);
(xvii) "AVERAGE DAILY TRADING PRICE" means, for any
security as of any date, the average of the high and low trading prices on such
date for such security on The Nasdaq National Market (as reported by Bloomberg),
or, if The Nasdaq National Market is not the principal trading market for such
security, the average of the high and low trading prices on such date of such
security on the principal securities exchange or trading market where such
security is listed or traded (as reported by Bloomberg), or if the foregoing do
not apply, the average of the high and low trading prices on such date of such
security in the over-the-counter market on the electronic bulletin board for
such security (as reported by Bloomberg). If the Average Daily Trading Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Average Daily Trading Price of such security on such date shall be
the fair market value as mutually determined by the Company and the holders of a
majority of the outstanding Preferred Shares (including for purposes of this
determination any Preferred Shares with respect to which the Average Daily
Trading Price is being determined). If the Company and the holders of Preferred
Shares are unable to agree upon the fair market value of the Common Stock, then
such dispute shall be resolved pursuant to Section 2(f)(iii) with the term
"Average Daily Trading Price" being substituted for the term "Market Price."
(All such determinations to be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period).
(c) Intentionally omitted.
-5-
<PAGE>
(d) Adjustment to Conversion Price - Dilution and Other
---------------------------------------------------
Events. In order to prevent dilution of the rights granted under this
- ------
Certificate of Designations, the Initial Market Price and the Conversion Price
will be subject to adjustment from time to time as
provided in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance
--------------------------------------------------
of Common Stock. Except as provided in Section 2(d)(iv), if and whenever on or
- ---------------
after the Issuance Date, the Company issues or sells, or is deemed to have
issued or sold, any shares of Common Stock (other than Preferred Shares or
shares of Common Stock issued upon conversion of Preferred Shares or as payment
of Dividends or deemed to have been issued by the Company in connection with an
Approved Stock Plan (as defined below)) for a consideration per share less than
a price (the "APPLICABLE PRICE") equal to the Initial Market Price in effect
immediately prior to such issuance or sale, then immediately after such issue or
sale, the Initial Market Price then in effect shall be reduced to an amount
equal to the product of (x) the Initial Market Price in effect immediately prior
to such issue or sale and (y) the quotient determined by dividing (1) the sum of
(I) the product of the Applicable Price and the number of shares of Common Stock
Deemed Outstanding (as defined below) immediately prior to such issue or sale,
and (II) the consideration, if any, received by the Company upon such issue or
sale, by (2) the product of (I) the Applicable Price and (II) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale.
Notwithstanding anything to the contrary in this Section 2(d), no adjustment to
the Initial Market Price shall be required unless such adjustment would result
in an increase or decrease of at least five percent (5%) of the Initial Market
Price; provided that any adjustments which by reason of this sentence are not
--------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. For purposes of determining the adjusted Initial Market
Price under this Section 2(d)(i), the following shall be applicable:
(A) Issuance of Options. If and whenever on or
-------------------
after the Issuance Date, the Company in any manner grants any rights or options
to subscribe for or to purchase Common Stock (other than pursuant to an Approved
Stock Plan or upon conversion of the Preferred Shares) or any stock or other
securities convertible into or exchangeable for Common Stock (such rights or
options being herein called "OPTIONS" and such convertible or exchangeable stock
or securities being herein called "CONVERTIBLE SECURITIES") and the price per
share for which Common Stock is issuable upon the exercise of such Options or
upon conversion or exchange of such Convertible Securities is less than the
Applicable Price, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the exercise
of such Options at the time of issuance of such Options (without regard to
limitations on exercise, conversion or exchange) shall be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of this Section 2(d)(i)(A), the "price per share for which
-6-
<PAGE>
Common Stock is issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" is determined by dividing (I) the total
amount, if any, received or receivable by the Company as consideration for the
granting of such Options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such Options at
the time of issuance of such Options (without regard to limitations on exercise,
conversion or exchange), plus in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by (II) the total
maximum number of shares of Common Stock issuable upon exercise of such Options
at the time of issuance of such Options (without regard to limitations on
exercise, conversion or exchange) or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. Except as
set forth in Section 2(d)(i)(C) below, no adjustment of the Initial Market Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.
(B) Issuance of Convertible Securities. If and
----------------------------------
whenever on or after the Issuance Date, the Company in any manner issues or
sells any Convertible Securities and the price per share for which Common Stock
is issuable upon such conversion or exchange is less than the Applicable Price,
then the maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities at the time of issuance of such
Convertible Securities (without regard to limitations on exercise, conversion or
exchange) shall be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For the purposes of this Section
2(d)(i)(B), the "price per share for which Common Stock is issuable upon such
conversion or exchange" is determined by dividing (I) the total amount received
or receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof at the time of issuance of such Convertible Securities (without regard
to limitations on exercise, conversion or exchange), by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities at the time of issuance of such Convertible
Securities (without regard to limitations on exercise, conversion or exchange).
Except as set forth in Section 2(d)(i)(C) below, no adjustment of the Initial
Market Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Initial Market Price had been or are to be made pursuant
to other provisions of this Section 2(d)(i), no further adjustment of the
Initial Market Price shall be made by reason of such issue or sale.
-7-
<PAGE>
(C) Change in Option Price or Rate of Conversion.
---------------------------------------------
If the purchase price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock change at any time, the Initial Market Price in
effect at the time of such change shall be readjusted to the Initial Market
Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold; provided that no adjustment shall
be made if such adjustment would result in an increase of the Initial Market
Price then in effect. Notwithstanding the foregoing, no adjustment will be made
pursuant to this Section 2(d)(i)(C) due to changes in a Variable Price (as
defined in Section 2(d)(iv)) resulting solely from changes in the market price
of the Common Stock, except for adjustments at the time of conversion, exchange
or exercise of such Options and Convertible Securities; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Initial Market Price then in effect.
(D) Certain Definitions. For purposes of
-------------------
determining the adjusted Initial Market Price under this Section 2(d)(i), the
following terms have the meanings set forth below:
(I) "APPROVED STOCK PLAN" shall mean any
contract, plan or agreement which has been approved by the Board of Directors of
the Company, pursuant to which the Company's securities may be issued to any
employee, officer, director, consultant or other service provider (other than
Smith & Nephew).
(II) "COMMON STOCK DEEMED OUTSTANDING" means,
at any given time, the number of shares of Common Stock actually outstanding at
such time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof regardless of whether the
Options or Convertible Securities are actually exercisable at such time, but
excluding any shares of Common Stock issuable upon conversion of the Preferred
Shares.
(E) Effect on Initial Market Price of Certain
-----------------------------------------
Events. For purposes of determining the adjusted Initial Market Price under
- ------
this Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If
-------------------------------------
any Common Stock, Options or Convertible Securities are issued or sold or deemed
to have been issued or sold for cash, the consideration received therefor will
be deemed to be the amount received by the Company therefor, before deduction of
commissions, underwriting discounts or allowances or placement agent or finder
fees (but only to the extent that such commissions, discounts, allowances and
fees do not exceed, in the aggregate, 6% of the gross proceeds to the Company)
-8-
<PAGE>
and other reasonable expenses paid or incurred by the Company in connection with
such issuance or sale, provided that any amounts paid to the purchasers of such
Common Stock, Options or Convertible Securities or to any affiliates of such
purchasers in connection with such issuance or sale shall be deducted from the
amount of consideration received by the Company. In case any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company will be the average of the Average Daily Trading Prices
of such securities for the five consecutive trading days immediately preceding
the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of a majority of the Preferred Shares
then outstanding. If such parties are unable to reach agreement within ten (10)
days after the occurrence of an event requiring valuation (the "VALUATION
EVENT"), the fair value of such consideration will be determined within ten (10)
days of the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser selected by the Company. The determination of such
appraiser shall be binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any
-----------------------
Option is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01 and the aggregate
consideration received by the Company in such integrated transaction shall be
included in the adjustment calculation in Section 2(d)(i) above.
(III) Treasury Shares. The number of shares
---------------
of Common Stock outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of any shares so
owned or held will be considered an issue or sale of Common Stock.
(IV) Record Date. If the Company takes a
-----------
record of the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities, or (2) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date will be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
-9-
<PAGE>
(ii) Adjustment of Initial Market Price upon Subdivision
---------------------------------------------------
or Combination of Common Stock. If the Company at any time subdivides (by any
- ------------------------------
stock split, stock dividend, recapitalization or otherwise) one or more classes
of its outstanding shares of Common Stock into a greater number of shares, the
Initial Market Price in effect immediately prior to such subdivision each will
be proportionately reduced. If the Company at any time combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Initial
Market Price in effect immediately prior to such combination will be
proportionately increased.
(iii) Reorganization, Reclassification, Consolidation,
------------------------------------------------
Merger or Sale. Any recapitalization, reorganization, reclassification,
- --------------
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person (as defined below) or other transaction which is effected in
such a way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior
to the consummation of any Organic Change, the Company will make appropriate
provision (in form and substance satisfactory to the holders of a majority of
the Preferred Shares then outstanding) to insure that each of the holders of the
Preferred Shares will thereafter have the right to acquire and receive in lieu
of or in addition to (as the case may be) the shares of Common Stock otherwise
acquirable and receivable upon the conversion of such holder's Preferred Shares,
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number of
shares of Common Stock which would have been acquirable and receivable upon the
conversion of such holder's Preferred Shares had such Organic Change not taken
place (without taking into account any limitations or restrictions on the timing
or amount of conversions). In any such case, the Company will make appropriate
provision (in form and substance satisfactory to the holders of a majority of
the Preferred Shares then outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 2(d) and Section 2(e)
will thereafter be applicable to the Preferred Shares (including, in the case of
any such consolidation, merger or sale in which the successor entity or
purchasing entity is other than the Company, an immediate adjustment of the
Initial Market Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, if the value so reflected is less than the
Initial Market Price in effect immediately prior to such consolidation, merger
or sale and an immediate revision to the Initial Market Price to reflect the
price of the common stock of the surviving entity and the market in which such
common stock is traded). The Company will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor entity
(if other than the Company) resulting from consolidation or merger or the entity
purchasing such assets assumes, by written instrument (in form and substance
-10-
<PAGE>
satisfactory to the holders of a majority of the Preferred Shares then
outstanding), the obligation to deliver to each holder of Preferred Shares such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire. "PERSON" shall mean an
individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
(iv) Adjustment of Floating Conversion Price and/or
----------------------------------------------
Initial Market Price upon Issuance of Convertible Securities. (A) If and
- ------------------------------------------------------------
whenever after the Issuance Date, the Company in any manner issues or sells
Convertible Securities that are convertible into or exercisable or exchangeable
for Common Stock at a price which may vary with the market price of the Common
Stock (the formulation for such variable price being herein referred to as, the
"VARIABLE PRICE") and such Variable Price is not calculated using the same
formula used to calculate the Floating Conversion Price in effect immediately
prior to the time of such issue or sale, the Company shall provide written
notice thereof via facsimile and overnight courier to each holder of the
Preferred Shares ("VARIABLE NOTICE") on the date of issuance of such Convertible
Securities. If the holders of Preferred Shares representing at least two-thirds
(2/3) of the Preferred Shares then outstanding provide written notice via
facsimile and overnight courier (the "VARIABLE PRICE ELECTION NOTICE") to the
Company within five (5) Business Days of receiving a Variable Notice that such
holders desire to replace the Floating Conversion Price then in effect with the
Variable Price described in such Variable Notice, then from and after the date
of the Company's receipt of the Variable Price Election Notice the Floating
Conversion Price will automatically be replaced with the Variable Price
(together with such modifications to this Certificate of Designations as may be
required to give full effect to the substitution of the Variable Price for the
Floating Conversion Price), subject to further adjustments as provided in this
Certificate of Designations. A holder's delivery of a Variable Price Election
Notice shall serve as the consent required to amend this Certificate of
Designations pursuant to Section 15 below. In the event that a holder delivers
a Conversion Notice at any time after the Company's issuance of Convertible
Securities with a Variable Price but before such holder's receipt of the
Company's Variable Notice, then such holder shall have the option by written
notice to the Company to rescind such Conversion Notice or to have the
Conversion Price be equal to such Variable Price for the conversion effected by
such Conversion Notice.
(B) If the Company in any manner issues or sells Convertible
Securities that are convertible into or exchangeable or exercisable for Common
Stock at a price which has the possibility of not varying with the market price
of the Common Stock (the formulation for such fixed price being herein referred
to as, the "FIXED PRICE") and such Fixed Price is less than 120% of the Initial
Market Price in effect immediately prior to the time of such issue or sale, the
Company shall provide written notice thereof via facsimile and overnight courier
to each holder of the Preferred Shares ("FIXED NOTICE") on the date of issuance
of such Convertible Securities. If the holders of Preferred Shares representing
-11-
<PAGE>
at least two-thirds (2/3) of the Preferred Shares then outstanding provide
written notice via facsimile and overnight courier (the "FIXED PRICE ELECTION
NOTICE") to the Company within five (5) Business Days of receiving a Fixed
Notice that such holders desire to have the Initial Market Price then in effect
replaced with a price equal to the product of 0.8333 and the Fixed Price
described in such Fixed Notice, then from and after the date of the Company's
receipt of the Fixed Price Election Notice the Initial Market Price will
automatically be replaced with a price equal to the product of 0.8333 and the
Fixed Price (together with such modifications to this Certificate of
Designations as may be required to give full effect to the replacement of the
Initial Market Price with 83.33% of the Fixed Price), subject to further
adjustments as provided in this Certificate of Designations. A holder's
delivery of a Fixed Price Election Notice shall serve as the consent required to
amend this Certificate of Designations pursuant to Section 15 below. In the
event that a holder delivers a Conversion Notice at any time after the Company's
issuance of Convertible Securities with a Fixed Price but before such holder's
receipt of the Company's Fixed Notice, then such holder shall have the option by
written notice to the Company to rescind such Conversion Notice or to have the
Conversion Price for such conversion be calculated using an Initial Market Price
equal to 83.33% of the Fixed Price. No adjustment to the Initial Market Price
shall be made pursuant to this paragraph in connection with the issuance of
Convertible Securities that are convertible into Common Stock only at a Fixed
Price and which Fixed Price is not subject to any adjustments or resets other
than adjustments substantially similar to those set forth in Sections 2(d)(i),
(ii) and (iii). In the event that the Initial Market Price is adjusted pursuant
to this paragraph, then the issue or sale of Convertible Securities which was
the basis for such adjustment shall not result in any adjustment to the Initial
Market Price pursuant to Section 2(d)(i).
(v) Certain Events. If any event occurs of the type
--------------
contemplated by the provisions of this Section 2(d) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided, however, that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 2(d).
(vi) Notices.
-------
(A) Immediately upon any adjustment of the
Conversion Price, the Company will give written notice thereof to each holder of
the Preferred Shares, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(B) The Company will give written notice to each
holder of the Preferred Shares at least ten (10) days prior to the date on which
the Company closes its books or takes a record (I) with respect to any dividend
or distribution upon the Common Stock, (II) with respect to any pro rata
-12-
<PAGE>
subscription offer to holders of Common Stock, or (III) for determining rights
to vote with respect to any Organic Change, dissolution or liquidation and in no
event shall such notice be provided to such holder prior to such information
being made known to the public.
(C) The Company will also give written notice to
each holder of the Preferred Shares at least ten (10) days prior to the date on
which any Organic Change, dissolution or liquidation will take place and in no
event shall such notice be provided to such holder prior to such information
being made known to the public.
(e) Purchase Rights. In addition to any adjustments of the
---------------
Conversion Price pursuant to Section 2(d), if at any time after the Issuance
Date the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property pro rata to the
record holders of any class of Common Stock (the "PURCHASE RIGHTS"), then the
holders of the Preferred Shares will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
holder could have acquired if such holder had held the number of shares of
Common Stock acquirable upon complete conversion of the Preferred Shares
(without taking into account any limitations or restrictions on the timing or
amount of conversions) immediately before the date on which a record is taken
for the grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of the Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.
(f) Mechanics of Conversion. Subject to the Company's
-----------------------
inability to fully satisfy its obligations under a Conversion Notice (as defined
below) as provided for in Section 4:
(i) Holder's Delivery Requirements. To convert
------------------------------
Preferred Shares into full shares of Common Stock on any date (the "CONVERSION
DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m. Eastern Time, on such date, a
copy of a fully executed notice of conversion in the form attached hereto as
Exhibit I (the "CONVERSION NOTICE") to the Company or its designated transfer
- ---------
agent (the "TRANSFER AGENT"), and (B) if required by Section 2(f)(vii),
surrender to a common carrier, for delivery to the Company as soon as
practicable following such date, the original certificate(s) representing the
Preferred Shares being converted (or an indemnification undertaking with respect
to such shares in the case of their loss, theft or destruction) (the "PREFERRED
STOCK CERTIFICATE(S)").
(ii) Company's Response. Upon receipt by the Company of
------------------
a facsimile copy of a Conversion Notice, the Company shall (A) immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder and (B) on the second Business Day following the date of receipt,
-13-
<PAGE>
(I) issue and surrender to a common carrier for overnight delivery to the
address specified in the Conversion Notice, a certificate, registered in the
name of the holder or its designee, for the number of shares of Common Stock
to which the holder shall be entitled, or (II) credit such aggregate number of
shares of Common Stock to which the holder shall be entitled to the holder's
or its designee's balance account with The Depository Trust Company. If the
number of Preferred Shares represented by the Preferred Stock Certificate(s)
submitted for conversion is greater than the number of Preferred Shares being
converted, then the Company shall, as soon as practicable and in no event
later than two Business Days after receipt of the Preferred Stock
Certificate(s) and at its own expense, issue and deliver to the holder a new
Preferred Stock Certificate representing the number of Preferred Shares not
converted.
(iii) Dispute Resolution. In the case of a dispute as
------------------
to the determination of the Average Daily Trading Price or the arithmetic
calculation of the Conversion Rate, the Company shall promptly issue to the
holder the number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to the holder via
facsimile within one (1) Business Day of receipt of such holder's Conversion
Notice. If such holder and the Company are unable to agree upon the
determination of the Average Daily Trading Price or arithmetic calculation of
the Conversion Rate within one (1) Business Day of such disputed determination
or arithmetic calculation being submitted to the holder, then the Company shall
within one (1) Business Day submit via facsimile (A) the disputed determination
of the Average Daily Trading Price to an independent, reputable investment bank,
or (B) the disputed arithmetic calculation of the Conversion Rate to its
independent, outside accountant. The Company shall cause the investment bank or
the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the holder of the results no later than
forty-eight (48) hours from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error.
(iv) Record Holder. The person or persons entitled to
-------------
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within six
-----------------------------------
Business Days after the Company's or the Transfer Agent's (as applicable)
receipt of a facsimile copy of a Conversion Notice, the Company shall fail to
issue a certificate for the number of shares of Common Stock to which a holder
is entitled or to credit the holder's balance account with The Depository Trust
Company for such number of shares of Common Stock to which the holder is
entitled upon such holder's conversion of the Preferred Shares, pursuant to
Section 2(f)(ii), in addition to all other available remedies which such holder
-14-
<PAGE>
may pursue hereunder and under the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof), the Company shall pay additional
damages to such holder on each date after such sixth (6th) Business Day that
such conversion is not timely effected in an amount equal to 0.5% of the product
of (A) the sum of the number of shares of Common Stock not issued to the holder
on a timely basis pursuant to Section 2(f)(ii) and to which such holder is
entitled and (B) the Average Daily Trading Price of the Common Stock on the last
possible date which the Company could have issued such Common Stock to such
holder without violating Section 2(f)(ii).
(vi) Company's Failure to Issue Certificates. If within
---------------------------------------
ten Business Days after the Company's receipt of the Preferred Stock
Certificates to be converted and the Conversion Notice the Company shall fail to
issue a new Preferred Stock Certificate representing the number of Preferred
Shares to which such holder is entitled, pursuant to Section 2(f)(ii), in
addition to all other available remedies which such holder may pursue hereunder
and under the Securities Purchase Agreement (including indemnification pursuant
to Section 8 thereof), the Company shall pay additional damages to such holder
on each date after such tenth (10th) Business Day that such delivery of such
Preferred Stock Certificates is not timely effected in an amount equal to 0.5%
of the product of (A) the number of shares of Common Stock issuable upon
conversion of the Preferred Shares represented by such Preferred Stock
Certificate as of the last possible date which the Company could have issued
such Preferred Stock Certificate to such holder without violating Section
2(f)(ii) and (B) the Average Daily Trading Price of the Common Stock on the last
possible date which the Company could have issued such Preferred Stock
Certificate to such holder without violating Section 2(f)(ii).
(vii) Book-Entry. Notwithstanding anything to the
----------
contrary set forth herein, upon conversion of Preferred Shares in accordance
with the terms hereof, the holder thereof shall not be required to physically
surrender the certificate representing the Preferred Shares to the Company
unless the full number of Preferred Shares represented by the certificate are
being converted. The holder and the Company shall maintain records showing the
number of Preferred Shares so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the holder and the
Company, so as not to require physical surrender of the certificate representing
the Preferred Shares upon each such conversion. In the event of any dispute or
discrepancy, such records of the Company shall be controlling and determinative
in the absence of manifest error. Notwithstanding the foregoing, if Preferred
Shares represented by a certificate are converted as aforesaid, the holder may
not transfer the certificate representing the Preferred Shares unless the holder
first physically surrenders the certificate representing the Preferred Shares to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the holder a new certificate of like tenor, registered as the holder
may request, representing in the aggregate the remaining number of Preferred
Shares represented by such certificate. The holder and any assignee, by
acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares, the
-15-
<PAGE>
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated of the face thereof. Each certificate for
Preferred Shares shall bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE,
INCLUDING SECTION 2(f)(vii) THEREOF. THE NUMBER OF PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF
PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO
SECTION 2(f)(vii) OF THE CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS.
(g) Mandatory Conversion or Redemption at Maturity. If any
----------------------------------------------
Preferred Shares remain outstanding on the Maturity Date (as defined below),
then all such Preferred Shares, at the Company's option, either (i) shall be
converted as of such date in accordance with this Section 2 as if the holders of
such Preferred Shares had given the Conversion Notice on the Maturity Date (a
"MATURITY DATE MANDATORY CONVERSION") or (ii) shall be redeemed as of such date
for an amount in cash per Preferred Share (the "MATURITY DATE REDEMPTION PRICE")
equal to the sum of (A) $50,000 plus (B) the Additional Amount as of such date
(a "MATURITY DATE MANDATORY REDEMPTION"); provided, however, that if the Company
has elected a Maturity Date Mandatory Conversion and a Triggering Event has
occurred and is continuing on the Maturity Date, then the Company shall, within
five Business Days following the Maturity Date (unless otherwise notified in
writing by the holder of its request to have the Preferred Shares converted into
Common Stock), pay to each holder of Preferred Shares then outstanding, in
immediately available funds, an amount equal to the Maturity Date Redemption
Price. The Company shall be deemed to have elected a Maturity Date Mandatory
Conversion unless it delivers written notice to each holder of Preferred Shares
at least 20 Business Days prior to the Maturity Date of its election to effect a
Maturity Date Mandatory Redemption. If the Company elects a Maturity Date
Mandatory Redemption, then on the Maturity Date the Company shall pay to each
holder of Preferred Shares outstanding on the Maturity Date, by wire transfer of
immediately available funds, an amount per Preferred Share equal to the Maturity
Date Redemption Price. All holders of Preferred Shares shall thereupon
surrender all Preferred Stock Certificates, duly endorsed for cancellation, to
the Company, provided that the Company has complied with its obligations under
this Section 2(g). Notwithstanding the foregoing, if the Common Stock is not
designated for quotation on The Nasdaq National Market or listed on The New York
Stock Exchange, Inc. but such events do not constitute a Triggering Event, then
the Maturity Date shall be extended until the Common Stock is so designated or
listed. "MATURITY DATE" means the date which is three years after the
applicable Issuance Date, subject to extension as described in the immediately
preceding sentence and subject to extension pursuant to Section 3(u) of the
Registration Rights Agreement, which extension shall be equal to one and
one-half (1?) day for each day in any Grace Period (as defined in the
Registration Rights Agreement).
-16-
<PAGE>
(h) Fractional Shares. The Company shall not issue any
-----------------
fraction of a share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a fraction of
a share of Common Stock. If, after the aforementioned aggregation, the issuance
would result in the issuance of a fraction of a share of Common Stock, the
Company shall round such fraction of a share of Common Stock up or down to the
nearest whole share.
(i) Taxes. The Company shall pay any and all taxes which may
-----
be imposed upon it with respect to the issuance and delivery of shares of Common
Stock upon the conversion of the Preferred Shares.
(j) Conversion Restrictions. The right of a holder of
-----------------------
Preferred Shares to convert Preferred Shares pursuant to this Section 2 shall be
limited as set forth below. Without the prior consent of the Company, a holder
of Preferred Shares shall not be entitled to convert (i) any Preferred Shares
during the period beginning on and including the Issuance Date of such Preferred
Shares and ending on and including the date which is 120 days after the Issuance
Date of such Preferred Shares and (ii) in any calendar month beginning with the
first calendar month which ends on or after the day which is 120 days after the
Issuance Date of such Preferred Shares, more than 10% of the number of Preferred
Shares acquired by such holder at a Conversion Price less than or equal to 90%
of the Initial Market Price then in effect; provided the number of Preferred
Shares permitted to be converted each month shall be cumulative in that any
shares permitted to be converted in any month and not so converted shall be
carried over into each successive months until so converted. Notwithstanding
the foregoing, the conversion restrictions set forth in this Section 2(j) shall
not apply (A) on and after any date on which the Common Stock is not listed on
The Nasdaq National Market, The New York Stock Exchange, Inc. or The American
Stock Exchange, Inc. or has been suspended from trading (excluding suspensions
of not more than one day resulting from business announcements), or any such
delisting or suspension is threatened or pending (including, without limitation,
the Company is not in compliance with published listing requirements), (B) on or
after any date on which there shall have occurred an event constituting a Major
Transaction (as defined in Section 3(c)), Triggering Event (as defined in
Section 3(d)) or a Material Adverse Change (as defined below), (C) with respect
the restriction set forth in clause (i) of the immediately preceding sentence,
to any conversion of Preferred Shares at a Conversion Price which is equal to or
greater than 120% of the Initial Market Price then in effect, (D) with respect
to the restriction set forth in clause (ii) of the immediately preceding
sentence, to any conversion of Preferred Shares at a Conversion Price greater
than or equal to 120% of the Initial Market Price then in effect or (E) on or
after any date on which there shall have been an announcement of a pending Major
Transaction. "MATERIAL ADVERSE CHANGE" means any change, event, result or
happening not in the normal course of the Company's business or operations
involving, directly or indirectly, the Company or any of its subsidiaries
-17-
<PAGE>
resulting in a material adverse effect on the business, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(k) Adjustment of Conversion Restrictions upon Issuance of
------------------------------------------------------
Convertible Securities. Except as provided below, if the Company in any manner
- ----------------------
issues or sells Convertible Securities that are convertible into Common Stock
and are subject to (i) restrictions on the amount of shares that can be
converted, or (ii) no restrictions on the amount of shares that can be converted
(the restriction on conversions or lack thereof being herein referred to as the
"CONVERSION RESTRICTION"), and such Conversion Restriction is not formulated
using the same time periods and percentages used in Section 2(j), then the
Company shall provide written notice thereof via facsimile and overnight courier
to each holder of the Preferred Shares ("CONVERSION RESTRICTION NOTICE") on the
date of issuance of such Convertible Securities. If the holders of Preferred
Shares representing at least two-thirds (2/3) of the Preferred Shares then
outstanding which remain subject to the restrictions in Section 2(j) provide
written notice via facsimile and overnight courier (the "CONVERSION RESTRICTION
ELECTION NOTICE") to the Company within five (5) Business Days of receiving a
Conversion Restriction Notice that such holders desire to replace the conversion
restrictions set forth in Section 2(j) then in effect with the Conversion
Restriction described in such Conversion Restriction Notice, then from and after
the date of the Company's receipt of the Conversion Restriction Election Notice
the conversion restrictions set forth in Section 2(j) automatically will be
replaced with the Conversion Restrictions (together with such modifications to
this Certificate of Designations as may be required to give full effect to the
substitution of the Conversion Restrictions for the conversion restrictions set
forth in Section 2(j)), provided, however, holders of Preferred Shares shall not
be entitled to replace the conversion restrictions set forth in Section 2(j)
with the Conversion Restrictions applicable to issuances of Convertible
Securities that are convertible, exchangeable or exercisable for shares of
Common Stock in an amount not to exceed, individually or in the aggregate, the
lesser of (i) 250,000 shares of Common Stock (subject to adjustments for stock
splits, stock dividends, recapitalizations or other similar events) and (ii) the
average daily trading volume of the Common Stock (as reported by Bloomberg) for
the 20 consecutive trading days immediately preceding such issuance or sale. A
holder's delivery of a Conversion Restriction Election Notice shall serve as the
consent required to amend this Certificate of Designations pursuant to Section
15 below.
(3) Redemption at Option of Holders.
-------------------------------
(a) Redemption Option Upon Major Transaction. In addition to
----------------------------------------
all other rights of the holders of Preferred Shares contained herein,
simultaneous with or after the occurrence of a Major Transaction (as defined
below), each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to the greater of (i) 125%
of the Liquidation Value (as defined in Section 11); and (ii) the product of (A)
the Conversion Rate at such time, and (B) the Average Daily Trading Price on the
date of the public announcement of such Major Transaction or the next date on
which the exchange or market on which the Common Stock is traded is open if such
public announcement is made (X) after 12:00 p.m. Eastern Time, on such date or
(Y) on a date on which the exchange or market on which the Common Stock is
traded is closed (the "MAJOR TRANSACTION REDEMPTION PRICE").
-18-
<PAGE>
(b) Redemption Option Upon Triggering Event. In addition to
---------------------------------------
all other rights of the holders of Preferred Shares contained herein,
simultaneous with or after the occurrence of a Triggering Event (as defined
below), each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to the greater of (i) 125%
of the Liquidation Value; and (ii) the product of (A) the Conversion Rate at
such time, and (B) the greater of (I) the Average Daily Trading Price on the
trading day immediately preceding such Triggering Event or (II) the Average
Daily Trading Price on the date of the holder's delivery to the Company of a
Notice of Redemption at Option of Buyer Upon Triggering Event (as defined below)
or, if such date of delivery is not a trading day, the next date on which the
exchange or market on which the Common Stock is traded is open (the "TRIGGERING
EVENT REDEMPTION PRICE" and, collectively with the Major Transaction Redemption
Price, the "REDEMPTION PRICE").
(c) "Major Transaction". A "MAJOR TRANSACTION" shall be
-------------------
deemed to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination in which holders of the
Company's voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company) (a "CHANGE OF
CONTROL TRANSACTION");
(ii) the sale or transfer of all or substantially all of
the Company's assets; or
(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock.
(d) "Triggering Event". A "TRIGGERING EVENT" shall be deemed
------------------
to have occurred at such time as any of the following events:
(i) the failure of the Registration Statement (as
defined in the Registration Rights Agreement) to be declared effective by the
SEC on or prior to the date that is 150 days after the Initial Issuance Date;
-19-
<PAGE>
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
(other than on days during any Allowable Grace Period) to the holder of the
Preferred Shares for sale of the Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of the Registration
Rights Agreement, and such lapse or unavailability continues for a period of ten
consecutive trading days (other than on days during any Allowable Grace Period);
(iii) suspension from listing or delisting of the Common
Stock from The Nasdaq National Market or The New York Stock Exchange, Inc. for a
period of five consecutive days;
(iv) the Company's notice to any holder of Preferred
Shares, including by way of public announcement, at any time, of its intention
not to comply with proper requests for conversion of any Preferred Shares into
shares of Common Stock, including due to any of the reasons set forth in Section
4(a) below; or
(v) the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase Agreement, the
Registration Rights Agreement, this Certificate of Designations or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated thereby or hereby, except to the extent that
such breach would not have a Material Adverse Effect (as defined in Section 3(a)
of the Securities Purchase Agreement) and except, in the case of a breach of a
covenant which is curable, only if such breach continues for a period of at
least ten days.
(e) Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. No sooner than 15 days nor later than 10 days prior to the
- -----------
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Company shall deliver written notice thereof via
facsimile and overnight courier (a "NOTICE OF MAJOR TRANSACTION") to each holder
of Preferred Shares. At any time after receipt of a Notice of Major Transaction
(or, in the event a Notice of Major Transaction is not delivered at least 10
days prior to a Major Transaction, at any time on or after the date which is 10
days prior to a Major Transaction), any holder of the Preferred Shares then
outstanding may require the Company to redeem all or a portion of the holder's
Preferred Shares then outstanding by delivering written notice thereof via
facsimile and overnight courier (a "NOTICE OF REDEMPTION AT OPTION OF BUYER UPON
MAJOR TRANSACTION") to the Company, which Notice of Redemption at Option of
Buyer Upon Major Transaction shall indicate (i) the number of Preferred Shares
that such holder is submitting for redemption, and (ii) the applicable Major
Transaction Redemption Price, as calculated pursuant to Section 3(a).
-20-
<PAGE>
(f) Mechanics of Redemption at Option of Buyer Upon
-----------------------------------------------
Triggering Event. Within one (1) day after the occurrence of a Triggering
- ----------------
Event, the Company shall deliver written notice thereof via facsimile and
overnight courier (a "NOTICE OF TRIGGERING EVENT") to each holder of Preferred
Shares. At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to redeem
all or a portion of the holder's Preferred Shares then outstanding by delivering
written notice thereof via facsimile and overnight courier (a "NOTICE OF
REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT") to the Company, which
Notice of Redemption at Option of Buyer Upon Triggering Event shall indicate (i)
the number of Preferred Shares that such holder is submitting for redemption,
and (ii) the applicable Triggering Event Redemption Price, as calculated
pursuant to Section 3(b).
(g) Payment of Redemption Price. Upon the Company's receipt
---------------------------
of a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares, the Company shall immediately notify each holder of
Preferred Shares by facsimile of the Company's receipt of such Notice(s) of
Redemption at Option of Buyer Upon Triggering Event or Notice(s) of Redemption
at Option of Buyer Upon Major Transaction and each holder which has sent such a
notice shall promptly submit, if required by Section(2)(f)(vii), to the Company
or its Transfer Agent such holder's Preferred Stock Certificates which such
holder has elected to have redeemed. The Company shall deliver the applicable
Triggering Event Redemption Price, in the case of a redemption pursuant to
Section 3(f), to such holder within five (5) Business Days after the Company's
receipt of a Notice of Redemption at Option of Buyer Upon Triggering Event and,
in the case of a redemption pursuant to Section 3(e), the Company shall deliver
the applicable Major Transaction Redemption Price simultaneous with the
consummation of the Major Transaction; provided that, if required by Section
2(f)(vii), a holder's Preferred Stock Certificates shall have been so delivered
to the Company; provided further that if the Company is unable to redeem all of
the Preferred Shares to be redeemed, the Company shall redeem an amount from
each holder of Preferred Shares being redeemed equal to such holder's pro-rata
amount (based on the number of Preferred Shares held by such holder relative to
the number of Preferred Shares outstanding) of all Preferred Shares being
redeemed. If the Company shall fail to redeem all of the Preferred Shares
submitted for redemption (other than pursuant to a dispute as to the arithmetic
calculation of the Redemption Price), in addition to any remedy such holder of
Preferred Shares may have under this Certificate of Designation, the Securities
Purchase Agreement and the Registration Rights Agreement, the applicable
Redemption Price payable in respect of such unredeemed Preferred Shares shall
bear interest at the rate of 1.5% per month (prorated for partial months) until
paid in full. Until the Company pays such unpaid applicable Redemption Price in
full to a holder of Preferred Shares submitted for redemption, such holder shall
have the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of
redemption, require the Company to promptly return to such holder(s) all of the
Preferred Shares that were submitted for redemption by such holder(s) under this
-21-
<PAGE>
Section 3 and for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the "VOID OPTIONAL
REDEMPTION NOTICE"). Upon the Company's receipt of such Void Optional
Redemption Notice(s) prior to payment of the full applicable Redemption Price to
such holder, (i) the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event or the Notice(s) of Redemption at Option of Buyer Upon Major Transaction,
as the case may be, shall be null and void with respect to those Preferred
Shares submitted for redemption and for which the applicable Redemption Price
has not been paid, (ii) the Company shall immediately return any Preferred
Shares submitted to the Company by each holder for redemption under this Section
3(g) and for which the applicable Redemption Price has not been paid and (iii)
the Initial Market Price of such returned Preferred Shares shall be adjusted to
the lesser of (A) the Initial Market Price as in effect on the date on which the
Void Optional Redemption Notice(s) is delivered to the Company and (B) the
lowest Average Daily Trading Price during the period beginning on the date on
which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or
the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as the
case may be, is delivered to the Company and ending on the date on which the
Void Optional Redemption Notice(s) is delivered to the Company; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Initial Market Price then in effect. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Average Daily Trading Price or
the arithmetic calculation of the Redemption Price, such dispute shall be
resolved pursuant to Section 2(f)(iii) above with the term "Average Daily
Trading Price" being substituted for the term "Market Price" and the term
"Redemption Price" being substituted for the term "Conversion Rate". A holder's
delivery of a Void Optional Redemption Notice and exercise of its rights
following such notice shall not effect the Company's obligations to make any
payments which have accrued prior to the date of such notice. Payments provided
for in this Section 3 shall have priority to payments to other stockholders in
connection with a Major Transaction.
(4) Inability to Fully Convert.
--------------------------
(a) Holder's Option if Company Cannot Fully Convert. If,
-----------------------------------------------
upon the Company's receipt of a Conversion Notice or on the Maturity Date, the
Company can not issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities, including without limitation the Exchange Cap (as defined in Section
14 below), from issuing all of the Common Stock which is to be issued to a
holder of Preferred Shares pursuant to a Conversion Notice or (z) fails to have
a sufficient number of shares of Common Stock registered for resale under the
Registration Statement, then the Company shall issue as many shares of Common
-22-
<PAGE>
Stock as it is able to issue in accordance with such holder's Conversion Notice
and pursuant to Section 2(f) and, with respect to the unconverted Preferred
Shares, the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at a
price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
product of (A) the Conversion Rate and (B) the Average Daily Trading Price as of
such Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z), require the Company to issue restricted
shares of Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 2(f);
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were to be
converted pursuant to such holder's Conversion Notice (provided that a holder's
voiding its Conversion Notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y), require the
Company to issue shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f) at a Conversion Price equal to
the average of Average Daily Trading Prices of the Common Stock for the five
consecutive trading days preceding such holder's Notice in Response to Inability
to Convert (as defined below) or such other market price that satisfies the
applicable exchange or trading market.
(b) Mechanics of Fulfilling Holder's Election. The Company
-----------------------------------------
shall immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which cannot
be fully satisfied as described in Section 4(a), a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the "INABILITY TO
FULLY CONVERT NOTICE"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such holder's
Conversion Notice, (ii) the number of Preferred Shares which cannot be converted
and (iii) the applicable Mandatory Redemption Price. Such holder shall notify
the Company of its election pursuant to Section 4(a) above by delivering written
notice via facsimile to the Company ("NOTICE IN RESPONSE TO INABILITY TO
CONVERT").
-23-
<PAGE>
(c) Payment of Redemption Price. If such holder shall elect
---------------------------
to have its shares redeemed pursuant to Section 4(a)(i), the Company shall pay
the Mandatory Redemption Price in cash to such holder within ten days of the
Company's receipt of the holder's Notice in Response to Inability to Convert.
If the Company shall fail to pay the applicable Mandatory Redemption Price to
such holder on a timely basis as described in this Section 4(c) (other than
pursuant to a dispute as to the determination of the arithmetic calculation of
the Redemption Price), in addition to any remedy such holder of Preferred Shares
may have under this Certificate of Designations, the Securities Purchase
Agreement and the Registration Rights Agreement, such unpaid amount shall bear
interest at the rate of 1.5% per month (prorated for partial months) until paid
in full. Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may void the Mandatory Redemption with respect to those
Preferred Shares for which the full Mandatory Redemption Price has not been paid
and (i) receive back such Preferred Shares and (ii) the Initial Market Price of
such returned Preferred Shares shall be adjusted to the lesser of (A) the
Initial Market Price in effect on the date on which the holder voided the
Mandatory Redemption and (B) the lowest Average Daily Trading Price during the
Period beginning on the Conversion Date and ending on the date the holder voided
the Mandatory Redemption. Notwithstanding the foregoing, if the Company fails
to pay the applicable Mandatory Redemption Price within such ten-day period due
to a dispute as to the determination of the arithmetic calculation of the
Redemption Price, such dispute shall be resolved pursuant to Section 2(f)(iii)
with the term "Redemption Price" being substituted for the term "Conversion
Rate".
(d) Pro-rata Conversion and Redemption. In the event the
----------------------------------
Company receives a Conversion Notice, Notice of Redemption at Option of Buyer
Upon Major Transaction or Notice of Redemption at Option of Buyer Upon
Triggering Event from more than one holder of Preferred Shares on the same day
and the Company can convert and/or redeem some, but not all, of the Preferred
Shares pursuant to this Section 4, the Company shall convert and redeem from
each holder of Preferred Shares electing to have Preferred Shares converted and
redeemed at such time an amount equal to such holder's pro-rata amount (based on
the number of Preferred Shares held by such holder relative to the number of
Preferred Shares outstanding) of all Preferred Shares being converted and
redeemed at such time.
(e) Forced Delisting. If the Company's inability to fully
----------------
convert Preferred Shares is pursuant to the Exchange Cap and the stockholders
have voted not to approve issuances in excess of the Exchange Cap, and if so
directed by the holders of at least two-thirds (?) of the Preferred Shares then
outstanding, the Company shall immediately delist the Common Stock from the
exchange or automated quotation system on which the Common Stock is traded and
have the Common Stock, at such holders' option, traded on the electronic
bulletin board or the "pink sheets."
-24-
<PAGE>
(5) Conversion at the Company's Election. At any time or times on
------------------------------------
or after the date which is one year after the Issuance Date of the applicable
Preferred Shares, the Company shall have the right, in its sole discretion, to
require that any or all of such outstanding Preferred Shares be converted
("CONVERSION AT COMPANY'S ELECTION") at the Conversion Rate; provided that the
Conditions to Conversion at the Company's Election (as set forth below) are
satisfied. The Company shall exercise its right to Conversion at Company's
Election by providing each holder of Preferred Shares written notice ("NOTICE OF
CONVERSION AT COMPANY'S ELECTION") at least 5 trading days prior to the date
selected by the Company for conversion ("COMPANY'S ELECTION CONVERSION DATE").
If the Company elects to require conversion of some, but not all, of such
Preferred Shares, the Company shall convert an amount from each holder of
Preferred Shares equal to such holder's pro rata amount (based on the number of
such Preferred Shares held by such holder relative to the number of such
Preferred Shares outstanding on date of the Company's delivery of the Notice of
Conversion at Company's Election) of all Preferred Shares the Company is
requiring to be converted. The Notice of Conversion at Company's Election shall
indicate (x) the number of Preferred Shares the Company has selected for
conversion, (y) the Company's Election Conversion Date, which date shall be not
less than 5 or more than 30 trading days after each holder's receipt of such
notice, and (z) each holder's pro rata share of outstanding Preferred Shares.
All Preferred Shares selected for conversion in accordance with the provision of
this Section 5 shall be converted as of the Company's Election Conversion Date
in accordance with Section 2 as if the holders of such Preferred Shares selected
by the Company to be converted had given the Conversion Notice on the Company's
Election Conversion Date. If required by Section 2(f)(vii), all holders of
Preferred Shares shall thereupon and within two Business Days after the
Company's Election Conversion Date surrender all Preferred Stock Certificates
selected for conversion, duly endorsed for cancellation, to the Company.
"CONDITIONS TO CONVERSION AT THE COMPANY'S ELECTION" means the following
conditions: (i) on each day during the period beginning 30 days prior to the
date of the Company's Notice of Conversion at Company's Election and ending on
and including the Company's Election Conversion Date, the Registration Statement
shall be effective and available for the sale of no less than 125% of the sum of
(A) the number of Conversion Shares then issuable upon the conversion of all
outstanding Preferred Shares (without regard to any limitations on conversion
herein or elsewhere), including the Conversion Shares to be issued pursuant to
this Conversion at the Company's Election, and (B) the number of Conversion
Shares and Dividend Shares that are then held by the holders of the Preferred
Shares; (ii) on each day during the period beginning 30 days prior to the date
of the Company's Notice of Conversion at Company's Election and ending on and
including the Company's Election Conversion Date, the Common Stock is designated
for quotation on The Nasdaq National Market or listed on The New York Stock
Exchange, Inc. and is not suspended from trading; (iii) on each day during the
15 consecutive trading days immediately preceding the date of the receipt by the
holders of Preferred Shares of the Notice of Conversion at Company's Election,
the Average Daily Trading Price of the Common Stock is at least 240% of the
Initial Market Price; (iv) on each day during the period beginning on and
including the date of the receipt by the holders of Preferred Shares of the
Notice of Conversion at Company's Election and ending on and including the
Company's Election Conversion Date, the Average Daily Trading Price of the
Common Stock is at least 240% of the Initial Market Price; (v) during the period
-25-
<PAGE>
beginning on the first Issuance Date of any Preferred Shares and ending on and
including the Company's Election Conversion Date, the Company shall have
delivered all Conversion Shares upon conversion of the Preferred Shares to the
holders of Preferred Shares on a timely basis as set forth in Section 2(e)(ii)
of this Certificate of Designations; and (vi) the Company otherwise has
satisfied its obligations and is not in default under this Certificate of
Designations, the Securities Purchase Agreement and the Registration Rights
Agreement. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for conversion) into
Common Stock pursuant to Section 2(a) on or prior to the date immediately
preceding the Company's Election Conversion Date.
(6) Company's Right to Redeem in Lieu of Conversion.
-----------------------------------------------
(a) Notwithstanding Section 2 or anything herein to the contrary, but subject to
Section 6(e), at any time after the Issuance Date, the Company may elect to
redeem Preferred Shares submitted for conversion at a Conversion Price less than
or equal to 90% of the Initial Market Price in lieu of converting such Preferred
Shares (a "COMPANY REDEMPTION IN LIEU OF CONVERSION"). If the Company elects to
redeem some, but not all, of the Preferred Shares submitted for conversion, the
Company shall redeem a number of Preferred Shares from each holder of Preferred
Shares submitted for conversion on the applicable date equal to such holder's
pro-rata amount (based on the number of Preferred Shares held by such holder
relative to the number of Preferred Shares outstanding) of all Preferred Shares
submitted for conversion which the Company elects to redeem.
(b) Redemption Price of Company Redemption in Lieu of
-------------------------------------------------
Conversion. The "REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF CONVERSION"
- ----------
shall be an amount per Preferred Share equal to 105% of the Liquidation Value of
such Preferred Shares.
(c) Mechanics of Company Redemption in Lieu of Conversion.
-----------------------------------------------------
The Company shall exercise its right to redeem by delivering written notice by
facsimile and overnight courier ("NOTICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION") no later than three Business Days prior to the first day of a
Calendar Quarter to (i) each holder of the Preferred Shares and (ii) the
Transfer Agent. Such Notice of Company Redemption in Lieu of Conversion shall
(A) indicate the maximum, if any, number of Preferred Shares which shall be
subject to Company Redemption in Lieu of Conversion which maximum number of
Preferred Shares, if less than all of the Preferred Shares outstanding, shall be
allocated pro rata among the holders of Preferred Shares (based on the number of
Preferred Shares held by each holder on the date of the Company's delivery of
Notice of Company Redemption in Lieu of Conversion relative to the total number
of Preferred Shares outstanding on such date), (B) confirm the Calendar Quarter
during which the Company may effect Company Redemption in Lieu of conversion.
The Company's Notice of Company Redemption in Lieu of Conversion shall be
effective for the period of the applicable Calendar Quarter (the "REDEMPTION IN
LIEU OF CONVERSION PERIOD"). The Company may terminate a Redemption in Lieu of
Conversion Period at any time with respect to Preferred Shares which have not
-26-
<PAGE>
been submitted for conversion by delivering written notice of such termination
to each holder of Preferred Shares by facsimile and overnight courier at least
five Business Days prior to the date of such termination. If the Company
terminates a Redemption in Lieu of Conversion Period as described in the
preceding sentence, then the Company shall not be entitled to submit another
Notice of Company Redemption in Lieu of Conversion during the remainder of the
calendar quarter. Any Preferred Shares submitted for conversion after the
termination of the Redemption in Lieu of Conversion Period or the number of
which is in excess of the maximum number of Preferred Shares designated in the
Notice of Company Redemption in Lieu of Conversion shall be converted in
accordance with Section 2.
(d) Payment of Redemption Price. The Company shall pay the
---------------------------
applicable Redemption Price of Company Redemption in Lieu of Conversion to the
holder of the Preferred Shares being redeemed in cash within five business days
after the Conversion Date, but not prior to such holder's delivery to the
Company of the Preferred Stock Certificates representing the Preferred Shares
being redeemed. If the Company shall fail to pay the applicable Redemption
Price of Company Redemption in Lieu of Conversion to such holder on a timely
basis as described in this Section 6(d), in addition to any remedy such holder
of Preferred Shares may have under this Certificate of Designations, the
Securities Purchase Agreement and the Registration Rights Agreement, such unpaid
amount shall bear interest at the rate of 1.5% per month (prorated for partial
months) until paid in full. Until the Company pays such unpaid applicable
Redemption Price of Company Redemption in Lieu of Conversion in full to each
holder, each holder of Preferred Shares submitted for redemption pursuant to
this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid, shall have the option (the
"VOID COMPANY REDEMPTION OPTION") to, in lieu of redemption, require the Company
to promptly return to each holder all of the Preferred Shares that were
submitted for redemption by such holder under this Section 6 and for which the
applicable Redemption Price of Company Redemption in Lieu of Conversion has not
been paid, by sending written notice thereof to the Company via facsimile (the
"VOID COMPANY REDEMPTION NOTICE"). Upon the Company's receipt of such Void
Company Redemption Notice(s) prior to payment of the full applicable redemption
price to each holder, (i) the Company's Redemption in Lieu of Conversion shall
be null and void with respect to those Preferred Shares submitted for redemption
and for which the applicable Redemption Price has not been paid and (ii) the
Company shall immediately either, at the option of the holder, (A) return any
Preferred Shares submitted to the Company by such holder for redemption under
this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid or (B) deliver the Conversion
Shares to such holder which would have been issuable on the Conversion Date with
respect to Preferred Shares submitted to the Company by such holder for
redemption under this Section 6 and for which the applicable Redemption Price of
Company Redemption in Lieu of Conversion has not been paid. Notwithstanding the
-27-
<PAGE>
foregoing, if the Company fails to pay the applicable Redemption Price of
Company Redemption in Lieu of Conversion to a holder within the time period
described in this Section 6(d) due to a dispute as to the arithmetic calculation
of the Redemption Price of Company Redemption in Lieu of Conversion, such
dispute shall be resolved pursuant to Section 2(f)(iii) with the term
"Redemption Price of Company Redemption in Lieu of Conversion" being substituted
for the term "Conversion Rate." If the Company fails to timely effect a Company
Redemption in Lieu of Conversion in accordance with this Section 6, the Company
shall not be allowed to submit another Notice of Company Redemption in Lieu of
Conversion without the prior written consent of the holders of at least
two-thirds (2/3) of the Preferred Shares then outstanding.
(e) Company Must Have Immediately Available Funds or Credit
-------------------------------------------------------
Facilities. The Company shall not be entitled to send any Notice of Company
- ----------
Redemption in Lieu of Conversion pursuant to Section 6(b) above and begin the
redemption procedure under this Section 6, unless it has:
(i) the full amount of the Redemption Price of Company
Redemption in Lieu of Conversion in cash, available in a demand or other
immediately available account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar financial
institutions that are immediately available and unrestricted for use in
redeeming the Preferred Shares, in the full amount of the Redemption Price of
Company Redemption in Lieu of Conversion;
(iii) a written agreement with a standby underwriter or
qualified buyer ready, willing and able to purchase from the Company a
sufficient number of shares of stock to provide proceeds necessary to redeem any
Preferred Shares that are not converted prior to a Company Redemption in Lieu of
Conversion; or
(iv) a combination of the items set forth in the preceding
clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price
of Company Redemption in Lieu of Conversion.
(7) Redemption at the Company's Election Upon Change of Control. At
-----------------------------------------------------------
any time or times on or after the date the Company publicly discloses a Change
of Control Transaction (as in Section 3(c)(i)), the Company shall have the
right, in its sole discretion, to require that all of the outstanding Preferred
Shares be redeemed ("REDEMPTION AT COMPANY'S ELECTION") at the Major Transaction
Redemption Price ("COMPANY'S ELECTION REDEMPTION PRICE"); provided that the
Conditions to Redemption at the Company's Election (as set forth below) are
satisfied. The Company shall exercise its right to Redemption at Company's
Election by providing each holder of Preferred Shares written notice ("NOTICE OF
REDEMPTION AT COMPANY'S ELECTION") after the public disclosure of a Change of
Control Transaction and at least 20 trading days prior to the date of
-28-
<PAGE>
consummation of the Change of Control Transaction ("COMPANY'S ELECTION
REDEMPTION DATE"). The Notice of Redemption at Company's Election shall
indicate the anticipated Company's Election Redemption Date. If the Company has
exercised its right of Redemption at Company's Election and the conditions to
such Redemption at Company's Election have been satisfied, then all Preferred
Shares outstanding at the time of the consummation of the Change of Control
Transaction shall be redeemed as of the Company's Election Redemption Date by
payment by the Company to each holder of Preferred Shares of the Company's
Election Redemption Price concurrent with the closing of the Change of Control
Transaction. If required by Section 2(f)(vii), all holders of Preferred Shares
shall thereupon and within two business days after the Company's Election
Redemption Date, or such earlier date as the Company and each holder of
Preferred Shares mutually agree, surrender all outstanding Preferred Stock
Certificates, duly endorsed for cancellation, to the Company. If the Company
fails to pay the full Company's Election Redemption Price with respect to any
Preferred Shares concurrently with the closing of the Change of Control
Transaction, then the Redemption at Company's Election shall be null and void
with respect to such Preferred Shares and the holder of such Preferred Shares
shall be entitled to all the rights of a holder of outstanding Preferred Shares
set forth in this Certificate of Designations. "CONDITIONS TO REDEMPTION AT THE
COMPANY'S ELECTION" means the following conditions: (i) during the period
beginning on the first Issuance Date of any Preferred Shares and ending on and
including the Company's Election Redemption Date, the Company shall have
delivered Conversion Shares upon conversion of the Preferred Shares to the
Buyers on a timely basis as set forth in Section 2(e)(ii) of this Certificate of
Designations; and (ii) the Company otherwise has satisfied its obligations in
all material respects and is not in default in any material respect under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement. Notwithstanding the above, any holder of
Preferred Shares may convert such shares (including Preferred Shares selected
for redemption) into Common Stock pursuant to Section 2(a) on or prior to the
date immediately preceding the Company's Election Redemption Date.
(8) Reissuance of Certificates. Subject to Section 2(f)(vii), in
--------------------------
the event of a conversion or redemption pursuant to this Certificate of
Designations of less than all of the Preferred Shares represented by a
particular Preferred Stock Certificate, the Company shall promptly cause to be
issued and delivered to the holder of such Preferred Shares a preferred stock
certificate representing the remaining Preferred Shares which have not been so
converted or redeemed.
(9) Reservation of Shares. The Company shall, so long as any of
---------------------
the Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares, such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all of the
Preferred Shares then outstanding (without regard to any limitations on
conversions); provided that the number of shares of Common Stock so reserved
shall at no time be less than 150% of the number of shares of Common Stock for
which the Preferred Shares are at any time convertible. The initial number of
shares of Common Stock reserved for conversions of the Preferred Shares and each
increase in the number of shares so reserved shall be allocated pro rata among
-29-
<PAGE>
the holders of the Preferred Shares based on the number of Preferred Shares held
by each holder at the time of issuance of the Preferred Shares or increase in
the number of reserved shares, as the case may be. In the event a holder shall
sell or otherwise transfer any of such holder's Preferred Shares, each
transferee shall be allocated a pro rata portion of the number of reserved
shares of Common Stock reserved for such transferor. Any shares of Common Stock
reserved and which remain allocated to any person or entity which does not hold
any Preferred Shares shall be allocated to the remaining holders of Preferred
Shares, pro rata based on the number of Preferred Shares then held by such
holder.
(10) Voting Rights. Holders of Preferred Shares shall have no
-------------
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Delaware, and as expressly provided in
this Certificate of Designations.
(11) Liquidation, Dissolution, Winding-Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Preferred Shares shall be entitled to receive in cash out of
the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "PREFERRED FUNDS"), before any amount
shall be paid to the holders of any of the capital stock of the Company of any
class junior in rank to the Preferred Shares in respect of the preferences as to
the distributions and payments on the liquidation, dissolution and winding up of
the Company, an amount per Preferred Share equal to the sum of (i) $50,000 and
(ii) the Additional Amount (such sum being referred to as the "LIQUIDATION
VALUE"); provided that, if the Preferred Funds are insufficient to pay the full
amount due to the holders of Preferred Shares and holders of shares of other
classes or series of preferred stock of the Company that are of equal rank with
the Preferred Shares as to payments of Preferred Funds (the "PARI PASSU
SHARES"), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to all
holders of Preferred Shares and Pari Passu Shares. The purchase or redemption
by the Company of stock of any class, in any manner permitted by law, shall not,
for the purposes hereof, be regarded as a liquidation, dissolution or winding up
of the Company. Neither the consolidation or merger of the Company with or into
any other Person, nor the sale or transfer by the Company of less than
substantially all of its assets, shall, for the purposes hereof, be deemed to be
a liquidation, dissolution or winding up of the Company. No holder of Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the amounts
provided for herein; provided that a holder of Preferred Shares shall be
entitled to all amounts previously accrued with respect to amounts owed
hereunder.
(12) Preferred Rank; Participation. (a) All shares of Common
-----------------------------
Stock shall be of junior rank to all Preferred Shares in respect to the
preferences as to distributions and payments upon the liquidation, dissolution
and winding up of the Company. The rights of the shares of Common Stock shall
-30-
<PAGE>
be subject to the preferences and relative rights of the Preferred Shares.
Without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or issue additional or other capital stock that is of senior
rank to the Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the Company.
Without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or make any amendment to the Company's Certificate of
Incorporation or bylaws, or file any resolution of the board of directors of the
Company with the Secretary of State of the State of Delaware containing any
provisions, which would adversely affect or otherwise impair the rights or
relative priority of the holders of the Preferred Shares relative to the holders
of the Common Stock or the holders of any other class of capital stock. In the
event of the merger or consolidation of the Company with or into another
corporation, the Preferred Shares shall maintain their relative powers,
designations and preferences provided for herein and no merger shall result
inconsistent therewith.
(b) Subject to the rights of the holders, if any, of the Pari
Passu Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the holders
of Common Stock to the same extent as if such holders of Preferred Shares had
converted the Preferred Shares into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
(13) Restriction on Redemption and Cash Dividends with respect to
------------------------------------------------------------
Other Capital Stock. Until all of the Preferred Shares have been converted or
- -------------------
redeemed as provided herein, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
(14) Limitation on Number of Conversion Shares. Notwithstanding
-----------------------------------------
any other provision herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares if the issuance
of such shares of Common Stock would exceed that number of shares of Common
Stock which the Company may issue upon Conversion of the Preferred Shares (the
"EXCHANGE CAP") without breaching the Company's obligations, if any, under the
rules or regulations of The Nasdaq Stock Market, Inc., except that such
limitation shall not apply in the event that the Company (a) obtains the
approval of its stockholders as required by applicable rules and regulations of
The Nasdaq Stock Market for issuances of Common Stock in excess of such amount
or (ii) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of a majority of the Preferred Shares then outstanding. Until such
-31-
<PAGE>
approval or written opinion is obtained, no purchaser of Preferred Shares
pursuant to the Securities Purchase Agreement (the "PURCHASERS") shall be
issued, upon conversion of Preferred Shares, shares of Common Stock in an amount
greater than the product of (i) the Exchange Cap amount multiplied by (ii) a
fraction, the numerator of which is the number of Preferred Shares issued to
such Purchaser pursuant to the Securities Purchase Agreement and the denominator
of which is the aggregate amount of all the Preferred Shares issued to the
Purchasers pursuant to the Securities Purchase Agreement (the "CAP ALLOCATION
AMOUNT"). In the event that any Purchaser shall sell or otherwise transfer any
of such Purchaser's Preferred Shares, the transferee shall be allocated a pro
rata portion of such Purchaser's Cap Allocation Amount. In the event that any
holder of Preferred Shares shall convert all of such holder's Preferred Shares
into a number of shares of Common Stock which, in the aggregate, is less than
such holder's Cap Allocation Amount, then the difference between such holder's
Cap Allocation Amount and the number of shares of Common Stock actually issued
to such holder shall be allocated to the respective Cap Allocation Amounts of
the remaining holders of Preferred Shares on a pro rata basis in proportion to
the number of Preferred Shares then held by each such holder.
(15) Vote to Change the Terms of or Issue Preferred Shares. The
-----------------------------------------------------
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
this Certificate of Designations or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares, or (b) any issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement.
(16) Lost or Stolen Certificates. Upon receipt by the Company of
---------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the holder to the Company and, in the case of mutilation, upon
surrender and cancellation of the Preferred Stock Certificate(s), the Company
shall execute and deliver new preferred stock certificate(s) of like tenor and
date; provided, however, the Company shall not be obligated to re-issue
preferred stock certificates if the holder contemporaneously requests the
Company to convert such Preferred Shares into Common Stock.
(17) Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Certificate of Designations
- -----------------
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as the
Preferred Shares are expressly described herein. Amounts set forth or provided
for herein with respect to payments, conversion and the like (and the
-32-
<PAGE>
computation thereof) shall be the amounts to be received by the holder thereof
and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of the Preferred Shares and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that,
in the event of any such breach or threatened breach, the holders of the
Preferred Shares shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.
(18) Specific Shall Not Limit General; Construction. No specific
----------------------------------------------
provision contained in this Certificate of Designations shall limit or modify
any more general provision contained herein. This Certificate of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the drafter
hereof.
(19) Failure or Indulgence Not Waiver. No failure or delay on the
--------------------------------
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
* * * * * *
-34-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations
to be signed by Gail K. Naughton, its President, as of July 9, 1998.
ADVANCED TISSUE SCIENCES, INC.
By: /s/ Gail K. Naughton
---------------------------
Gail K. Naughton
President
<PAGE>
EXHIBIT I
ADVANCED TISSUE SCIENCES, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series B Convertible Preferred
Stock, par value $.01 per share (the "PREFERRED SHARES"), of Advanced Tissue
Sciences, Inc., a DELAWARE corporation (the "COMPANY"), indicated below into
shares of Common Stock, par value $.01 per share (the "COMMON STOCK"), of the
Company, by tendering the stock certificate(s) representing the Preferred Shares
specified below as of the date specified below.
Date of Conversion: ____________________________________________________
Number of Preferred Shares to be converted: ____________________________
Stock certificate no(s). of Preferred Shares to be converted: __________
Please confirm the following information:
Conversion Price: _________________________________________________
Number of shares of Common Stock
to be issued: ______________________________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: ____________________________________________
____________________________________________
____________________________________________
____________________________________________
Facsimile Number: ____________________________________________
Authorization: ____________________________________________
By:_________________________________________
Title:______________________________________
Dated: ____________________________________________
Account Number:
(if electronic book entry transfer):_________________________________
Transaction Code Number
(if electronic book entry transfer):_________________________________
<PAGE>
ACKNOWLEDGEMENT
---------------
The Company hereby acknowledges this Conversion Notice and hereby directs
Chase Mellon Shareholders Services to issue the above indicated number of shares
of Common Stock in accordance with the Transfer Agent Instructions dated July
___, 1998 from the Company and acknowledged and agreed to by Chase Mellon
Shareholders Services.
ADVANCED TISSUE SCIENCES, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Exhibit 4.1
AMENDMENT NO. 2 TO INVESTMENT AGREEMENT
This Amendment No. 2 to Investment Agreement (this "Amendment") is
---------
made as of July 10, 1998 by and between Hatteras Partners, L.P., formerly known
as Ramius Hatteras Partners, L.P. (the "Investor") and Advanced Tissue Sciences,
--------
Inc., a corporation organized and existing under the laws of the State of
Delaware (the "Company").
-------
WHEREAS, the Investor and the Company are parties to that certain
Investment Agreement dated as of February 9, 1996, as amended by Amendment No. 1
to Investment Agreement dated as of January 26, 1998 (the "Investment
----------
Agreement") pursuant to which the Investor shall, upon the request of the
Company, invest up to $50,000,000 in the Company's Common Stock, par value $.01
per share (the "Common Stock"); and
------------
WHEREAS, pursuant to Section 1.2(a) of the Investment Agreement, the
Investment Agreement terminates on the earlier of February 9, 1999 or the
occurrence of certain specified events, and the Investor and the Company desire
to extend the term to February 9, 2000;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Defined Terms. Capitalized terms used but not defined herein
-------------
shall have the meanings ascribed to them in the Investment Agreement.
2. Amendment of Section 1.2(a) to Extend Term to February 9, 2000.
--------------------------------------------------------------
The first sentence of Section 1.2(a) of the Investment Agreement is hereby
restated to read as follows:
"At any time prior to the earlier of (i) February 9, 2000 or (ii) the
termination of this Agreement in accordance with Article V herein, the Company
may deliver written notices to the Investor (each such notice hereinafter
referred to as a "Put Notice") stating a dollar amount (the "Dollar Amount") of
---------- -------------
Common Stock which the Company intends to sell to the Investor five business
days following the date (the "Put Notice Date") on which the Put Notice is given
---------------
to the Investor by the Company in accordance with Section 6.4 herein."
3. Balance of Investment Agreement Unaffected. Except as amended
------------------------------------------
hereby, the Investment Agreement continues in full force and effect as
originally executed.
4. Entire Agreement. This Amendment, together with the Investment
----------------
Agreement, constitutes the entire agreement among the parties pertaining to the
subject matter hereof and completely supersedes all prior or contemporaneous
agreements, understandings, arrangements, commitments, negotiations and
discussions of the parties, whether oral or written (all of which shall have no
substantive significance or evidentiary effect). Each party acknowledges,
represents and warrants that it has not relied on any representation, agreement,
understanding, arrangement or commitment which has not been expressly set forth
in this Amendment and the Investment Agreement. Each party acknowledges,
represents and warrants that this Amendment, together with the Investment
Agreement, is fully integrated and not in need of parol evidence in order to
<PAGE>
reflect the intentions of the parties. The parties specifically intend that the
literal words of this Amendment and the Investment Agreement shall, alone,
conclusively determine all questions concerning the parties' intent.
5. Remedies for Failure to Purchase. For purposes of
--------------------------------
clarification, after February 9, 1999, the deliveries to be made by the Investor
to Company under Section 5(i), (ii) or (iii) of Amendment No. 1 to the
Investment Agreement shall no longer apply, and the warrants issued in
conjunction with the Investment Agreement and Amendment No. 1 to the Investment
Agreement to purchase 225,000 shares of Common Stock of the Company shall no
longer be subject to forfeiture.
6. Counterparts. This Amendment may be executed in one or more
------------
counterparts, which, when taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the date first
above written.
ADVANCED TISSUE SCIENCES, INC.
By: /s/ Arthur J. Benvenuto
--------------------------
Name: Arthur J. Benvenuto
Title: Chairman and
Chief Executive Officer
HATTERAS PARTNERS, L.P.
By: Bertram Capital, LLC
By: /s/ Jeffrey E. Devers
------------------------
Name: Jeffrey E. Devers
Title: Managing Member
Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of July 10, 1998,
by and among Advanced Tissue Sciences, Inc., a Delaware corporation, with
headquarters located at 10933 N. Torrey Pines Rd., La Jolla, California 92037
(the "COMPANY"), and the investors listed on the Schedule of Buyers attached
hereto (individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. The Company has authorized the following new series of its Preferred
Stock, par value $.01 per share (the "PREFERRED STOCK"): the Company's Series B
Convertible Preferred Stock, which shall be convertible into shares of the
Company's Common Stock, par value $.01 per share (the "COMMON STOCK") (as
converted, the "CONVERSION SHARES"), in accordance with the terms of the
Company's Certificate of Designations, Preferences and Rights of the Preferred
Shares, substantially in the form attached hereto as Exhibit A (the "CERTIFICATE
---------
OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially an aggregate of 500 of the Preferred Shares (the
"INITIAL PREFERRED SHARES") in the respective amounts set forth opposite each
Buyer's name on the Schedule of Buyers;
D. Subject to the terms and conditions set forth in this Agreement, the
Company will have the right to cause the Buyers to purchase up to an aggregate
of 500 Preferred Shares (pro rata based on the number of Initial Preferred
Shares each Buyer purchased in relation to the total number of Initial Preferred
Shares) (the "PUT PREFERRED SHARES") (the Initial Preferred Shares and the Put
Preferred Shares collectively are referred to in this Agreement as the
"PREFERRED SHARES");
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS
---------
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
<PAGE>
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
-------------------------------------
a. Purchase of Preferred Shares. Subject to satisfaction (or
----------------------------
waiver) of the conditions set forth in Sections 6(a) and 7(a), the Company shall
issue and sell to the Buyers and the Buyers severally shall purchase from the
Company an aggregate of 500 Initial Preferred Shares, in the respective amounts
set forth opposite each Buyer's name on the Schedule of Buyers (the "INITIAL
CLOSING"). Subject to satisfaction (or waiver) of the conditions set forth in
Sections 1(c), 1(d), 6(b) and 7(b), the Company may require that each Buyer
purchase, at up to two closings, if applicable, that number of additional
Preferred Shares equal to such Buyer's pro rata portion of up to an aggregate of
500 Preferred Shares (based on the number of Initial Preferred Shares each Buyer
purchased in relation to the total number of Initial Preferred Shares purchased
by the Buyers) (the "PUT CLOSINGS"). The Initial Closing and the Put Closings
collectively are referred to in this Agreement as the "CLOSINGS." The purchase
price (the "PURCHASE PRICE") of each Preferred Share at each of the Closings
shall be $50,000.
b. The Initial Closing Date. The date and time of the Initial
------------------------
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time, within
three (3) business days following the date hereof, subject to satisfaction (or
waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) (or such later date as is mutually agreed to by the Company and the
Buyers). The Initial Closing shall occur on the Initial Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693.
c. The Put Closing Dates. The date and time of each of the Put
---------------------
Closings (the "PUT CLOSING DATES") shall be 10:00 a.m. Central Time, on the date
specified in the Company's Put Share Notice (as defined below), subject to
satisfaction (or waiver) of the conditions to each of the Put Closings set forth
in Sections 6(b) and 7(b) and the conditions set forth in Section 1(d), (or such
later date as is mutually agreed to by the Company and the Buyers). During the
period (the "COMPANY PUT RIGHT PERIOD") beginning on the later of (i) January 1,
1999 and (ii) the date on which the Company receives the $15,000,000 milestone
payment from Smith & Nephew pursuant to the Dermagraft joint venture with Smith
& Nephew and publicly announces receipt of such payment (the "MILESTONE DATE")
and ending on the earlier of (x) April 15, 1999 and (y) the date which is 90
days after the Milestone Date, but subject to the requirements of Sections 6(b)
and 7(b) and satisfaction of the Put Notice Conditions (as defined in Section
1(d)), the Company may require each Buyer to purchase Put Preferred Shares by
delivering written notice to each of the Buyers (a "PUT SHARE NOTICE") six
business days (the "PUT SHARE NOTICE DATE") prior to the Put Closing Date set
forth in the Put Share Notice. The Put Share Notice shall set forth (i) each
Buyer's pro rata portion (based on the number of Initial Preferred Shares each
Buyer purchased in relation to the total number of Initial Preferred Shares
purchased by the Buyers) of the aggregate number of Put Preferred Shares (which
aggregate number shall not exceed 500 Preferred Shares, less any Put Preferred
Shares previously purchased) which the Company is requiring each Buyer to
-2-
<PAGE>
purchase at such Put Closing, (ii) the aggregate Purchase Price for each such
Buyer's Put Preferred Shares and (iii) the date selected by the Company for the
Put Closing Date, which Put Closing Date shall be on the sixth business day
after the Put Share Notice Date but not later than the date which is 90 days
after the Milestone Date. Each Put Closing shall occur on the Put Closing Date
at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600,
Chicago, Illinois 60661-3693. The Initial Closing Date and the Put Closing
Dates collectively are referred to in this Agreement as the "CLOSING DATES."
d. The Put Notice Conditions. Notwithstanding anything in this
-------------------------
agreement to the contrary, the Company shall not be entitled to deliver a Put
Share Notice and require the Buyers to purchase the Put Preferred Shares unless,
in addition to the satisfaction of the requirements of Sections 6(b) and 7(b),
all of the following conditions (the "PUT NOTICE CONDITIONS") are satisfied:
(i) during the period beginning 30 business days prior to the Put Closing Date
and ending on and including the Put Closing Date, the registration statement
(the "REGISTRATION STATEMENT") covering the resale of the Conversion Shares has
been declared effective by the SEC and at all times during such period has been
effective and available for the sale of no less than 150% of the sum of (A) the
number of Conversion Shares then issuable upon the conversion of all outstanding
Preferred Shares and (B) the number of Conversion Shares that are then held by
the Buyers and (C) any shares of Common Stock issued with respect to outstanding
Preferred Shares as a result of a stock dividend or otherwise; (ii) during the
period beginning on the 120th day following the Initial Closing Date and ending
on and including the Put Closing Date, the Common Stock is listed on The Nasdaq
National Market and has not been suspended from trading at any time during such
period, has not been voluntarily delisted at any time during such period, nor is
there any pending or threatened delisting or suspension including, but not
limited to, the Company not being in compliance with published listing
requirements (except for a voluntary suspension of not more than one day due to
a business announcement by the Company); (iii) no event constituting a Major
Transaction (as defined in Section 3(c) of the Certificate of Designations),
including an agreement to consummate a Major Transaction, or a Triggering Event
(as defined in Section 3(d) of the Certificate of Designations) shall have
occurred nor shall any pending event which would constitute a Major Transaction
have been publicly disclosed from the period beginning on and including the
Closing Date and ending on and including the Put Closing Date; (iv) on each day
during the period beginning on and including the date which is 20 business days
prior to the Put Closing Date and ending on and including the Put Closing Date,
the Average Daily Trading Price (as defined in the Certificate of Designations)
of the Common Stock shall not be less than the greater of (A) $4.50 and (B) 138%
of the Market Price (as defined in the Certificate of Designations) on the
second trading day immediately following the Initial Closing Date (subject to
adjustment for stock splits, stock dividends, reorganizations and combinations
and other similar events); (v) the Company shall have obtained shareholder
approval for the issuance of greater than 20% of its outstanding shares of
Common Stock, if necessary; (vi) during the period beginning on the Initial
Closing Date and ending on and including the Put Closing Date, the Company shall
have delivered Conversion Shares upon conversion of the Preferred Shares to the
Buyers on a timely basis as set forth in Section 2(f)(ii) of the Certificate of
Designations; (vii) there shall not have been more than one prior Put Share
-3-
<PAGE>
Notice delivered to the Buyers; (viii) the number of Put Preferred Shares to be
sold by the Company at such Put Closing is not less than 100 Preferred Shares
and (ix) on the Put Closing Date the Registration Statement is effective and
available for the sale of no less than 150% of the number of Conversion Shares
then issuable upon conversion of the Put Preferred Shares to be issued by the
Company.
e. Form of Payment. On each of the Closing Dates, (i) each Buyer
---------------
shall pay the Purchase Price to the Company for the Preferred Shares to be
issued and sold to such Buyer at the respective Closing, by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions, and (ii) the Company shall deliver to each Buyer, stock
certificates (in the denominations as such Buyer shall request) (the "STOCK
CERTIFICATES") representing such number of the Preferred Shares which such Buyer
is then purchasing (as indicated opposite such Buyer's name on the Schedule of
Buyers), duly executed on behalf of the Company and registered in the name of
such Buyer or its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose. Such Buyer (i) is acquiring the Preferred
------------------
Shares and (ii) upon conversion of the Preferred Shares, will acquire the
Conversion Shares then issuable (the Preferred Shares, the Conversion Shares and
any shares of Common Stock issued by the Company as a dividend on the Preferred
Shares (the "DIVIDEND SHARES") collectively are referred to herein as the
"SECURITIES"), for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
--------------------------
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. Such Buyer understands that the
----------------------
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such Securities.
d. Information. Such Buyer and its advisors, if any, have been
-----------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
-4-
<PAGE>
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer's right to rely on the Company's representations and
warranties contained in Section 3 below. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
e. No Governmental Review. Such Buyer understands that no United
----------------------
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. Such Buyer understands that except as
------------------
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act (or a successor rule thereto)("RULE 144"); (ii) any sale of the Securities
made in reliance on Rule 144 may be made only in accordance with the terms of
Rule 144 and further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
g. Legends. Such Buyer understands that the certificates or other
-------
instruments representing the Preferred Shares and, until such time as the sale
of the Conversion Shares and the Dividend Shares, have been registered under the
1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares and the Dividend Shares, except
as set forth below, shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
-5-
<PAGE>
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS,
OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if (i) such Securities are registered for sale under the 1933 Act, (ii)
in connection with a sale transaction, such holder provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of such Securities may be made without registration
under the 1933 Act, or (iii) such holder provides the Company with reasonable
assurances that such Securities can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold. Each Buyer acknowledges, covenants and agrees to
sell the Securities represented by a certificate(s) from which the legend has
been removed, only pursuant to (i) a registration statement effective under the
1933 Act, or (ii) advice of counsel that such sale is exempt from registration
required by Section 5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement and the
--------------------------
Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of such Buyer and each is a valid and binding agreement
of such Buyer enforceable against such Buyer in accordance with its respective
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that jurisdiction
---------
specified on the Schedule of Buyers.
j. Short Sale Limitation. During the 30 days immediately
---------------------
preceding the Initial Closing Date, neither such Buyer nor its affiliates has
engaged, directly or indirectly, in any transaction constituting a "short sale"
(as defined in Rule 3b-3 of the Securities Exchange Act of 1934, as amended (the
"1934 ACT")) or similar hedge of the Common Stock.
k. Section 9 of the Securities Exchange Act. So long as a Buyer
----------------------------------------
holds any Preferred Shares, such Buyer will comply with the provisions of
Section 9 of the 1934 Act, and the rules promulgated thereunder with respect to
transactions involving the Securities.
-6-
<PAGE>
l. No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Registration Rights Agreement by such Buyer and the
consummation by such Buyer of the transactions contemplated hereby and thereby
will not result in a violation of the certificate of incorporation, by-laws or
other documents of organization of such Buyer.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its
------------------------------
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in Schedule 3(a)) are
-------------
corporations or other legal entities duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are incorporated, and
have the requisite corporate power and authorization to own their properties and
to carry on their business as now being conducted. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL
ADVERSE EFFECT" means any material adverse effect on the business, properties,
assets, operations, results of operations or financial condition of the Company
and its Subsidiaries, if any, taken as a whole, or on the transactions
contemplated hereby or by the agreements and instruments to be entered into in
connection herewith, or on the authority or ability of the Company to perform
its obligations under the Transaction Documents (as defined below) or the
Certificate of Designations.
b. Authorization; Enforcement; Compliance with Other Instruments.
-------------------------------------------------------------
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement, and the
Irrevocable Transfer Agent Instructions (as defined in Section 5) and each of
the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents and the
Certificate of Designations by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including without limitation the
issuance of the Preferred Shares and the reservation for issuance and the
issuance of the Conversion Shares issuable upon conversion thereof, any Dividend
Shares with respect thereto and any shares of Common Stock issued as payment of
Registration Delay Payments (as defined in the Registration Rights Agreement),
have been duly authorized by the Company's Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders, (iii) the Transaction Documents have been duly executed and
delivered by the Company, (iv) the Transaction Documents constitute the valid
and binding obligations of the Company enforceable against the Company in
-7-
<PAGE>
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies, and (v)
prior to each of the Closing Dates, the Certificate of Designations will have
been filed with the Secretary of State of the State of Delaware and will be in
full force and effect, enforceable against the Company in accordance with its
terms.
c. Capitalization. As of the date hereof, the authorized capital
--------------
stock of the Company consists of (i) 100,000,000 shares of Common Stock, of
which as of the date hereof 39,324,173 shares were issued and outstanding,
8,251,676 shares were issuable and reserved for issuance pursuant to the
Company's stock option and purchase plans and warrants and no shares are
issuable and reserved for issuance pursuant to securities (other than the
Preferred Shares) exercisable or exchangeable for, or convertible into, shares
of Common Stock and (ii) 1,000,000 shares of Preferred Stock, of which as of the
date hereof, no shares were issued and outstanding. All of such outstanding
shares have been, or upon issuance will be, validly issued and are fully paid
and nonassessable. Except as disclosed in Schedule 3(c), (i) no shares of the
-------------
Company's capital stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company; (ii)
there are no outstanding debt securities; (iii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries; (iv) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the 1933 Act (except the Registration
Rights Agreement); (v) there are no outstanding securities of the Company or any
of its Subsidiaries which contain any redemption or similar provisions, and
there are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (vi) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities as described in this Agreement; and
(vii) the Company does not have any stock appreciation rights or "phantom stock"
plans or agreements or any similar plan or agreement. The Company has furnished
to the Buyers true and correct copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE
OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof
(the "BY-LAWS"), and the terms of all securities convertible into or exercisable
for Common Stock and the material rights of the holders thereof in respect
thereto.
-8-
PAGE>
d. Issuance of Securities. The Preferred Shares are duly
----------------------
authorized and, upon issuance in accordance with the terms hereof, shall be (i)
validly issued, fully paid and non-assessable, (ii) free from all taxes, liens
and charges with respect to the issue thereof and (iii) entitled to the rights
and preferences set forth in the Certificate of Designations. At least
10,000,000 shares of Common Stock (subject to adjustment pursuant to the
Company's covenant set forth in Section 4(f) below) have been duly authorized
and reserved for issuance upon conversion of the Preferred Shares. Upon
conversion in accordance with the Certificate of Designations, the Conversion
Shares will be, and upon payment thereof, the Dividend Shares and any shares of
Common Stock issued as payment of Registration Delay Payments will be, validly
issued, duly listed, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock. The issuance by the Company
of the Securities is exempt from registration under the 1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the
------------ -------------
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares and the Dividend Shares) will
not (i) result in a violation of the Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
Preferred Stock of the Company or the By-laws; (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or instrument
to which the Company or any of its Subsidiaries is a party; or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and regulations
of the principal market or exchange on which the Common Stock is traded or
listed) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected. Except as disclosed in Schedule 3(e), neither the Company nor its
-------------
Subsidiaries is in violation of any term of or in default under (i) its
Certificate of Incorporation, any Certificate of Designations, Preferences and
Rights of any outstanding series of Preferred Stock or By-laws or their
organizational charter or by-laws, respectively, or (ii) any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries the consequences of which would have a Material Adverse Effect.
Except as specifically contemplated by this Agreement and as required under the
1933 Act, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self-regulatory agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by the
Transaction Documents or the Certificate of Designations in accordance with the
terms hereof or thereof. Except as disclosed in Schedule 3(e), all consents,
-------------
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. Except as disclosed in Schedule 3(e), the Company
-------------
and its Subsidiaries are unaware of any facts or circumstances which might give
rise to any of the foregoing. The business of the Company and its Subsidiaries
is not being conducted, and shall not be conducted, in violation of any law,
-9-
<PAGE>
ordinance or regulation of any governmental entity the consequences of which
would have a Material Adverse Effect. The Company is not in violation of the
listing requirements of The Nasdaq National Market as in effect on the date
hereof and on each of the Closing Dates and, except as disclosed in Schedule
--------
3(e), is not aware of any facts which would reasonably lead to delisting or
- ----
suspension of the Common Stock by The Nasdaq National Market in the foreseeable
future (including, but not limited to, the Company not being in compliance with
published listing requirements).
f. SEC Documents; Financial Statements. Since December 31, 1996,
-----------------------------------
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act, (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the "SEC DOCUMENTS"). The Company has delivered to the Buyers or
their respective representatives true and complete copies of the SEC Documents.
As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance
with generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading. Neither the Company nor any of its Subsidiaries or
any of their officers, directors, employees or agents have provided the Buyers
with any material, nonpublic information.
g. Absence of Certain Changes. Except as disclosed in the SEC
--------------------------
Documents or Schedule 3(g), since December 31, 1997 there has been no material
-------------
adverse change and no material adverse development in the business, properties,
operations, financial condition, liabilities or results of operations of the
Company or its Subsidiaries. The Company has not taken any steps, and does not
currently expect to take any steps, to seek protection pursuant to any
-10-
<PAGE>
bankruptcy law nor does the Company or any of its Subsidiaries have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings.
h. Absence of Litigation. There is no action, suit, proceeding,
---------------------
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its Subsidiaries, threatened against or affecting the Company,
the Common Stock or any of the Company's Subsidiaries or any of the Company's or
the Company's Subsidiaries' officers or directors in their capacities as such,
except as expressly set forth in Schedule 3(h).
-------------
i. Acknowledgment Regarding Buyers' Purchase of Preferred Shares.
-------------------------------------------------------------
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby. The Company further acknowledges
that each Buyer is not acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
Certificate of Designations and the transactions contemplated thereby and any
advice given by any of the Buyers or any of their respective representatives or
agents in connection with the Transaction Documents and the Certificate of
Designations and the transactions contemplated thereby is merely incidental to
such Buyer's purchase of the Securities. The Company further represents to each
Buyer that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.
j. No Undisclosed Events, Liabilities, Developments or
---------------------------------------------------
Circumstances. No event, liability, development or circumstance has occurred or
- -------------
exists with respect to the Company or its Subsidiaries or their respective
business, properties, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a currently
effective registration statement on Form S-3 filed with the SEC and which has
not been publicly disclosed.
k. No General Solicitation. Neither the Company, nor any of its
-----------------------
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of The Nasdaq Stock Market, Inc., nor will the
Company or any of its Subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
-11-
<PAGE>
m. Employee Relations. Neither the Company nor any of its
------------------
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. Neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that relations with
their employees are good. No executive officer (as defined in Rule 501(f) of
the 1933 Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer's employment with the Company.
n. Intellectual Property Rights. The Company and its Subsidiaries
----------------------------
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted except where the failure to own or possess such
rights or licenses would not have a Material Adverse Effect. Except as set
forth on Schedule 3(n), none of the Company's trademarks, trade names, service
-------------
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, government authorizations, trade
secrets or other intellectual property rights have expired or terminated, or are
expected to expire or terminate within two years from the date of this Agreement
where the result of such expiration or termination would have, individually or
in the aggregate, a Material Adverse Effect. The Company and its Subsidiaries
do not have any knowledge of any infringement by the Company or its Subsidiaries
of trademarks, trade name rights, patents, patent rights, copyrights,
inventions, licenses, service names, service marks, service mark registrations,
trade secrets or other similar rights of others, and, except as set forth on
Schedule 3(n), there is no claim, action or proceeding being made or brought
- -------------
against, or to the Company's knowledge, being threatened against, the Company or
its Subsidiaries regarding trademarks, trade name rights, patents, patent
rights, inventions, copyrights, licenses, service names, service marks, service
mark registrations, trade secrets or other infringement; and the Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing except as would not have a Material Adverse Effect. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties.
o. Environmental Laws. The Company and its Subsidiaries (i) are
------------------
in compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"("ENVIRONMENTAL LAWS"("ENVIRONMENTAL
LAWS"ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in com-pliance with all terms and conditions
of any such permit, license or approval, except in each case where the failure
to comply or receive, as the case may be, would not have a Material Adverse
Effect.
-12-
<PAGE>
p. Title. Except as set forth in Schedule 3(p), the Company and
----- -------------
its Subsidiaries have good and marketable title in fee simple to all real
property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each
case free and clear of all liens, encumbrances and defects except such as are
described in Schedule 3(p) or such as do not materially affect the value of such
-------------
property and do not interfere with the use made and proposed to be made of such
property by the Company or any of its Subsidiaries. Any real property and
facilities held under lease by the Company or any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its Subsidiaries.
q. Insurance. The Company and each of its Subsidiaries are
---------
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole.
r. Regulatory Permits. Except as set forth on Schedule 3(r), the
------------------ -------------
Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses except where the
failure to possess such certificates, authorizations or permits would not have a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
s. Internal Accounting Controls. The Company and each of its
----------------------------
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. No Materially Adverse Restrictions, Etc. Except as disclosed
----------------------------------------
in the SEC Documents, neither the Company nor any of its Subsidiaries is subject
to any charter, corporate or other legal restriction, or any judgment, decree,
order, rule or regulation which in the judgment of the Company's officers has or
-13-
<PAGE>
is expected in the future to have a Material Adverse Effect. Except as
disclosed in the SEC Documents, neither the Company nor any of its Subsidiaries
is a party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
u. Tax Status. Except as set forth on Schedule 3(u), the Company
---------- -------------
and each of its Subsidiaries has made or filed all federal and state income and
all other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its Subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
v. Certain Transactions. Except as set forth in writing to the
--------------------
Buyers or in the SEC Documents filed at least ten days prior to the date hereof
and except for arm's length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties and other than the grant of stock
options disclosed on Schedule 3(c), none of the officers, directors, or
-------------
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
w. Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
will increase in certain circumstances. The Company further acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with this Agreement and the Certificate of Designations is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.
x. No Other Agreements. The Company has not, directly or
-------------------
indirectly, made any agreements with any Buyers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents.
y. Application of Takeover Protections. The Company and its board
-----------------------------------
of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
-14-
<PAGE>
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company's Certificate of Incorporation, the
Rights Agreement, dated as of January 6, 1995, between the Company and Chemical
Trust Company of California or the laws of the state of its incorporation which
is or could become applicable to the Buyers as a result of the transactions
contemplated by this Agreement, including, without limitation, the Company's
issuance of the Securities and the Buyer's ownership of the Securities.
4. COVENANTS.
---------
a. Best Efforts. Each party shall use its best efforts timely to
------------
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to
------
the Securities as required under Regulation D and to provide a copy thereof to
each Buyer promptly after such filing. The Company shall, on or before each of
the Closing Dates, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date. The Company shall make all filings and reports relating to
the offer and sale of the Securities required under applicable securities or
"Blue Sky" laws of the states of the United States following each of the Closing
Dates.
c. Reporting Status. Until the earlier of (i) the date which is
----------------
one year after the date as of which the Investors (as that term is defined in
the Registration Rights Agreement) may sell all of the Conversion Shares without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto), or (ii) the date on which (A) the Investors shall have sold all the
Conversion Shares and the Dividend Shares, if any, and (B) none of the Preferred
Shares is outstanding (the "REGISTRATION PERIOD"), the Company shall file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the
---------------
sale of the Preferred Shares for substantially the same purposes and in
substantially the same amounts as indicated in Schedule 4(d).
-------------
e. Financial Information. The Company agrees to send the
---------------------
following to each Investor (as that term is defined in the Registration Rights
Agreement) during the Registration Period: (i) within two (2) business days
after the filing thereof with the SEC, a copy of its Annual Reports on Form
10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and
any registration statements or amendments (other than on Form S-8) filed
-15-
<PAGE>
pursuant to the 1933 Act; (ii) on the same day as the release thereof, facsimile
copies of all press releases issued by the Company or any of its Subsidiaries
and (iii) copies of any notices and other information made available or given to
the stockholders of the Company generally, contemporaneously with the making
available or giving thereof to the stockholders.
f. Reservation of Shares. The Company shall take all action
---------------------
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 150% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares (without regard to any
limitations on conversions).
g. Restrictions on Sales. No Buyer nor any affiliates of such
---------------------
Buyer shall be entitled, so long as neither a Triggering Event (as defined in
the Certificate of Designations) nor a Major Transaction (as defined in the
Certificate of Designations) has occurred, to sell or agree to sell any shares
of Common Stock during the five consecutive trading days immediately following
(i) the date which is the fourth trading day immediately preceding the Initial
Closing Date and (ii) the Put Share Notice Date.
h. Listing. The Company shall promptly secure the listing of all
-------
of the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
The Nasdaq National Market), if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents and the Certificate of Designations. The Company shall
maintain the Common Stock's authorization for listing on The Nasdaq National
Market or The New York Stock Exchange, Inc. ("NYSE"). Neither the Company nor
any of its Subsidiaries shall take any action which may result in the delisting
or suspension of the Common Stock on The Nasdaq National Market or NYSE (other
than to switch listings from The National Nasdaq Market to NYSE) including, but
not limited to, not being in compliance with published listing requirements.
The Company shall promptly provide to each Buyer copies of any notices it
receives from The Nasdaq National Market or NYSE regarding the continued
eligibility of the Common Stock for listing on such automated quotation system
or securities exchange. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(h).
Notwithstanding the foregoing, the Company shall not be required to list a
number of shares of Common Stock for conversion of the Preferred Shares in
excess of the Exchange Cap, if applicable.
i. Expenses. Subject to Section 9(l) below, following the Initial
--------
Closing, the Company shall reimburse the Buyers for the Buyers' expenses
(including attorneys fees and expenses) in connection with negotiating and
preparing the Transaction Documents and consummating the Transactions
contemplated thereby up to an aggregate of $50,000.
-16-
<PAGE>
j. Transactions With Affiliates. So long as any Preferred Shares
----------------------------
are outstanding the Company shall not, and shall cause each of its Subsidiaries
not to, enter into, amend, modify or supplement, or permit any Subsidiary to
enter into, amend, modify or supplement, any material agreement, transaction,
commitment or arrangement with any of its or any Subsidiary's officers,
directors, person who were officers or directors at any time during the previous
two years, stockholders who beneficially own 5% or more of the Common Stock, or
affiliates or with any individual related by blood, marriage or adoption to any
such individual or with any entity in which any such entity or individual owns a
5% or more beneficial interest (each a "RELATED PARTY"), except for (a)
customary employment arrangements and benefit programs on reasonable terms, (b)
any agreement, transaction, commitment or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such Related Party, or (c) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company. For purposes hereof, any director who is also an
officer of the Company or any Subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "AFFILIATE" for purposes hereof means, with respect
to any person or entity, another person or entity that, directly or indirectly,
(i) has a 5% or more equity interest in that person or entity, (ii) has 5% or
more common ownership with that person or entity, (iii) controls that person or
entity, or (iv) shares common control with that person or entity. "CONTROL" or
"CONTROLS" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
k. Filing of Form 8-K. On or before the fifth business day
------------------
following each of the Closing Dates, the Company shall file a Form 8-K with the
SEC describing the terms of the transaction contemplated by the Transaction
Documents and consummated at such Closing, in each case in the form required by
the 1934 Act.
l. Proxy Statement. Upon the earlier of (i) June 30, 1999 and
---------------
(ii) the date after the 120th day following the Closing Date on which the
average of the Average Daily Trading Prices (as defined in the Certificate of
Designations) for the five consecutive trading days ending on such date of the
Common Stock is equal to or less than $3.75 (the earlier of such dates being
referred to herein as the "PROXY STATEMENT TRIGGER DATE"), the Company shall
provide each stockholder entitled to vote at the next meeting of stockholders of
the Company, which meeting shall not be later than 60 days after the Proxy
Statement Trigger Date (the "STOCKHOLDER MEETING DEADLINE"), a proxy statement,
which has been previously reviewed by the Buyers and a counsel of their choice,
soliciting each such stockholder's affirmative vote at such stockholder meeting
for approval of the Company's issuance of all of the Securities as described in
this Agreement, and the Company shall use its best efforts to solicit its
stockholders' approval of such issuance of the Securities and cause the Board of
Directors of the Company to recommend to the stockholders that they approve such
proposal. If such stockholder meeting is not the Company's annual stockholder
meeting, such proxy statement shall not seek approval of any matters other than
the approval described in the preceding sentence and the election of directors
and increasing the number of authorized shares of Common Stock. If the Company
fails to hold a meeting of its stockholders by the Stockholder Meeting Deadline,
then, as partial relief (which remedy shall not be exclusive of any other
-17-
<PAGE>
remedies available at law or in equity), the Company shall pay to each holder of
Preferred Shares an amount in cash per Preferred Share equal to the product of
(i) $10,000; multiplied by (ii) .02; multiplied by (iii) the quotient of (x) the
number of days after the Stockholder Meeting Deadline that a meeting of the
Company's stockholders is not held, divided by (y) 30. The Company shall make
the payments referred to in the immediately preceding sentence within five days
of the earlier of (I) the holding of the meeting of the Company's stockholders,
the failure of which resulted in the requirement to make such payments, and (II)
the last day of each 30-day period beginning on the Stockholder Meeting
Deadline. In the event the Company fails to make such payments in a timely
manner, such payments shall bear interest at the rate of 1.5% per month (pro
rated for partial months) until paid in full.
m. Underwriting Lock-Up Agreements. Subject to the terms and
-------------------------------
conditions set forth below, at any time during the period beginning on and
including the Initial Closing Date and ending on the date which is two years
after the Initial Closing Date, the Company may require that all, but not less
than all, of the holders of the Preferred Shares agree to sign a "lock-up"
agreement with the underwriters of a public offering of the Common Stock
pursuant to which the holders would agree not to sell any Conversion Shares
issued to the holders pursuant to a Conversion Notice delivered to the Company
during the period beginning on the date designated by the Company, which date
shall be not less than 20 days after the holders' receipt of such notice, and
ending on the date which is the earlier of the closing date of such offering and
60 days after the beginning of the lock-up period as designated by the Company
(the "UNDERWRITING LOCK-UP PERIOD"). The Company shall exercise this right by
delivering written notice (the "LOCK-UP REQUEST NOTICE") of such request to all
of the holders of the Preferred Shares then outstanding at least 20 days prior
to the date on which the Underwriting Lock-Up Period will begin, but in no event
prior to the filing of the registration statement for such proposed offering.
The Lock-up Request Notice shall state (i) that the underwriters of such
offering have requested that the holders of the Preferred Shares enter into
"lock-up" agreements, (ii) the date on which the Underwriting Lock-Up Period
will begin and (iii) the name of the managing underwriters of the proposed
offering. Notwithstanding the foregoing, the Company shall not be entitled to
require the holders to enter into lock-up agreements unless (A) the Underwriting
Lock-Up Period is not more than 60 days, (B) the Underwriting Lock-Up Period
shall terminate immediately upon (I) the termination or abandonment or
indefinite delay of the underwritten offering, (II) the announcement of a
pending or consummated Major Transaction or (III) the occurrence of a Triggering
Event, (C) the managing underwriters for such proposed offering are included on
the Schedule of Underwriters attached to this Agreement, (D) all officers and
directors of the Company enter into substantially similar or more restrictive
"lock-up" agreements, (E) the preliminary prospectus for such underwritten
public offering reflects a price per share to the public of not less than 120%
of the Initial Market Price, in effect on the date hereof (subject to adjustment
as a result of any stock split, stock dividend, recapitalization, reverse stock
split, consolidation, exchange or similar event) and aggregate gross proceeds to
the Company of at least $20,000,000, (F) during the period beginning on the date
which is ten business days prior to the filing of the registration statement for
the proposed offering and ending on and including the first day of the
Underwriting Lock-Up Period, (I) the Registration Statement has been effective
-18-
<PAGE>
and available for sale of all the Registrable Securities, (II) there has been no
stop order or other regulatory prohibition on trading of the Common Stock and
(III) the Average Daily Trading Price on each day during such period is at least
120% of the Initial Market Price on the date hereof (subject to adjustment as a
result of any stock split, stock dividend, recapitalization, reverse stock
split, consolidation, exchange or similar event), (G) there has been no other
Underwriting Lock-Up Period in the 365 days prior to the date of the Lock-Up
Request Notice, (H) there has been no Grace Period (as defined in the
Registration Rights Agreement) during the period beginning on and including the
date which is ten business days prior to the filing of the registration
statement for the proposed offering and ending on and including the first day of
the Underwriting Lock-Up Period, (I) the Company is in compliance with the
Certificate of Designations and (J) at least 30% of the Preferred Shares
originally issued (including the Preferred Shares issued at the Put Option
Closing, if any) remain outstanding. In the event the Company requires an
Underwriting Lock-Up Period, the Mandatory Conversion Date (as defined in the
Certificate of Designations) shall be delayed two days for each day in the
Underwriting Lock-Up Period as provided in Section 2(g) of the Certificate of
Designations. If the Company delivers a Lock-Up Request Notice and the
underwritten public offering is not consummated within 90 days of the first day
of the Underwriting Lock-Up Period, then the Company may require an Underwriting
Lock-Up Period pursuant to this Section 4(m) on only one other occasion.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
The Company shall issue irrevocable instructions to its transfer agent
in the form attached as Exhibit D hereto, and any subsequent transfer agent, to
---------
issue certificates, registered in the name of each Buyer or its respective
nominee(s), for the Conversion Shares in such amounts as specified from time to
time by each Buyer to the Company upon conversion of the Preferred Shares and
upon payment by the Company of dividends on the Preferred Shares in Dividend
Shares (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration
of the Conversion Shares and the Dividend Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares and the Dividend Shares, prior to registration of the
Conversion Shares and the Dividend Shares under the 1933 Act) will be given by
the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreements
set forth in Section 2(g) to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with an opinion of counsel, in generally acceptable form, that
registration of a resale by such Buyer of any of such Securities is not required
under the 1933 Act, the Company shall permit the transfer, and, in the case of
the Conversion Shares and the Dividend Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denominations
as specified by such Buyer and without any restrictive legends. The Company
acknowledges that a breach by it of its obligations hereunder will cause
-19-
<PAGE>
irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
a. Initial Closing Date. The obligation of the Company hereunder
--------------------
to issue and sell the Initial Preferred Shares to each Buyer at the Initial
Closing is subject to the satisfaction, at or before the Initial Closing Date,
of each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction
Documents and delivered the same to the Company.
(ii) The Certificate of Designations shall have been filed with
the Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares being purchased by such Buyer at the Initial
Closing by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer shall be
true and correct as of the date when made and as of the Initial Closing
Date as though made at that time (except for representations and warranties
that speak as of a specific date), and such Buyer shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or
complied with by such Buyer at or prior to the Initial Closing Date.
b. Put Closing Date. The obligation of the Company hereunder to
----------------
issue and sell the Put Preferred Shares to each Buyer at each of the Put
Closings is subject to the satisfaction, at or before the Put Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase
Price for the Put Preferred Shares being purchased by such Buyer at the
Put Closing by wire transfer of immediately available funds pursuant to
the wire instructions provided by the Company.
-20-
<PAGE>
(ii) The representations and warranties of such Buyer shall be
true and correct as of the date when made and as of the Put Closing Date
as though made at that time (except for representations and warranties
that speak as of a specific date), and such Buyer shall have performed,
satisfied and complied in all material respects with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Buyer at or prior to the
Put Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
-------------------------------------------------
a. Initial Closing Date. The obligation of each Buyer hereunder
--------------------
to purchase the Initial Preferred Shares at the Initial Closing is subject to
the satisfaction, at or before the Initial Closing Date, of each of the
following conditions, provided that these conditions are for each Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Certificate of Designations, shall have been filed with
the Secretary of State of the State of Delaware, and a copy thereof
certified by such Secretary of State shall have been delivered to such
Buyer.
(iii) The Common Stock shall be authorized for quotation on The
Nasdaq National Market or listing on NYSE, trading in the Common Stock
issuable upon conversion of the Initial Preferred Shares on The Nasdaq
National Market or NYSE shall not have been suspended by the SEC, The
Nasdaq Stock Market, Inc. or NYSE and all of the Conversion Shares
issuable upon conversion of the Initial Preferred Shares to be sold at
the Initial Closing and the Dividend Shares issuable with respect thereto
shall be listed upon The Nasdaq National Market or NYSE.
Notwithstanding the foregoing, the Company shall not be required to list
a number of shares of Common Stock for conversion of the Preferred Shares
in excess of the Exchange Cap, if applicable.
(iv) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Initial Closing
Date as though made at that time (except for representations and warranties
that speak as of a specific date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents or Certificate of Designations to
be performed, satisfied or complied with by the Company at or prior to
the Initial Closing Date. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the
Initial Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by such Buyer including, without
limitation, an update as of the Initial Closing Date regarding the
representation contained in Section 3(c) above.
-21-
<PAGE>
(v) Such Buyer shall have received the opinion of Brobeck Phleger
& Harrison LLP dated as of the Initial Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit C attached hereto.
---------
(vi) The Company shall have executed and delivered to such Buyer
the Stock Certificates (in such denominations as such Buyer shall request)
for the Initial Preferred Shares being purchased by such Buyer at the
Initial Closing.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "RESOLUTIONS").
(viii) As of the Initial Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares, at least
10,000,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged
---------
in writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 20
days of the Initial Closing.
(xi) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) certified copies of
its Certificate of Incorporation and (C) By-laws, each as in effect at the
Initial Closing.
(xii) The Company shall have delivered to such Buyer a certified
copy of its Certificate of Incorporation as certified by the Secretary of
State of the State of Delaware within 20 days of the Initial Closing Date.
(xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by the Transaction
Documents as such Buyer or its counsel may reasonably request.
-22-
<PAGE>
b. Put Closing Dates. The obligation of each Buyer hereunder to
-----------------
purchase the Put Preferred Shares at each of the Put Closings is subject to the
satisfaction, at or before each of the Put Closing Dates, of each of the
following conditions, provided that these conditions are for each Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have complied with the requirements of
Section 1(c) and all of the Put Notice Conditions set forth in Section 1(d)
shall have been satisfied.
(ii) The Certificate of Designations, shall be in full force and
effect and shall not have been amended since the Initial Closing Date
(except for any amendments approved by such Buyer), and a copy thereof
certified by the Secretary of State of the State of Delaware shall have
been delivered to such Buyer.
(iii) The Common Stock shall be authorized for quotation on The
Nasdaq National Market or listing on NYSE, trading in the Common Stock
issuable upon conversion of the Put Preferred Shares on The Nasdaq
National Market or NYSE shall not have been suspended by the SEC, The
Nasdaq Stock Market, Inc. or NYSE and all of the Conversion Shares
issuable upon conversion of the Put Preferred Shares to be sold at the
Put Closing and the Dividend Shares issuable with respect thereto shall
be listed upon The Nasdaq National Market or NYSE.
(iv) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Put Closing Date as
though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents or the Certificate of Designations
to be performed, satisfied or complied with by the Company at or prior to
the Put Closing Date (other than those set forth in Section 4(e) of this
Agreement). The Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions
required by Section 4(e) of this Agreement. Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Put Closing Date, to the foregoing effect and
as to such other matters as may be reasonably requested by such Buyer
including, without limitation, an update as of the Put Closing Date
regarding the representation contained in Section 3(c) above.
(v) Such Buyer shall have received the opinion of Brobeck Phleger
& Harrison LLP dated as of the Put Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit C attached hereto.
---------
(vi) The Company shall have executed and delivered to such Buyer
the Stock Certificates (in such denominations as such Buyer shall request)
for the Put Preferred Shares being purchased by such Buyer at the Put
Closing.
-23-
<PAGE>
(vii) The Board of Directors of the Company shall have adopted,
and shall not have amended, the Resolutions.
(viii) As of the Put Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Preferred Shares, a number of shares of
Common Stock equal to at least 150% of the number of shares of Common
Stock which would be issuable upon conversion in full of the then
outstanding Preferred Shares (without regard to any limitations on
conversions), including for such purposes the Put Preferred Shares to be
issued at such Put Closing.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in the state of such corporation's state of incorporation issued
by the Secretary of State of such state of incorporation as of a date
within 10 days of the Put Closing Date.
(xi) The Company shall have delivered to such Buyer a certified
copy of its Certificate of Incorporation as certified by the Secretary of
State of the State of Delaware within ten days of the Put Closing Date.
(xii) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) certified copies of
its Certificate of Incorporation and (C) By-laws, each as in effect at the
Put Closing.
(xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
---------------
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the Company shall defend,
protect, indemnify and hold harmless each Buyer and each other holder of the
Securities and all of their stockholders, officers, directors, employees and
direct or indirect investors and any of the forgoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
-24-
<PAGE>
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or the Certificate of Designations or any
other certificate, instrument or document contemplated hereby or thereby, (b)
any breach of any covenant, agreement or obligation of the Company contained in
the Transaction Documents or the Certificate of Designations or any other
certificate, instrument or document contemplated hereby or thereby, or (c) any
cause of action, suit or claim brought or made against such Indemnitee and
arising out of or resulting from the execution, delivery, performance or
enforcement of the Transaction Documents or the Certificate of Designations (d)
any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, excluding
losses resulting solely from a decline in the market value of the Company's
securities or (e) the status of such Buyer or holder of the Securities as an
investor in the Company. Notwithstanding the foregoing, Indemnified Liabilities
shall not include any liability of an Indemnitee arising solely out of such
Indemnitee's willful misconduct or fraudulent action(s). To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
Except as otherwise set forth herein, the mechanics and procedures with respect
to the rights and obligations under this Section 8 shall be the same as those
set forth in Sections 6(a) and (d) of the Registration Rights Agreement,
including, without limitation, those procedures with respect to the settlement
of claims and the Company's rights to assume the defense of claims.
9. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law. This Agreement shall be governed by and
-------------
interpreted in accordance with the laws of the State of New York without regard
to the principles of conflict of laws. Each party hereby irrevocably submits to
the non-exclusive jurisdiction of the state and federal courts sitting in the
City of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
-25-
<PAGE>
b. Counterparts. This Agreement may be executed in two or more
------------
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for convenience
--------
of reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
----------------------------
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
No such amendment shall be effective to the extent that it applies to less than
all of the holders of the Preferred Shares then outstanding. No consideration
shall be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents or the
Certificate of Designations unless the same consideration also is offered to all
of the parties to the Transaction Documents or holders of the Preferred Shares,
as the case may be.
f. Notices. Any notices, consents, waivers or other
-------
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one (1) business day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
-26-
<PAGE>
If to the Company:
Advance Tissue Sciences, Inc.
10933 N. Torrey Pines Rd.
La Jolla, California 92037
Telephone: (619) 450-5730
Facsimile: (619) 450-5732
Attention: Vice President, Finance
and Administration
With a copy to:
Brobeck Phleger & Harrison, LLP
38 Technology Drive
Irvine, California 92618
Telephone: (949) 790-6300
Facsimile: (949) 790-6301
Attention: Richard A. Fink
If to the Transfer Agent:
Chase Mellon Shareholder Services
400 South Hope Street, 4th Floor
Los Angeles, California 90071
Telephone: (213) 553-9718
Facsimile: (213) 553-9735
Attention: Martha Mijango
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Preferred Shares. The Company shall
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the holders of two-thirds (2/3) of the Preferred Shares
-27-
<PAGE>
then outstanding including by merger or consolidation except pursuant to a Major
Transaction with respect to which the Company is in compliance with Sections
2(d)(iv) and 3 of the Certificate of Designations. A Buyer may assign some or
all of its rights hereunder without the consent of the Company; provided,
however, that any such assignment shall not release such Buyer from its
obligations hereunder unless such obligations are assumed by such assignee and
the Company has consented to such assignment and assumption. Notwithstanding
anything to the contrary contained in the Transaction Documents, Buyer shall be
entitled to pledge the Securities in connection with a bona fide margin account.
h. No Third Party Beneficiaries. This Agreement is intended for
----------------------------
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section
--------
9(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set forth in Section 8, shall survive each
of the Closings. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right to
---------
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).
k. Further Assurances. Each party shall do and perform, or cause
------------------
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Initial Closing shall not
-----------
have occurred with respect to a Buyer on or before three (3) business days from
the date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the
non-breaching Buyers for expenses up to the amount described in Section 4(i)
above, provided that no Buyer has failed to satisfy the conditions set forth in
Section 7.
-28-
<PAGE>
m. Placement Agent. Each Buyer, severally and not jointly,
---------------
acknowledges that it has not engaged any placement agent in connection with the
purchase of the Preferred Shares. Each Buyer, severally and not jointly, shall
be responsible for the payment of any fees or commissions of placement agents or
brokers engaged by such Buyer relating to or arising out of the transactions
contemplated hereby. Each Buyer, severally and not jointly, shall pay, and hold
the Company harmless against, any liability, loss or expense (including, without
limitation, attorneys' fees and out of pocket expenses) arising in connection
with any such claim. The Company acknowledges that it has not engaged any
placement agent in connection with the sale of the Preferred Shares. The
Company shall be responsible for the payment of any placement agent's fees or
brokers commissions relating to or arising out of the transactions contemplated
hereby (other than for which any Buyer is responsible pursuant to this Section
9(m)). The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, attorneys' fees and
out of pocket expenses) arising in connection with any such claim (other than
for which any Buyer is responsible pursuant to this Section 9(m)).
n. No Strict Construction. The language used in this Agreement
----------------------
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. Remedies. Each Buyer and each holder of Preferred Shares or
--------
Conversion Shares shall have all rights and remedies set forth in the
Transaction Documents and the Certificate of Designation and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any person having any rights under any provision of this Agreement shall
be entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a
-----------------
payment or payments to the Buyers hereunder or pursuant to the Registration
Rights Agreement or the Certificate of Designations or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
* * * * * *
-29-
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
ADVANCED TISSUE SCIENCES, INC. THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.
Its: General Partner
By: /s/ Arthur J. Benvenuto
----------------------------
Name: Arthur J. Benvenuto By: /s/ James F. O'Brien, Jr.
Its: Chairman of the Board and --------------------------------
Chief Executive Officer Name: James F. O'Brien, Jr.
Its: President
HERACLES FUND
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
--------------------------------
Name: James F. O'Brien, Jr.
Its: President
HALIFAX FUND, L.P.
By: The Palladin Group, L.P.
Its: Attorney-in-Fact
By: /s/ Robert Chender
--------------------------------
Name: Robert Chender
Title: Managing Director
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
RAPHAEL, L.P.
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: /s/ Michael L. Gordon
---------------------------------
Name: Michael L. Gordon
Its: Managing Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
WINGATE CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
FISHER CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
CCG INVESTMENT FUND LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
CCG CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
MIDWAY CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
NUMBER OF
INITIAL INVESTOR'S
INVESTOR ADDRESS PREFERRED REPRESENTATIVES'ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER SHARES AND FACSIMILE NUMBER
- ------------- --------------------------------------- --------- -------------------------------------
<S> <C> <C> <C>
Themis Partners L.P. c/o Promethean Investment Group, L.L.C. 40 Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Residence: New York
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Heracles Fund Bank of Bermuda (Cayman) Limited 100 Promethean Investment Group, L.L.C.
P.O. Box 513 40 West 57th Street, Suite 1520
3rd Floor British American Center New York, New York 10019
Dr. Roy's Drive Attn: James F. O'Brien, Jr.
Georgetown, Grand Cayman Facsimile: 212-698-0505
Cayman Island, BWI
Attn: Allen J. Bernardo Katten Muchin & Zavis
Facsimile: 809-949-7802 525 West Monroe, Suite 1600
Residence: Cayman Islands Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Halifax Fund, L.P. c/o Citco Fund Services (Cayman Islands) Ltd. 80 The Palladin Group L.P.
Corporate Centre, West Bay Road As Investment Advisor
P.O. Box 31106 SMB 40 West 57th Street
Grand Cayman, Cayman Islands 15th Floor
Facsimile: 345-949-3877 New York, NY 10019
Attn: Kevin Gerlitz
Residence: Cayman Islands Facsimile: 212-698-0563
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 98 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor 245 Park Avenue - 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Residence: New York
Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 10 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor 245 Park Avenue - 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Residence: New York
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 24 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor 245 Park Avenue - 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Residence: New York
<PAGE>
GAM Arbitrage c/o Angelo, Gordon & Co., L.P. 5 Angelo, Gordon & Co., L.P.
Investments, Inc. 245 Park Avenue - 26th Floor 245 Park Avenue - 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Residence: New York
AG Super Fund c/o Angelo, Gordon & Co., L.P. 3 Angelo, Gordon & Co., L.P.
International, L.P. 245 Park Avenue - 26th Floor 245 Park Avenue - 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Residence: New York
Wingate Capital Ltd. c/o Citadel Investment Group, L.L.C. 41 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 338-7803 Telephone: (312) 902-5200
Residence: Cayman Islands
Fisher Capital Ltd. c/o Citadel Investment Group, L.L.C. 77 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 338-7803 Telephone: (312) 902-5200
Residence: Cayman Islands
CCG Investment c/o Citadel Investment Group, L.L.C. 9 Katten Muchin & Zavis
Fund Ltd. 225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 338-7803 Telephone: (312) 902-5200
Residence: Cayman Islands
CCG Capital Ltd. c/o Citadel Investment Group, L.L.C. 9 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 338-7803 Telephone: (312) 902-5200
Residence: Cayman Islands
<PAGE>
Midway Capital Ltd. c/o Citadel Investment Group, L.L.C. 4 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 338-7803 Telephone: (312) 902-5200
Residence: Cayman Islands
</TABLE>
<PAGE>
SCHEDULES
---------
Schedule of Buyers
Schedule of Underwriters
Schedule 3(a) - Subsidiaries
Schedule 3(c) - Capitalization
Schedule 3(e) - Conflicts
Schedule 3(g) - Material Changes
Schedule 3(h) - Litigation
Schedule 3(n) - Intellectual Property
Schedule 3(p) - Liens
Schedule 3(r) - Regulatory Permits
Schedule 3(u) - Tax Status
Schedule 4(d) - Use of Proceeds
EXHIBITS
--------
Exhibit A - Form of Certificate of Designations, Preferences and rights
of the Preferred Shares
Exhibit B - Form of Registration Rights Agreement
Exhibit C - Form of Company Counsel Opinion
Exhibit D - Form of Irrevocable Transfer Agent Instructions
<PAGE>
SCHEDULE OF UNDERWRITERS
------------------------
ABN AMRO
A.G. Edwards & Sons Inc.
Bancamerica Robertson
BT Alex Brown
Cowen & Co.
Cruttendon Roth Incorporated
CS First Boston
Dain Bosworth Incorporated
Dean Witter
Deutsche Morgan Grenfell
Donaldson Lufkin & Jenrette
Fahnestock & Co. Inc.
Furman Selz Incorporated
Genesis Merchant Securities
Goldman Sachs & Co.
Hambrecht & Quist
Invermed Associates
Jeffries & Company, Inc.
J.P. Morgan & Company
Lehman Brothers
Merrill Lynch
Montgomery Securities
Morgan Stanley Co., Inc.
Needham & Company, Inc.
Oppenheimer & Co.
Pacific Growth Equities Inc.
Paine Webber
Piper Jaffray Inc.
Prudential Bache Securities
Punk Ziegel & Knoll
Raymond James & Associates, Inc.
Salomon Brothers
SBC Warburg/Dillon Read
Smith Barney
SoundView Financial Group, Inc.
Sutro & Co. Incorporated
UBS Securities, Inc.
Unterberg Harris
Vector Securities
Volpe, Welty & Company
Wedbush Morgan Securities
Exhibit 10.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of July 10,
1998, by and among Advanced Tissue Sciences, Inc., a Delaware corporation, with
headquarters located at 10933 N. Torrey Pines Rd., La Jolla, California 92037
(the "COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively,
the "BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among
the parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers shares of the
Company's Series B Convertible Preferred Stock (the "PREFERRED SHARES"), which
will be convertible into shares of the Company's common stock, par value $.01
per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of Series B Convertible Preferred Stock (the "CERTIFICATE
OF DESIGNATIONS"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
-----------
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer and any transferee or assignee thereof
to whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
<PAGE>
d. "REGISTRABLE SECURITIES" means the Conversion Shares issued or
issuable upon conversion of the Preferred Shares (without regard to any
restrictions on conversion), any Dividend Shares (as defined in the Certificate
of Designations), any shares of Common Stock issued as payment of Registration
Delay Payments (as defined in Section 2(h)) and any shares of capital stock
issued or issuable with respect to the Conversion Shares or the Preferred Shares
as a result of any stock split, stock dividend, recapitalization, exchange or
similar event or otherwise, regardless of any limitation on conversions of
Preferred Shares; provided, Registrable Shares shall not include securities
previously sold pursuant to the Registration Statement.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
------------
a. Mandatory Registration. The Company shall prepare, and, as
----------------------
soon as practicable but in no event later than 60 days after the date of
issuance of the relevant Preferred Shares, file with the SEC a Registration
Statement or Registration Statements (as is necessary) on Form S-3 (or, if such
form is unavailable for such a registration, on such other form as is available
for such a registration, subject to the consent of the Investors holding a
majority of the Registrable Securities and the provisions of Section 2(c), which
consent will not be unreasonably withheld), covering the resale of all of the
Registrable Securities, which Registration Statement(s) shall state that, in
accordance with Rule 416 promulgated under the 1933 Act, such Registration
Statement(s) also covers such indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Preferred Shares (i)
to prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of changes in the Conversion Price or Conversion
Rate of the Preferred Shares in accordance with the terms thereof. Such
Registration Statement shall initially register for resale at least 7,850,000
shares of Common Stock, subject to adjustment as provided in Section 3(b). Such
registered shares of Common Stock shall be allocated among the Investors pro
rata based on the total number of Registrable Securities issued or issuable as
of each date that a Registration Statement, as amended, relating to the resale
of the Registrable Securities is declared effective by the SEC. The Company
shall use its best efforts to have the Registration Statement(s) declared
effective by the SEC as soon as practicable, but in no event later than 120 days
after the issuance of the relevant Preferred Shares.
b. Allocation of Registrable Securities. The initial number of
------------------------------------
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time of such establishment or increase, as the case may be.
In the event an Investor shall sell or otherwise transfer any of such holder's
Registrable Securities, each transferee shall be allocated a pro rata portion of
the then remaining number of Registrable Securities included in such
-2-
<PAGE>
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any person or entity
which does not hold any Registrable Securities shall be allocated to the
remaining Investors, pro rata based on the number of Registrable Securities then
held by such Investors. For the avoidance of doubt, the number of Registrable
Securities held by any Investor shall be determined as if all Preferred Shares
then outstanding were converted into or exercised for Registrable Securities.
c. Counsel. Subject to Section 5 hereof, in connection with any
-------
offering pursuant to this Section 2, the Investors shall have the right to
select one legal counsel to administer their interest in the offering. The
Company shall reasonably cooperate with any such counsel.
d. Piggy-Back Registrations. If at any time prior to the
------------------------
expiration of the Registration Period (as hereinafter defined) the number of
shares of Common Stock available for sale under the Registration Statement is
insufficient to cover all of the Registrable Securities and the Company proposes
to file with the SEC a Registration Statement relating to an offering for its
own account or the account of others under the 1933 Act of any of its securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans) the Company shall promptly send to each Investor
who is entitled to registration rights under this Section 2(d) written notice of
the Company's intention to file a Registration Statement and of such Investor's
rights under this Section 2(d) and, if within twenty (20) days after receipt of
such notice, such Investor shall so request in writing, the Company shall
include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, subject to the priorities
set forth in Section 2(e). No right to registration of Registrable Securities
under this Section 2(d) shall be construed to limit any registration required
under Section 2(a). The obligations of the Company under this Section 2(d) may
be waived by Investors holding a majority of the Registrable Securities. If an
offering in connection with which an Investor is entitled to registration under
this Section 2(d) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Common Stock included in such underwritten offering.
e. Priority in Piggy-Back Registration Rights in connection with
-------------------------------------------------------------
Registrations for Company Account. If the registration referred to in Section
- ---------------------------------
2(d) is to be an underwritten public offering and the managing underwriter(s)
advise the Company in writing, that in their reasonable good faith opinion,
marketing or other factors dictate that a limitation on the number of shares of
Common Stock which may be included in the Registration Statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
-3-
<PAGE>
securities entitled to inclusion of their securities in the Registration
Statement by reason of demand registration rights, and (3) third, the securities
requested to be registered by the Investors and other holders of securities
entitled to participate in the registration, as of the date hereof, drawn from
them pro rata based on the number each has requested to be included in such
registration.
f. Eligibility for Form S-3. The Company represents, warrants and
------------------------
covenants that on and after the date hereof it meets and will meet the
requirements for the use of Form S-3 for registration of the sale by the
Investors of the Registrable Securities and the Company has filed and shall file
all reports required to be filed by the Company with the SEC in a timely manner
so as to obtain and maintain such eligibility for the use of Form S-3. In the
event that Form S-3 is not available for sale by the Investors of the
Registrable Securities, then the Company (i) with the consent of the Investors
holding a majority of the Registrable Securities pursuant to Section 2(a), shall
register the sale of the Registrable Securities on another appropriate form and
(ii) the Company shall undertake to register the Registrable Securities on Form
S-3 as soon as such form is available, provided that the Company shall maintain
the effectiveness of the Registration Statement then in effect until such time
as a Registration Statement on Form S-3 covering the Registrable Securities has
been declared effective by the SEC.
g. Rule 416. The Company and the Investors each acknowledge that
--------
an indeterminate number of Registrable Securities shall be registered pursuant
to Rule 416 under the 1933 Act so as to include in such Registration Statement
any and all Registrable Securities which may become issuable (i) to prevent
dilution resulting from stock splits, stock dividends or similar transactions
and (ii) if permitted by law, by reason of reductions in the Conversion Price
(as defined in the Certificate of Designations) of the Preferred Shares in
accordance with the terms thereof, including, without limitation, the terms
which may cause the Conversion Price to decrease as the price of the Common
Stock decreases (collectively, the "RULE 416 SECURITIES"). In this regard, the
Company agrees to use all reasonable efforts to ensure that the maximum number
of Registrable Securities which may be registered pursuant to Rule 416 under the
1933 Act are covered by the Registration Statement and, absent guidance from the
SEC or other definitive authority to the contrary, the Company shall use all
reasonable efforts to affirmatively support and to not take any position adverse
to the position that the Registration Statement filed hereunder covers all of
the Rule 416 Securities. If the Company determines that the Registration
Statement filed hereunder does not cover all of the Rule 416 Securities, the
Company shall immediately provide to each Investor written notice setting forth
the basis for the Company's position and the authority therefor.
h. Effect of Failure to Obtain and Maintain Effectiveness of
---------------------------------------------------------
Registration Statement. If the Registration Statement is not (i) filed within
- ----------------------
60 days of the Initial Issuance Date (as defined in the Certificate of
Designations) (the "SCHEDULED FILING DATE"), (ii) declared effective by the SEC
on or before 120 days after the Initial Issuance Date (the "SCHEDULED EFFECTIVE
DATE"), or (iii) if after the Registration Statement has been declared effective
-4-
<PAGE>
by the SEC, sales cannot be made (other than on any days during any Allowable
Grace Period (as defined in Section 3(u))) pursuant to the Registration
Statement (whether because of a failure to keep the Registration Statement
effective, to disclose such information as is necessary for sales to be made
pursuant to the Registration Statement, to register sufficient shares of Common
Stock or otherwise), then, as partial relief for the damages to any holder by
reason of any such delay in or reduction of its ability to sell any of the
Registrable Securities (which remedy shall not be exclusive of any other
remedies available at law or in equity), the Company shall pay to each holder of
Preferred Shares an amount in cash per Preferred Share held equal to the product
of (i) $50,000 multiplied by (ii) the sum of (A) .02, if the Registration
Statement is not filed by the Scheduled Filing Date, plus (B) .02, if the
Registration Statement is not declared effective by the SEC by the Scheduled
Effective Date, plus (C) the product of (I) .00067 multiplied by (II) the sum of
(x) the number of days after the Scheduled Filing Date that the relevant
Registration Statement has not been filed with the SEC, (y) the number of days
after the Scheduled Effective Date and prior to the date that the relevant
Registration Statement has not been declared effective by the SEC, and (z) the
number of days (excluding days during an Allowable Grace Period (as defined in
Section 3(u))) that sales cannot be made pursuant to the Registration Statement
after the Registration Statement has been declared effective. The payments to
which a holder shall be entitled pursuant to this Section 2(h) are referred to
herein as "REGISTRATION DELAY PAYMENTS." Registration Delay Payments shall be
paid within five business days of the earlier of (A) the first day of the month
following the occurrence of the event resulting in the requirement to make
Registration Delay Payments, or (B) the date on which the event resulting in the
requirement to make Registration Delay Payments is cured; provided, however, the
Company shall not be required to pay any amounts under (A) or (B) more than
once. In the event the Company fails to make Registration Delay Payments in a
timely manner, such Registration Delay Payments shall bear interest at the rate
of 1.5% per month (prorated for partial months) until paid in full. If the
Company fails to pay the Registration Delay Payments, including any interest
thereon, within 15 business days of the applicable payment date, then the holder
entitled to such payments shall have the right at any time, so long as the
Company continues to fail to make such payments, to require the Company, upon
written notice, to immediately issue, in lieu of the Registration Delay
Payments, including any interest thereon, the number of shares of Common Stock
equal to the quotient of (X) the sum of the Registration Delay Payments and all
interest accrued thereon divided by (Y) the lowest Average Daily Trading Price
(as defined in the Certificate of Designations) on any day during the period
beginning on and including the date the Registration Delay Payments were due and
payable and ending on and including the date the holder delivers written notice
to the Company of its election to receive shares of Common Stock in lieu of the
Registration Delay Payments.
-5-
<PAGE>
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(d) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the sixtieth (60th) day after the date of issuance of the relevant Preferred
Shares for the registration of Registrable Securities pursuant to Section 2(a))
and use its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than 120 days after the issuance of the relevant
Preferred Shares for the registration of Registrable Securities), and keep such
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities without restriction pursuant to Rule 144(k) promulgated
under the 1933 Act (or successor thereto) or (ii) the date on which (A) the
Investors shall have sold all the Registrable Securities and (B) none of the
Preferred Shares is outstanding (the "REGISTRATION PERIOD"), which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the event the
number of shares available under a Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the Registrable Securities, the
Company shall amend such Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as
to cover all of the Registrable Securities, in each case, as soon as
practicable, but in any event within fifteen (15) days after the necessity
therefor arises (based on the market price of the Common Stock and other
relevant factors on which the Company reasonably elects to rely). The Company
shall use it best efforts to cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if at any time the number of Registrable
-6-
<PAGE>
Securities issued or issuable upon conversion of the Preferred Shares is greater
than the quotient determined by dividing (i) the number of shares of Common
Stock available for resale under such Registration Statement by (ii) 1.5. For
purposes of the calculation set forth in the foregoing sentence, any
restrictions on the convertibility of the Preferred Shares or the Conversion
Price shall be disregarded and such calculation shall assume that the Preferred
Shares are then convertible into shares of Common Stock at the then prevailing
Conversion Rate (as defined in the Company's Certificate of Designations).
c. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel
without charge (i) promptly after the same is prepared and filed with the SEC at
least one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regards to such
Registration Statement(s), any correspondence by or on behalf of the Company to
the SEC or the staff of the SEC and any correspondence from the SEC or the staff
of the SEC to the Company or its representatives (but in no event, without the
prior written consent of the Investor, shall the Company disclose to such
Investor material non-public information), (ii) upon the effectiveness of any
Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents, including copies of any preliminary or final prospectus, as such
Investor may reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.
d. The Company shall use its reasonable efforts to (i) register
and qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as any Investor reasonably requests, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threatening of any proceeding for such
purpose.
e. Intentionally Omitted.
-7-
<PAGE>
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor in writing of the happening of any event
as a result of which the prospectus included in a Registration Statement, as
then in effect, includes an untrue statement of a material fact or omission to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Investor (or such other
number of copies as such Investor may reasonably request). The Company shall
also promptly notify each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to each Investor by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, and (iii) of the Company's
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance
of any stop order or other suspension of effectiveness of a Registration
Statement, or the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction and, if such an order or suspension is
issued, to obtain the withdrawal of such order or suspension at the earliest
possible moment and to notify each Investor who holds Registrable Securities
being sold (and, in the event of an underwritten offering, the managing
underwriters) of the issuance of such order and the resolution thereof or its
receipt of actual notice of the initiation or threat of any proceeding for such
purpose.
h. The Company shall permit each Investor and a single firm of
counsel, initially Katten Muchin & Zavis or such other counsel as thereafter
designated as selling stockholders' counsel by the Investors who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement and all amendments and supplements thereto at least seven
(7) business days prior to their filing with the SEC, and not file any document
in a form to which such counsel reasonably objects; provided no Registration
Delay Payments shall accrue for any delay caused solely by such counsel's
unreasonable objections. The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement or any amendment
or supplement thereto without the prior approval of such counsel, which consent
shall not be unreasonably withheld.
i. At the request of any Investor and at such Investor's expense,
the Company shall use its best efforts to furnish to such Investor, on the date
of the effectiveness of the Registration Statement and thereafter from time to
time on such dates as an Investor may reasonably request (i) a letter, dated
such date, from the Company's independent certified public accountants in form
and substance as is customarily given by independent certified public
-8-
<PAGE>
accountants to underwriters in an underwritten public offering, and (ii) an
opinion, dated as of such date, of counsel representing the Company for purposes
of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering, addressed to the Investors.
j. The Company shall make available for inspection by (i) any
Investor and (ii) one firm of attorneys and one firm of accountants or other
agents retained by the Investors, (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable such Inspector to exercise its due
diligence responsibility, if any, and cause the Company's officers, directors
and employees to supply all information which any Inspector may reasonably
request for purposes of such due diligence; provided, however, that each
Inspector shall hold in strict confidence and shall not make any disclosure
(except to an Investor) or use of any Record or other information which the
Company determines in good faith to be confidential, and of which determination
the Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
has knowledge. The Company shall not be required to disclose any confidential
information in such Records to an Inspector unless and until such Inspector
shall have entered into a confidentiality agreement with the Company with
respect thereto, substantially in the form of this Section 3(j). Each Investor
agrees that it shall, upon learning that disclosure of such Records is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
-9-
<PAGE>
l. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on The Nasdaq National Market and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(l).
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the Investors may reasonably request and registered in such names as the
Investors may request.
n. Intentionally Omitted.
o. The Company shall provide a transfer agent and registrar for
all such Registrable Securities not later than the effective date of such
Registration Statement.
p. If requested by the Investor, the Company shall (i) immediately
incorporate in a prospectus supplement or post-effective amendment such
information as the Investors agree should be included therein relating to the
sale and distribution of Registrable Securities, including, without limitation,
information with respect to the offering of the Registrable Securities to be
sold in such offering; (ii) make all required filings of such prospectus
supplement or post-effective amendment as soon as notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and
(iii) supplement or make amendments to any Registration Statement or the related
prospectus if requested by a shareholder of such Registrable Securities.
q. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities, provided
that the Company shall have no obligation to seek registration or approval with
governmental agencies or authorities outside the United States.
r. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
-10-
<PAGE>
s. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
t. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
---------
u. Notwithstanding anything to the contrary in Section 3(f), at
any time after the Registration Statement has been declared effective, the
Company may delay the disclosure of material non-public information concerning
the Company the disclosure of which at the time is not, in the good faith
opinion of the Board of Directors of the Company and its counsel, in the best
interest of the Company and, in the opinion of counsel to the Company, otherwise
required (a "GRACE PERIOD"); provided, that the Company shall promptly (i)
notify the Investors in writing of the existence of material non-public
information giving rise to a Grace Period and the date on which the Grace Period
will begin, and (ii) notify the Investors in writing of the date on which the
Grace Period ends; and, provided further, that no grace period shall exceed 15
days and during any consecutive 365 day period, such Grace Period shall not
exceed 45 calendar days in the aggregate (an "ALLOWABLE GRACE PERIOD"). For
purposes of determining the length of a Grace Period above, the Grace Period
shall begin on and include the date the Investors receive the notice referred to
in clause (i) above and shall end on and include the date the Investors receive
the notice referred to in clause (ii) above. The provisions of Sections 2(h)
and 3(g) hereof shall not be applicable during the period of any Allowable Grace
Period. Upon expiration of the Allowable Grace Period, the Company shall again
be bound by the first sentence of Section 3(f) with respect to the information
giving rise thereto. In the event of any Grace Period, the Maturity Date (as
defined in the Certificate of Designations) shall be delayed one and one-half
(1-1/2) days for each day in the Grace Period as provided in Section 2(g) of
the Certificate of Designations.
-11-
<PAGE>
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
a. At least seven (7) business days prior to the first anticipated
filing date of a Registration Statement, the Company shall notify each Investor
in writing of the information the Company requires from each such Investor if
such Investor elects to have any of such Investor's Registrable Securities
included in such Registration Statement. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request. At least ten Business Days prior to the first filing date
of the Registration Statement, the Company shall notify each Investor if any of
such Investor's Registrable Securities are eligible for inclusion in the
Registration Statement and such notice shall include a request for information.
If at least three Business Days prior to the filing date the Company has not
received the information requested from an Investor (a "Non-Responsive
Investor") then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive Investor promptly
after such Non-Responsive Investor provides the required information. If
available, the Company shall include such Non-Responsive Investor's Registrable
Securities in the Registration Statement by amending such Registration Statement
to include such securities. No Registration Delay Penalties shall accrue to a
Non-Responsive Investor during the period such Investor is delinquent in
providing information to the Company. If the Company has to file an additional
Registration Statement to register the Registrable Securities of a
Non-Responsive Investor due solely to such Investor's failure to provide
information reasonably requested by the Company, such Investor shall pay the
reasonable out-of-pocket expenses actually incurred by the Company in connection
with such Registration Statement other than filing fees.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. As promptly as practicable after becoming aware of such event,
each Investor shall notify the Company in writing of the happening of any event
as a result of which the information provided in writing by such Investor to the
Company expressly for use in the Prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
-12-
<PAGE>
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f).
e. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such Investor agrees to
enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations (only with respect to violations
which occur in reliance upon and in conformity with information furnished in
writing to the Company by such Investor expressly for use in the Registration
Statement for such underwritten public offering), with the managing underwriter
of such offering and take such other actions as are reasonably required in order
to expedite or facilitate the disposition of the Registrable Securities, unless
such Investor notifies the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from such Registration
Statement. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions.
5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and reasonable fees and
disbursements of one counsel for the Investors, shall be paid by the Company.
-13-
<PAGE>
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents of,
and each Person, if any, who controls, any Investor within the meaning of the
1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT")
(each, an "INDEMNIFIED PERSON"), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, attorneys' fees,
amounts paid in settlement or expenses, joint or several, (collectively,
"CLAIMS") incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("BLUE SKY FILING"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which the statements therein were
made, not misleading, (ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, or (iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"VIOLATIONS"). Subject to the restrictions set forth in Section 6(d) with
respect to the number of legal counsel, the Company shall reimburse each
Indemnified Person, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto; (ii) with respect
to any preliminary prospectus, shall not inure to the benefit of any such person
from whom the person asserting any such Claim purchased the Registrable
Securities that are the subject thereof (or to the benefit of any person
controlling such person) if the untrue statement or omission of a material fact
contained in the preliminary prospectus was corrected in the prospectus, as then
amended or supplemented, if such prospectus was timely made available by the
Company pursuant to Section 3(c), and the Indemnified Person was promptly
advised in writing not to use the incorrect prospectus prior to the use giving
-14-
<PAGE>
rise to a violation and such Indemnified Person, notwithstanding such advice,
used it; (iii) shall not be available to the extent such Claim is based on a
failure of the Investor to deliver or to cause to be delivered the prospectus
made available by the Company; and (iv) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer or disposition of the Registrable Securities by
the Investors.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, the Company, each of its directors,
each of its officers who signs the Registration Statement, each Person, if any,
who controls the Company within the meaning of the 1933 Act or the 1934 Act
each, an "INDEMNIFIED PARTY"), against any Claim or Indemnified Damages to which
any of them may become subject, under the 1933 Act, the 1934 Act or otherwise,
insofar as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(d), such Investor will
reimburse each Indemnified Party promptly as such expenses are incurred and are
due and payable any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) and the agreement
with respect to contribution contained in Section 7 shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor; provided, further, however, that the Investor
shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
c. Intentionally Omitted.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
-15-
<PAGE>
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The indemnifying
party shall pay for only one separate legal counsel for the Indemnified Persons
or the Indemnified Parties, as applicable, and such counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates, if the Investors are
entitled to indemnification hereunder, or the Company, if the Company is
entitled to indemnification hereunder, as applicable. The Indemnified Party or
Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall, without the consent of the Indemnified Party or
Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition
to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
-16-
<PAGE>
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of fraudulent misrepresentation; and (iii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
--------------------------
With a view to making available to the Investors the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1934 Act so long as the Company
remains subject to such requirements (it being understood that nothing herein
shall limit the Company's obligations under Section 4(c) of the Securities
Purchase Agreement) and the filing of such reports and other documents is
required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 and the
1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the investors to
sell such securities pursuant to Rule 144 without registration.
-17-
<PAGE>
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
--------------------------------
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold two-thirds (?) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any person to amend or
consent to a waiver or modification of any provision of this Agreement unless
the same consideration also is offered to all of the parties to this Agreement.
11. MISCELLANEOUS.
-------------
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
-18-
<PAGE>
b. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically or electronically generated and kept on file by
the sending party); (iii) one (1) business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Advanced Tissue Sciences, Inc.
10933 N. Torrey Pines Rd.
La Jolla, California 92037
Telephone: (619) 450-5730
Facsimile: (619) 450-5732
Attention: Vice President, Finance and Administration
With a copy to:
Brobeck Phleger & Harrison, LLP
38 Technology Drive
Irvine, California 92618
Telephone: (949) 790-6300
Facsimile: (949) 790-6301
Attention: Richard A. Fink
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers attached hereto, with copies to such Buyer's counsel as set forth
on the Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York without regard to the
principles of conflict of laws. Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
-19-
<PAGE>
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
e. This Agreement and the Securities Purchase Agreement constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein.
This Agreement and the Securities Purchase Agreement supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a
party, may be delivered to the other party hereto by facsimile transmission of a
copy of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the
Investors pursuant to this Agreement shall be made, unless otherwise specified
in this Agreement, by Investors holding a majority of the Registrable
Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
-20-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
ADVANCED TISSUE SCIENCES, INC. THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.
Its: General Partner
By: /s/ Arthur J. Benvenuto
---------------------------
Name: Arthur J. Benvenuto
Its: Chairman of the Board and By: /s/ James F. O'Brien, Jr.
Chief Executive Officer --------------------------------
Name: James F. O'Brien, Jr.
Its: President
HERACLES FUND
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
--------------------------------
Name: James F. O'Brien, Jr.
Its: President
HALIFAX FUND, L.P.
By: The Palladin Group, L.P.
Its: Attorney-in-Fact
By: /s/ Robert Chender
--------------------------------
Name: Robert Chender
Title: Managing Director
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
RAPHAEL, L.P.
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Managing Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
--------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
WINGATE CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
FISHER CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
CCG INVESTMENT FUND LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
CCG CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
MIDWAY CAPITAL LTD.
By: /s/ Benjamin E. Kopin
--------------------------------
Name: Benjamin E. Kopin
Its: Secretary
<PAGE>
SCHEDULE OF BUYERS
INVESTOR'S
INVESTOR ADDRESS REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER
- ------------- -------------------- --------------------
Themis Partners L.P. c/o Promethean Investment Promethean Investment
Group, L.L.C. Group, L.L.C.
40 West 57th Street, 40 West 57th Street,
Suite 1520 Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois
60661-3693
Attn: Robert J. Brantman,
Esq.
Facsimile: 312-902-1061
Heracles Fund Bank of Bermuda (Cayman) Promethean Investment
Limited Group, L.L.C.
P.O. Box 513 40 West 57th Street,
3rd Floor British American Suite 1520
Center New York, New York 10019
Dr. Roy's Drive Attn: James F. O'Brien, Jr.
Georgetown, Grand Cayman Facsimile: 212-698-0505
Cayman Island, BWI
Attn: Allen J. Bernardo Katten Muchin & Zavis
Facsimile: 809-949-7802 525 West Monroe, Suite 1600
Chicago, Illinois
60661-3693
Attn: Robert J. Brantman,
Esq.
Facsimile: 312-902-1061
Halifax Fund, L.P. c/o Citco Fund Services The Palladin Group, L.P.
(Cayman Islands) Ltd. As Investment Advisor
Corporate Centre, 40 West 57th Street
West Bay Road 15th Floor
P.O. Box 31106 SMB New York, NY 10019
Grand Cayman, Cayman Islands Attn: Kevin Gerlits
Facsimile: 345-949-3877 Facsimile: 212-698-0563
Leonardo, L.P. c/o Angelo, Gordon & Co., Angelo, Gordon & Co.,
L.P. L.P.
245 Park Avenue 245 Park Avenue
26th Floor 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Raphael, L.P. c/o Angelo, Gordon & Co., Angelo, Gordon & Co.,
L.P. L.P.
245 Park Avenue 245 Park Avenue
26th Floor 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., Angelo, Gordon & Co.,
L.P. L.P.
245 Park Avenue 245 Park Avenue
26th Floor 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
<PAGE>
GAM Arbitrage c/o Angelo, Gordon & Co., Angelo, Gordon & Co.,
Investments, Inc. L.P. L.P.
245 Park Avenue 245 Park Avenue
26th Floor 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
AG Super Fund c/o Angelo, Gordon & Co., Angelo, Gordon & Co.,
International, L.P. L.P. L.P.
245 Park Avenue 245 Park Avenue
26th Floor 26th Floor
New York, New York 10167 New York, New York 10167
Attn: Gary Wolf Attn: Gary Wolf
Facsimile: 212-867-6449 Facsimile: 212-867-6449
Wingate Capital Ltd. c/o Citadel Investment Katten Muchin & Zavis
Group, L.L.C. 525 W. Monroe Street
225 West Washington Street Chicago, Illinois
Chicago, Illinois 60606 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J.
Facsimile: (312) 338-0780 Brantman, Esq.
Telephone: (312) 338-7803 Facsimile: (312) 902-1061
Telephone: (312) 902-5200
Fisher Capital Ltd. c/o Citadel Investment Katten Muchin & Zavis
Group, L.L.C. 525 W. Monroe Street
225 West Washington Street Chicago, Illinois
Chicago, Illinois 60606 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J.
Facsimile: (312) 338-0780 Brantman, Esq.
Telephone: (312) 338-7803 Facsimile: (312) 902-1061
Telephone: (312) 902-5200
CCG Investment Fund c/o Citadel Investment Katten Muchin & Zavis
Ltd. Group, L.L.C. 525 W. Monroe Street
225 West Washington Street Chicago, Illinois
Chicago, Illinois 60606 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J.
Facsimile: (312) 338-0780 Brantman, Esq.
Telephone: (312) 338-7803 Facsimile: (312) 902-1061
Telephone: (312) 902-5200
CCG Capital Ltd. c/o Citadel Investment Katten Muchin & Zavis
Group, L.L.C. 525 W. Monroe Street
225 West Washington Street Chicago, Illinois
Chicago, Illinois 60606 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J.
Facsimile: (312) 338-0780 Brantman, Esq.
Telephone: (312) 338-7803 Facsimile: (312) 902-1061
Telephone: (312) 902-5200
Midway Capital Ltd. c/o Citadel Investment Katten Muchin & Zavis
Group, L.L.C. 525 W. Monroe Street
225 West Washington Street Chicago, Illinois
Chicago, Illinois 60606 60661-3693
Attention: Daniel J. Hopkins Attention: Robert J.
Facsimile: (312) 338-0780 Brantman, Esq.
Telephone: (312) 338-7803 Facsimile: (312) 902-1061
Telephone: (312) 902-5200
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn: ___________________
RE: ADVANCED TISSUE SCIENCES, INC.
------------------------------
Ladies and Gentlemen:
We are counsel to ADVANCED TISSUE SCIENCES, INC., a Delaware corporation
(the "COMPANY"), and have represented the Company in connection with that
certain Securities Purchase Agreement (the "PURCHASE AGREEMENT") entered into by
and among the Company and the Buyers named therein (collectively, the "HOLDERS")
pursuant to which the Company issued to the Holders shares of its Series B
Convertible Preferred Stock, par value $.01 per share, (the "PREFERRED
SHARES"). Pursuant to the Purchase Agreement, the Company also has entered into
a Registration Rights Agreement with the Holders (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of the Common Stock of the Company, par value
$.01 per share (the "COMMON STOCK") issuable upon conversion of the Preferred
Shares, under the Securities Act of 1933, as amended (the "1933 ACT"). In
connection with the Company's obligations under the Registration Rights
Agreement, on ____________ ___, 1998, the Company filed a Registration Statement
on Form _____ (File No. 333-_____________) (the "REGISTRATION STATEMENT") with
the Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:__________________
cc: [LIST NAMES OF INVESTORS]
