SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No.1)*
Procept Incorporated
(Name of Issuer)
Common Stock, par value $.01 per share
(Title of Class of Securities)
742 683 10 5
(CUSIP Number)
Paramount Capital Asset Management, Inc.
c/o Lindsay A. Rosenwald, M.D.
787 Seventh Avenue
New York, NY 10019
(212) 554-4300
with a copy to:
David R. Walner, Esq. Monica C. Lord, Esq.
Paramount Capital Asset Kramer, Levin,
Management, Inc. Naftalis & Frankel
787 Seventh Avenue 919 Third Avenue
New York, NY 10019 New York, NY 10022
(212) 554-4372 (212) 715-9100
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications)
August 22, 1997
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following:
|-|
Note: Six copies of this statement, including all exhibits, should be filed with
the Commission. See Rule 13d- 1(a) for other parties to whom copies are to be
sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
Page 1 of 10 pages
<PAGE>
CUSIP No. 742 683 10 5 13D Page 2 of 10 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Paramount Capital Asset Management, Inc.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_|
(b) |_|
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e)
|_|
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY None
OWNED BY ------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON 16,744,828**
WITH ------------------------------------
9 SOLE DISPOSITIVE POWER
None
------------------------------------
10 SHARED DISPOSITIVE POWER
16,744,828**
------------------------------------
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
16,744,828**
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES*
|_|
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
55.0%**
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
CO
- --------------------------------------------------------------------------------
** Consists of (i) 5,973,334 shares of Common Stock issuable upon conversion of
Series A Preferred Stock which are presently votable on an as-converted basis,
and (ii) 10,771,494 shares of Common Stock issuable upon exercise of warrants
and conversion of notes, which, accordingly, are not presently votable.
<PAGE>
CUSIP No. 742 683 10 5 13D Page 3 of 10 Pages
- ---------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Aries Domestic Fund, L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_|
(b) |_|
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e)
|_|
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY None
OWNED BY ------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON 5,860,690**
WITH ------------------------------------------------------
9 SOLE DISPOSITIVE POWER
None
------------------------------------------------------
10 SHARED DISPOSITIVE POWER
5,860,690**
------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
5,860,690**
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES*
|_|
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
19.2%**
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- --------------------------------------------------------------------------------
** Consists of (i) 2,090,667 shares of Common Stock issuable upon conversion of
Series A Preferred Stock which are presently votable on an as-converted basis,
and (ii) 3,770,023 shares of Common Stock issuable upon exercise of warrants and
conversion of notes, which, accordingly, are not presently votable.
<PAGE>
CUSIP No. 742 683 10 5 13D Page 4 of 10 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
The Aries Trust
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_|
(b) |_|
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e)
|_|
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Cayman Islands
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY None
OWNED BY ----------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON 10,884,138**
WITH ----------------------------------------------------
9 SOLE DISPOSITIVE POWER
None
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
10,884,138**
----------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
10,884,138**
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES*
|_|
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
35.7%**
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO (see Item 2)
- --------------------------------------------------------------------------------
** Consists of (i) 3,882,667 shares of Common Stock issuable upon conversion of
Series A Preferred Stock which are presently votable on an as-converted basis,
and (ii) 7,001,471 shares of Common Stock issuable upon exercise of warrants and
conversion of notes, which, accordingly, are not presently votable.
<PAGE>
CUSIP No. 742 683 10 5 13D Page 5 of 10 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Lindsay A. Rosenwald, M.D.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_|
(b) |_|
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e)
|_|
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY None
OWNED BY -----------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON 16,744,828**
WITH -----------------------------------------------------
9 SOLE DISPOSITIVE POWER
None
-----------------------------------------------------
10 SHARED DISPOSITIVE POWER
16,744,828**
----------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
16,744,828**
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES*
|_|
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
55.0%**
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
** Consists of (i) 5,973,334 shares of Common Stock issuable upon conversion of
Series A Preferred Stock which are presently votable on an as-converted basis,
and (ii) 10,771,494 shares of Common Stock issuable upon exercise of warrants
and conversion of notes, which, accordingly, are not presently votable.
<PAGE>
SCHEDULE 13D
This Amendment No. 1 amends and supplements the following Items of the
Reporting Persons' Statement on Schedule 13D, dated July 10, 1997, (the
"Schedule").
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
References to the exercise price of the Class B Warrants are hereby
amended from $.5859 per share to $.46875 per share (see Item 6). Furthermore,
the information contained in Item 3 to the Schedule is hereby amended by adding
the following:
On August 22, 1997, in accordance with Section 9.15 of the Purchase
Agreement, Aries Domestic and Aries Trust, exchanged their shares of Purchased
Common for 28,000 shares of Series A Preferred Stock, stated value $100.00 per
share, of the Issuer. The Series A Preferred Stock is convertible into Common
Stock at an initial conversion price, subject to adjustment as set forth in Item
6, equal to $.46875 (the "Series A Preferred Conversion Price"), representing an
initial conversion rate of 213.333333 per share.
ITEM 4. PURPOSE OF TRANSACTION.
The information contained in Item 4 to the Schedule is hereby amended
and supplemented to read in its entirety as follows:
The Reporting Persons acquired securities of the Issuer as an
investment in the Issuer. Except as indicated in this Schedule 13D, the
Reporting Persons currently have no plans or proposals that relate to or would
result in any of the matters described in subparagraphs (a) through (j) of Item
4 of Schedule 13D. Pursuant to Section 7.19 of the Purchase Agreement, the
Reporting Persons have the right to appoint a majority of the members of the
Board of Directors of the Issuer; provided, however, that, to the extent the
exercise of such right would violate Rule 4460(i) of the National Association of
Securities Dealers' Marketplace Rules, the Reporting Persons shall not exercise
such right until the earliest of (i) the date of approval by the stockholders of
the Issuer of the transactions (the "Transactions") contemplated by the Purchase
Agreement and the Letter of Intent between the Issuer, Paramount Capital, Inc.,
Aries Trust and Aries Domestic (the "Letter of Intent"), (ii) the date that Rule
4460(i) no longer applies to the Transactions and (iii) September 30, 1997 (the
earliest such date, the "Approval Date"), nonetheless, the Reporting Persons
currently have the right to appoint at least three directors or observers. In
connection with the Transactions, Mr. Michael S. Weiss joined the Issuer's Board
of Directors pursuant to the Purchase Agreement and the Letter of Intent and has
been elected by the Board of Directors of the Issuer to serve as the Chairman of
the Issuer's Board of Directors. The A Notes provide that the Issuer shall not
declare or pay any dividend nor make any other distribution or redemption with
respect to any shares of its capital stock without the prior written consents of
Aries Trust and Aries Domestic, provided, however, that the Issuer may
repurchase shares of its Common Stock from officers, Directors or employees of
the Issuer upon any such person's termination or resignation. Furthermore, upon
the Approval Date, the Series A Preferred Conversion Price shall be reset to
equal the lesser of (x) $.29 and (y) 50% of the average closing bid price of the
Common Stock for either (i) the five (5) consecutive trading days immediately
succeeding the Approval Date, (ii) the thirty (30) consecutive trading days
immediately preceding the Approval Date or (iii) the five (5) consecutive
trading days immediately preceding the Approval Date, whichever is lowest (such
lesser price, the "Approval Price"). Additionally, upon the Approval Date, the
conversion price of the
Page 6 of 10 Pages
<PAGE>
A Notes and the exercise prices of the class A Warrants and the Class B Warrants
shall be adjusted to equal the Approval Price. Pursuant to Section 7.31 of the
Purchase Agreement, the Issuer has covenanted to keep available sufficient
authorized but unissued shares of Common Stock to fulfill its obligations under
the Purchase Agreement, and it appears the Issuer will need to take such actions
as are necessary in order to comply with this covenant. The Reporting Persons
may from time to time acquire, or dispose of, Common Stock and/or other
securities of the Issuer if and when they deem it appropriate. The Reporting
Persons may formulate other purposes, plans or proposals relating to any of such
securities of the Issuer to the extent deemed advisable in light of market
conditions, investment policies and other factors.
ITEM 5. INTEREST IN SECURITIES OF ISSUER.
The information contained in Item 5 to the Schedule is hereby amended
and supplemented to read in its entirety as follows:
(a) As of August 22, 1997, Dr. Rosenwald and Paramount Capital,
through acquisition of the shares by Aries Trust and Aries
Domestic, may be deemed beneficially to own 16,744,828 shares or
55.0% of the Issuer's Common Stock, and Aries Domestic and Aries
Trust may be deemed to beneficially own the following number of
shares of Common Stock:
Aries Domestic 5,860,690
Aries Trust 10,884,138
Each Reporting Person disclaims beneficial ownership of all the
Common Stock other than the respective Purchased Common, if any,
actually held by such Reporting Person. Of the shares of Common
Stock of the Issuer that the Reporting Persons may be deemed
beneficially to own, only the 28,000 shares of Series A Preferred
Stock may be currently voted, which shares, which vote on an
as-converted basis and are initially convertible into 5,973,334
shares of Common Stock, represent 30.3% of the outstanding vote
of the stockholders of the Issuer (10.6% for Aries Domestic and
19.7% for Aries Trust).
(b) Dr. Rosenwald and Paramount Capital share the power to vote or to
direct the vote, to dispose or to direct the disposition of those
shares beneficially owned by each of Aries Domestic and Aries
Trust.
(c) Other than the purchase of the Common Stock, the A Notes, the
Class A Warrants and the Class B Warrants pursuant to the
Purchase Agreement and the exchange of the Purchased Common for
Series A Preferred Stock, the Reporting Persons have not engaged
in any transactions in the Common Stock of the Issuer in the past
60 days. See Item 3.
(d) & (e) Not applicable.
Page 7 of 10 Pages
<PAGE>
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF THE ISSUER.
The information contained in Item 6 to the Schedule is hereby amended
and supplemented to read in its entirety as follows:
Pursuant to the Certificate of Designation for the Series A Preferred
Stock, if, upon any of the closings of the Company's next offering or series of
offerings of equity securities with gross proceeds in excess of $2,000,000
("Qualified Offering"), the resulting conversion price, exercise price or
effective price per share of Common Stock ("Qualified Offering Price") in such
Qualified Offering is less then twice the Series A Preferred Conversion Price at
such time, then the Series A Preferred Conversion Price shall be reduced at such
time to equal fifty percent (50%) of such resulting Qualified Offering Price.
The Series A Preferred Conversion Price is subject to certain antidilution
adjustments. In addition, the Series A Preferred Conversion Price in effect
immediately prior to June 30, 1998 (the "Series A Reset Date") will be adjusted
and reset effective as of the Series A Reset Date if the average closing bid
price per share of Common Stock for the 20 consecutive trading days immediately
preceding the Series A Reset Date (the "12-Month Trading Price") is less than
140% of the then applicable Series A Preferred Conversion Price (a "Series A
Reset Event"). Upon the occurrence of a Series A Reset Event, the then
applicable Series A Preferred Conversion Price will be reduced to be equal to
the greater of (i) the 12- Month Trading Price divided by 1.4 and (ii) 25% of
the then applicable Series A Preferred Conversion Price. The Series A Preferred
Conversion Price will similarly be reset in connection with any reduction in the
conversion price, exercise price or effective price per share of Common Stock of
the Issuer of any equity securities sold in a Qualified Offering analogous to
the above described reset or, alternatively, on June 30, 1999. Unless converted
earlier, the Issuer has the right at any time after the Series A Reset Date to
cause the Series A Preferred Stock to be converted, in whole or in part, on a
pro rata basis, into shares of Common Stock on 60 days' prior written notice,
provided that the closing bid quotation for the Common Stock as reported on the
NASDAQ, or on such exchange on which the Common Stock is then traded or listed,
exceeds 300% of the Series A Preferred Conversion Price for 20 consecutive
trading days ending three trading days prior to the date of the notice of
mandatory conversion. Pursuant to the Purchase Agreement, in the event that the
Issuer does not obtain the Required Shareholder Approvals (as defined in Section
7.27 of the Purchase Agreement) by September 30, 1997, each of the Aries Funds
shall have the right, for a period of 10 years, at such Aries Fund's respective
election (the "Non-Approval Put") (i) to require the Issuer to repurchase with
cash, within two business days after request is made therefor, all or any
portion of the shares of Series A Preferred Stock then owned by such Aries Fund
for $140 per share tendered for such repurchase, (ii) to require the Issuer to
issue A Notes, within two business days after request is made therefor, in
exchange for all or any portion of the shares of Series A Preferred Stock then
owned by such Aries Fund, in a principal amount of $140 per share tendered for
such repurchase or (iii) any combination of the above. The Issuer and the Aries
Funds have agreed to amend the exercise price of the Class B Warrants from
$.5859 per share to $.46875 per share while keeping the aggregate number of
shares of Common Stock initially subject to such Class B Warrants constant.
Paramount Capital is the investment manager of the Aries Trust and the General
Partner of Aries Domestic and in such capacities has the authority to make
certain investment decisions on behalf of such entities, including decisions
relating to the securities of the Issuer. In connection with its investment
management duties, Paramount Capital receives certain management fees and
performance allocations from the Aries Trust and Aries Domestic. Dr. Rosenwald
is the sole shareholder of Paramount Capital. Additionally, on June 29, 1997,
the Issuer entered into a Letter of Intent with Paramount Capital, Inc. pursuant
to which it is contemplated that Paramount Capital, Inc. will act as financial
advisor and placement agent for the Issuer in future capital raising and other
strategic transactions. Dr. Rosenwald is the sole shareholder and Mr. Weiss is a
Senior Managing Director of Paramount Capital, Inc. Except as indicated in this
13D and exhibits, there is no contract, arrangement, understanding or
relationship between the Reporting Persons and any other person, with respect to
any securities of the Issuer.
Page 8 of 10 Pages
<PAGE>
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
The information contained in Item 7 to the Schedule is hereby amended
and supplemented to read in its entirety as follows:
Exhibit A: Agreement of Joint Filing of Schedule 13D dated as of July 9, 1997
Exhibit B: List of executive officers and directors of Paramount Capital and
information called for by Items 2-6 of this statement relating to
said officers and directors.
Exhibit C: List of executive officers and directors of Aries Domestic and
information called for by Items 2-6 of this statement relating to
said officers and directors.
Exhibit D: List of executive officers and directors of Aries Trust and
information called for by Items 2-6 of this statement relating to
said officers and directors.
Exhibit E: Securities Purchase Agreement dated as of June 30, 1997.
Exhibit F: Senior Convertible Note for $70,000 issued to Aries Domestic
dated June 30, 1997.
Exhibit G: Senior Convertible Note for $130,000 issued to Aries Trust dated
June 30, 1997.
Exhibit H: Class A Warrant for the Purchase of 959,944 shares of Common
Stock issued to Aries Domestic dated June 30, 1997.
Exhibit I: Class A Warrant for the Purchase of 1,782,752 shares of Common
Stock issued to Aries Trust dated June 30, 1997.
Exhibit J: Class B Warrant for the Purchase of 2,660,746 shares of Common
Stock issued to Aries Domestic dated June, 1997.
Exhibit K: Class B Warrant for the Purchase of 4,941,386 shares of Common
Stock issued to Aries Trust dated June 30, 1997.
Exhibit L: Letter of Intent dated June 29, 1997.
Exhibit M: Certificate of Designation for Series A Convertible Preferred
Stock of Procept, Inc.
Page 9 of 10 Pages
<PAGE>
SIGNATURES
After reasonable inquiry and to the best knowledge and belief
of the undersigned, the undersigned certify that the information set forth in
this statement is true, complete and correct.
PARAMOUNT CAPITAL ASSET MANAGEMENT, INC.
Dated: September 2, 1997
New York, NY By: /s/ Lindsay A. Rosenwald, M.D.
--------------------------------
Lindsay A. Rosenwald, M.D.
President
ARIES DOMESTIC FUND, L.P.
By: Paramount Capital Asset Management, Inc.
General Partner
Dated: September 2, 1997
New York, NY By: /s/ Lindsay A. Rosenwald, M.D.
--------------------------------
Lindsay A. Rosenwald, M.D.
President
THE ARIES TRUST
By: Paramount Capital Asset Management, Inc.
Investment Manager
Dated: September 2, 1997
New York, NY By: /s/ Lindsay A. Rosenwald, M.D.
--------------------------------
Lindsay A. Rosenwald, M.D.
President
Dated: September 2, 1997
New York, NY /s/ Lindsay A. Rosenwald, M.D.
--------------------------------
Lindsay A. Rosenwald, M.D.
Page 10 of 10 Pages
<PAGE>
EXHIBIT E
SECURITIES PURCHASE AGREEMENT
PURCHASE AGREEMENT (this
"Agreement") dated as of June 30, 1997, by and among
PROCEPT, INC., a Delaware corporation (the
"Company"), THE ARIES FUND, A CAYMAN ISLAND TRUST
(the "Trust"), and THE ARIES DOMESTIC FUND, L.P., a
Delaware limited partnership (the "Partnership")
(collectively with the Trust, the "Purchasers").
The Company desires to issue and sell to Purchasers, and Purchasers
desire to purchase from the Company, 30,000 shares of Series A Convertible
Preferred Stock of the Company, par value $.01 per share, stated value $100.00
per share, (the "Series A Preferred Stock") issued pursuant to a Certificate of
Designations in the form attached hereto as Exhibit A (the "Certificate of
Designations"), 2,742,696 Class A Warrants (the "Class A Warrants") to purchase
one share of the Common Stock, par value $.01 per share, of the Company (the
"Common Stock") in the form attached as Exhibit B hereto, and 7,602,132 Class B
Warrants to purchase one share of the Common Stock of the Company (the "Class B
Warrants," and collectively with the Class A Warrants, the "Warrants") in the
form attached hereto as Exhibit C, upon and subject to the terms and conditions
hereinafter set forth (the "Series A Offering"). Alternatively, in the event the
Company fails to obtain approval from its stockholders of the inclusion in the
Company's Certificate of Incorporation of blank check Preferred Stock on or
before June 30, 1997, then, in lieu of Series A Preferred Stock, the Company
desires to sell to purchasers, and purchasers desire to purchase from the
Company (i) 5,973,334 (the "Alternate Offering Quantity") shares of Common
Stock, (ii) the contractual rights contained in Article 9 hereof (the "Article
IX Rights") and (iii) $200,000 principal amount of 12% Convertible Notes (the "A
Notes") a form of which is attached hereto as Exhibit D (the sale and purchase
of the Warrants, however, remaining as above) (the "Alternate Offering") (the
Common Stock to be purchased pursuant to the Alternate Offering, if any,
including the Common Stock issuable upon any Reset Issuance, Annual Issuance,
Dilutive Issuance or Approval Issuance (as defined in Article 9), the Common
Stock issuable upon conversion of the Series A Preferred Stock issuable upon
exercise of the Approval Call (as defined in Article 9), and the Common Stock
issuable upon conversion of the A Notes being referred to herein as the
"Alternate Offering Common").
Accordingly, in consideration of the premises and the mutual agreements
contained herein, Purchasers and the Company hereby agree as follows:
1. Purchase of Company Securities.
1.1. Purchase and Sale of the Series A Preferred Stock and the
Warrants. Subject to the terms and conditions set forth herein, the Company
hereby agrees to issue and sell to Purchasers, and Purchasers, severally and not
jointly, hereby agree to purchase from the Company, the Series A Preferred Stock
and the Warrants (allocated amongst the Trust and the
1
<PAGE>
Partnership as set forth on Exhibit E hereto), at the Closing (as such term is
defined in Section 2 hereof). The aggregate purchase price for the Series A
Preferred Stock and the Warrants sold pursuant to this Agreement (including any
additional shares of Common Stock issuable pursuant to Section 8.6) shall be
$3,000,000 (the "Purchase Price") (allocated amongst the Trust and the
Partnership as set forth on Exhibit E hereto). "Operative Documents" as used
herein shall mean this Agreement, the Certificate of Designations, the Warrants,
the A Notes and the Letter of Intent between Paramount Capital, Inc., Procept
Inc. and the Purchasers (the "Letter of Intent"). In the event that the Company
fails to obtain approval from its stockholders of the inclusion in the Company's
Certificate of Incorporation of blank check preferred stock on or before June
30, 1997, then the term "Series A Preferred Stock" as used herein shall mean the
Alternate Offering Common and the A Notes as well as any Series A Preferred
Stock issued pursuant hereto (including any Series A Preferred Stock issued upon
exercise of the Approval Call).
2. Closing. The closing of the purchase and sale of the Series A
Preferred Stock and the Warrants will take place at the offices of Paramount
Capital Asset Management, Inc. at 787 Seventh Avenue, New York, New York, 10019.
Such closing (the "Closing") will take place at 3:00 P.M., local time, on June
30, 1997; provided that the Closing may take place at such other time, place or
later date as may be mutually agreed upon by the Company and Purchasers. The
date of the Closing is referred to herein as the "Closing Date." At the Closing,
the Company will deliver to Purchasers the Series A Preferred Stock and the
Warrants purchased as set forth in Section 1 hereof, against payment of the
Purchase Price by Purchasers, by wire transfer payable to the Company. The
Series A Preferred Stock and the Warrants shall be registered in Purchasers'
name or the name of the nominee(s) of Purchasers in such denominations as
Purchasers shall request pursuant to instructions delivered to the Company not
less than one day prior to the Closing Date.
3.. Conditions to the Obligations of Purchasers at the Closing. The
obligation of Purchasers to purchase and pay for the Series A Preferred Stock
and the Warrants to be purchased by Purchasers at the Closing is subject to the
satisfaction on or prior to the Closing Date of the following conditions, which
may only be waived by written consent of Purchasers:
3.1 Opinion of Counsel to the Company. Purchasers shall have received
from Palmer & Dodge, LLP, counsel for the Company, its opinion dated the Closing
Date in the form of Exhibit F hereto.
3.2 Representations and Warranties. All of the representations and
warranties of the Company contained in this Agreement shall be true and correct
at and as of the Closing Date, except to the extent of changes caused by the
transactions contemplated hereby.
3.3. Performance of Covenants. All of the covenants and agreements of
the Company contained in this Agreement and required to be performed on or prior
to the Closing Date shall have been performed in a manner satisfactory in all
respects to Purchasers in their sole discretion.
2
<PAGE>
3.4. Legal Action. No injunction, order, investigation, claim, action
or proceeding before any court or governmental body shall be pending or
threatened wherein an unfavorable judgment, decree or order would restrain,
impair or prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, declare unlawful the transactions contemplated by this
Agreement or cause any such transaction to be rescinded.
3.5. Consents. The Company shall have obtained in writing or made all
consents, waivers, approvals, orders, permits, licenses and authorizations of,
and registrations, declarations, notices to and filings and applications with,
any governmental authority or any other person or entity (including, without
limitation, securityholders and creditors of the Company) required to be
obtained or made in order to enable the Company to observe and comply with all
its obligations under this Agreement and to consummate the transactions
contemplated hereby.
3.6. Closing Documents. The Company shall have delivered to Purchasers
the following:
(a) a certificate executed by the President or Chief Executive Officer
of the Company dated the Closing Date stating that the conditions set forth in
Sections 3.2 through 3.5 have been satisfied;
(b) an incumbency certificate dated the Closing Date for the officers
of the Company executing this Agreement, the shares representing the Series A
Preferred Stock and the Warrants and any other documents or instruments
delivered in connection with this Agreement at the Closing;
(c) a certificate of the Secretary or Assistant Secretary of the
Company, dated the Closing Date, as to the continued and valid existence of the
Company, certifying the attached copy of the By-laws of the Company, the
authorization of the execution, delivery and performance of this Agreement, and
the resolutions adopted by the Board of Directors of the Company authorizing the
actions to be taken by the Company under this Agreement;
(d) a certificate of the Secretary of State of the State of Delaware,
dated a recent date, to the effect that the Company is in good standing in the
State of Delaware and that all annual reports, if any, have been filed as
required and that all taxes and fees have been paid in connection therewith;
(e) a certified copy of the Certificate of Incorporation of the Company
as filed with the Secretary of State of the State of Delaware and any amendments
thereto; and
(f) such certificates, other documents and instruments as Purchasers
and their counsel may reasonably request in connection with, and to effect, the
transactions contemplated by this Agreement.
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3.7. Proceedings. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby to be consummated
at the Closing and all documents incident thereto shall be satisfactory in form
and substance to Purchasers.
3.8. Due Diligence. Prior to the Closing Date, Purchasers and their
counsel shall have completed their due diligence and business review of the
Company, its business, assets, liabilities, corporate and legal status and
intellectual property, including patents, licenses and technical processes, all
of which shall be satisfactory in form and substance to each Purchaser and their
counsel in each Purchaser's sole discretion.
3.9. Closing Financial Statements; Absence of Changes. (a) The Company
shall have provided to Purchasers (i) the unaudited balance sheet of the Company
as of March 31, 1997, and the related unaudited statement of operations for the
three-month period then ended, as well as the related unaudited statements of
stockholders' equity (deficit) and cash flows for the three-month period then
ended, accompanied by the unqualified certification thereon of the Chief
Financial Officer or Vice President--Finance of the Company (together with any
notes thereto, the "March 31 Financial Statements") and (ii) a "bring-down"
certificate of the Chief Executive Officer of the Company and the Chief
Financial Officer or Vice President--Finance of the Company with respect to the
financial position of the Company as of the Closing Date and as to results for
the period from the date of the March 31 Financial Statements to the Closing
Date, in form and substance satisfactory to Purchaser and its counsel.
(b) Except as set forth on the schedules hereto of the Company
delivered to Purchaser as of the date hereof, there shall have been no material
adverse change in the financial condition, operating results, employee or
customer relations or prospects of, or otherwise with respect to, the Company
from the date of the March 31 Financial Statements to the Closing Date.
3.10. Schedules. The Company shall have provided to the Purchasers all
schedules required pursuant to this Agreement, which schedules shall be
satisfactory to Purchasers in their sole discretion.
4. Conditions to the Obligations of the Company at the Closing. The
obligation of the Company to issue and sell the Series A Preferred Stock and the
Warrants to Purchasers at the Closing is subject to the satisfaction on or prior
to the Closing Date of the following conditions, any of which may be waived by
the Company:
4.1. Representations and Warranties. The representations and warranties
of Purchasers contained in this Agreement shall be true and correct at and as of
the Closing Date.
4.2. Legal Action. No injunction, order, investigation, claim, action
or proceeding before any court or governmental body shall be pending or
threatened wherein an unfavorable judgment, decree or order would restrain,
impair or prevent the carrying out of this
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Agreement or any of the transactions contemplated hereby, declare unlawful the
transactions contemplated by this Agreement or cause any such transaction to be
rescinded.
5. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchasers as follows:
5.1. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority, and holds all licenses,
permits and other required authorizations from governmental authorities,
necessary to conduct its business as it is now being conducted or proposed to be
conducted and to own or lease the properties and assets it now owns or holds
under lease (except that the Company may in the future be required to obtain
certain approvals of the U.S. Food and Drug Administration in connection with
its business as proposed to be conducted). The Company is duly qualified or
licensed and in good standing as a foreign corporation in Massachusetts and in
each jurisdiction wherein the character of its properties or the nature of the
activities conducted by it makes such qualification or licensing necessary.
5.2. Charter Documents. The Company has heretofore delivered to
Purchasers true, correct and complete copies of the Company's Certificate of
Incorporation and By-Laws as in full force and effect on the date hereof.
5.3. Capitalization. As of the date hereof, the Company's authorized
capitalization consists solely of: 30,000,000 shares of Common Stock, of which
13,723,338 shares are presently issued and outstanding; and 7,292,637 shares of
Common Stock are reserved for issuance upon the conversion or exercise of
presently outstanding convertible securities, options, warrants or other rights
to purchase Common Stock. As of the date hereof, the Company has no shares of
treasury stock. All outstanding securities of the Company are validly issued,
fully paid and nonassessable. No stockholder of the Company is entitled to any
preemptive rights with respect to the purchase or sale of any securities by the
Company. Except as has been set forth in Schedule 5.3 hereto, there are no
outstanding options, warrants or other rights, commitments or arrangements,
written or oral, to purchase or otherwise acquire any authorized but unissued
shares of capital stock of the Company or any security directly or indirectly
convertible into or exchangeable for any capital stock of the Company or under
which any such option, warrant or convertible security may be issued in the
future, and there are no voting trusts or agreements, stockholders' agreements,
pledge agreements, buy-sell, rights of first offer, negotiation or refusal or
proxies or similar arrangements relating to any securities of the Company to
which the Company is a party, and to the best knowledge of the Company after due
investigation there are no such trusts, agreement, rights, proxies or similar
arrangements as to which the Company is not a party. Except as set forth on
Schedule 5.3 and as contemplated herein, none of the shares of capital stock of
the Company is reserved for any purpose, and the Company is neither subject to
any obligation (contingent or otherwise), nor has any option to repurchase or
otherwise acquire or retire any shares of its capital stock. Schedule 5.3 sets
forth (i) the number of shares of Common Stock authorized for issuance under any
stock
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option plan of the Company; (ii) the number of shares of Common Stock as to
which options under any such plan have been (a) reserved for issuance and (b)
exercised; and (iii) the exercise prices for all outstanding options under any
such plan. Except as set forth on Schedule 5.3, no antidilution adjustments with
respect to the outstanding securities of the Company will be triggered by the
issuance of the securities contemplated hereby.
5.4 Due Authorization, Valid Issuance, Etc.. The Series A Preferred
Stock has been duly authorized and, when issued in accordance with this
Agreement upon the Closing Date, will be free and clear of all liens imposed by
or through the Company. The Warrants have been duly authorized and, when issued
in accordance with this Agreement upon the Closing Date, will be validly issued
and free and clear of all liens imposed by or through the Company. The Common
Stock issuable upon the conversion of the Series A Preferred Stock and upon the
exercise of the Warrants has been duly authorized and reserved and, when issued
in accordance with the terms and conditions thereof and this Agreement, will be
validly issued, fully paid and nonassessable shares of Common Stock and will be
free and clear of all liens imposed by or through the Company. The issuance,
sale and delivery of the Series A Preferred Stock, the Warrants and the Common
Stock issuable upon the conversion of the Series A Preferred Stock and upon the
exercise of the Warrants will not be subject to any preemptive right of
stockholders of the Company or to any right of first refusal or other right in
favor of any person.
5.5. Subsidiaries. The Company has no wholly or partially owned
Subsidiaries (as defined in Section 9.10) and does not control, directly or
indirectly, any other corporation, business trust, firm, partnership,
association, joint venture, entity or organization. Except as set forth in
Schedule 5.5 the Company does not own any shares of stock, partnership interest,
joint venture interest or any other security, equity or interest in any other
corporation or other organization or entity.
5.6. Authorization; No Breach. The Company has the full corporate power
and authority to execute, deliver and enter into this Agreement and to perform
its obligations hereunder, and the execution, delivery and performance of this
Agreement, the Certificate of Designations, the Warrants and all other
transactions contemplated hereby have been duly authorized by the Company, and
this Agreement constitutes a legal, valid and binding obligation of the Company,
enforceable in accordance with its terms except as the enforceability hereof may
be limited by (a) bankruptcy, insolvency, moratorium and similar laws affecting
creditors' rights generally and (b) the availability of remedies under general
equitable principles and (c) to the extent the indemnification provisions
contained in section 8.5 hereof may be limited by applicable federal or state
securities laws. Except as set forth on Schedule 5.6 hereto, the execution and
delivery by the Company of this Agreement, the offering, sale and issuance of
the Series A Preferred Stock and the Warrants pursuant to this Agreement, and
the performance and fulfillment of the Company of its obligations under this
Agreement, the Series A Preferred Stock and the Warrants, do not and will not
(i) conflict with or result in a breach of the terms, conditions or provisions
of, (ii) constitute a default under, or event which, with notice or lapse of
time or both, would constitute a breach of or default under, (iii) result in the
creation of any lien, security interest, adverse claim, charge or encumbrance
upon the capital stock or assets of
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the Company pursuant to, (iv) give any third party the right to accelerate any
obligation under or terminate, (v) result in a violation of, (vi) result in the
loss of any license, certificate, legal privilege or legal right enjoyed or
possessed by the Company under, or (vii) require any authorization, consent,
approval, exemption or other action by or notice to any court or administrative
or governmental body pursuant to or require the consent of any other person
under, the Certificate of Incorporation or By-Laws of the Company or any law,
statute, rule or regulation to which the Company is subject or by which any of
its properties are bound, or any agreement, instrument, order, judgment or
decree to which the Company is subject or by which its properties are bound.
5.7. Financial Statements and SEC Documents. (a) Attached hereto as
Schedule 5.7 are (i) the audited financial statements of the Company for the
fiscal year ended December 31, 1996, including the balance sheet as at the end
of such fiscal year and the related statements of operations, stockholders'
equity (deficit) and cash flows for such fiscal year, certified by Coopers &
Lybrand, L.L.P. and (ii) the March 31 Financial Statements (the financial
statements referred to in clauses (i) and (ii) are referred to herein
collectively as the "Financial Statements"). For purposes of this Agreement,
March 31, 1997, shall be hereinafter referred to as the "Balance Sheet Date."
The Financial Statements have been prepared in accordance with the books and
records of the Company and generally accepted accounting principles, applied
consistently with the past practices of the Company (except as otherwise noted
in such Financial Statements), reflect all liabilities and obligations of the
Company, as of their respective dates, and present fairly the financial position
of the Company and the results of its operations as of the time and for the
periods indicated therein.
(b) The Company has made available to Purchasers a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by the Company with the Securities and Exchange Commission since
January 1, 1993 (as such documents have since the time of their filing been
amended, the "SEC Documents") which are all the documents (other than
preliminary material) that the Company was required to file with the Securities
and Exchange Commission since such date. As of their respective dates, the SEC
Documents complied in all respects with the requirements of the Securities Act
(as defined in Section 9.7) and/or the Exchange Act (as defined in Section 9.8)
as the case may be, and the rules and regulations of the Securities and Exchange
Commission thereunder applicable to such SEC Documents and none of the SEC
Documents contained any untrue statement of a material fact or omitted to
statement of 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. The financial statements of the Company included in the
SEC Documents comply as to form in all respects with applicable accounting
requirements and with the published rules and regulations of the Securities and
Exchange Commission with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-Q of the Securities
and Exchange Commission) and fairly present (subject, in the case of the
unaudited statements, to normal, recurring audit
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adjustments) the financial position of the Company as at the dates thereof and
the consolidated results of their operations and cash flows for the periods then
ended.
5.8. No Material Adverse Changes. Except as set forth on Schedule 5.8
hereto, since the Balance Sheet Date there has not at any time been (a) any
material adverse change in the financial condition, operating results, business
prospects, employee relations or customer relations of the Company, or (b) other
adverse changes, which in the aggregate have been materially adverse to the
Company.
5.9. Absence of Certain Developments. Except as contemplated by this
Agreement, and except as set forth in Schedule 5.9 hereto, since the Balance
Sheet Date, the Company has not, nor will have prior to the Closing: (a) issued
any securities; (b) borrowed any amount or incurred or became subject to any
liabilities (absolute or contingent), other than liabilities incurred in the
ordinary course of business and liabilities under contracts entered into in the
ordinary course of business, none of which are or shall be material and which
are less than $25,000; (c) discharged or satisfied any lien, adverse claim or
encumbrance or paid any obligation or liability (absolute or contingent), other
than current liabilities paid in the ordinary course of business; (d) declared
or made any payment or distribution of cash or other property to the
stockholders of the Company with respect to the Common Stock or purchased or
redeemed any shares of Common Stock; (e) mortgaged, pledged or subjected to any
lien, adverse claim, charge or any other encumbrance, any of its properties or
assets, except for liens for taxes not yet due and payable; (f) sold, assigned
or transferred any of its assets, tangible or intangible, except in the ordinary
course of business and in an amount less than $25,000, or disclosed to any
person, firm or entity not party to a confidentiality agreement with the Company
any proprietary confidential information; (g) suffered any extraordinary losses
or waived any rights of material value; (h) made any capital expenditures or
commitments therefor; (i) entered into any other transaction other than in the
ordinary course of business in an amount less than $25,000 or entered into any
material transaction, whether or not in the ordinary course of business; (j)
made any charitable contributions or pledges; (k) suffered damages, destruction
or casualty loss, whether or not covered by insurance, affecting any of the
properties or assets of the Company or any other properties or assets of the
Company which could have a material adverse effect on the business or operations
of the Company; (l) made any change in the nature or operations of the business
of the Company; or (m) resolved or entered into any agreement or understanding
with respect to any of the foregoing.
5.10. Properties. The Company has good and marketable title to all of
the real property and good title to all of the personal property and assets it
purports to own, including those reflected as owned on the Company Balance Sheet
or acquired thereafter, and a good and valid leasehold interest in all property
indicated as leased on the Company Balance Sheet, whether such property is real
or personal, free and clear of all liens, adverse claims, charges, encumbrances
or restrictions of any nature whatsoever, except (a) such as are reflected on
the Company Balance Sheet or described in Schedule 5.10 hereto and (b) for
receivables and charges collected in the ordinary course of business. Except as
disclosed in Schedule 5.10 hereto, the Company owns or leases all such
properties as are necessary to its operations as now conducted
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and as presently proposed to be conducted and all such properties are, in all
material respects, in good operating condition and repair.
5.11. Taxes. Except as referred to in Schedule 5.11 hereto, the Company
has timely filed all federal, state, local and foreign tax returns and reports
required to be filed, and all taxes, fees, assessments and governmental charges
of any nature shown by such returns and reports to be due and payable have been
timely paid except for those amounts being contested in good faith and for which
appropriate amounts have been reserved in accordance with generally accepted
accounting principles and are reflected on the Company Balance Sheet. There is
no tax deficiency which has been, or, to the knowledge of the Company might be,
asserted against the Company which would adversely affect the business or
operations, or proposed business or operations, of the Company. All such tax
returns and reports were prepared in accordance with the relevant rules and
regulations of each taxing authority having jurisdiction over the Company and
are true and correct. The Company has neither given nor been requested to give
any waiver of any statute of limitations relating to the payment of federal,
state, local or foreign taxes. The Company has not been, nor is it now being,
audited by any federal, state, local or foreign tax authorities. The Company has
made all required deposits for taxes applicable to the current tax year. The
Company is not, and has never been, a member of any "affiliated group" within
the meaning of Section 1504 of the Internal Revenue Code, as in effect from time
to time.
5.12. Litigation. Except as set forth on Schedule 5.12 hereto, there
are no actions, suits, proceedings, orders, investigations or claims pending or,
to the Company's knowledge, threatened against or affecting the Company, at law
or in equity or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality; there are no
arbitration proceedings pending under collective bargaining agreements or
otherwise; and, to the knowledge of the Company, there is no basis for any of
the foregoing.
5.13. Compliance with Law. The Company has complied in all respects
with all applicable statutes and regulations of the United States and of all
states, municipalities and applicable agencies and foreign jurisdictions or
bodies in respect of the conduct of its business and operations and benefit
plans, and the failure, if any, by the Company to have fully complied with any
such statute or regulation does not and will not materially adversely affect the
business, operations or financial condition of the Company.
5.14. Trademarks and Patents. Schedule 5.14 annexed hereto contains a
true, complete and correct list of all trademarks, trade names, patents and
copyrights (and applications therefor) if any, heretofore or presently owned or
licensed or used or required to be used by the Company in connection with its
business; and, except as set forth on Schedule 5.14, each such trademark, trade
name, patent and copyright (and application therefor) listed in Schedule 5.14 as
being owned by the Company is not subject to any license, royalty arrangement,
option or dispute and is free and clear of all liens. To the best knowledge of
the Company, none of the trademarks, trade names, patents or copyrights used by
the Company in connection with its
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business infringe any trademark, trade name, patent or copyright of others in
the United States or in any other country, in any way which adversely affects or
which in the future may adversely affect the business or operations of the
Company. Except as set forth in Schedule 5.14, no stockholder, officer or
director of the Company or any other person owns or has any interest in any
trademark, trade name, service mark, patent, copyright or application therefor,
or trade secret, licenses, invention, information or proprietary right or
process, if any, used by the Company in connection with its business. The
Company has no notice or knowledge of any objection or claim being asserted by
any person with respect to the ownership, validity enforceability or use of any
such trademarks, trade names, patents and copyrights (and applications therefor)
listed on Schedule 5.14 or challenging or questioning the validity or
effectiveness of any license relating thereto. There are no unresolved conflicts
with, or pending claims of, any other person, whether in litigation or
otherwise, involving the trademarks, trade names, patents and copyrights (and
applications therefor), and there are no liens, encumbrances, adverse claims, or
rights of any other person which would prevent the Company from fulfilling its
obligations under this Agreement. To the best knowledge of the Company, the
business of the Company, as presently conducted and as proposed to be conducted
does not and will not cause the Company to violate any trademark, trade name,
patent, copyright, trade secret, license or proprietary interest of any other
person or entity, in any way which adversely affects or which in the future may
adversely affect the business or operations of the Company. Except as disclosed
in Schedule 5.14 hereto, the Company possesses all proprietary technology
necessary for the conduct of business by the Company, both as presently
conducted and as presently proposed to be conducted.
5.15. Insurance. Schedule 5.15 annexed hereto contains a brief
description of each insurance policy maintained by the Company with respect to
its properties, assets and business; each such policy is in full force and
effect; and the Company is not in default with respect to its obligations under
any of such insurance policies. The insurance coverage of the Company is in
amounts not less than is customarily maintained by corporations engaged in the
same or similar business and similarly situated, including, without limitation,
insurance against loss, damage, fire, theft, public liability and other risks.
The activities and operations of the Company have been conducted in a manner so
as to conform to all applicable provisions of these insurance policies and the
Company has not taken or failed to take any action which would cause any such
insurance policy to lapse.
5.16. Agreements. Except as set forth in Schedule 5.16 hereto, the
Company is neither a party to nor bound by any agreement or commitment, written
or oral, which obligates the Company to make payments to any person, or which
obligates any person to make payments to the Company, in the case of each such
agreement in an amount exceeding $75,000 in the aggregate, or which is otherwise
material to the conduct and operation of the Company's business or proposed
business or any of its properties or assets, including, without limitation, all
shareholder, employment, non-competition and consulting agreements and employee
benefit plans and arrangements and collective bargaining agreements to which the
Company is a party or by which it is bound. All such agreements are legal, valid
and binding obligations of the Company, in full force and effect, and
enforceable in accordance with their respective terms,
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except as the enforceability thereof may be limited by (a) bankruptcy,
insolvency, moratorium, and similar laws affecting creditors' rights generally
and (b) the availability of remedies under general equitable principles. The
Company has performed all obligations required to be performed by it, and is not
in default, or in receipt of any claim, under any such agreement or commitment,
and the Company has no present expectation or intention of not fully performing
all of such obligations, nor does the Company have any knowledge of any breach
or anticipated breach by the other parties to any such agreement or commitment.
The Company is not a party to any contract, agreement, instrument or
understanding which materially adversely affects the business, properties,
operations, assets or condition (financial or otherwise) of the Company.
Purchasers have been furnished with, or the Company has made available for the
Purchaser's review, a true and correct copy of each written agreement referred
to in Schedule 5.16, together with all amendments, waivers or other changes
thereto.
5.17. Undisclosed Liabilities. Except as set forth on Schedule 5.17
hereto, the Company has no obligation or liability (whether accrued, absolute,
contingent, unliquidated, or otherwise, whether or not known to the Company,
whether due or to become due) arising out of transactions entered into at or
prior to the Closing of this Agreement, or any action or inaction at or prior to
the Closing of this Agreement, or any state of facts existing at or prior to the
Closing of this Agreement, except (a) liabilities reflected on the Company
Balance Sheet; (b) liabilities in an amount less than $25,000 incurred in the
ordinary course of business since the Balance Sheet Date (none of which is a
liability for breach of contract, breach of warranty, torts, infringements,
claims or lawsuits); and (c) liabilities or obligations disclosed in the
schedules hereto.
5.18. Employees; Conflicting Agreements. (a) The Company shall cause
all members of management and all professional employees of and consultants and
advisors to the Company, including all employees and consultants and advisors
involved in its research and development, to be subject to agreements with
respect to (i) nondisclosure of confidential information, (ii) assignment of
patents, trademarks, copyrights and proprietary rights to the Company and (iii)
disclosure to the Company of inventions.
(b) Except as set forth on Schedule 5.18, to the best of the Company's
knowledge, no stockholder, director, officer or key employee of the Company is a
party to or bound by any agreement, contract or commitment, or subject to any
restrictions in connection with any previous or current employment of any such
person, which adversely affects, or which in the future may adversely affect,
the business or the proposed business of the Company or the rights of Purchasers
under this Agreement and in respect of its rights as a holder of the Series A
Preferred Stock and the Warrants.
5.19. Disclosure. Neither this Agreement nor any of the schedules,
exhibits, written statements, documents or certificates prepared or supplied by
the Company with respect to the transactions contemplated hereby contain any
untrue statement of a material fact or omit a material fact necessary to make
the statements contained herein or therein not misleading in light of the
circumstances under which made. Except as disclosed in Schedule 5.19 hereto,
there
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exists no fact or circumstance which, to the knowledge of the Company upon due
inquiry, materially adversely affects, or which could reasonably be anticipated
to have a material adverse effect on, the existing or expected financial
condition, operating results, assets, customer relations, employee relations or
business prospects of the Company.
5.20. Compliance with the Securities Laws. Except as set forth on
Schedule 5.20 hereto, neither the Company nor anyone acting on its behalf has
directly or indirectly offered the Series A Preferred Stock or the Warrants or
any part thereof or any similar security of the Company (or any other securities
convertible or exchangeable for the Series A Preferred Stock and the Warrants or
any similar security), for sale to, or solicited any offer to buy the same from,
anyone other than Purchasers. Assuming the accuracy and truth of each of the
Purchasers' representations set forth in Section 6 of this Agreement, all
securities of the Company heretofore sold and issued by it were sold and issued,
and the Series A Preferred Stock and the Warrants were offered and will be sold
and issued, in compliance with all applicable federal and state securities laws.
5.21. Brokers. Except as set forth on Schedule 5.21, no finder,
investment banker, broker, agent, financial person or other intermediary has
acted on behalf of the Company in connection with the offering of the Series A
Preferred Stock and the Warrants or the consummation of this Agreement or any of
the transactions contemplated hereby and none of the foregoing are entitled to
any compensation or success fee in connection therewith.
5.22. Transactions with Affiliates. Except as set forth in Schedule
5.22, no director, officer, employee, consultant or agent of the Company, or
member of the family of any such person or any corporation, partnership, trust
or other entity in which any such person, or any member of the family of any
such person, has a substantial interest in or is an officer, director, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof, is a
party to any transaction with the Company, including any contract, agreement or
other arrangement providing for the employment of, furnishing of services by or
requiring payments to any such person or firm.
5.23. Environmental Matters (a) The Company and all properties owned,
operated or leased by the Company have obtained and currently maintain all
environmental permits required for their business and operations and are in
compliance with all such environmental permits; (ii) there are no legal
proceedings pending nor, to the best knowledge of the Company, threatened to
modify or revoke any such environmental permits; and (iii) neither Company nor
any property owned, operated or leased by the Company has received any notice
from any source that there is lacking any environmental permit required for the
current use or operation of the business of the Company, or any property owned,
operated or leased by the Company.
(b) Except as set forth in Schedule 5.23 hereto, (i) all real property
owned, operated or leased by the Company, and, to the best knowledge of the
Company, all property adjacent to such properties, are free from contamination
by any hazardous material; and the
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Company is not subject to environmental costs and liabilities with respect to
hazardous materials, and no facts or circumstances exist which could give rise
to environmental costs and liabilities with respect to hazardous materials.
(c) Except as set forth in Schedule 5.23 hereto, there is not now, nor
has there been in the past, on, in, or under any real property owned, leased, or
operated by the Company, or by any of its predecessors (i) any
asbestos-containing materials, (ii) any underground storage tanks, (iii)
above-ground storage tanks, (iv) impoundments, (v) poly-chlorinated biphenyls or
(vi) radioactive substances.
(d) The Company has provided or made available to the Purchasers drafts
and final versions of all environmental site assessments (including, but not
limited to Phase I and Phase II reports), risk management studies and internal
environmental audits that have been conducted by or on behalf of the Company
("Environmental Studies"), with respect to any real property that now or in the
past has been owned, operated or leased by the Company, or any of its
predecessors.
(e) Except as set forth in Schedule 5.23 hereto, the Company and all
properties owned, operated or leased by the Company are in compliance with
environmental law.
(f) Except as set forth in Schedule 5.23 hereto, neither the Company
nor any property owned, leased or operated by the Company has received or been
issued any written request for information, or has been notified that it is a
potentially responsible party under the environmental laws with respect to any
on-site or off-site for which environmental costs and liabilities are asserted.
6. Representations and Warranties of Purchasers. Purchasers hereby
severally and not jointly represent and warrant to the Company as follows:
6.1. Investment Intent. Each of the Purchasers is an "accredited
investor" within the meaning of Regulation D under the Securities Act. Each of
the Purchasers has experience in making investments in development stage
biotechnology companies and is acquiring the Series A Preferred Stock and the
Warrants for its own account and not with a present view to, or for sale in
connection with, any distribution thereof in violation of the registration
requirements of the Securities Act. Purchasers consent to the placing of a
legend on the certificates representing the Series A Preferred Stock and the
Warrants to the effect that the shares of Common Stock issuable upon exercise or
conversion, as the case may be, of the Warrants, and the Series A Preferred
Stock have not been registered under the Securities Act and may not be
transferred except in accordance with applicable securities laws or an exception
therefrom. Each of the Purchasers acknowledges that it has reviewed the
Company's Form 10-K for the year ended December 31, 1996.
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6.2. Authorization. Each of the Purchasers has the power and authority
to execute and deliver this Agreement and to perform its obligations hereunder,
having obtained all required consents, if any, and this Agreement, when executed
and delivered, will constitute a legal valid and binding obligation of such
Purchaser.
6.3. Brokers. No finder, broker, agent, financial person or other
intermediary has acted on behalf of Purchasers in connection with the offering
of the Series A Preferred Stock and the Warrants or the consummation of this
Agreement or any of the transactions contemplated hereby.
7. Covenants of the Company. So long as the Purchasers, Paramount
Capital, Inc. and their affiliates, in the aggregate, beneficially own (taking
into account shares issuable upon conversion or exercise of other securities
held by them) at least five percent (5%) of the outstanding shares of any class
or classes (however designated) of capital stock entitled to vote generally in
the election of members of the Board of Directors (the "Voting Shares"), the
Company covenants and agrees with Purchasers as follows:
7.1. Books and Accounts. The Company will: (a) make and keep books,
records and accounts, which, in reasonable detail, accurately and fairly reflect
its transactions, including without limitation, dispositions of its assets; and
(b) devise and maintain a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and in accordance with
the Company's past practices or any other criteria applicable to such
statements, and to maintain accountability for assets, (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.
7.2. Periodic Reports. (a) The Company will furnish to Purchasers as
soon as practicable, and in any event within 90 days after the end of each
fiscal year of the Company (commencing with the fiscal year ended December 31,
1997), an annual report of the Company, including a balance sheet as at the end
of such fiscal year and statement of operations, stockholders' equity (deficit)
and cash flows for such fiscal year, together with the related notes thereto,
setting forth in each case in comparative form corresponding figures for the
preceding fiscal year, all of which will be correct and complete and will
present fairly the financial position of the Company and the results of its
operations and changes in its financial position as of the time and for the
period then ended. Such financial statements shall be accompanied by an
unqualified report (other than qualifications contingent upon the Company's
ability to obtain additional financing), in form and substance reasonably
satisfactory to Purchasers, of independent public accountants reasonably
satisfactory to Purchasers to the effect that such financial statements have
been prepared in accordance with the books and records of the Company and
generally accepted accounting principles applied on a basis consistent with
prior years (except as otherwise specified in such report), and present fairly
the financial position of
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the Company and the results of its operations and changes in their financial
position as of the time and for the period then ended. The Company will use its
best efforts to conduct its business so that such report of the independent
public accountants will not contain any qualifications as to the scope of the
audit, the continuance of the Company, or with respect to the Company's
compliance with generally accepted accounting principles consistently applied,
except for changes in methods of accounting in which such accountants concur.
(b) The Company will furnish to Purchasers, as soon as practicable and
in any event within 45 days after the end of each of the first three fiscal
quarters of the Company during each fiscal year, a quarterly report of the
Company consisting of an unaudited balance sheet as at the end of such quarter
and an unaudited statement of operations, stockholders' equity (deficit) and
cash flows for such quarter and the portion of the fiscal year then ended,
setting forth in each case in comparative form corresponding figures for the
preceding fiscal year. All such reports shall be certified by the Chief
Financial Officer or Vice President--Finance of the Company to be correct and
complete, to present fairly the financial position of the Company and the
consolidated results of its operations and changes in its financial position as
of the time and for the period then ended and to have been prepared in
accordance with generally accepted accounting principles.
(c) The Company shall furnish to Purchasers, within 30 days after the
end of each calendar month, an unaudited balance sheet of the Company as of the
end of such month and the related unaudited statement of operations,
stockholders' equity (deficit) and cash flows for such month and for the fiscal
year to date, setting forth in each case in comparative form the corresponding
figures for the budget for the current fiscal year, or such other financial
information as otherwise agreed to by the parties hereto. All such statements
shall be certified by the Chief Financial Officer or Vice President--Finance of
the Company to the effect that such statements fairly present the financial
condition of the Company as of the dates shown and the results of its operations
for the periods then ended and that such statements have been prepared in
conformity with generally accepted accounting principles consistently applied
except for normal, recurring, year-end audit adjustments and the absence of
footnotes.
(d) Commencing with the Company's fiscal year commencing January 1,
1997, the Company shall furnish to Purchasers, as soon as practicable and in any
event not less than sixty (60) days prior to the end of each fiscal year of the
Company, (i) an annual operating budget for the Company, for the succeeding
fiscal year, containing projections of profit and loss, cash flow and ending
balance sheets for each month of such fiscal year and (ii) a business plan for
the Company as specified in Section 7.18. The Company shall furnish to
Purchasers at least thirty (30) days prior to the date the Board of Directors is
scheduled to approve the annual operating budget and business plan referred to
above, such operating budget and business plan as proposed to be approved by the
Board of Directors. Promptly upon preparation thereof, the Company shall furnish
to Purchasers any other operating budgets or business plans that the Company may
prepare and any revisions or modifications of such previously furnished budgets
or business plans.
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(e) The annual statements and quarterly statements furnished pursuant
to Sections 7.2(a) and (b) shall include a narrative discussion prepared by the
Company describing the business operations of the Company during the period
covered by such statements. The monthly statements furnished pursuant to Section
7.02(c) shall be accompanied by a statement describing any material events,
transactions or deviations from the Company's Business Plan (as defined below)
contemplated by Section 7.18 and containing an explanation of the causes and
circumstances thereof.
7.3. Certificates of Compliance. The Company covenants that promptly
after the occurrence of any default hereunder or any default under or breach of
any material agreement, or any other material adverse event or circumstance
affecting the Company, it will deliver to Purchasers an Officers' Certificate
specifying in reasonable detail the nature and period of existence thereof, and
what actions the Company has taken and proposes to take with respect thereto.
7.4. Other Reports and Inspection. (a) The Company will furnish to
Purchasers (a) as soon as practicable after issuance, copies of any financial
statements or reports prepared by the Company for, or otherwise furnished to,
its stockholders or the Securities and Exchange Commission and (b) promptly,
such other documents, reports and financial data as Purchasers may reasonably
request. In addition the Company will, upon prior notice, make available to
Purchasers or its representatives or designees (a) all assets, properties and
business records of the Company for inspection and/or copying and (b) the
directors, officers and employees of the Company for interviews concerning the
business, affairs and finances of the Company.
7.5. Insurance. The Company will at all times maintain valid policies
of worker's compensation and such other insurance with respect to its properties
and business of the kinds and in amounts not less than is customarily maintained
by corporations engaged in the same or similar business and similarly situated,
including, without limitation, insurance against fire, loss, damage, theft,
public liability and other risks. The activities and operations of the Company
shall be conducted in a manner to as to conform in all material respects to all
applicable provisions of such policies.
7.6. Use of Proceeds; Restriction on Payments. The Company shall use
the net proceeds from the sale of the Series A Preferred Stock and Warrants to
bridge its working capital needs through such time as it can consummate an
offering of its securities. The Company covenants and agrees that it will not,
without the prior written consents of the Purchasers, directly or indirectly use
any of the proceeds to (i) repay any indebtedness of the Company, including but
not limited to any indebtedness to officers, employees, directors or principal
stockholders of the Company, but excluding accounts payable incurred in the
ordinary course of business or (ii) redeem, repurchase or otherwise acquire any
equity security of the Company, without the prior written consents of the
Purchasers. Notwithstanding the foregoing, the Company shall not make any
payments before August 15 to any parties that exceed $25,000
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(or, after August 15, that exceed $50,000) without the prior written consents of
the Partnership and the Trust.
7.7. Material Changes. The Company will promptly notify Purchasers of
any material adverse change in the business, properties, assets or condition,
financial or otherwise, of the Company, or any other material adverse event or
circumstance affecting the Company, and of any litigation or governmental
proceeding pending or, to the knowledge of the Company, threatened against the
Company or against any director or officer of the Company.
7.8. Transactions with Affiliates. Except as disclosed as Schedules
5.16 and 5.22 and, for the transactions contemplated by this Agreement, the
Company shall not (a) engage in any transaction with, (b) make any loans to, nor
(c) enter into any contract, agreement or other arrangement (i) providing for
(x) the employment of, (y) the furnishing of services by, or (z) the rental of
real or personal property from, or (ii) otherwise requiring payments to, any
officer, director or key employee of the Company or any relative of such persons
or any other "affiliate" or "associate" of such persons (as such terms are
defined in the rules and regulations promulgated under the Securities Act),
without the prior written approval of the Partnership and the Trust.
7.9. Corporate Existence, Licenses and Permits; Maintenance of
Properties; New Businesses. The Company will at all times conduct its business
in the ordinary course and cause to be done all things necessary to maintain,
preserve and renew its existence and will preserve and keep in force and effect,
all licenses, permits and authorizations necessary to the conduct of its and
their respective businesses. The Company will also maintain and keep its
properties in good repair, working order and condition, and from time to time,
to make all needful and proper repairs, renewals and replacements, so that the
business carried on in connection therewith may be properly conducted at all
times.
7.10. Other Material Obligations. The Company will comply with, (a) all
material obligations which it is subject to, or becomes subject to, pursuant to
any contract or agreement, whether oral or written, as such obligations are
required to be observed or performed, unless and to the extent that the same are
being contested in good faith and by appropriate proceedings and the Company has
set aside on its books adequate reserves with respect thereto, and (b) all
applicable laws, rules, and regulations of all governmental authorities, the
violation of which could have a material adverse effect upon the business of the
Company.
7.11. Amendment to the Certificate of Incorporation and the By-Laws.
The Company will perform and be in compliance with and observe all of the
provisions set forth in its Certificate of Incorporation and By-Laws to the
extent that the performance of such obligations is legally permissible; provided
that the fact that performance is not legally permissible will not prevent such
nonperformance from constituting an event of default under this Agreement. The
Company will not amend its Certificate of Incorporation or By-Laws or any
Certificate of Designations for any other series of Preferred Stock of the
Company so as
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adversely to affect the rights of Purchasers under this Agreement, the
Certificate of Incorporation, the By-Laws, the Warrants or the Certificate of
Designations.
7.12. Merger; Sale of Assets. The Company will not become a party to
any merger, consolidation or reorganization, or sell, lease, license, sublicense
or otherwise dispose of all or substantially all of its assets, without the
prior approval of Purchasers.
7.13. Acquisition. The Company will not acquire any interest in any
business from any person, firm or entity (whether by a purchase of assets,
purchase of stock, merger or otherwise) without the prior approval of
Purchasers.
7.14. Dividends; Distributions; Repurchases of Common Stock; Treasury
Stock. The Company shall not declare or pay any dividends on, or make any other
distribution with respect to, its capital stock, whether now or hereafter
outstanding, or purchase, acquire, redeem or retire any shares of its capital
stock, without the consent of Purchasers, provided, however, the foregoing shall
not prohibit the Company from repurchasing any shares of its Common Stock from
any present or former officer, Director or employee of the Company upon a
termination or resignation of such person from the Company.
7.15. Consents and Waivers. (a) Except as set forth on Schedule 7.15,
the Company has obtained all consents and waivers needed to enable it to perform
all of its obligations under this Agreement and the transactions contemplated
hereby.
(b) Except as set forth on Schedule 7.15, the Company has obtained from
all holders of options, warrants and other securities of the Company having any
right of first refusal, offer, sale, negotiation or similar rights or
antidilution or other rights to have the terms (including, without limitation,
conversion or exercise prices or rates) of such instruments adjusted by virtue
of the purchase and sale of the Series A Preferred Stock and the Warrants or the
other transactions contemplated by this Agreement, a written waiver in form and
substance satisfactory to Purchasers and their counsel.
7.16. Taxes and Liens. The Company will duly pay and discharge when
payable, all taxes, assessments and governmental charges imposed upon or against
the Company or its properties, or any part thereof or upon the income or profits
therefrom, in each case before the same become delinquent and before penalties
accrue thereon, as well as all claims for labor, materials or supplies which if
unpaid might by law become a lien upon any of its property, unless and to the
extent that the same are being contested in good faith and by appropriate
proceedings and the Company has set aside on its books adequate reserves with
respect thereto.
7.17. Restrictive Agreement. The Company covenants and agrees that
subsequent to the Closing, it will not be a party to any agreement or instrument
which by its terms would restrict the Company's performance of its obligations
pursuant to this Agreement, the Certificate of Incorporation, By-laws, the
Warrants or the Series A Preferred Stock.
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7.18. Business Plan. Commencing with the Company's fiscal year
commencing January 1, 1997, the Company's Chief Financial Officer or Vice
President--Finance shall prepare or have prepared and submit to the Board of
Directors not less than 60 days prior to the beginning of each fiscal year of
the Company, an updated business plan (the "Business Plan") for such year which
shall set forth the Company's product development, marketing and servicing
plans, capital expenditures and expense budgets and shall encompass a statement
of long range strategy over a five-year period and short-range tactics over a
two-year period. The Business Plan shall specify quantitative and qualitative
goals for the Company and relate the attainment of those goals to the Company's
strategic objectives.
7.19. Director and Observer. (a) For a period of five years after the
Closing Date, the Partnership and the Trust shall be entitled to nominate a
majority of the voting members of the Board of Directors of the Company
provided, however, that, to the extent such right would cause the Company to
violate Rule 4460(i) of the National Association of Securities Dealers'
Marketplace Rules, the Partnership and the Trust shall not elect such number of
directors as would violate such rule until the earlier of (1) the date of
approval by the stockholders of the Company of the transactions contemplated
herein and in the Letter of Intent, (2) the date that Rule 4460(i) no longer
applies to such transactions and (3) September 30, 1997. Notwithstanding the
foregoing, the Purchasers shall immediately, and during the entirety of such
five (5) year period, have the right to appoint at least three designees to the
Board of Directors. If necessary, the Directors of the Company will elect each
such person to the Board of Directors of the Company by creating a new position
on the Board of Directors promptly following such person's nomination by
Purchasers and shall nominate such person for election in connection with any
stockholder vote for Directors, and the Company will use its best efforts to
ensure that the stockholders of the Company vote all their voting securities in
favor of such person's election. The Company agrees to vote all voting
securities for which the Company holds proxies, granting it voting discretion,
or is otherwise entitled to vote, in favor of, and to use its best efforts in
all respect to cause, the election of each such individual proposed by the
Partnership and the Trust. In the event that a vacancy is created on the Board
of Directors at any time by the death, disability, resignation or removal (with
or without cause) of any such individual proposed and nominated by the
Partnership and the Trust, pursuant to this Agreement, the Company will, and
will use its best efforts to ensure that the stockholders of the Company, vote
all voting securities to elect each individual proposed by the Partnership and
the Trust and approved by the Company and nominated for election by the
Partnership and the Trusts to fill such vacancy and serve as a voting Director.
(b) In addition to the rights set forth in Section 7.19(a), from and
after the Closing Date, until such time as Purchasers or their affiliates shall
not beneficially own any securities of the Company, the Partnership and the
Trust shall be entitled to designate nonvoting observers who shall be entitled
to attend all meetings of the Board of Directors and any of its committees and
who shall be provided (i) reasonable prior notice of all meetings of the Board
of Directors and any of its committees, (ii) reasonable prior notice of any
action that the Board of Directors or any of its committees may take by written
consent, (iii) promptly delivered copies of all minutes and other records of
action by, and all written information furnished to,
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the Board of Directors or any of its committees and (iv) any other information
requested by such observer which a member of the Board of Directors would be
entitled to request to discharge his or her duties. Such observers shall be
entitled to the same rights to reimbursement for the expense of attendance at
meeting as any outside Director.
(c) If the Partnership and the Trust give notice to the Company that
the Partnership and the Trust desire to remove a Director proposed by the
Partnership and the Trust pursuant to this Agreement, the Company shall, and
shall use its best efforts to ensure that the stockholders of the Company shall,
vote all voting securities in favor of removing such Director if a vote of
holders of such securities shall be required to remove the Director, and the
Company agrees to take any action necessary to facilitate such removal.
(d) Each Director nominated by the Partnership and the Trust shall be
entitled to the same type and an amount of compensation at least equal to the
highest amount payable to any other Director for serving in such capacity.
(e) The Company shall take all steps necessary to limit the size of the
Board to no greater than seven members or such fewer number as designated by the
Partnership, and the Trust.
(f) Concurrently with the Closing Date, if requested by the Partnership
and the Trust, the Company shall have voted to appoint the initial Directors
nominated by the Partnership and the Trust, to its Board of Directors subject
only to such individuals' acceptance of such appointment in accordance with the
provisions of this Section 7.19, which individuals shall be identified in
writing to the Company by such time.
(g) At any time that a designee or designees of the Partnership and the
Trust serve on the Company's Board of Directors, the Partnership and the Trust
shall be entitled to representation on any committee of the Board of Directors
proportionate with their representation on the Board as a whole.
7.20. Board of Directors. (a) The Company shall promptly reimburse each
director or observer of the Company designated by the Partnership and the Trust
who is not an employee of the Company for all of his reasonable expenses
incurred in attending each meeting of the Board of Directors of the Company or
any committee thereof.
(b) The Company shall at all times maintain provisions in its By-laws
and/or Certificate of Incorporation indemnifying all directors against liability
and absolving all directors from liability to the Company and its stockholders
to the maximum extent permitted under the laws of the State of Delaware.
(c) The By-laws of the Company shall always contain provisions
consistent with the provisions of this Section 7.20 except to the extent this
Section 7.20 deals with the possible observer.
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(d) For so long as any designee of Purchasers is a director of the
Company, the Company shall procure and maintain Director and Officer Liability
Insurance covering such designees with a coverage amount and other terms
acceptable to each of the Purchasers with a reputable insurance carrier. In
addition, the Company shall enter into an indemnification agreement, in form and
substance satisfactory to the Purchasers, with each such designee.
7.21. No Subsidiaries. The Company will not create or acquire any
entity that would be a Subsidiary (as defined in Section 10.10) without the
Purchasers' prior written consents.
7.22. Publicity. (a) The Company shall not issue any press release,
make any other public announcement with respect to this Agreement or the
transactions contemplated hereby, hold any press conference nor engage in any
other publicity without obtaining the prior written approval of Purchasers,
except as may be required by law or the regulations of any securities exchange
or the Nasdaq Stock Market.
(b) The Company shall not disclose or use the names, identity,
addresses or any other information regarding each of the Purchasers or any of
its officers, directors, employees, shareholders, nominees and/or designees
without such Purchaser's prior written consent; provided, however, each of the
names of Purchasers (but not its addresses) may be disclosed in the Shelf
Registration Statement.
(c) After the Closing Date, upon request of the Partnership and the
Trust, the Company shall cause, at its sole expense, the immediate publication
of a "tombstone" advertisement in the Wall Street Journal (National Edition)
announcing the consummation of this Agreement and the transactions contemplated
herein, the exact form and substance of which shall be mutually agreed upon by
the Company and the Partnership and the Trust.
7.23. Restriction on Securities. (a) During the 18 months following the
Closing Date, the Company shall not without prior written consent of the
Partnership and the Trust, issue, offer or sell any of its equity or debt
securities (including, without limitation, any securities convertible into or
exercisable for such securities); provided that the Company may issue shares of
Common Stock upon conversion or exercise of the Company's outstanding securities
and pursuant to exercise of options under any stock option plan of the Company
in accordance with the terms of such plan (it being agreed that the issuance of
any additional options under such plan may be effected only with the prior
written consent of the Purchasers); provided, further, that the Company, with
the consents of the Partnership and the Trust, may issue options under the
Company's Non-Employee Director Stock Option Plan and shares of Common Stock
under the Company's 1993 Stock Purchase Plan in accordance with the terms of
such plans which will not be amended without the consent of the Partnership and
the Trust); provided, further, that this Section 7.23 shall not apply to the
offerings to be conducted by the Company with Paramount Capital, Inc. acting as
placement agent as contemplated in the Letter of Intent (all such exccepted
Common Stock, the "7.23 Exceptions"). During the 36-months following the Closing
Date, the Company shall not, without the prior written consents of the
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Purchasers, offer or sell any of its debt or equity securities in reliance on
Regulation S of the Securities Act. During the 36-month period following the
Closing Date, the Company will not extend the expiration date nor lower the
exercise price of any options or warrants, or take any similar action with
respect to any convertible securities of the Company, without the prior written
consent of the Partnership and the Trust.
(b) Prior to the Closing Date, the Company shall obtain the written
agreement of all executive officers and directors of the Company (and shall use
its best efforts to obtain a written agreement from all 5% or greater
stockholders of the Company, calculated without including any issuances
contemplated by this Agreement) to "lock-up" all of the shares of Common Stock
owned by each of them at any time until 24 months following the Closing Date,
and to agree not to directly or indirectly, issue, agree or offer to sell, grant
an option for the purchase or sale, assign, sell, contract to sell, sell "short"
or "short against the box" (as those terms are generally understood), pledge,
hypothecate, distribute or otherwise encumber or dispose of, any such shares
(including options, rights, warrants or other securities convertible into,
exchangeable, exercisable for or evidencing any right to purchase or subscribe
for shares of capital stock of the Company (whether or not beneficially owned by
the undersigned) or any beneficial interest therein of any shares of the Common
Stock, all in form and substance satisfactory to the Partnership and the Trust
and their counsel.
(c) The Company shall not, directly or indirectly, through any officer,
director, agent or otherwise, initiate, solicit, encourage, negotiate or discuss
with any third party (including by way of furnishing non-public information
concerning the Company or its businesses, assets or properties), nor take any
other action to facilitate any inquiries with respect to the making of, any
proposal that constitutes or may reasonably be expected to lead to, a Competing
Transaction (as defined below), provided, however, that the foregoing
prohibitions shall terminate either (x) on the date that is 210 days after the
Closing Date if the Company does not proceed with the Series B Offering or (y)
upon the final closing date of the Series B Offering if the Company does proceed
with the Series B Offering. "Competing Transaction" shall mean any proposal with
respect to (a) a possible public or private offering or placement of its
securities, (b) a recapitalization, merger or other business combination
involving the Company or any of its subsidiaries or (c) the acquisition of a
substantial portion of the assets of the Company. Notwithstanding the foregoing,
nothing shall prohibit the Board of Directors of the Company from (i) furnishing
information to, or entering into discussions or negotiations with any person or
entity that makes an unsolicited proposal with respect to a Competing
Transaction, if, and only to the extent that, (A) the Board of the Directors of
the Company, after consultation with and based upon the written advice of
independent legal counsel, determines in good faith that such action is
necessary for the Board of Directors of the Company to comply with its fiduciary
duties to stockholders under applicable law, but only in response to a written,
bona fide proposal with respect to a Competing Transaction that the Board of
Directors of the Company, after consultation with its financial advisors,
determines is financially superior to the Company, than the Series A and Series
B Offerings and related transactions (considered together as a complete
transaction), taking into account the ability of the party making such proposal
to finance such proposal and such party's ability to obtain any required
regulatory and third party
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approvals for such Competing Transaction (a "Superior Proposal") and (B) the
Company, prior to furnishing such information to, or entering into discussions
or negotiations with, such person or entity (x) provides notice to Paramount
Capital, Inc. and the Purchasers to the effect that it is furnishing information
to, or entering into discussions or negotiations with, such person or entity and
(y) receives from such person or entity an executed confidentiality agreement in
reasonably customary form; or (ii) complying with its obligations, if any, under
applicable law to disclose the existence and terms of any proposal for a
Competing Transaction.
7.24. Restriction on Liens. The Company shall not create or permit the
imposition of any liens on any of its assets from and after the Closing Date
without the prior written consents of the Purchasers.
7.25. Restrictions on Indebtedness. The Company shall not, without the
prior written consent of the Purchasers, incur, create, assume nor suffer to
exist any indebtedness (including but not limited to any indebtedness to current
executive officers, employees, directors or principal stockholders of the
Company, but excluding (x) accounts payable incurred in the ordinary course and
paid in accordance with roman numeral (iv) of paragraph 14 of the Letter of
Intent and (y) indebtedness existing on the date hereof reflected in the
Company's March 31, 1997 Financial Statement.
7.26 Blank Check Preferred. (a) In the event that the Company fails to
obtain approval from its stockholders of the inclusion in the Company's Charter
of blank check Preferred Stock in connection with the Proxy Statement prior to
June 30, 1997, then, with the consent of the Partnership and the Trust, the
Company (i) shall amend its current proxy statement (the "Proxy Statement") by
no later than July 3, 1997, and (ii) with the assistance of a proxy solicitor
acceptable to the Trust and the Partnership, shall use best efforts to obtain
approval of the inclusion of blank check Preferred Stock in its Certificate of
Incorporation by no later than July 15, 1997. In the event that the Company
fails to obtain approval from its stockholders of the inclusion in the Company's
Charter of blank check Preferred Stock in connection with the Proxy Statement,
the Company shall obtain such approval as set forth in Subsection 7.26(b) below.
(b) The Company shall obtain the Required Shareholder Approvals as soon
as possible following the Closing and, in any event, before September 30, 1997.
The Company shall, as promptly as possible, engage a nationally recognized
independent investment banking firm to render a fairness opinion on the
transactions contemplated herein and in the Letter of Intent.
7.27. Put Exercisable Upon Certain Events. In the event that the
Company does not obtain the Required Shareholder Approvals (as hereafter
defined) by September 30, 1997, each Purchaser shall have the right, for a
period of 10 years, at such Purchaser's election (the "Non-Approval Put") (i) to
require the Company to repurchase with cash, within two business days after
request is made therefor, all or any portion of the shares of Series A Preferred
Stock then owned by such Purchaser for $140 per share tendered for such
repurchase (or in the case
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of the Alternate Offering, 140% of the aggregate Dilution Value (as defined
below) of the number of shares of Alternate Offering Common tendered for such
repurchase), (ii) to require the Company to issue A Notes, within two business
days after request is made therefor, in exchange for all or any portion of the
shares of Series A Preferred Stock then owned by such Purchaser, in a principal
amount of $140 per share tendered for such repurchase (or in the case of the
Alternate Offering, in a principal amount of 140% of the aggregate Dilution
Value of the number of shares of Alternate Offering Common tendered for such
exchange) or (iii) any combination of the above.
The "Required Shareholder Approvals" shall mean any required approval
by the holders of Common Stock of the Company necessary (whether pursuant to law
or the rules of The Nasdaq Stock Market) to consummate the transactions
contemplated hereby and to provide the Purchasers with all of the rights set
forth in this Agreement and the instruments referred to herein, including,
without limitation, approvals of (a) the amendment of the Company's Certificate
of Incorporation to authorize "blank check" preferred stock, (b) the issuance
pursuant to this Agreement of Series A Preferred Stock, the Warrants and the New
Warrants (as defined in the Warrants) or any Common Stock issuable upon the
conversion or exercise of any of the foregoing, (c) the Approval Issuance and
(d) the appointment by the Purchasers of a majority of the Company's Board of
Directors.
7.28 Break-up Fee. If, by September 30, 1997, the Series A Offering is
not completed on the terms contained herein and in the Letter of Intent, or if
the required adjustments to the Conversion Price (as defined in the Certificate
of Designation for the Series A Preferred Stock) of the Series A Preferred Stock
or the conversion of the Class A and Class B Warrants into New Warrants has not
been approved or has not occurred or, in the case of the Alternate Offering, the
Approval Issuance (as defined below) has not been approved or has otherwise not
occurred, or if Paramount Capital, Inc., the Partnership and the Trust have not
appointed a majority of the Company's Board of Directors, or if the Purchasers
have not acquired capital stock of the Company representing in excess in the
aggregate of 51% of the Voting Shares, as a result of the failure of the Company
to obtain the Required Shareholder Approval or for any other reason, then, in
addition to any other rights of the Purchasers or Paramount Capital, Inc. or
obligations of the Company hereunder and under the Letter of Intent, the Company
shall pay to the Purchasers a fee of $500,000. In addition to and
notwithstanding the foregoing, whether or not the proposed financings are
completed and irrespective of the reason that the proposed financings are not
completed (including a determination by Paramount Capital, Inc., the Trust
and/or the Partnership not to proceed with the transaction for any reason) the
Company shall be responsible for, and shall reimburse the Trust and the
Partnership for, all costs incurred in connection with the Series A Transaction
(as defined in the Letter of Intent) and the transactions contemplated by the
Letter of Intent (including, without, limitation, attorney's fees, expenses and
disbursements).
7.29 Class Covenant. In the event of the Alternate Offering, in
addition to any other covenants contained herein, the Company covenants that it
shall not, without the prior written consent of the Rights Holders (as defined
below) having at least 50% of all outstanding
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Article IX Rights, (i) incur or voluntarily repay prior to the maturity thereof
any indebtedness in excess of $100,000 or (ii) authorize or issue, or increase
the authorized amount of, any equity security ranking prior to, or on a parity
with, the Common Stock (other than additional Common Stock approved in writing
by the Partnership and the Trust or any Article IX Issuances, any 7.23
Exceptions) (A) upon a Liquidation Event (as defined below), (B) with respect to
the payment of any dividends or distributions or (C) with respect to voting
rights (except for class voting rights required by law).
7.30 Listing. The Company shall, concurrently with the issuance of any
Alternate Offering Common, take all actions necessary so that the shares
comprising any such issuance are listed on any stock exchange or quotation
system on which the Common Stock trades.
7.31 Reservation of Shares; Transfer Taxes, Etc. The Company shall at
all times reserve and keep available, out of its authorized and unissued shares
of Common Stock, solely for the purpose of effecting any conversions of Series A
Preferred Stock or A Notes, any exercises of Class A and Class B Warrants, and
any Reset Issuance (as defined below), Annual Issuance (as defined below),
Dilution Issuance (as defined below) and Approval Issuance (as defined below
and, together with Reset Issuances, Annual Issuances and Dilution Issuances,
referred to herein as "Article IX Issuances"), such number of shares of its
Common Stock free of preemptive rights as shall be sufficient to effect such
conversions, exercises and Article IX Issuances from time to time required or
reasonably anticipated. The Company shall use its best efforts from time to
time, in accordance with the laws of the State of Delaware to increase the
authorized number of shares of Common Stock if at any time the number of shares
of authorized, unissued and unreserved Common Stock shall not be sufficient to
permit any required or reasonably anticipated conversions of Series A Preferred
Stock and A Notes, exercises of Class A and Class B Warrants and Article IX
Issuance. In the event, and to the extent, that the company does not have
sufficient authorized but unissued shares of Common Stock to effect any
conversion of Series A Preferred Stock or A Notes, any exercise of Warrants, any
Article IX Issuance or any other issuance of Common Stock pursuant to this
Agreement (collectively a "Common Issuance Event"), the Company shall pay each
Purchaser cash or A Notes in an amount per share of Common Stock that would have
been issued to such Purchaser pursuant to such Common Issuance Event but for the
lack of sufficient authorized but unissued Common Stock equal to the greater of
(i) 1.40 times the Dilution Value (as defined below) (or, in the case of shares
of Common Stock issuable upon conversion of the Series A Preferred Stock, or
exercise of the Warrants, 1.40 times the respective Conversion Price or exercise
price) and (ii) the Market Price, in either case determined as of the date of
the event giving rise to such Common Issuance Event.
The Company shall pay any and all issue or other taxes that may be
payable in respect to any Article IX Issuance.
7.32 D&O Insurance. The Company shall obtain, by July 10, 1997, at the
latest, a waiver (the "D&O Insurance Waiver") from the provider of its Director
and Officer
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Liability Insurance Policy of any provisions thereof that allow or require any
termination, reduction, limitation or other impairment of coverage upon a change
of control with respect to the transactions contemplated herein and in the
Letter of Intent.
8. Registration of Common Stock.
8.1. Registration. The Company will, as soon as practicable, but not
later than the earlier of (a) 30 days after the final closing date of the Series
B Offering or a Qualified Offering (as defined below) and (b) 210 days after the
Closing Date (each a "Filing Target Date"), (i) file a shelf registration
statement (the "Shelf Registration Statement") with respect to (x) the resale of
the shares of Common Stock issuable upon conversion of the Series A and Series B
Preferred Stock or, in the case of the Alternate Offering, the Alternate
Offering Common and any Common Stock to be issued pursuant to the Series B
Offering (including any Common Stock issuable upon the exercise of the Placement
Warrants and Advisory Warrants (as defined in the Letter of Intent) and any
Common Stock issuable pursuant to contractual rights created in the Series B
Offering analogous to the Article IX Rights herein, (y) the Class C Warrants and
(z) the shares of Common Stock issuable upon exercise of the Class A, Class B
and Class C Warrants (including the New Warrants, as the case may be) (together,
the "Registrable Securities") with the SEC and use its best efforts to have such
Shelf Registration Statement declared effective by the SEC prior to the date
which is 75 days after the final closing date of the Series B Offering or other
applicable Filing Target Date (subject to penalties for failure to effect such
registration in the time frames required as set forth in Section 8.6 below) and
(b) cause such Shelf Registration Statement to remain effective until such date
as the holders of the Registrable Securities have completed the distribution
described in the Shelf Registration Statement or at such time that such shares
are no longer, by reason of Rule 144(k) under the Securities Act of 1933, as
amended, required to be registered for the sale thereof by such holders, but
this sentence shall not relieve the Company of any obligation to comply with
this Article 8 as to any Registrable Securities thereafter issued. If requested
by the Purchasers, and in accordance with applicable securities laws, the Shelf
Registration Statement shall cover the direct sale of such Registrable
Securities to the holders of such securities. A "Qualified Offering" means an
equity offering (other than the Series A Offering) or series of offerings with
gross proceeds to the Company in excess of $2,000,000.
8.2. Registration Procedures. In connection with the registration of
any Registrable Securities under the Securities Act as provided in this Section
8, the Company will use its best efforts, as expeditiously as possible:
(a) To prepare and file with the Securities and Exchange Commission the
Shelf Registration Statement with respect to such Registrable Securities and use
its best efforts to cause such Shelf Registration Statement to become effective;
(b) To prepare and file with the Securities and Exchange Commission
such amendments and supplements to such Shelf Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such Shelf
Registration Statement effective
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until the disposition of all securities in accordance with the intended methods
of disposition by the seller or sellers thereof set forth in such Shelf
Registration Statement shall be completed, and to comply with the provisions of
the Securities Act (to the extent applicable to the Company) with respect to
such dispositions;
(c) To furnish to each seller of such Registrable Securities such
number of copies of such Shelf Registration Statement and of each such amendment
and supplement thereto (in each case including all exhibits), such number of
copies of the prospectus included in such Shelf Registration Statement
(including each preliminary prospectus), in conformity with the requirements of
the Securities Act, and such other documents, as such seller may reasonably
request, in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) To use its best efforts to register or qualify such Registrable
Securities covered by such Shelf Registration Statement under such other
securities or blue sky laws of such jurisdictions as any seller reasonably
requests, and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller to consummate the disposition in
such jurisdictions of the Registrable Securities owned by such seller, except
that the Company will not for any such purpose be required to qualify generally
to do business as a foreign corporation in any jurisdiction wherein it would
not, but for the requirements of this Section 8.2(d) be obligated to be
qualified, to subject itself to taxation in any such jurisdiction, or to consent
to general service of process in any such jurisdiction;
(e) To provide a transfer agent and registrar for all such Registrable
Securities covered by such Shelf Registration Statement not later than the
effective date of such Shelf Registration Statement;
(f) To notify each seller of such Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such Shelf Registration Statement contains an untrue
statement of a material fact or omits any fact necessary to make the statements
therein not misleading, and, at the request of any such seller, the Company will
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading;
(g) To cause all such Registrable Securities to be listed on each
securities exchange or automated over-the-counter trading system on which
similar securities issued by the Company are then listed;
(h) To enter into such customary agreements and take all such other
actions as reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities; and
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(i) To make available for inspection by any seller of Registrable
Securities, all financial and other records, pertinent corporation documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such seller in
connection with the Shelf Registration Statement pursuant to Section 8.1.
8.3 Registration and Selling Expenses. (a) All expenses incurred by the
Company in connection with the Company's performance of or compliance with this
Section 8, including, without limitation (i) all registration and filing fees
(including all expenses incident to filing with the National Association of
Securities Dealers, Inc.), (ii) blue sky fees and expenses, (iii) all necessary
printing and duplicating expenses and (iv) all fees and disbursements of counsel
and accountants for the Company (including the expenses of any audit of
financial statements), retained by the Company (all such expenses being herein
called "Registration Expenses"), will be paid by the Company except as otherwise
expressly provided in this Section 8.3.
(b) The Company will, in any event, in connection with any registration
statement, pay its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal, accounting
or other duties in connection therewith and expenses of audits of year-end
financial statements), the expense of liability insurance and the expenses and
fees for listing the securities to be registered on one or more securities
exchanges or automated over-the-counter trading systems on which similar
securities issued by the Company are then listed.
(c) Nothing herein shall be construed to prevent any holder or holders
of Registrable Securities from retaining such counsel (the Trust and the
Partnership to be limited to one counsel representing them both and any other
purchasers to be represented by one counsel separately from the Trust and the
Partnership) as they shall choose, the expenses of which shall be borne by the
Company.
8.4. Other Public Sales and Registrations. The Company agrees that it
will not, on its own behalf, file or cause to become effective any other
registration of any of its securities under the Securities Act or otherwise
effect a public sale or distribution of its securities (except pursuant to
registration on Form S-8 or any successor form relating to a special offering to
the employees or security holders of the Company) until at least 180 days have
elapsed after the effective date of the Shelf Registration Statement. In
addition, the Company agrees that it will use its best efforts to obtain prior
to the filing of the Shelf Registration Statement an agreement in form and
substance satisfactory to Purchasers and their counsel in their sole and
absolute discretion from each person that has the right to have the Company file
or cause to become effective any other registration of any of its securities
under the Securities Act or otherwise effect a public sale or distribution of
its securities (except pursuant to registration on Form S-8 or any successor
form relating to a special offering to the employees or security holders of the
Company), pursuant to which each such person will agree for the benefit of the
Company and
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Purchasers to waive any and all such rights until at least 180 days have elapsed
after the effective date of the Shelf Registration Statement.
8.5. Indemnification. (a) The Company hereby agrees to indemnify, to
the maximum extent permitted by law, each holder of Registrable Securities, its
officers and directors, if any, and each person, if any, who controls such
holder within the meaning of the Securities Act, against, and promptly to
reimburse them for, all losses, claims, damages, liabilities and expenses (under
the Securities Act or common law or otherwise) caused by any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or prospectus (and as amended or supplemented if the Company has
furnished any amendments or supplements thereto) or any preliminary prospectus,
which registration statement, prospectus or preliminary prospectus shall be
prepared in connection with the registration contemplated by this Section 8, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses are caused by any untrue statement or alleged untrue statement
contained in or by any omission or alleged omission from information furnished
in writing by such holder to the Company in connection with the registration
contemplated by this Section 8, provided the Company will not be liable pursuant
to this Section 8.5 if such losses, claims, damages, liabilities or expenses
have been caused by any selling security holder's failure to deliver a copy of
the registration statement or prospectus, or any amendments or supplements
thereto, after the Company has furnished such holder with the number of copies
required by Section 8.2(c).
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder shall furnish to the
Company in writing such information as is reasonably requested by the Company
for use in any such registration statement or prospectus and shall severally,
but not jointly, indemnify, to the extent permitted by law, the Company, its
directors and officers and each person, if any, who controls the Company within
the meaning of the Securities Act, against any losses, claims, damages,
liabilities and expenses resulting from any untrue statement or alleged untrue
statement of a material fact or any omission or alleged omission of a material
fact required to be stated in the registration statement or prospectus or any
amendment thereof or supplement thereto or necessary to make the statements
therein not misleading, but only to the extent such losses, claims, damages,
liabilities or expenses are caused by an untrue statement or alleged untrue
statement contained in or by an omission or alleged omission from information so
furnished in writing by such holder in connection with the registration
contemplated by this Section 8. If the offering pursuant to any such
registration is made through underwriters, each such holder agrees to enter into
an underwriting agreement in customary form with such underwriters and to
indemnify such underwriters, their officers and directors, if any, and each
person who controls such underwriters within the meaning of the Securities Act
to the same extent as hereinabove provided with respect to indemnification by
such holder of the Company. Notwithstanding the foregoing or any other provision
of this Agreement, in no event shall a holder of Registrable Securities be
liable for any such losses, claims, damages, liabilities or expenses in excess
of the lesser of (a) the net proceeds received by such holder in the offering or
(b) $1,000,000.
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(c) Promptly after receipt by an indemnified party under Section 8.5
(a) or (b) of notice of the commencement of any action or proceeding, such
indemnified party will, if a claim in respect thereof is made against the
indemnifying party under such Section, notify the indemnifying party in writing
of the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under such Section. In case any such action or
proceeding is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and, to the extent that it wishes, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
with counsel approved by such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under such Section for any legal or any other expenses subsequently
incurred by such indemnified party in connection with the defense thereof (other
than reasonable costs of investigation) unless incurred at the written request
of the indemnifying party. Notwithstanding the above, the indemnified party will
have the right to employ counsel of its own choice in any such action or
proceeding if the indemnified party has reasonably concluded that there may be
defenses available to it which are different from or additional to those of the
indemnifying party, or counsel to the indemnified party is of the opinion that
it would not be desirable for the same counsel to represent both the
indemnifying party and the indemnified party because such representation might
result in a conflict of interest (in either of which cases the indemnifying
party will not have the right to assume the defense of any such action or
proceeding on behalf of the indemnified party or parties and such legal and
other expenses will be borne by the indemnifying party). An indemnifying party
will not be liable to any indemnified party for any settlement of any such
action or proceeding effected without the consent of such indemnifying party.
(d) If the indemnification provided for in Section 8.5(a) or (b) is
unavailable under applicable law to an indemnified party in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and of
the holders of Registrable Securities on the other in connection with the
statements or omissions which resulted in such losses, claims, damages, or
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and of the holders of Registrable
Securities on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
or by the holders of Registrable Securities and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages and liabilities referred to above shall be deemed to
include, subject to the limitations set forth in Section 8.5(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to
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contribution from any person who is not guilty of such fraudulent
misrepresentation. Notwithstanding the foregoing or any other provision of this
Agreement, in no event shall a holder of Registrable Securities be liable for
any such losses, claims, damages, liabilities or expenses in excess of the
lesser of (a) the net proceeds received by such holder in the offering or (b)
$1,000,000.
(e) Promptly after receipt by the Company or any holder of Securities
of notice of the commencement of any action or proceeding, such party will, if a
claim for contribution in respect thereof is to be made against another party
(the "contributing party"), notify the contributing party of the commencement
thereof; but the omission so to notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit, or proceeding is brought
against any party, and such party notifies a contributing party of the
commencement thereof, the contributing party will be entitled to participate
therein with the notifying party and any other contributing party similarly
notified.
8.6. Additional Common Stock Issuable Upon Delay of Registration. (a)
Except to the extent any delay is due to the failure of a holder to reasonably
cooperate in providing to the Company such information as shall be reasonably
requested by the Company in writing for use in the Shelf Registration Statement,
if the Shelf Registration Statement is not filed with the Securities and
Exchange Commission within the target dates set forth in the first sentence of
Section 8.1 (the "Outside Target Date"), the Company shall declare and pay for
no additional consideration to Purchasers of additional shares of Series A
Preferred Stock and Warrants or New Warrants, as the case may be, equal to 0.25%
of the shares of Series A Preferred Stock (or, in the case of the Alternate
Offering, Common Stock, Article IX Rights and principal amount of A Notes) and
the Warrants or the New Warrants, as the case may be, then held by Purchasers
for each day after the Outside Target Date that the Registration Statement
remains unfiled.
(b) If the Shelf Registration Statement is not declared effective by
the Securities and Exchange Commission within 210 days following the Closing
Date (the "Targeted Effective Date"), the Company shall declare and pay for no
additional consideration to Purchasers additional shares of Series A Preferred
Stock (or, in the case of the Alternate Offering, Common Stock, Article IX
Rights and A Notes) and Warrants or New Warrants, as the case may be, equal to
0.25% of the shares of the Series A Preferred Stock (or, in the case of the
Alternate Offering, Common Stock, Article IX Rights and principal amount of A
Notes) and the Warrants or the New Warrants, as the case may be, then held by
Purchasers for each day the Shelf Registration Statement is not declared
effective by the Securities and Exchange Commission following the occurrence of
the Targeted Effective Date.
(c) All shares of Common Stock issuable pursuant to Section 8.6(a) and
(b) shall be duly authorized, fully paid and nonassessable shares of Common
Stock and shall be included in the Shelf Registration Statement contemplated by
Section 8.1. Such shares shall be registered
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in Purchasers' names or the name of the nominee(s) of Purchasers in such
denominations as Purchasers shall request pursuant to instructions delivered to
the Company.
9. Article IX Rights.
In the event of the Alternate Offering, the Purchasers shall have the
additional contractual rights contained in this Article 9.
9.1 Definitions. As used in this Agreement, the following terms shall
have the following meanings, unless the context otherwise requires:
(a) "Article IX Rights" shall mean the rights to receive all
Reset Issuances, Annual Issuances, Dilution Issuances and Approval Issuances,
the right to exercise the Liquidation Put and Approval Call, the other rights
provided in this Article 9, and the right to give or withhold consent under
Section 7.29.
(b) "Change of Shares" shall mean any event that necessitates an
adjustment to the Dilution Value (as defined below) pursuant to Section 9.7
below.
(c) The "Closing Bid Price" of any security, for any trading day
(as defined below), shall be the reported per share closing bid price, regular
way, of such security on the relevant Stock Market (as defined below) on such
trading day or, if there were no transactions on such trading day, the average
of the reported closing bid and asked prices, regular way, of such security on
the relevant Stock Market on such trading day.
(d) "Dilution Event" shall mean any event that necessitates an
adjustment to the Dilution Value (as defined below) pursuant to Section 9.6
below.
(e) The "Dilution Value" initially shall be $0.46875. The
Dilution Value is further subject to adjustment pursuant to Sections 9.2, 9.6,
9.7, 9.16 and 9.17.
(f) "Fair Market Value" of any asset (including any security)
means the fair market value thereof as mutually determined by the Company and
the Partnership and the Trust If the Company and the Partnership and the Trust
are unable to reach agreement on any valuation matter, such valuation shall be
submitted to and determined by a nationally recognized independent investment
bank selected by the Board of Directors of the Company and the Partnership and
the Trust (or, if such selection cannot be agreed upon promptly, or in any event
within ten days, then such valuation shall be made by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in New York City in accordance with its rules), the costs of which
valuation shall be paid for by the Company.
(g) The "Issuance Base Amount" for each Purchaser, at any time,
means the sum of (i) the portion of the Alternate Offering Quantity allocated to
such Purchaser pursuant to Exhibit E hereof, (ii) the number of shares of any
Reset Issuances (as defined below)
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made to such Purchaser occurring before such time, (iii) the number of shares of
any Annual Issuances (as defined below) made to such Purchaser occurring before
such time, (iv) the number of shares of any Dilution Issuances (as defined
below) made to such Purchaser occurring before such time, (v) the number of
shares of Common Stock issued to such Purchaser upon conversion of all or any
portion of the principal and interest of the A Notes and (vi) the number of
shares of Common Stock issued to such Purchaser upon any Approval Issuances
(with appropriate adjustments for any Change of Shares and subject to reduction
pursuant to Section 9.10). For any transferee Rights Holder, the Issuance Base
Amount, at any time, shall be the number of shares of Common Stock related to
such Article IX Rights as were transferred to such Rights Holder plus the number
of shares of any Reset Issuance, Annual Issuance, Dilution Issuance, Approval
Issuance and any issuance pursuant to conversion of any principal and/or
interest of A Notes made to such Rights Holder occurring subsequent to such
transfer but before such time. The Issuance Base Amount shall include Dilution
Issuances which would have been required but for the operation of Paragraph
9.6(b)(i).
(h) "Liquidation Event" shall mean any (i) liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, (ii)
sale or other disposition of all or substantially all of the assets of the
Company or (iii) any consolidation, merger, combination, reorganization or other
transaction in which the Company is not the surviving entity or shares of Common
Stock constituting more than 50% of the voting power of the Company are
exchanged for or changed into stock or securities of another entity, cash and/or
any other property (clause (iii) of this Subsection being referred to as a
"Merger Transaction"). Notwithstanding the above, any consolidation, merger,
combination, reorganization or other transaction in which the Company is not the
surviving entity but the stockholders of the Company immediately prior to such
transaction own in excess of 50% of the voting power of the corporation
surviving such transaction and own such interest in substantially the same
proportions as prior to such transaction, shall not be considered a Liquidation
Event or a Merger Transaction, provided that the surviving corporation has made
appropriate provisions acceptable to the Rights Holders to ensure that the
Article IX Rights survive any such transaction.
(i) "Market Price" shall mean the average Closing Bid Price
(adjusted, where appropriate, for any Change of Shares) for twenty (20)
consecutive trading days, ending with the trading day prior to the date as of
which the Market Price is being determined, provided that if the prices referred
to in the definition of Closing Bid Price cannot be determined for such period,
"Market Price" shall mean Fair Market Value.
(j) The "Post-Dilution Common Quantity" means the quotient of the
Pre-Dilution Common Value (as defined below) divided by the Dilution Value
immediately following the relevant Dilution Event or Reset Event.
(k) The "Pre-Dilution Common Value" means the product of the
Issuance Base Amount times the Dilution Value immediately preceding the relevant
Dilution Event or Reset Event.
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(l) "Rights Holder" shall mean the Purchasers or any Person who
succeeds to any such Purchaser's respective Article IX Rights pursuant to
Section 9.9.
(m) The "Stock Market" shall mean, with respect to any security,
the principal national securities exchange on which such security is listed or
admitted to trading or, if such security is not listed or admitted to trading on
any national securities exchange, shall mean The Nasdaq National Market System
or The Nasdaq SmallCap Market (collectively, "Nasdaq") or, if such security is
not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such security is
not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as
furnished by any NASD member firm selected from time to time by the Company for
that purpose.
(n) A "trading day" shall mean a day on which the Stock Market is
open for the transaction of business.
(o) The "Transfer Agent"shall mean American Stock Transfer &
Trust Company or the duly appointed successor thereto serving as the transfer
agent for the Common Stock.
9.2 Reset. (a) The Dilution Value in effect immediately prior to the
date that is 12 months after the Closing Date (the "Reset Date") shall be
adjusted and reset effective as of the Reset Date if the Market Price of the
Common Stock as of the Reset Date (the "12-Month Trading Price") is less than
140% of the then applicable Dilution Value (a "Reset Event"). Upon the
occurrence of a Reset Event, the Dilution Value shall be reduced to be equal to
the greater of (A) the 12-Month Trading Price divided by 1.40, and (B) 25% of
the then applicable Dilution Value.
(b) Within 15 days of the Reset Date, the Company shall prepare a
certificate signed by the principal financial officer of the Company setting
forth the Dilution Value as of the Reset Date, showing in reasonable detail the
facts upon which such Dilution Value is based, and such certificate shall
forthwith be filed with the Transfer Agent. A notice stating that the Dilution
Value has been adjusted pursuant to this paragraph, or that no adjustment is
necessary, and setting forth the Dilution Value in effect as of the Reset Date
shall be mailed as promptly as practicable after the Reset Date by the Company
to all Rights Holders at their last addresses as they shall appear in the
Transfer Agent's record books.
9.3 Reset Issuance. If there is any change in the Dilution Value as a
result of Subsection 9.2(a), then, on such date, the Company shall issue to each
Rights Holder a number of shares of Common Stock (the "Reset Issuance") equal to
the difference between such Rights Holder's respective Post-Dilution Common
Quantity minus such Rights Holder's respective Issuance Base Amount.
9.4 Annual Issuances. On each anniversary of the Reset Date (or the
next succeeding business day), the Company shall issue (each a "Annual
Issuance") to each Rights
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Holder a number of shares of Common Stock having an aggregate Market Price equal
to 10% of the product of (i) such Rights Holder's respective Issuance Base
Amount on the applicable anniversary date times (ii) 140% of the Dilution Value
immediately prior to such Annual Issuance.
9.5 Dilution Issuances. Upon the occurrence of any Dilution Event, the
Company shall issue (each a "Dilution Issuance") to each Rights Holder a number
of shares of Common Stock equal to the difference of such Rights Holder's
respective Post-Dilution Common Quantity minus such Rights Holder's respective
Issuance Base Amount.
9.6 Anti-Dilution Adjustments.
(a) Except as otherwise provided in Subsection 9.6(c), in the
event the Company shall, at any time or from time to time after the date hereof,
sell or issue any shares of Common Stock for a consideration per share less than
either (i) the Dilution Value in effect on the date of such sale or issuance or
(ii) the Market Price of the Common Stock as of the date of the sale or issuance
(any such sale or issuance a "Dilutive Issuance"), then, and thereafter upon
each further Dilutive Issuance, the Dilution Value in effect immediately prior
to such Dilutive Issuance shall be changed to a price (rounded to the nearest
cent) determined by multiplying the Dilution Value in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to the Dilutive Issuance
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Paragraph 9.6(b)(v) below) for the issuance
of such additional shares would purchase at the greater of (x) the Dilution
Value in effect on the date of such issuance or (y) the Market Price of the
Common Stock as of such date, and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after the Dilutive Issuance.
Such adjustment shall be made successively whenever such an issuance is made.
(b) For purposes of Subsection 9.6(a), the following Paragraphs
(i) to (v) shall also be applicable:
(i) No adjustment of the Dilution Value shall be made unless
such adjustment would require a decrease of at least $.01; provided that any
adjustments which by reason of this Paragraph 9.6(b)(i) are not required to be
made shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with adjustments so carried
forward, shall require a decrease of at least $.01 in the Dilution Value then in
effect hereunder.
(ii) In case of (A) the sale or other issuance by the
Company (including as a component of a unit) of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common Stock or
any securities convertible into or exchangeable for Common Stock (such
securities convertible, exercisable or exchangeable into Common Stock being
herein called "Convertible Securities"), or (B) the issuance by the
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Company, without the receipt by the Company of any consideration therefor, of
any rights or warrants to subscribe for or purchase, or any options for the
purchase of, Common Stock or Convertible Securities, whether or not such rights,
warrants or options, or the right to convert or exchange such Convertible
Securities, are immediately exercisable, and the consideration per share for
which Common Stock is issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the minimum aggregate consideration, as set forth in
the instrument relating thereto without regard to any antidilution or similar
provisions contained therein for a subsequent adjustment of such amount, payable
to the Company upon the exercise of such rights, warrants or options, plus the
consideration received by the Company for the issuance or sale of such rights,
warrants or options, plus, in the case of such Convertible Securities, the
minimum aggregate amount, as set forth in the instrument relating thereto
without regard to any antidilution or similar provisions contained therein for a
subsequent adjustment of such amount, of additional consideration, if any, other
than such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number, as set forth in the instrument
relating thereto without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such amount, of shares of
Common Stock issuable upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities issuable upon the
exercise of such rights, warrants or options) is less than either the Dilution
Value or the Market Price of the Common Stock as of the date of the issuance or
sale of such rights, warrants or options, then such total maximum number of
shares of Common Stock issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible Securities (as of
the date of the issuance or sale of such rights, warrants or options) shall be
deemed to be "Common Stock" for purposes of Subsection 9.6(a) and shall be
deemed to have been sold for an amount equal to such consideration per share and
shall cause an adjustment to be made in accordance with Subsection 9.6(a).
(iii) In case of the sale or other issuance by the Company
of any Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per share for
which Common Stock is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the total amount of
consideration received by the Company for the sale of such Convertible
Securities, plus the minimum aggregate amount, as set forth in the instrument
relating thereto without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such amount, of additional
consideration, if any, other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum number, as set forth in
the instrument relating thereto without regard to any antidilution or similar
provisions contained therein for a subsequent adjustment of such amount, of
shares of Common Stock issuable upon the conversion or exchange of such
Convertible Securities) is less than either the Dilution Value or the Market
Price of the Common Stock as of the date of the sale of such Convertible
Securities, then such total maximum number of shares of Common Stock issuable
upon the conversion or exchange of such Convertible Securities (as of the date
of the sale of such Convertible Securities) shall be deemed to be "Common Stock"
for purposes of Subsection
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9.6(a) and shall be deemed to have been sold for an amount equal to such
consideration per share and shall cause an adjustment to be made in accordance
with Subsection 9.6(a).
(iv) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities referred to in
Paragraphs (ii) or (iii) of this Subsection 9.6(b) or any other securities of
the Company convertible, exchangeable or exercisable for shares of Common Stock,
for any reason other than an event that would require adjustment to prevent
dilution, so that the consideration per share received by the Company after such
modification is less than either the Dilution Value or the Market Price of the
Common Stock as of the date prior to such modification, then such securities, to
the extent not theretofore exercised, converted or exchanged, shall be deemed to
have expired or terminated immediately prior to the date of such modification
and the Company shall be deemed for purposes of calculating any adjustments
pursuant to this Section 9.6 to have issued such new securities upon such new
terms on the date of modification. Such adjustment shall become effective as of
the date upon which such modification shall take effect. On the expiration or
cancellation of any such right, warrant or option or the termination or
cancellation of any such right to convert or exchange any such Convertible
Securities, the Dilution Value then in effect hereunder shall forthwith be
readjusted to such Dilution Value as would have obtained (A) had the adjustments
made upon the issuance or sale of such rights, warrants, options or Convertible
Securities been made upon the basis of the issuance of only the number of shares
of Common Stock theretofore actually delivered (and the total consideration
received therefor) upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities and (B) had
adjustments been made on the basis of the Dilution Value as adjusted under
clause (A) of this sentence for all transactions (which would have affected such
adjusted Dilution Value) made after the issuance or sale of such rights,
warrants, options or Convertible Securities.
(v) In case of the sale of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or purchase, or
any options for the purchase of, Common Stock or Convertible Securities, the
consideration received by the Company therefor shall be deemed to be the gross
sales price therefor without deducting therefrom any expense paid or incurred by
the Company or any underwriting discounts or commissions or concessions paid or
allowed by the Company in connection therewith. In the event that any securities
shall be issued in connection with any other securities of the Company, together
comprising one integral transaction in which no specific consideration is
allocated among the securities, then each of such securities shall be deemed to
have been issued for such consideration as the Board of Directors of the Company
determines in good faith; provided, however that if the Partnership or the Trust
disagrees with such determination, the Company shall retain, at its own expense,
an independent investment banking firm acceptable to the Partnership and the
Trust for the purpose of obtaining an appraisal.
(c) Notwithstanding any other provision hereof, no adjustment to
the Dilution Value will be made:
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(i) upon the exercise of any of the options or warrants
outstanding on the date hereof under the Company's existing stock option plans;
or
(ii) upon the issuance or exercise of options which may
hereafter be granted with the approval of the Board of Directors, or exercised,
under any employee benefit plan of the Company to officers, directors,
consultants or employees, but only with respect to such options as are
exercisable at prices no lower than the Closing Bid Price (or, if the prices
referenced in the definition of Closing Bid Price cannot be determined, the Fair
Market Value) of the Common Stock as of the date of grant thereof; or
(iii) upon the issuance of stock which may hereafter be
purchased or sold with the approval of the Board of Directors, under the 1993
Employee Stock Purchase Plan of the Company to officers, directors, consultants
or employees, but only with respect to such shares as are purchased and/or sold
in accordance with the current plan and at prices no lower than 85% of the
Closing Bid Price (or, if the prices referenced in the definition of Closing Bid
Price cannot be determined, 85% of the Fair Market Value) of the Common Stock as
of the date of purchase and/or sale thereof; or
(iv) upon the issuance of Common Stock to Rights Holders
pursuant to any Reset Issuance, Annual Issuance or Dilution Issuance, upon
issuance or exercise of the Placement Warrants or Advisory Warrants (as defined
in the Letter of Intent), or upon the issuance or exercise of the Class A, Class
B or Class C Warrants issued (A) on or prior to the Closing Date or pursuant to
the Series B Offering or (B) pursuant to the exercise of the Placement Warrants
or Advisory Warrants (as defined in the Letter of Intent), or upon the issuance
or exercise of any Class A, Class B and Class C Warrants approved by the
Partnership and the Trust; or
(v) upon the issuance or sale of Common Stock or Convertible
Securities pursuant to the exercise of any rights, options or warrants to
receive, subscribe for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, whether or not such rights, warrants or options
were outstanding on the Closing Date or were thereafter issued or sold, provided
that an adjustment was either made or not required to be made in accordance with
Subsection 9.6(a) in connection with the issuance or sale of such securities or
any modification of the terms thereof; or
(vi) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, provided that any
adjustments required to be made upon the issuance or sale of such Convertible
Securities or any modification of the terms thereof were so made, and whether or
not such Convertible Securities were outstanding on the Closing Date or were
thereafter issued or sold.
Paragraph 9.6(b)(iv) shall nevertheless apply to any modification
of the rights of conversion, exchange or exercise of any of the securities
referred to in Paragraphs (i), (ii), (iii), (v), (vi) and, to the extent
effected with respect to fewer than all of the outstanding
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Class A, Class B and Class C Warrants, as the case may be, Paragraph (iv) of
this Subsection 9.6(c).
(d) As used in this Section 9.6, the term "Common Stock" shall
mean and include the Company's Common Stock authorized on the date hereof and
shall also include any capital stock of any class of the Company thereafter
authorized which shall not be limited to a fixed sum or percentage in respect of
the rights of the holders thereof to participate in dividends and in the
distribution of assets upon the voluntary liquidation, dissolution or winding up
of the Company.
(e) The Company from time to time may decrease the Dilution Value
by any amount for any period of time if the period is at least 20 days and if
the decrease is irrevocable during the period. Whenever the Dilution Value is so
decreased, the Company shall mail to the Rights Holders a notice of the decrease
at least 15 days before the date the decreased Dilution Value takes effect, and
such notice shall state the decreased Dilution Value and the period it will be
in effect.
The Company may make such decreases in the Dilution Value, in
addition to those required or allowed by this Article IX, as shall be determined
by it, as evidenced by a resolution of the Board of Directors, to be advisable
in order to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
9.7 Change of Shares Adjustments. In the event the Company shall, at
any time or from time to time after the date hereof (i) issue any shares of
Common Stock as a stock dividend to the holders of Common Stock or (ii)
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such issuance, subdivision or combination being
herein called a "Change of Shares"), then the Dilution Value shall be changed to
a price (rounded to the nearest cent) determined by multiplying the Dilution
Value in effect immediately prior to such Change of Shares by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the Change of Shares and the denominator of which shall be
the number of shares of Common Stock outstanding immediately following the
Change of Shares.
9.8 Liquidation Put. (a) The Rights Holder may require the Company to
repurchase with cash any number (not to exceed such Rights Holder's Issuance
Base Amount) of shares of Common Stock then owned by such Rights Holder for 140%
of the aggregate Dilution Value of such shares; provided, however, in the event
of a Merger Transaction, any repurchase pursuant to this Section 9.8 may be paid
in cash, property (valued as provided in Subsection 9.8 (d)) and/or securities
(valued as provided in Subsection 9.8 (d)) of the entity surviving such Merger
Transaction.
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(b) The Rights Holder covenants not to exercise the Liquidation
Put unless a Liquidation Event has occurred (it being understood that this
Section 9.8 shall not affect any rights under Section 7.27).
(c) The Rights Holder's Article IX Rights shall be terminated to
the pro rata extent of any exercise of such Rights Holder's Liquidation Put.
(d) Any securities or other property to be delivered to the
Rights Holder pursuant to this Section 9.8 shall be valued as follows:
(i) Securities not subject to an investment letter or other
similar restriction on free marketability:
(A) If actively traded on the Stock Market, the value
shall be deemed to be the Market Price of such
securities as of the third day prior to the date
of valuation.
(B) If not actively traded on the Stock Market, the
value shall be the Fair Market Value of such
securities.
(ii) For securities for which there is an active public
market but which are subject to an investment letter or other restrictions on
free marketability, the value shall be the Fair Market Value thereof, determined
by discounting appropriately the Market Price thereof.
(iii) For all other securities, the value shall be the Fair
Market Value thereof.
9.9 Transfer of Article IX Rights. The Rights Holders' Article IX
Rights are transferrable along with the Common Stock to which they relate. Any
such transferee of Article IX Rights shall provide his or her name and address
to the Company. Any transfer of Common Stock and related Article IX Rights shall
be performed in accordance with applicable securities laws and regulations.
9.10 Adjustments to Issuance Base Amount. Upon the termination of any
of the Rights Holder's Article IX Rights, such Rights Holder's Issuance Base
Amount shall be proportionally reduced.
9.11 Notices.
(a) After each adjustment of the Dilution Value pursuant to
Sections 9.2, 9.6, 9.7 and 9.16 the Company will promptly prepare a certificate
signed by the Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Dilution Value as so adjusted
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and (ii) a brief statement of the facts accounting for such adjustment. The
Company will promptly file such certificate with the Transfer Agent and cause a
brief summary thereof to be sent by ordinary first class mail to each Rights
Holder at his or her last address as it shall appear on the Transfer Agent's
record books. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of such adjustment. The affidavit of
an officer of the Transfer Agent or the Secretary or an Assistant Secretary of
the Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts therein stated. The Transfer Agent may rely on
the information in the certificate as true and correct and has no duty nor
obligation independently to verify the amounts or calculations therein set
forth.
(b) After any adjustment in the Issuance Base Amount resulting
from (i) any Reset Issuance, Annual Issuances or Dilution Issuances, (ii) any
Change in Shares or (iii) any termination of Article IX Rights, the Company will
promptly prepare a certificate signed by the Chief Executive Officer or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Company setting forth: (x) the Issuance Base Amount
immediately preceding and succeeding such adjustment and (y) a brief statement
of the facts accounting for such adjustment. The Company will promptly file such
certificate with the Transfer Agent and cause a brief summary thereof to be sent
by ordinary first class mail to each Rights Holder at his or her last address as
it shall appear on the Transfer Agent's record books. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of such adjustment. The affidavit of an officer of the Transfer Agent
or the Secretary or an Assistant Secretary of the Company that such notice has
been mailed shall, in the absence of fraud, be prima facie evidence of the facts
therein stated. The Transfer Agent may rely on the information in the
certificate as true and correct and has no duty nor obligation independently to
verify the amounts or calculations therein set forth.
9.12 Treasury Stock. Any Reset Issuance, Annual Issuance, Dilution
Issuance or Approval Issuance shall be made with duly authorized, fully-paid and
non-assessable shares of Common Stock, in accordance with Delaware Law, and
shall be drawn from the treasury stock of the Company to the extent available.
The Company shall promptly furnish to the Partnership and the Trust, upon
request, an opinion of counsel reasonably satisfactory to the Partnership and
the Trust that the requirements of this Section 9.12 have been met as to any
issuance referred to herein. The Company shall not otherwise sell, issue, cancel
or otherwise impair any of its treasury stock without the Partnership and the
Trust's prior written consent.
9.13 Mandatory Termination of Article IX Rights. At any time on or
after the Reset Date, provided that the Required Shareholder Approvals have been
obtained, the Company may cause the Rights Holder's Article IX Rights to be
terminated if the Closing Bid Price of the Common Stock shall have exceeded 300%
of the then applicable Dilution Value for the 20 consecutive trading days ending
on the third business day prior to the date of notice of termination. No greater
than 60 nor fewer than 20 days prior to the date of any such mandatory
termination, notice by first class mail, postage prepaid, shall be given to the
Rights Holders, addressed to such Rights Holders at their last addresses as they
shall appear in the Transfer
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Agent's record books. Each such notice shall specify the date fixed for
termination. Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given by the Company on the date deposited in the
mail, whether or not the Rights Holder receives such notice; and failure
properly to give such notice by mail, or any defect in such notice, to any
Rights Holders shall not affect the validity of the proceedings for the
termination of any other Rights Holders' Article IX Rights.
9.14 With the written consent of the Company and the Rights Holders
holding at least a majority of the issued and outstanding Common Stock subject
to Article IX Rights, any provision of this Article IX may be waived (either
generally or in a particular instance, either retroactively or prospectively and
either for a specified period of time or indefinitely) or amended. Upon the
effectuation of each such waiver or amendment, the Company shall promptly give
written notice thereof to the Rights Holders, if any, who have not previously
received notice thereof or consented thereto in writing.
9.15 Approval Call. (a) Upon, and within five (5) years following, the
Company's obtaining the approval of its stockholders of the inclusion in the
Company's Certificate of Incorporation of blank check preferred stock, each
Rights Holder may require the Company to authorize and designate the Series A
Preferred Stock and each Rights Holder may require (the "Approval Call") the
Company to sell an amount Series A Preferred Stock to such Rights Holder
determined by dividing the product of (a) such Rights Holder's Issuance Base
Amount times the Dilution Value at such time by (b) the per share stated value
of the Series A Preferred Stock, at an exercise price equal to the aggregate
stated value of any shares of Series A Preferred Stock so called. The Approval
Call may be exercised with respect to all or any portion of the permitted
quantity of Series A Preferred Stock, and shall survive any exercise, to the
extent of any portion of such permitted quantity of Series A Preferred Stock
with respect to which it has not yet been exercised.
(b) The Rights Holder's Article IX Rights shall be terminated to
the pro rata extent of any exercise of such Rights Holder's Approval Call.
(c) The exercise price of the Approval Call shall be paid by the
Rights Holders in shares of Common Stock valued at their aggregate Dilution
Value at such time.
(d) The Registration Rights contained in Article 8 shall apply to
the Common Stock issuable upon the conversion of the Series A Preferred Stock
issuable upon exercise of the Approval Call.
9.16. Approval Issuance. (a) Immediately upon the earliest of (i) the
approval by the holders of Common Stock of the Company of the provisions of this
Section 9.16, to the extent such approval is necessary pursuant to Rule 4460(i)
of the National Association of Securities Dealers' Marketplace Rules, (ii) any
event which renders such stockholder approval
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unnecessary or which renders such Rule inapplicable and (iii) September 30, 1997
(such earliest date, the "Approval Date"), the Dilution Value shall be adjusted
as provided in Subsection 9.16(b) the Company shall issue to each Rights Holder
a number of fully paid and non-assessable shares of Common Stock, free of
preemptive rights, (the "Approval Issuance") equal to such Rights Holder's
respective Post-Dilution Common Quantity minus such Rights Holders respective
Issuance Base Amount at such time.
(b) Upon the Approval Date, the Dilution Value shall be adjusted
to equal the lesser of (x) $.29 and (y) 50% of the average Closing Bid Price for
either (A) the thirty consecutive trading days immediately preceeding the
Approval Date, (B) the five consecutive trading days immediately preceding the
Approval Date or (C) the five consecutive trading days immediately succeeding
the Approval Date, whichever is lowest.
9.17. (a) The Dilution Value is subject to reduction as described below
upon each closing of the Series B Offering or any other Qualified Offering in
the event that the quotient of (a) the price per unit sold in the Series B
Offering or other Qualified Offering divided by (b) the quantity of Common Stock
included in each unit sold in such Series B Offering or other Qualified Offering
(such quotient, the "Qualified Offering Dilution Value") is less than the
Dilution Value at such time (or, in the event that securities other than Common
Stock are sold in any such Series B Offering or other Qualified Offering, the
"Qualified Offering Dilution Value" shall mean the lowest exercise price or
conversion price of any such securities). In the event of any such adjustment,
the Dilution Value shall be reduced to equal the lowest Qualified Offering
Dilution Value at any such closing of the Series B Offering or other Qualified
Offering.
(b) Upon any adjustment to the Dilution Value pursuant to this Section
9.17, the Company shall issue to each Rights Holder a number of shares of Common
Stock equal to the difference of such Rights Holder's respective Post-Dilution
Common Quantity minus such Rights Holder's respective Issuance Base Amount.
10. Certain Definitions. For the purposes of this Agreement the
following terms have the respective meanings set forth below:
10.1. "Affiliate" means any person, corporation, firm or entity which
directly or indirectly controls, is controlled by, or is under common control
with the indicated person, corporation, firm or entity.
10.2. "Common Stock" means the Company's Common Stock.
10.3. "Generally Accepted Accounting Principles" means generally
accepted accounting principles consistently applied.
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10.4. "Officers' Certificate" means a certificate executed on behalf of
the Company by its President, Chairman of the Board, Chief Executive Officer,
Chief Financial Officer, Vice President--Finance, Secretary and/or one of its
other Vice- Presidents.
10.5. "Registrable Securities" means (i) the Common Stock issuable upon
conversion of the Series A Preferred Stock and exercise of the Warrants (or the
New Warrants) purchased pursuant to Section 1.1 (or, in the case of the
Alternate Offering, all Alternate Offering Common) (ii) any other shares of
Common Stock now owned or hereafter acquired by Purchasers (whether Common Stock
owned directly or underlying convertible securities of the Company). For
purposes of this Agreement, any shares of Common Stock issued pursuant to
Section 8.6 shall be deemed to be Registrable Securities and shall be included
in the Shelf Registration Statement contemplated by Section 8.1.
10.6. "Securities" means the Series A Preferred Stock (or, in the case
of the Alternate Offering, the Alternate Offering Common and the A Notes), the
Warrants (or the New Warrants) and any Common Stock issuable upon conversion or
exercise of the foregoing whether issued at the Closing or thereafter.
10.7. "Securities Act" means, as of any given time, the Securities Act
of 1933, as amended, or any similar federal law then in force.
10.8. "Securities Exchange Act" means, as of any given time, the
Securities Exchange Act of 1934, as amended, or any similar federal law then in
force.
10.9. "Securities and Exchange Commission" includes any governmental
body or agency succeeding to the functions thereof.
10.10. "Subsidiary" means any person, corporation, firm or entity at
least the majority of the equity securities (or equivalent interest) of which
are, at the time as of which any determination is being made, owned of record or
beneficially by the Company, directly or indirectly, through any Subsidiary or
otherwise.
11. Company Indemnities. (a) The Company agrees to indemnify and hold
harmless the Partnership, the Trust and Paramount Capital, Inc. and each
selected dealer selected by Paramount Capital, Inc., if any, and their
respective partners, affiliates, shareholders, directors, officers, agents,
advisors, representatives, employees, counsel and controlling persons within the
meaning of the Securities Act of 1933, as amended, and each person serving as a
Director of the Company as a designee of the Purchasers (a "Director Designee")
(any of the foregoing, a "Paramount Indemnified Party") against any and all
losses, liabilities, claims, damages and expenses whatsoever (and all actions in
respect thereof) (including, without limitation, any shareholder lawsuits) and
promptly to reimburse any such Paramount Indemnified Party for legal fees and
related expenses as incurred (including, but not limited to the costs of giving
testimony or furnishing documents in response to a subpoena or otherwise, the
costs of investigating, preparing, pursuing or defending any such action or
claim whether or not pending
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or threatened and whether or not Paramount Capital Inc. or any Paramount
Indemnified Party is a party thereto), insofar as such losses, liabilities,
claims, damages or expenses arise out of, relate to, are in incurred in
connection with, or are in any way a result of, (i) the engagement of Paramount
Capital, Inc. pursuant to the Letter of Intent, the Placement Agency Agreement
(as defined in the Letter of Intent), Advisory Agreement (as defined in the
Letter of Intent), or other offering documents or any of the transactions
contemplated by this Agreement and the other offering documents (the
"Engagement"), including any modifications or future additions to such
engagement and related activities prior to the date hereof, (ii) any act by
Paramount Capital, Inc. the Partnership, the Trust or any other Paramount
Indemnified Party taken in connection with the Engagement or the transactions
contemplated herein or taken by a Director Designee in accordance with, or to
ensure compliance by the Company with, the provisions of this Agreement, (iii) a
breach of any representation, warranty, covenant, or agreement of the Company
contained in this Agreement, the Placement Agency Agreement, the Letter of
Intent or any of the other offering documents, (iv) the employment by the
Company of any device, scheme or artifice to defraud, or the engaging by the
Company in any act, practice or course of business which operates or would
operate as a fraud or deceit, or any conspiracy with respect thereto, in
connection with the sale of the Units, or (v) any untrue statement or alleged
untrue statement of a material fact contained herein or in any of the Series A
or Series B offering documents or the omission or alleged omission therefrom of
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except to the
extent any of the foregoing are finally and fully adjudicated by a court of
competent jurisdiction to be a direct result of the intentional misconduct of
any Paramount Indemnified Party.
(b) The Company agrees to indemnify and hold harmless a Paramount
Indemnified Party to the same extent as the foregoing indemnity, and subject to
the limitations set forth therein, against any and all loss, liability, claim,
damage and expense whatsoever directly arising out of the exercise by any person
of any right under the Securities Act of 1933, as amended, or the Securities and
Exchange Act of 1934, as amended, or the securities or Blue Sky laws of any
state on account of violations of the representations, warranties or agreements
set forth herein and in any documents related hereto.
12. Miscellaneous.
12.1. Termination; Survival of Representations, Warranties and
Covenants. Except as otherwise provided for in this Agreement all
representations, warranties, covenants and agreements contained in this
Agreement, or in any document, exhibit, schedule or certificate by any party
delivered in connection herewith shall survive the execution and delivery of
this Agreement and the Closing Date and the consummation of the transactions
contemplated hereby, regardless of any investigation made by Purchasers or on
their behalf.
12.2. Expenses. The Company shall pay all its own expenses in
connection with this Agreement and the transactions contemplated herein. The
Company agrees to pay promptly and save the Partnership and the Trust harmless
against liability for the payment all expenses
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incurred by the Company and the Partnership and the Trust in connection with the
preparation and consummation of the Agreement and the transactions contemplated
herein, including but not limited to: all costs and expenses under Section 8,
including without limitation, the costs of preparing, printing and filing with
the Securities and Exchange Commission the Shelf Registration Statement and
amendments, post-effective amendments, and supplements thereto; preparing,
printing and delivering exhibits thereto and copies of the preliminary, final
and supplemental prospectuses; preparing, printing and delivering all selling
documents, including but not limited to the subscription agreement, the warrant
agreement and stock and warrant certificates; legal fees and disbursements of
the Partnership and the Trusts' counsel (which amount shall be offset against
payment of the purchase price for legal fees that have been accrued up to such
date and the remainder of which shall be paid within 30 days of submission of
any statements therefor) in connection with the preparation and consummation of
this Agreement and the transactions contemplated herein, including the legal
fees and costs of negotiating and drafting any transaction documents, due
diligence and any necessary regulatory filings (including, without limitation,
the Shelf Registration Statement, Forms 3, 4 and 5 and Schedule 13-D filings);
the cost of a total of two sets of bound closing volumes for the Partnership and
the Trust and their counsel; and the cost of the tombstone advertisement in the
Wall Street Journal (National Edition) pursuant to Section 7.22(c).
12.3. Amendments and Waivers. Except for the Operative Documents, this
Agreement and all exhibits and schedules hereto set forth the entire agreement
and understanding among the parties as to the subject matter hereof and merges
and supersedes all prior discussions, agreements and understandings of any and
every nature among them. This Agreement may be amended only by mutual written
agreement of the Company and the holders of a majority of the outstanding shares
of Series A Preferred Stock, and the Company may take any action herein
prohibited or omit to take any action herein required to be performed by it, and
any breach of any covenant, agreement, warranty or representation may be waived,
only if the Company has obtained the written consent or waiver of the holders of
a majority of the outstanding shares of Series A Preferred Stock. No course of
dealing between or among any persons having any interest in this Agreement will
be deemed effective to modify, amend or discharge any part of this Agreement or
any rights or obligations of any person under or by reason of this Agreement.
12.4. Successors and Assigns. This Agreement may not be assigned by the
Company except with the prior written consent of the holders of a majority of
the outstanding shares of Series A Preferred Stock. This Agreement shall be
binding upon and inure to the benefit of the Company and its permitted
successors and assigns and Purchasers and their successors and assigns. The
provisions hereof which are for Purchasers' benefit as purchasers or holders of
the Series A Preferred Stock and the Warrants are also for the benefit of, and
enforceable by, any subsequent holder of such Series A Preferred Stock and
Warrants.
12.5. Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given personally or when mailed
by certified or registered mail, return
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receipt requested and postage prepaid, and addressed to the addresses of the
respective parties set forth below or to such changed addresses as such parties
may have fixed by notice; provided, however, that any notice of change of
address shall be effective only upon receipt:
If to the Company:
Procept, Inc.
840 Memorial Drive
Cambridge, MA 02139
Attn: Stanley C. Erck
With a Copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attn: Lynnette C. Fallon
If to the Partnership or the Trust:
Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Attn: David R. Walner
With a Copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Monica C. Lord
12.6. Governing Law. The validity, performance, construction and effect
of this Agreement shall be governed by the internal laws of the State of New
York without giving effect to such State's principles of conflict of laws.
12.7. Counterparts. This Agreement may be executed in any number of
counterparts and, notwithstanding that any of the parties did not execute the
same counterpart, each of such counterparts shall, for all purposes, be deemed
an original, and all such counterparts shall constitute one and the same
instrument binding on all of the parties thereto.
12.8. Headings. The headings of the Sections hereof are inserted as a
matter of convenience and for reference only and in no way define, limit or
describe the scope of this Agreement or the meaning of any provision hereof.
12.9. Severability. In the event that any provision of this Agreement
or the application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable
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<PAGE>
by a court of competent jurisdiction, the remainder of this Agreement shall not
be affected except to the extent necessary to delete such illegal, invalid or
unenforceable provision unless the provision held invalid shall substantially
impair the benefit of the remaining portion of this Agreement.
12.10. Freedom of Action. (a) The Partnership and the Trust and their
affiliates shall not have any obligation to the Company not to (i) engage in the
same or similar activities or lines of business as the Company or develop or
market any products, services or technologies that does or may in the future
compete, directly or indirectly, with those of the Company, (ii) invest or own
any interest publicly or privately in, or develop a business relationship with,
any corporation, partnership or other person or entity engaged in the same or
similar activities or lines or business as, or otherwise in competition with,
the Company or (iii) do business with any client, collaborator, licensor,
consultant, vendor or customer of the Company. The Partnership and the Trust and
its officers, directors, employees or former employees and affiliates shall not
have any obligation, or be liable, to the Company solely on account of the
conduct described in the preceding sentence. In the event that either of the
Partnership or the Trust and any officer, director, employee or former employee
or affiliate thereof acquires knowledge of a potential transaction, agreement,
arrangement or other matter which may be a corporate opportunity for both the
Partnership and the Trust and the Company, neither of the Partnership and the
Trust nor their officers, directors, employees or former employees or affiliates
shall have any duty to communicate or offer such corporate opportunity to the
Company and neither of the Partnership and the Trust nor their officers,
directors, employees or former employees or affiliates shall be liable to the
Company for breach of any fiduciary duty, as a stockholder or otherwise, solely
by reason of the fact that Partnership and the Trust or any of their officers,
directors, employees or former employees or affiliates pursue or acquire such
corporate opportunity for either of the Partnership or the Trust, direct such
corporate opportunity to another person or entity or communicate or fail to
communicate such corporate opportunity or entity to the Company. As used in this
Section, the Partnership and the Trust shall mean either and both of the
Partnership and the Trust and their affiliates (excluding the Company as an
affiliate of the Partnership and the Trust).
(b) The provisions of this Section 12.10 shall be enforceable to the
fullest extent permitted by law.
12.11. Rights of Purchasers Inter Se. Each Purchaser shall have the
absolute right to exercise or refrain from exercising any right or rights which
such Purchaser may have by reason of this Agreement or any security including,
without limitation, the right to consent to the waiver of any obligation of the
Company under this Agreement and to enter into an agreement with the Company for
the purpose of modifying this Agreement or any agreement effecting such
modification, and such Purchaser shall not incur any liability to any other
Purchaser or Purchasers with respect to exercising or refraining from exercising
any such right or rights. Each Purchaser and Paramount Capital, Inc. may assign
to an affiliate any of their respective rights under this Agreement.
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<PAGE>
12.12. Consent to Jurisdiction. The parties hereto irrevocably consent
to the jurisdiction of the courts of the State of New York and of any federal
court located in such State in connection with any action or proceeding arising
out of or relating to this Agreement, any document or instrument delivered
pursuant to, in connection with or simultaneously with this Agreement, or a
breach of this Agreement or any such document or instrument. In any such action
or proceeding, each party hereto waives personal service of any summons,
complaint or other process and agrees that service thereof may be made in
accordance with this Section 12.12. Within 30 days after such service, or such
other time as may be mutually agreed upon in writing by the attorneys for the
parties to such action or proceeding, the party so served shall appear or answer
such summons, complaint or other process.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
PROCEPT INC.
By: /s/ Lindsay A. Rosenwald, M.D.
------------------------------------
Name:
Title:
THE ARIES FUND, A CAYMAN ISLAND
TRUST
By: its Investment Manager, PARAMOUNT
CAPITAL ASSET MANAGEMENT, INC.
By: /s/ Lindsay A. Rosenwald, M.D.
------------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: President
THE ARIES DOMESTIC FUND, L.P.
By: its General Partner, PARAMOUNT
CAPITAL ASSET MANAGEMENT, INC..
By: /s/ Lindsay A. Rosenwald, M.D.
------------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: President
<PAGE>
EXHIBIT F
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT
TO APPLICABLE STATE SECURITIES LAWS.
PROCEPT, INC.
No. A-2
SENIOR CONVERTIBLE NOTE
$70,000.00 New York, New York
June 30, 1997
Procept, Inc., a Delaware corporation, (the "Company"), for
value received, hereby promises to pay to the Aries Domestic Fund, L.P. (the
"Holder"), or registered assigns, the principal sum of seventy thousand dollars
($70,000.00), with interest from the date of original issuance of this Senior
Convertible Note on the unpaid principal balance at a rate equal to twelve
percent (12%) per annum, on the earlier of (a) September 30, 1997, (b) five (5)
business days following the completion of any equity offering or series of
equity offerings with gross proceeds to the Company in excess of $1,000,000 (the
"Maturity Date"), and (c) the failure of the Company to obtain the Required
Shareholder Approval (as defined in the Purchase Agreement). Payment shall be
made at such place as designated by the Holder upon surrender of this Senior
Convertible Note, and shall be in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. This Senior Convertible Note is one of a duly
authorized issue of Procept, Inc. 12% Senior Convertible Notes in an aggregate
principal amount of $200,000.00, subject to increase pursuant to Sections 7.27
and 8.6 of the Purchase Agreement (as defined below) (individually a "Note" and
collectively the "Notes") issued pursuant to a Securities Purchase Agreement
dated June 30, 1997 (the "Purchase Agreement") between the Company and the
Holders of the Notes (the "Noteholders"). The Notes shall be senior to all other
indebtedness of the Company ("Other Indebtedness") and all Other Indebtedness
shall be subordinated to the Notes.
SECTION 1. PREPAYMENT.
This Note (including interest accrued on the principal hereof)
may be prepaid by the Company, at any time without penalty or premium provided
that the Company shall provide the holders of the Notes with at least 30 days
prior written notice of prepayment, and prior to
<PAGE>
such prepayment, the holders of the Notes shall have the opportunity to exercise
their optional conversion rights pursuant to Section 2 hereof.
SECTION 2. OPTIONAL CONVERSION.
(a) Right of Conversion. (i) Immediately or, (ii) if the rules
of any securities exchange or automated quotation system on which the Company's
common stock, par value $.01 per share, (the "Common Stock") is traded or
quoted, or any other law or regulation, require the approval of the shareholders
of the Company to permit convertibility of the Notes, then (x) upon the receipt
of such approvals but (y) in no event later than September 30, 1997, the Notes
shall be convertible, in whole or in part, at the option (the "Optional
Conversion Right") of the holders thereof and upon notice to the Company as set
forth in paragraph 2(b) below, into either, at the election of the holder (A)
shares of Series A Preferred Stock of the Company (the "Preferred Stock") or (B)
Common Stock of the Company . In the event that the holders elect to receive
Common Stock, the number of shares shall be equal to the Conversion Amount
divided by the then current Conversion Price (as defined below). The Conversion
Amount shall be the Liquidation Amount (as defined below), or in the case of a
partial conversion, such lesser amount as designated by the converting holder.
The Liquidation Amount shall mean the aggregate principal value of the Notes
held by such Holder plus any accrued and unpaid interest. The Conversion Price
shall initially be $.46875, subject to adjustment as provided below,
representing an initial conversion rate (subject to adjustment) of 21,333 shares
of Common Stock per $10,000 of Conversion Amount.
In the event that the holders elect to receive Preferred
Stock, then the number of shares of Preferred Stock to be received by the
holders shall be the Liquidation Amount divided by the then current Preferred
Conversion Price (as defined below). The Preferred Stock Conversion Price shall
initially be $100.00, subject to adjustment as provided below, representing a
Preferred Stock initial conversion rate (subject to adjustment) of 100 shares of
Preferred Stock per $10,000 of Conversion Amount. In the event that the holders
elect to receive Preferred Stock in connection with any conversion hereunder
rather than Common Stock, any reference to the to the terms "Common Stock" or
the "Conversion Price", shall be read to mean the " Preferred Stock" and the
"Preferred Conversion Price", with all the provisions applicable to the "Common
Stock" and the "Conversion Price" being applied to the terms "Preferred Stock"
and the "Preferred Stock Conversion Price", respectively, on a proportional
basis .
The Conversion Price is subject to adjustment, upon the Series
B Final Closing Date (as defined in the Letter of Intent between the Corporation
and Paramount Capital, Inc., dated June 30, 1997 (the "Letter of Intent")), if
the conversion price of the preferred stock (the "Series B Preferred Stock")
sold in the Series B Offering (as defined in the Letter of Intent), or the price
per share of any Common Stock sold in such Series B Offering, or the exercise
price of any warrants sold in such Series B Offering is less than the Conversion
Price. In such event, the Conversion Price shall be reduced to equal the lesser
of any such conversion price, purchase price or exercise price of any securities
sold in such Series B Offering as in effect on any of the respective closing
dates of such Series B Offering. In the event that there is no Series B Final
Closing Date, or the above referenced Series B Offering is not commenced or is
otherwise
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<PAGE>
terminated, if the price per share of Common Stock (or the effective price,
conversion price or exercise price per share of Common Stock, as the case may
be, of a security convertible into or exchangeable for Common Stock) offered to
investors in the next offering or series of related offerings of equity
securities of the Corporation (or any securities convertible into or exercisable
for equity securities) following the date hereof which yields gross proceeds to
the Corporation in excess of $2,000,000 in the aggregate (a "Qualified
Offering") shall be less than the Conversion Price then in effect, the
Conversion Price shall be reduced to equal the lowest such offering price (or
effective price, conversion price or exercise price, as the case may be) per
share of Common Stock to investors in such Qualified Offering.
The Conversion Price is subject to adjustment, upon any
Approval Issuance (as defined in the Purchase Agreement). In the event of any
such Approval Issuance, the Conversion Price shall be adjusted to equal the
Dilution Value (as defined in the Purchase Agreement) immediately following such
Approval Issuance.
(b) Conversion Procedures. Any holder of Notes desiring to
convert such Notes into Common Stock shall surrender the Notes at the offices of
the Company, which Notes shall be accompanied by irrevocable written notice to
the Company that the holder elects so to convert such Notes and specifying the
name or names (with address) in which a certificate or certificates evidencing
shares of Common Stock are to be issued. The Company will make a notation of the
date that a notice of conversion is received, which date shall be deemed to be
the date of receipt for purposes hereof.
The Company shall deliver to the holder converting the Notes,
or to the nominee or nominees of such person, certificates evidencing the number
of full shares of Common Stock to which such person shall be entitled as
aforesaid, together with a cash adjustment of any fraction of a share as
hereinafter provided. Subject to the following provisions of this paragraph,
such conversion shall be deemed to have been made as of the date of such
surrender of the Notes and the person or persons entitled to receive the Common
Stock deliverable upon conversion of such Notes shall be treated for all
purposes as the record holder or holders of such Common Stock on such date;
provided, however, that the Company shall not be required to convert any Notes
while the stock transfer books of the Company are closed for any purpose, but
the surrender of Notes for conversion during any period while such books are so
closed shall become effective for conversion immediately upon the reopening of
such books as if the surrender had been made on the date of such reopening, and
the conversion shall be at the conversion rate in effect on such date.
All notices of conversion shall be irrevocable; provided,
however, that if the Company has sent notice of an event pursuant to paragraph
2(e) hereof, a holder of Notes may, at its election, provide in its notice of
conversion that the conversion of its Notes shall be contingent upon the
occurrence of the record date or effectiveness of such event (as specified by
such holder), provided that such notice of conversion is received by the Company
prior to such record date or effective date, as the case may be.
3
<PAGE>
(c) Protection From Dilution.
(i) Except as otherwise provided herein, in the event the
Company shall, at any time or from time to time after the date hereof, (A) sell
or issue any shares of Common Stock for a consideration per share less than
either (I) the Conversion Price in effect on the date of such sale or issuance
or (II) the Market Price (as defined in the Purchase Agreement) of the Common
Stock as of the date of the sale or issuance, (B) issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or (C) subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such sale, issuance, subdivision or combination being herein
called a "Change of Shares"), then, and thereafter upon each further Change of
Shares, the Conversion Price in effect immediately prior to such Change of
Shares shall be changed to a price (rounded to the nearest cent) determined by
multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the sale or issuance of such
additional shares or such subdivision or combination and the number of shares of
Common Stock which the aggregate consideration received (determined as provided
in Subparagraph 2(c)(v)(E)) for the issuance of such additional shares would
purchase at the greater of (x) the Conversion Price in effect on the date of
such issuance, and (y) the Market Price of the Common Stock as of such date, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the sale or issuance of such additional shares or
such subdivision or combination. Such adjustment shall be made successively
whenever such an issuance is made.
(ii) In case of any reclassification, capital reorganization
or other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another entity (other than a
consolidation or merger in which the Company is the continuing entity and which
does not result in any reclassification, capital reorganization or other change
of outstanding shares of Common Stock other than the number thereof), or in case
of any sale or conveyance to another entity of the property of the Company as,
or substantially as, an entirety (other than a sale/leaseback, mortgage or other
financing transaction), the Company shall cause effective provision to be made
so that the Holder shall be entitled to receive, upon conversion of this Note,
the kind and number of shares of stock or other securities or property
(including cash) receivable upon such reclassification, capital reorganization
or other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock into which such Note was convertible
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Subsection 2(c). The Company
shall not effect any such consolidation, merger or sale unless prior to, or
simultaneously with, the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the entity purchasing
assets or other appropriate entity shall assume, by written instrument executed
and delivered to the Company, the obligation to deliver to the Holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to receive and the other obligations
under this Note. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
4
<PAGE>
(iii) If, at any time or from time to time, the Company
shall issue or distribute to the holders of shares of Common Stock evidence of
its indebtedness, any other securities of the Company or any cash, property or
other assets (any such event being herein called a "Special Dividend"), then in
each case the Holder shall be entitled to a proportionate share of any such
Special Dividend as though it were the holder of the number of shares of Common
Stock of the Company into which this Note is convertible as of the record date
fixed for the determination of the holders of Common Stock of the Company
entitled to receive such Special Dividend.
(iv) After each adjustment of the Conversion Price pursuant
to this Subsection 2(c), the Company will promptly prepare a certificate signed
by the Chairman or President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, of the Company setting forth: (A) the
Conversion Price as so adjusted, (B) the conversion rate corresponding to such
Conversion Price and (C) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate in the Note Register
(as defined below) and send such certificate by ordinary first class mail to
each registered holder of Notes at his or her last address as it shall appear in
the Note Register. No failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity of such adjustment. The affidavit
of an authorized officer of the Company that such notice has been mailed shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
The Transfer Agent may rely on the information in the certificate as true and
correct and has no duty or obligation independently to verify the amounts or
calculations set forth therein.
(v) For purposes of Subsection 2(c)(i) hereof, the following
provisions (A) to (E) shall also be applicable:
(A) No adjustment of the Conversion Price shall be
made unless such adjustment would require an increase or
decrease of at least $.01 in such price; provided that any
adjustments which by reason of this Subparagraph (A) are not
required to be made shall be carried forward and shall be
made at the time of, and together with, the next subsequent
adjustment which, together with adjustments so carried
forward, shall require an increase or decrease of at least
$.01 in the Conversion Price then in effect hereunder.
(B) In case of (I) the sale or other issuance by
the Company (including as a component of a unit) of any
rights or warrants to subscribe for or purchase, or any
options for the purchase of, Common Stock or any securities
convertible into or exchangeable for Common Stock (such
securities convertible, exercisable or exchangeable into
Common Stock being herein called "Convertible Securities"),
or (II) the issuance by the Company, without the receipt by
the Company of any consideration therefor, of any rights or
warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or Convertible Securities,
whether or not such rights, warrants or options, or the
right to convert or exchange such Convertible Securities,
are immediately exercisable, and the consideration per share
for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or
exchange of such Convertible Securities (determined by
dividing
5
<PAGE>
(x) the minimum aggregate consideration, as set forth in the
instrument relating thereto without regard to any
antidilution or similar provisions contained therein for a
subsequent adjustment of such amount, payable to the Company
upon the exercise of such rights, warrants or options, plus
the consideration received by the Company for the issuance
or sale of such rights, warrants or options, plus, in the
case of such Convertible Securities, the minimum aggregate
amount, as set forth in the instrument relating thereto
without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such
amount, of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number, as set
forth in the instrument relating thereto without regard to
any antidilution or similar provisions contained therein for
a subsequent adjustment of such amount, of shares of Common
Stock issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such
Convertible Securities issuable upon the exercise of such
rights, warrants or options) is less than either the
Conversion Price or the Market Price of the Common Stock as
of the date of the issuance or sale of such rights, warrants
or options, then such total maximum number of shares of
Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of
such Convertible Securities (as of the date of the issuance
or sale of such rights, warrants or options) shall be deemed
to be "Common Stock" for purposes of Subsection 2(c)(i) and
shall be deemed to have been sold for an amount equal to
such consideration per share and shall cause an adjustment
to be made in accordance with Subsection 2(c)(i).
(C) In case of the sale by the Company of any
Convertible Securities, whether or not the right of
conversion or exchange thereunder is immediately
exercisable, and the price per share for which Common Stock
is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the total
amount of consideration received by the Company for the sale
of such Convertible Securities, plus the minimum aggregate
amount, as set forth in the instrument relating thereto
without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such
amount, of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number, as set
forth in the instrument relating thereto without regard to
any antidilution or similar provisions contained therein for
a subsequent adjustment of such amount, of shares of Common
Stock issuable upon the conversion or exchange of such
Convertible Securities) is less than either the Conversion
Price or the Market Price of the Common Stock as of the date
of the sale of such Convertible Securities, then such total
maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities (as of
the date of the sale of such Convertible Securities) shall
be deemed to be "Common Stock" for purposes of Subsection
2(c)(i) and shall be deemed to have been sold for an amount
equal to such consideration
6
<PAGE>
per share and shall cause an adjustment to be made in
accordance with Subsection 2(c)(i).
(D) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities
referred to in (B) and (C) above or any other securities of
the Company convertible, exchangeable or exercisable for
shares of Common Stock, for any reason other than an event
that would require adjustment to prevent dilution pursuant
to the terms of any such convertible, exchangeable or
exercisable instrument, so that the consideration per share
received by the Company after such modification is less than
either the Conversion Price or the Market Price as of the
date prior to such modification, then such securities, to
the extent not theretofore exercised, converted or
exchanged, shall be deemed to have expired or terminated
immediately prior to the date of such modification and the
Company shall be deemed for purposes of calculating any
adjustments pursuant to this Subsection 2(c) to have issued
such new securities upon such new terms on the date of
modification. Such adjustment shall become effective as of
the date upon which such modification shall take effect. On
the expiration or cancellation of any such right, warrant or
option or the termination or cancellation of any such right
to convert or exchange any such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be
readjusted to such Conversion Price as would have obtained
(a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities
been made upon the basis of the issuance of only the number
of shares of Common Stock theretofore actually delivered
(and the total consideration received therefor) upon the
exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities and
(b) had adjustments been made on the basis of the Conversion
Price as adjusted under clause (a) of this sentence for all
transactions (which would have affected such adjusted
Conversion Price) made after the issuance or sale of such
rights, warrants, options or Convertible Securities.
(E) In case of the sale of any shares of Common
Stock, any Convertible Securities, any rights or warrants to
subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, the
consideration received by the Company therefor shall be
deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the
Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection
therewith. In the event that any securities shall be issued
in connection with any other securities of the Company,
together comprising one integral transaction in which no
specific consideration is allocated among the securities,
then each of such securities shall be deemed to have been
issued for such consideration as the Board of Directors of
the Company determines in good faith; provided, however that
if the holders of in excess of ten percent (10%) of the then
outstanding principal amount of Notes disagree with such
determination, the Company shall retain, at its own
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<PAGE>
expense, an independent investment banking firm for the
purpose of rendering an appraisal.
(vi) Notwithstanding any other provision hereof, no
adjustment to the Conversion Price will be made:
(A) upon the exercise of (i) any of the options
outstanding on the date hereof under the Company's existing
stock option plans, or (ii) any warrants outstanding on the
date hereof listed on schedule 5.3 to the Purchase
Agreement, copies of which have been provided to the Holder
prior to the date hereof; or
(B) upon the issuance or exercise of options or
stock which may hereafter be granted, purchased or sold with
the approval of the Board of Directors, or exercised, under
any employee benefit plan or the 1993 Employee Stock
Purchase Plan of the Company to officers, directors,
consultants or employees, but only with respect to such
options as are exercisable at, and shares which are
purchased and/or sold at, prices no lower than the Closing
Bid Price (as defined in the Purchase Agreement) (or, if the
Closing Bid Price cannot be determined, the Fair Market
Value (as defined in the Purchase Agreement)) of the Common
Stock as of the date of grant thereof; or
(C) upon issuance or exercise of the Placement
Warrants, or the Advisory Warrants, (as defined in the
Letter of Intent) (collectively, the "Paramount Warrants"),
upon the issuance of any Common Stock pursuant to the
Purchase Agreement (including any Article IX Issuances (as
defined therein)), upon the exercise of the Class A and
Class B Warrants (as defined in the Letter of Intent) or
upon the issuance, conversion or exercise of the Series B
Preferred Stock or Common Stock (including any common stock
issuable pursuant to contractual rights analogous to the
Article IX Issuances) or the Class C Warrants to be issued
(i) on or prior to the Series B Final Closing Date (as
defined in the Letter of Intent) or (ii) pursuant to the
exercise of the Paramount Warrants, or upon the issuance,
conversion or exercise of any Series A or Series B Preferred
Stock or Class A, Class B or Class C Warrants approved in
writing by the Placement Agent, or upon the issuance of any
other equity securities of the Company to the extent that
such issuance causes an adjustment to the Conversion Price
pursuant to the second paragraph of Subsection 2(a); or
(D) upon the issuance or sale of Common Stock or
Convertible Securities pursuant to the exercise of any
rights, options or warrants to receive, subscribe for or
purchase, or any options for the purchase of, Common Stock
or Convertible Securities, whether or not such rights,
warrants or options were outstanding on the date of the
original issuance of the Notes or were thereafter issued or
sold, provided that an adjustment was either made or not
required to
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<PAGE>
be made in accordance with Subsection 2(c)(i) in connection
with the issuance or sale of such securities or any
modification of the terms thereof; or
(E) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities,
provided that any adjustments required to be made upon the
issuance or sale of such Convertible Securities or any
modification of the terms thereof were so made, and whether
or not such Convertible Securities were outstanding on the
date of the original issuance of the Notes or were
thereafter issued or sold.
Subparagraph 2(c)(v)(D) shall nevertheless apply to any modification of the
rights of conversion, exchange or exercise of any of the securities referred to
in Subparagraphs (A), (B), (D) and (E), or to the extent effected with respect
to fewer than all of such securities, Subparagraph (C) of this Subsection
2(c)(vi).
(vii) As used in this Subsection 2(c), the term "Common
Stock" shall mean and include the Company's Common Stock authorized on the date
of the original issue of the Notes and shall also include any capital stock of
any class of the Company thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution or winding up of the Company; provided, however, that
the shares issuable upon conversion of the Notes shall include only shares of
such class designated in the Certificate of Incorporation as Common Stock on the
date of the original issue of the Notes or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Subsection 2(c)(ii) hereof, the stock, securities or
property provided for in such section or (ii), in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon conversion of the Notes as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par value, or from
no par value to par value, such shares of Common Stock as so reclassified or
changed.
(viii) Any determination as to whether an adjustment in the
Conversion Price in effect hereunder is required pursuant to Subsection 2(a) or
2(c), or as to the amount of any such adjustment, if required, shall be binding
upon the holders of the Notes and the Company if made in good faith by the Board
of Directors of the Company.
(d) Reservation of Shares; Transfer Taxes; Etc. The Company
shall at all times reserve and keep available, out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Notes, including, without limitation upon any Default
Conversion, such number of shares of its Common Stock free of preemptive rights
as shall be sufficient to effect the conversion of all Notes from time to time
outstanding. The Company shall use its best efforts from time to time, in
accordance with the laws of the State of Delaware, to increase the authorized
number of shares of Common Stock if at any time the number of shares of Common
Stock not outstanding shall not be sufficient to permit the conversion of all
the then-outstanding Notes.
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<PAGE>
The Company shall pay any and all issue or other taxes that
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Notes. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue or
delivery of Common Stock (or other securities or assets) in a name other than
that in which the Notes so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Company the amount of such tax or has established, to the
satisfaction of the Company, that such tax has been paid. The Company covenants
that all shares of Common Stock issuable upon exercise of the Optional and
Default Conversion Rights shall be validly issued, fully paid and nonassessable.
(e) Prior Notice of Certain Events. In case:
(i) the Company shall declare any dividend (or any other
distribution); or
(ii) the Company shall authorize the granting to the holders
of Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change
in par value, or from par value to no par value, or from no par value
to par value); or
(iv) of any consolidation or merger to which the Company is
a party and for which approval of any stockholders of the Company
shall be required, or of the sale or transfer of all or substantially
all of the assets of the Company or of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or
other property; or
(v) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then the Company shall cause to be mailed to the holders of Notes, at their last
addresses as they shall appear upon the books of the Company, at least 20 days
prior to the applicable record date hereinafter specified, a notice stating (x)
the date on which a record (if any) is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants or, if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, rights or warrants are to be determined
and a description of the cash, securities or other property to be received by
such holders upon such dividend, distribution or granting of rights or warrants
or (y) the date on which such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding up or other
liquidation event is expected to become effective, the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such exchange, dissolution, liquidation or winding up or other liquidation event
and the consideration, including securities or other property, to be received by
such holders upon such exchange; provided, however, that no failure to mail such
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<PAGE>
notice or any defect therein or in the mailing thereof shall affect the validity
of the corporate action required to be specified in such notice.
(f) Other Changes in Conversion Rate. The Company from time
to time may increase the Conversion Rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the Conversion Rate is so increased, the Company shall mail to
holders of record of Notes a notice of the increase at least 15 days before the
date the increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period it will be in effect.
The Company may make such increases in the Conversion Rate,
in addition to those required or allowed by this paragraph 4, as shall be
determined by it, as evidenced by a resolution of the Board of Directors, to be
advisable in order to avoid or diminish any income tax to holders of Common
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
SECTION 3. DEFAULT CONVERSION.
(a) If this Note and all accrued interest shall not have
been paid in full on or before the Maturity Date or upon the occurrence of an
Event of Default (as defined in Section 7 hereof), the Holder shall have the
right (the "Default Conversion Right"), in addition to any other available
remedies set forth in Section 8 hereof or at law or in equity, to convert ten
percent (10%) of the principal amount of the Notes (the "Default Conversion
Amount") into a number of shares of Common Stock of the Company ("Default
Conversion Share Amount") which, when added to the Voting Securities (as defined
below) then owned by the Noteholders, equals fifty-one percent (51%) of the
outstanding shares of Common Stock of the Company for a purchase price of $.01
per share (the "Default Conversion Price"). For purposes of this Section 3,
Voting Securities shall mean the Alternate Offering Common Stock and/or Series A
Preferred Stock (both as defined in the Purchase Agreement)). Upon conversion,
the Company shall pay all accrued and unpaid interest on the Default Conversion
Amount.
(b) To exercise the Default Conversion Right, the Holder, on
or before the twentieth day after the Maturity Date, but before payment in full
of the then outstanding principal and interest under this Note, shall deliver to
the Company, at its office at as set forth in Section 11, or at such other place
as is designated in writing by the Company, a notice (the "Conversion Notice")
stating that the Holder is exercising the Default Conversion Right, the Default
Conversion Amount and the name or names in which the Holder wishes the
certificates for shares of Common Stock to be issued.
(c) To the extent permitted by applicable law, upon exercise
of the Default Conversion Right, the Holder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise (the
"Conversion Shares"), notwithstanding that the transfer books of the Company
shall then be closed or certificates representing such Conversion Shares shall
not then have been actually delivered to the Holder. As soon as practicable and
in any event within five (5) days after exercise of the Default Conversion
Right, the Company shall
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<PAGE>
issue and deliver to the Holder a certificate or certificates evidencing the
Conversion Shares registered in the name of the Holder or its designee, provided
that the Company may require the holder, by notice given to the Holder promptly
after receipt of the Conversion Notice, as a condition to the delivery of such
certificate or certificates, to present this Note to the Company for the
placement hereon of a legend indicating that the Default Conversion Right has
been exercised to the extent of the Default Conversion Amount, and this Note
(unless thereby paid in full) shall be immediately returned to the Holder.
(d) The issuance of any shares or other securities upon the
exercise of the Default Conversion Right, and the delivery of certificates or
other instruments representing such shares or other securities, shall be made
without charge to the Holder for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall not be
required to issue or deliver any such certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(e) The Holder shall not have, solely on account of such
status as a Holder of this Note, any rights of a stockholder of the Company,
either at law or in equity, or any notice of meetings of stockholders or of any
other proceedings of the Company except as provided in this Note.
SECTION 4. FRACTIONAL SHARES.
The Company shall not be required to issue fractions of
shares of Common Stock or other capital stock of the Company upon the exercise
of the Optional and Default Conversion Right. If any fraction of a share would
be issuable on any exercise of the Optional or Default Conversion Right (or
specified portions thereof), the Company shall purchase such fraction for an
amount in cash equal to the same fraction of the closing price for the Common
Stock on the trading date immediately preceding the date of exercise of such
Option or Default Conversion Right.
SECTION 5. AFFIRMATIVE COVENANTS OF THE COMPANY.
The Company covenants and agrees that until the payment in
full of this Note, the Company shall:
(a) Existence; Business. (i) Preserve, renew and keep in
full force and effect its legal existence and (ii) obtain, preserve, renew,
extend and keep in full force and effect the licenses, permits, authorizations,
patents, trademarks and trade names material to its business.
(b) Use of Proceeds. Use the proceeds of the Notes of this
issue solely as set forth in Section 7.6 of the Purchase Agreement.
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<PAGE>
(c) Reports. Furnish to the Holder, at the time furnished to
the Company's stockholders, reports furnished generally to the Company's
stockholders, and copies of Current Reports on Form 8-K.
(d) Notice of Events of Default. Furnish to the Holder
prompt written notice of any Event of Default, specifying the nature and extent
thereof and corrective action, if any, proposed to be taken with respect
thereto.
(e) Authorization of Stock Issuable Upon Conversion.
Authorize and reserve a sufficient number of its shares for exercise of the
Optional and Default Conversion Rights.
SECTION 6. NEGATIVE COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Holder that until
the payment in full of this Note, the Company shall not:
(a) Indebtedness. Without the prior written consent of the
Holders, incur, create, assume, nor suffer to exist any indebtedness including
but not limited to any indebtedness to current executive officers, employees,
directors or principal stockholders of the Company, but excluding (i) accounts
payable incurred in the ordinary course and paid in accordance with roman
numeral (iv) of paragraph 14 of the Letter of Intent dated June 30, 1997 and
(ii) indebtedness existing on the date hereof reflected in the Company's March
31, 1997 Financial Statement.
(b) Liens. Create, incur, assume or permit to exist any lien
on any property or assets (including stock or other securities of any person)
now owned or hereafter acquired by the Company, except (i) liens for taxes not
yet due or which are being contested by appropriate proceedings; (ii) carriers',
warehousemen's, mechanic's, materialmen's, repairmen's or other like liens
arising in the ordinary course of business and securing obligations that are not
due or which are being contested; or (iii) liens of attachments, judgments or
awards against the Company (X) which could not reasonably be expected to have an
adverse material effect on the Company or (Y) with respect to which an appeal or
proceeding for review shall be pending or a stay of execution shall have been
obtained, or which are otherwise being contested in good faith and by
appropriate proceedings, or (iv) purchase money liens, equipment leases and
financings incurred in the ordinary course of business.
(c) Sale and Lease-Back Transactions. Enter into any
arrangement, directly or indirectly, with any person whereby it shall sell or
transfer any property, real or personal, used or useful in its business, whether
now owned or hereafter acquired, and thereafter rent (including intellectual
property), lease or license such property or other property which it intends to
use for substantially the same purpose or purposes as the property being sold or
transferred.
(d) Mergers, Consolidations, Sales of Assets and
Acquisitions. Merge into or consolidate with any other person, or permit any
other person to merge into or consolidate with it, or sell, transfer, lease or
otherwise dispose of (in one transaction or in a series of transactions) all or
a substantial part of its assets (whether now owned or hereafter acquired) or
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<PAGE>
purchase, lease or otherwise acquire (in one transaction or a series of
transactions) all or a substantial part of the assets of any other person.
(e) Dividends and Distributions. Declare or pay, directly or
indirectly, any dividend or make any other distribution (by reduction of capital
or otherwise), whether in cash, property, securities or a combination thereof,
with respect to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for value any shares of any class
of its capital stock or set aside any amount for any such purpose, except as
permitted by Section 7.14 of the Purchase Agreement.
(f) No Impairment. By amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Note, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of this
Note against impairment.
SECTION 7. EVENTS OF DEFAULT DEFINED.
The following shall each constitute an "Event of Default"
hereunder:
(a) the failure of the Company to make any payment of
principal of, or interest on, this Note when due and payable;
(b) the failure of the Company to observe or perform any
covenant in this Note or in the Purchase Agreement, and such failure shall have
continued unremedied for a period of five (5) days;
(c) if the Company shall:
(1) admit in writing its inability to pay
its debts generally as they become due,
(2) file a petition in bankruptcy or a
petition to take advantage of any
insolvency act,
(3) make an assignment for the benefit of
its creditors,
(4) consent to the appointment of a receiver
of itself or of the whole or any
substantial part of its property,
(5) on a petition in bankruptcy filed
against, be adjudicated a bankrupt, or
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(6) file a petition or answer seeking
reorganization or arrangement under the
federal bankruptcy laws or any other
applicable law or statute of the United
States of America or any state thereof;
(d) if a court of competent jurisdiction shall enter an
order, judgment or decree appointing, without the consent of the Company, a
receiver of the Company or of the whole or any substantial part of its property,
or approving a petition filed against it seeking reorganization or arrangement
of the Company under the federal bankruptcy laws or any other applicable law or
statute of the United States of America or any State thereof, and such order,
judgment or decree shall not be vacated or set aside or stayed within thirty
(30) days from the date of entry thereof;
(e) if, under the provisions of any other law for the relief
or aid of debtors, any court of competent jurisdiction shall assume custody or
control of the Company or the whole or any substantial part of its property and
such custody or control shall not be terminated or stayed within thirty (30)
days from the date of assumption of such custody or control;
(f) the liquidation, dissolution or winding up of the
Company;
(g) the failure to comply with any section of the Purchase
Agreement; or
(h) a final judgment or judgments for the payment of money
in excess of $1,000,000 in the aggregate shall be rendered by one or more
courts, administrative or arbitral tribunals or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 30 days from the date of entry thereof and the Company shall
not, within such 30-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
SECTION 8. REMEDIES UPON EVENT OF DEFAULT.
(i) Upon the occurrence of an Event of Default, (i) the
entire principal amount of, and all accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest or other formalities of any kind, all of which are hereby
expressly waived by the Company and (ii) additional interest shall begin to
accrue, and shall be considered immediately due and payable, on the unpaid
principal amount of this Note at the rate of eighteen percent (18%) per annum
and shall continue to accrue until the initial interest and additional interest
is paid. In addition, the Holder may take any action available to it under the
Purchase Agreement or at law or in equity or by statute or otherwise.
(j) No remedy herein conferred upon the Holder of this Note
is intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
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SECTION 9. NOTE REGISTER.
(a) The Company shall keep at its principal executive office
a register (herein sometimes referred to as the "Note Register"), in which,
subject to such reasonable regulations as it may prescribe, but at its expense
(other than transfer taxes, if any), the Company shall provide for registration
and transfer of this Note.
(b) Whenever this Note shall be surrendered at the principal
executive office of the Company for transfer or exchange, accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed by the Holder hereof or his attorney duly authorized in writing,
the Company shall execute and deliver in exchange therefor a new Note or Notes,
as may be requested by such Holder, in the same aggregate unpaid principal
amount and payable on the same date as the principal amount of the Note or Notes
so surrendered; each such new Note shall be dated as of the date to which
interest has been paid on the unpaid principal amount of the Note or Notes so
surrendered and shall be in such principal amount and registered in such name or
names as such Holder may designate in writing.
(c) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Note
and of indemnity reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of this Note (in case of mutilation) the Company will make and
deliver in lieu of this Note a new Note of like tenor and unpaid principal
amount and dated as of the date to which interest has been paid on the unpaid
principal amount of this Note in lieu of which such new Note is made and
delivered.
SECTION 10. REGISTRATION UNDER SECURITIES ACT OF 1933.
The Holder of this Note shall have registration rights as
provided in Section 8 of the Purchase Agreement, with respect to the shares of
Common Stock issuable upon conversion of the Notes pursuant to the Optional and
Default Conversion Right. If the Holder is not a party to the Purchase
Agreement, by acceptance of this Note, the Holder agrees to comply with
provisions of Section 8 of the Purchase Agreement to the same extent as if it
were a party thereto.
SECTION 11. MISCELLANEOUS.
(a) Amendments and Waivers. The holders of sixty-six and
two-thirds percent (66 2/3%) or more in principal amount of outstanding Notes of
this issue may waive or otherwise consent to the amendment of any of the
provisions hereof, provided that no such waiver or amendment may reduce the
principal amount of or interest on any of the Notes of this issue or change the
stated maturity of the principal or reduce the percentage of holders of Notes of
this issue necessary to waive or amend the provisions of this Note, without the
consent of each holder of any Note affected thereby.
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(b) Restrictions on Transferability. In addition to the
restrictions set forth in Section 6(a) of this Note, the securities represented
by this Note have been acquired for investment and have not been registered
under the Securities Act of 1933, as amended, or the securities laws of any
state or other jurisdiction. Without such registration, such securities may not
be sold, pledged, hypothecated or otherwise transferred, except pursuant to
exemptions from the Securities Act of 1933, and the securities laws of any state
or other jurisdiction. Notwithstanding the above, the holder of this Note has
been provided the registration rights contained in Section 8 of the Purchase
Agreement with respect to the shares of the Company's Common Stock which may be
acquired upon exercise of the Optional and Default Conversion Right.
(c) Forbearance from Suit. No holder of Notes of this issue
shall institute any suit or proceeding for the enforcement of the payment of
principal or interest unless the holders of at least fifty-one percent (51%) in
principal amount of all of the outstanding Notes of this issue join in such suit
or proceeding.
(d) Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York, excluding the
body of law relating to conflict of laws. Notwithstanding anything to the
contrary contained herein, in no event may the effective rate of interest
collected or received by the Holder exceed that which may be charged, collected
or received by the Holder under applicable law.
(e) Interpretation. If any term or provision of this Note
shall be held invalid, illegal or unenforceable, the validity of all other terms
and provisions hereof shall in no way be affected thereby.
(f) Successors and Assigns. This Note shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of the
Holder and its successors and assigns.
(g) Notices. All notices, requests, consents and demands
shall be made in writing and shall be mailed postage prepaid, or delivered by
hand, to the Company or to the Holder thereof at their respective addresses set
forth below or to such other address as may be furnished in writing to the other
party hereto:
If to the Holder: At the address shown on Schedule A attached hereto.
with a copy to: Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Attn: David R. Walner
If to the Company: Procept, Inc.
840 Memorial Drive
Cambridge, MA
Attention: Stanley C. Erck
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with a copy to: Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Attn: Michael S. Weiss
(h) Saturdays, Sundays, Holidays. If any date that may at
any time be specified in this Note as a date for the making of any payment of
principal or interest under this Note shall fall on Saturday, Sunday or on a day
which in New York shall be a legal holiday, then the date for the making of that
payment shall be the next subsequent day which is not a Saturday, Sunday or
legal holiday.
(i) Purchase Agreement. This Note is subject to the terms
contained in the Purchase Agreement and the Operative Documents (as defined in
Purchase Agreement) dated the date hereof between the Company and certain
purchasers of the Notes and the holder of this Note is entitled to the benefits
of such Purchase Agreement and the Operative Documents and may, in addition to
any rights hereunder, enforce the agreements of the Company contained therein
and exercise the remedies provided for thereby or otherwise available in respect
thereof.
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IN WITNESS WHEREOF, this Note has been executed and delivered on the
date first above written by the duly authorized representative of the Company.
ATTEST: PROCEPT, INC.
/s/ Lynnette C. Fallon By: /s/ Stanley C. Erck
- ----------------------- --------------------------------
Name: Stanley C. Erck
Its: President
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EXHIBIT G
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT
TO APPLICABLE STATE SECURITIES LAWS.
PROCEPT, INC.
No. A-1
SENIOR CONVERTIBLE NOTE
$130,000.00 New York, New York
June 30, 1997
Procept, Inc., a Delaware corporation, (the "Company"), for
value received, hereby promises to pay to The Aries Fund, a Cayman Island Trust
(the "Holder"), or registered assigns, the principal sum of one hundred thirty
thousand dollars ($130,000.00), with interest from the date of original issuance
of this Senior Convertible Note on the unpaid principal balance at a rate equal
to twelve percent (12%) per annum, on the earlier of (a) September 30, 1997, (b)
five (5) business days following the completion of any equity offering or series
of equity offerings with gross proceeds to the Company in excess of $1,000,000
(the "Maturity Date"), and (c) the failure of the Company to obtain the Required
Shareholder Approval (as defined in the Purchase Agreement). Payment shall be
made at such place as designated by the Holder upon surrender of this Senior
Convertible Note, and shall be in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. This Senior Convertible Note is one of a duly
authorized issue of Procept, Inc. 12% Senior Convertible Notes in an aggregate
principal amount of $200,000.00, subject to increase pursuant to Sections 7.27
and 8.6 of the Purchase Agreement (as defined below) (individually a "Note" and
collectively the "Notes") issued pursuant to a Securities Purchase Agreement
dated June 30, 1997 (the "Purchase Agreement") between the Company and the
Holders of the Notes (the "Noteholders"). The Notes shall be senior to all other
indebtedness of the Company ("Other Indebtedness") and all Other Indebtedness
shall be subordinated to the Notes.
SECTION 1. PREPAYMENT.
This Note (including interest accrued on the principal hereof)
may be prepaid by the Company, at any time without penalty or premium provided
that the Company shall provide
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the holders of the Notes with at least 30 days prior written notice of
prepayment, and prior to such prepayment, the holders of the Notes shall have
the opportunity to exercise their optional conversion rights pursuant to Section
2 hereof.
SECTION 2. OPTIONAL CONVERSION.
(a) Right of Conversion. (i) Immediately or, (ii) if the rules
of any securities exchange or automated quotation system on which the Company's
common stock, par value $.01 per share, (the "Common Stock") is traded or
quoted, or any other law or regulation, require the approval of the shareholders
of the Company to permit convertibility of the Notes, then (x) upon the receipt
of such approvals but (y) in no event later than September 30, 1997, the Notes
shall be convertible, in whole or in part, at the option (the "Optional
Conversion Right") of the holders thereof and upon notice to the Company as set
forth in paragraph 2(b) below, into either, at the election of the holder (A)
shares of Series A Preferred Stock of the Company (the "Preferred Stock") or (B)
Common Stock of the Company . In the event that the holders elect to receive
Common Stock, the number of shares shall be equal to the Conversion Amount
divided by the then current Conversion Price (as defined below). The Conversion
Amount shall be the Liquidation Amount (as defined below), or in the case of a
partial conversion, such lesser amount as designated by the converting holder.
The Liquidation Amount shall mean the aggregate principal value of the Notes
held by such Holder plus any accrued and unpaid interest. The Conversion Price
shall initially be $.46875, subject to adjustment as provided below,
representing an initial conversion rate (subject to adjustment) of 21,333 shares
of Common Stock per $10,000 of Conversion Amount.
In the event that the holders elect to receive Preferred
Stock, then the number of shares of Preferred Stock to be received by the
holders shall be the Liquidation Amount divided by the then current Preferred
Conversion Price (as defined below). The Preferred Stock Conversion Price shall
initially be $100.00, subject to adjustment as provided below, representing a
Preferred Stock initial conversion rate (subject to adjustment) of 100 shares of
Preferred Stock per $10,000 of Conversion Amount. In the event that the holders
elect to receive Preferred Stock in connection with any conversion hereunder
rather than Common Stock, any reference to the to the terms "Common Stock" or
the "Conversion Price", shall be read to mean the " Preferred Stock" and the
"Preferred Conversion Price", with all the provisions applicable to the "Common
Stock" and the "Conversion Price" being applied to the terms "Preferred Stock"
and the "Preferred Stock Conversion Price", respectively, on a proportional
basis .
The Conversion Price is subject to adjustment, upon the Series
B Final Closing Date (as defined in the Letter of Intent between the Corporation
and Paramount Capital, Inc., dated June 30, 1997 (the "Letter of Intent")), if
the conversion price of the preferred stock (the "Series B Preferred Stock")
sold in the Series B Offering (as defined in the Letter of Intent), or the price
per share of any Common Stock sold in such Series B Offering, or the exercise
price of any warrants sold in such Series B Offering is less than the Conversion
Price. In such event, the Conversion Price shall be reduced to equal the lesser
of any such conversion price, purchase price or exercise price of any securities
sold in such Series B Offering as in effect on any of the respective closing
dates of such Series B Offering. In the event that there is no Series B Final
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Closing Date, or the above referenced Series B Offering is not commenced or is
otherwise terminated, if the price per share of Common Stock (or the effective
price, conversion price or exercise price per share of Common Stock, as the case
may be, of a security convertible into or exchangeable for Common Stock) offered
to investors in the next offering or series of related offerings of equity
securities of the Corporation (or any securities convertible into or exercisable
for equity securities) following the date hereof which yields gross proceeds to
the Corporation in excess of $2,000,000 in the aggregate (a "Qualified
Offering") shall be less than the Conversion Price then in effect, the
Conversion Price shall be reduced to equal the lowest such offering price (or
effective price, conversion price or exercise price, as the case may be) per
share of Common Stock to investors in such Qualified Offering.
The Conversion Price is subject to adjustment, upon any
Approval Issuance (as defined in the Purchase Agreement). In the event of any
such Approval Issuance, the Conversion Price shall be adjusted to equal the
Dilution Value (as defined in the Purchase Agreement) immediately following such
Approval Issuance.
(b) Conversion Procedures. Any holder of Notes desiring to
convert such Notes into Common Stock shall surrender the Notes at the offices of
the Company, which Notes shall be accompanied by irrevocable written notice to
the Company that the holder elects so to convert such Notes and specifying the
name or names (with address) in which a certificate or certificates evidencing
shares of Common Stock are to be issued. The Company will make a notation of the
date that a notice of conversion is received, which date shall be deemed to be
the date of receipt for purposes hereof.
The Company shall deliver to the holder converting the Notes,
or to the nominee or nominees of such person, certificates evidencing the number
of full shares of Common Stock to which such person shall be entitled as
aforesaid, together with a cash adjustment of any fraction of a share as
hereinafter provided. Subject to the following provisions of this paragraph,
such conversion shall be deemed to have been made as of the date of such
surrender of the Notes and the person or persons entitled to receive the Common
Stock deliverable upon conversion of such Notes shall be treated for all
purposes as the record holder or holders of such Common Stock on such date;
provided, however, that the Company shall not be required to convert any Notes
while the stock transfer books of the Company are closed for any purpose, but
the surrender of Notes for conversion during any period while such books are so
closed shall become effective for conversion immediately upon the reopening of
such books as if the surrender had been made on the date of such reopening, and
the conversion shall be at the conversion rate in effect on such date.
All notices of conversion shall be irrevocable; provided,
however, that if the Company has sent notice of an event pursuant to paragraph
2(e) hereof, a holder of Notes may, at its election, provide in its notice of
conversion that the conversion of its Notes shall be contingent upon the
occurrence of the record date or effectiveness of such event (as specified by
such holder), provided that such notice of conversion is received by the Company
prior to such record date or effective date, as the case may be.
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<PAGE>
(c) Protection From Dilution.
(i) Except as otherwise provided herein, in the event the
Company shall, at any time or from time to time after the date hereof, (A) sell
or issue any shares of Common Stock for a consideration per share less than
either (I) the Conversion Price in effect on the date of such sale or issuance
or (II) the Market Price (as defined in the Purchase Agreement) of the Common
Stock as of the date of the sale or issuance, (B) issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or (C) subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such sale, issuance, subdivision or combination being herein
called a "Change of Shares"), then, and thereafter upon each further Change of
Shares, the Conversion Price in effect immediately prior to such Change of
Shares shall be changed to a price (rounded to the nearest cent) determined by
multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the sale or issuance of such
additional shares or such subdivision or combination and the number of shares of
Common Stock which the aggregate consideration received (determined as provided
in Subparagraph 2(c)(v)(E)) for the issuance of such additional shares would
purchase at the greater of (x) the Conversion Price in effect on the date of
such issuance, and (y) the Market Price of the Common Stock as of such date, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the sale or issuance of such additional shares or
such subdivision or combination. Such adjustment shall be made successively
whenever such an issuance is made.
(ii) In case of any reclassification, capital reorganization
or other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another entity (other than a
consolidation or merger in which the Company is the continuing entity and which
does not result in any reclassification, capital reorganization or other change
of outstanding shares of Common Stock other than the number thereof), or in case
of any sale or conveyance to another entity of the property of the Company as,
or substantially as, an entirety (other than a sale/leaseback, mortgage or other
financing transaction), the Company shall cause effective provision to be made
so that the Holder shall be entitled to receive, upon conversion of this Note,
the kind and number of shares of stock or other securities or property
(including cash) receivable upon such reclassification, capital reorganization
or other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock into which such Note was convertible
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Subsection 2(c). The Company
shall not effect any such consolidation, merger or sale unless prior to, or
simultaneously with, the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the entity purchasing
assets or other appropriate entity shall assume, by written instrument executed
and delivered to the Company, the obligation to deliver to the Holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to receive and the other obligations
under this Note. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
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<PAGE>
(iii) If, at any time or from time to time, the Company
shall issue or distribute to the holders of shares of Common Stock evidence of
its indebtedness, any other securities of the Company or any cash, property or
other assets (any such event being herein called a "Special Dividend"), then in
each case the Holder shall be entitled to a proportionate share of any such
Special Dividend as though it were the holder of the number of shares of Common
Stock of the Company into which this Note is convertible as of the record date
fixed for the determination of the holders of Common Stock of the Company
entitled to receive such Special Dividend.
(iv) After each adjustment of the Conversion Price pursuant
to this Subsection 2(c), the Company will promptly prepare a certificate signed
by the Chairman or President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, of the Company setting forth: (A) the
Conversion Price as so adjusted, (B) the conversion rate corresponding to such
Conversion Price and (C) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate in the Note Register
(as defined below) and send such certificate by ordinary first class mail to
each registered holder of Notes at his or her last address as it shall appear in
the Note Register. No failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity of such adjustment. The affidavit
of an authorized officer of the Company that such notice has been mailed shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
The Transfer Agent may rely on the information in the certificate as true and
correct and has no duty or obligation independently to verify the amounts or
calculations set forth therein.
(v) For purposes of Subsection 2(c)(i) hereof, the following
provisions (A) to (E) shall also be applicable:
(A) No adjustment of the Conversion Price shall be
made unless such adjustment would require an increase or
decrease of at least $.01 in such price; provided that any
adjustments which by reason of this Subparagraph (A) are not
required to be made shall be carried forward and shall be
made at the time of, and together with, the next subsequent
adjustment which, together with adjustments so carried
forward, shall require an increase or decrease of at least
$.01 in the Conversion Price then in effect hereunder.
(B) In case of (I) the sale or other issuance by the
Company (including as a component of a unit) of any rights
or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or any securities convertible
into or exchangeable for Common Stock (such securities
convertible, exercisable or exchangeable into Common Stock
being herein called "Convertible Securities"), or (II) the
issuance by the Company, without the receipt by the Company
of any consideration therefor, of any rights or warrants to
subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, whether or not
such rights, warrants or options, or the right to convert or
exchange such Convertible Securities, are immediately
exercisable, and the consideration per share for which
Common Stock is issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of
such Convertible Securities (determined by dividing
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<PAGE>
(x) the minimum aggregate consideration, as set forth in the
instrument relating thereto without regard to any
antidilution or similar provisions contained therein for a
subsequent adjustment of such amount, payable to the Company
upon the exercise of such rights, warrants or options, plus
the consideration received by the Company for the issuance
or sale of such rights, warrants or options, plus, in the
case of such Convertible Securities, the minimum aggregate
amount, as set forth in the instrument relating thereto
without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such
amount, of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number, as set
forth in the instrument relating thereto without regard to
any antidilution or similar provisions contained therein for
a subsequent adjustment of such amount, of shares of Common
Stock issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such
Convertible Securities issuable upon the exercise of such
rights, warrants or options) is less than either the
Conversion Price or the Market Price of the Common Stock as
of the date of the issuance or sale of such rights, warrants
or options, then such total maximum number of shares of
Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of
such Convertible Securities (as of the date of the issuance
or sale of such rights, warrants or options) shall be deemed
to be "Common Stock" for purposes of Subsection 2(c)(i) and
shall be deemed to have been sold for an amount equal to
such consideration per share and shall cause an adjustment
to be made in accordance with Subsection 2(c)(i).
(C) In case of the sale by the Company of any
Convertible Securities, whether or not the right of
conversion or exchange thereunder is immediately
exercisable, and the price per share for which Common Stock
is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the total
amount of consideration received by the Company for the sale
of such Convertible Securities, plus the minimum aggregate
amount, as set forth in the instrument relating thereto
without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such
amount, of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number, as set
forth in the instrument relating thereto without regard to
any antidilution or similar provisions contained therein for
a subsequent adjustment of such amount, of shares of Common
Stock issuable upon the conversion or exchange of such
Convertible Securities) is less than either the Conversion
Price or the Market Price of the Common Stock as of the date
of the sale of such Convertible Securities, then such total
maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities (as of
the date of the sale of such Convertible Securities) shall
be deemed to be "Common Stock" for purposes of Subsection
2(c)(i) and shall be deemed to have been sold for an amount
equal to such consideration
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<PAGE>
per share and shall cause an adjustment to be made in
accordance with Subsection 2(c)(i).
(D) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities
referred to in (B) and (C) above or any other securities of
the Company convertible, exchangeable or exercisable for
shares of Common Stock, for any reason other than an event
that would require adjustment to prevent dilution pursuant
to the terms of any such convertible, exchangeable or
exercisable instrument, so that the consideration per share
received by the Company after such modification is less than
either the Conversion Price or the Market Price as of the
date prior to such modification, then such securities, to
the extent not theretofore exercised, converted or
exchanged, shall be deemed to have expired or terminated
immediately prior to the date of such modification and the
Company shall be deemed for purposes of calculating any
adjustments pursuant to this Subsection 2(c) to have issued
such new securities upon such new terms on the date of
modification. Such adjustment shall become effective as of
the date upon which such modification shall take effect. On
the expiration or cancellation of any such right, warrant or
option or the termination or cancellation of any such right
to convert or exchange any such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be
readjusted to such Conversion Price as would have obtained
(a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities
been made upon the basis of the issuance of only the number
of shares of Common Stock theretofore actually delivered
(and the total consideration received therefor) upon the
exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities and
(b) had adjustments been made on the basis of the Conversion
Price as adjusted under clause (a) of this sentence for all
transactions (which would have affected such adjusted
Conversion Price) made after the issuance or sale of such
rights, warrants, options or Convertible Securities.
(E) In case of the sale of any shares of Common
Stock, any Convertible Securities, any rights or warrants to
subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, the
consideration received by the Company therefor shall be
deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the
Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection
therewith. In the event that any securities shall be issued
in connection with any other securities of the Company,
together comprising one integral transaction in which no
specific consideration is allocated among the securities,
then each of such securities shall be deemed to have been
issued for such consideration as the Board of Directors of
the Company determines in good faith; provided, however that
if the holders of in excess of ten percent (10%) of the then
outstanding principal amount of Notes disagree with such
determination, the Company shall retain, at its own
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<PAGE>
expense, an independent investment banking firm for the
purpose of rendering an appraisal.
(vi) Notwithstanding any other provision hereof, no
adjustment to the Conversion Price will be made:
(A) upon the exercise of (i) any of the options
outstanding on the date hereof under the Company's existing
stock option plans, or (ii) any warrants outstanding on the
date hereof listed on schedule 5.3 to the Purchase
Agreement, copies of which have been provided to the Holder
prior to the date hereof; or
(B) upon the issuance or exercise of options or stock
which may hereafter be granted, purchased or sold with the
approval of the Board of Directors, or exercised, under any
employee benefit plan or the 1993 Employee Stock Purchase
Plan of the Company to officers, directors, consultants or
employees, but only with respect to such options as are
exercisable at, and shares which are purchased and/or sold
at, prices no lower than the Closing Bid Price (as defined
in the Purchase Agreement) (or, if the Closing Bid Price
cannot be determined, the Fair Market Value (as defined in
the Purchase Agreement)) of the Common Stock as of the date
of grant thereof; or
(C) upon issuance or exercise of the Placement
Warrants, or the Advisory Warrants, (as defined in the
Letter of Intent) (collectively, the "Paramount Warrants"),
upon the issuance of any Common Stock pursuant to the
Purchase Agreement (including any Article IX Issuances (as
defined therein)), upon the exercise of the Class A and
Class B Warrants (as defined in the Letter of Intent) or
upon the issuance, conversion or exercise of the Series B
Preferred Stock or Common Stock (including any common stock
issuable pursuant to contractual rights analogous to the
Article IX Issuances) or the Class C Warrants to be issued
(i) on or prior to the Series B Final Closing Date (as
defined in the Letter of Intent) or (ii) pursuant to the
exercise of the Paramount Warrants, or upon the issuance,
conversion or exercise of any Series A or Series B Preferred
Stock or Class A, Class B or Class C Warrants approved in
writing by the Placement Agent, or upon the issuance of any
other equity securities of the Company to the extent that
such issuance causes an adjustment to the Conversion Price
pursuant to the second paragraph of Subsection 2(a); or
(D) upon the issuance or sale of Common Stock or
Convertible Securities pursuant to the exercise of any
rights, options or warrants to receive, subscribe for or
purchase, or any options for the purchase of, Common Stock
or Convertible Securities, whether or not such rights,
warrants or options were outstanding on the date of the
original issuance of the Notes or were thereafter issued or
sold, provided that an adjustment was either made or not
required to
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<PAGE>
be made in accordance with Subsection 2(c)(i) in connection
with the issuance or sale of such securities or any
modification of the terms thereof; or
(E) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities,
provided that any adjustments required to be made upon the
issuance or sale of such Convertible Securities or any
modification of the terms thereof were so made, and whether
or not such Convertible Securities were outstanding on the
date of the original issuance of the Notes or were
thereafter issued or sold.
Subparagraph 2(c)(v)(D) shall nevertheless apply to any modification of the
rights of conversion, exchange or exercise of any of the securities referred to
in Subparagraphs (A), (B), (D) and (E), or to the extent effected with respect
to fewer than all of such securities, Subparagraph (C) of this Subsection
2(c)(vi).
(vii) As used in this Subsection 2(c), the term "Common
Stock" shall mean and include the Company's Common Stock authorized on the date
of the original issue of the Notes and shall also include any capital stock of
any class of the Company thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution or winding up of the Company; provided, however, that
the shares issuable upon conversion of the Notes shall include only shares of
such class designated in the Certificate of Incorporation as Common Stock on the
date of the original issue of the Notes or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Subsection 2(c)(ii) hereof, the stock, securities or
property provided for in such section or (ii), in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon conversion of the Notes as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par value, or from
no par value to par value, such shares of Common Stock as so reclassified or
changed.
(viii) Any determination as to whether an adjustment in the
Conversion Price in effect hereunder is required pursuant to Subsection 2(a) or
2(c), or as to the amount of any such adjustment, if required, shall be binding
upon the holders of the Notes and the Company if made in good faith by the Board
of Directors of the Company.
(d) Reservation of Shares; Transfer Taxes; Etc. The Company
shall at all times reserve and keep available, out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Notes, including, without limitation upon any Default
Conversion, such number of shares of its Common Stock free of preemptive rights
as shall be sufficient to effect the conversion of all Notes from time to time
outstanding. The Company shall use its best efforts from time to time, in
accordance with the laws of the State of Delaware, to increase the authorized
number of shares of Common Stock if at any time the number of shares of Common
Stock not outstanding shall not be sufficient to permit the conversion of all
the then-outstanding Notes.
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The Company shall pay any and all issue or other taxes that
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Notes. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue or
delivery of Common Stock (or other securities or assets) in a name other than
that in which the Notes so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Company the amount of such tax or has established, to the
satisfaction of the Company, that such tax has been paid. The Company covenants
that all shares of Common Stock issuable upon exercise of the Optional and
Default Conversion Rights shall be validly issued, fully paid and nonassessable.
(e) Prior Notice of Certain Events. In case:
(i) the Company shall declare any dividend (or any other
distribution); or
(ii) the Company shall authorize the granting to the holders
of Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change
in par value, or from par value to no par value, or from no par value
to par value); or
(iv) of any consolidation or merger to which the Company is
a party and for which approval of any stockholders of the Company shall
be required, or of the sale or transfer of all or substantially all of
the assets of the Company or of any compulsory share exchange whereby
the Common Stock is converted into other securities, cash or other
property; or
(v) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then the Company shall cause to be mailed to the holders of Notes, at their last
addresses as they shall appear upon the books of the Company, at least 20 days
prior to the applicable record date hereinafter specified, a notice stating (x)
the date on which a record (if any) is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants or, if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, rights or warrants are to be determined
and a description of the cash, securities or other property to be received by
such holders upon such dividend, distribution or granting of rights or warrants
or (y) the date on which such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding up or other
liquidation event is expected to become effective, the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such exchange, dissolution, liquidation or winding up or other liquidation event
and the consideration, including securities or other property, to be received by
such holders upon such exchange; provided, however, that no failure to mail such
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notice or any defect therein or in the mailing thereof shall affect the validity
of the corporate action required to be specified in such notice.
(f) Other Changes in Conversion Rate. The Company from time to
time may increase the Conversion Rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the Conversion Rate is so increased, the Company shall mail to
holders of record of Notes a notice of the increase at least 15 days before the
date the increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period it will be in effect.
The Company may make such increases in the Conversion Rate, in
addition to those required or allowed by this paragraph 4, as shall be
determined by it, as evidenced by a resolution of the Board of Directors, to be
advisable in order to avoid or diminish any income tax to holders of Common
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
SECTION 3. DEFAULT CONVERSION.
(a) If this Note and all accrued interest shall not have been
paid in full on or before the Maturity Date or upon the occurrence of an Event
of Default (as defined in Section 7 hereof), the Holder shall have the right
(the "Default Conversion Right"), in addition to any other available remedies
set forth in Section 8 hereof or at law or in equity, to convert ten percent
(10%) of the principal amount of the Notes (the "Default Conversion Amount")
into a number of shares of Common Stock of the Company ("Default Conversion
Share Amount") which, when added to the Voting Securities (as defined below)
then owned by the Noteholders, equals fifty-one percent (51%) of the outstanding
shares of Common Stock of the Company for a purchase price of $.01 per share
(the "Default Conversion Price"). For purposes of this Section 3, Voting
Securities shall mean the Alternate Offering Common Stock and/or Series A
Preferred Stock (both as defined in the Purchase Agreement)). Upon conversion,
the Company shall pay all accrued and unpaid interest on the Default Conversion
Amount.
(b) To exercise the Default Conversion Right, the Holder, on
or before the twentieth day after the Maturity Date, but before payment in full
of the then outstanding principal and interest under this Note, shall deliver to
the Company, at its office at as set forth in Section 11, or at such other place
as is designated in writing by the Company, a notice (the "Conversion Notice")
stating that the Holder is exercising the Default Conversion Right, the Default
Conversion Amount and the name or names in which the Holder wishes the
certificates for shares of Common Stock to be issued.
(c) To the extent permitted by applicable law, upon exercise
of the Default Conversion Right, the Holder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise (the
"Conversion Shares"), notwithstanding that the transfer books of the Company
shall then be closed or certificates representing such Conversion Shares shall
not then have been actually delivered to the Holder. As soon as practicable and
in any event within five (5) days after exercise of the Default Conversion
Right, the Company shall
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issue and deliver to the Holder a certificate or certificates evidencing the
Conversion Shares registered in the name of the Holder or its designee, provided
that the Company may require the holder, by notice given to the Holder promptly
after receipt of the Conversion Notice, as a condition to the delivery of such
certificate or certificates, to present this Note to the Company for the
placement hereon of a legend indicating that the Default Conversion Right has
been exercised to the extent of the Default Conversion Amount, and this Note
(unless thereby paid in full) shall be immediately returned to the Holder.
(d) The issuance of any shares or other securities upon the
exercise of the Default Conversion Right, and the delivery of certificates or
other instruments representing such shares or other securities, shall be made
without charge to the Holder for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall not be
required to issue or deliver any such certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(e) The Holder shall not have, solely on account of such
status as a Holder of this Note, any rights of a stockholder of the Company,
either at law or in equity, or any notice of meetings of stockholders or of any
other proceedings of the Company except as provided in this Note.
SECTION 4. FRACTIONAL SHARES.
The Company shall not be required to issue fractions of shares
of Common Stock or other capital stock of the Company upon the exercise of the
Optional and Default Conversion Right. If any fraction of a share would be
issuable on any exercise of the Optional or Default Conversion Right (or
specified portions thereof), the Company shall purchase such fraction for an
amount in cash equal to the same fraction of the closing price for the Common
Stock on the trading date immediately preceding the date of exercise of such
Option or Default Conversion Right.
SECTION 5. AFFIRMATIVE COVENANTS OF THE COMPANY.
The Company covenants and agrees that until the payment in
full of this Note, the Company shall:
(a) Existence; Business. (i) Preserve, renew and keep in full
force and effect its legal existence and (ii) obtain, preserve, renew, extend
and keep in full force and effect the licenses, permits, authorizations,
patents, trademarks and trade names material to its business.
(b) Use of Proceeds. Use the proceeds of the Notes of this
issue solely as set forth in Section 7.6 of the Purchase Agreement.
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(c) Reports. Furnish to the Holder, at the time furnished to
the Company's stockholders, reports furnished generally to the Company's
stockholders, and copies of Current Reports on Form 8-K.
(d) Notice of Events of Default. Furnish to the Holder prompt
written notice of any Event of Default, specifying the nature and extent thereof
and corrective action, if any, proposed to be taken with respect thereto.
(e) Authorization of Stock Issuable Upon Conversion. Authorize
and reserve a sufficient number of its shares for exercise of the Optional and
Default Conversion Rights.
SECTION 6. NEGATIVE COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Holder that until
the payment in full of this Note, the Company shall not:
(a) Indebtedness. Without the prior written consent of the
Holders, incur, create, assume, nor suffer to exist any indebtedness including
but not limited to any indebtedness to current executive officers, employees,
directors or principal stockholders of the Company, but excluding (i) accounts
payable incurred in the ordinary course and paid in accordance with roman
numeral (iv) of paragraph 14 of the Letter of Intent dated June 30, 1997 and
(ii) indebtedness existing on the date hereof reflected in the Company's March
31, 1997 Financial Statement.
(b) Liens. Create, incur, assume or permit to exist any lien
on any property or assets (including stock or other securities of any person)
now owned or hereafter acquired by the Company, except (i) liens for taxes not
yet due or which are being contested by appropriate proceedings; (ii) carriers',
warehousemen's, mechanic's, materialmen's, repairmen's or other like liens
arising in the ordinary course of business and securing obligations that are not
due or which are being contested; or (iii) liens of attachments, judgments or
awards against the Company (X) which could not reasonably be expected to have an
adverse material effect on the Company or (Y) with respect to which an appeal or
proceeding for review shall be pending or a stay of execution shall have been
obtained, or which are otherwise being contested in good faith and by
appropriate proceedings, or (iv) purchase money liens, equipment leases and
financings incurred in the ordinary course of business.
(c) Sale and Lease-Back Transactions. Enter into any
arrangement, directly or indirectly, with any person whereby it shall sell or
transfer any property, real or personal, used or useful in its business, whether
now owned or hereafter acquired, and thereafter rent (including intellectual
property), lease or license such property or other property which it intends to
use for substantially the same purpose or purposes as the property being sold or
transferred.
(d) Mergers, Consolidations, Sales of Assets and Acquisitions.
Merge into or consolidate with any other person, or permit any other person to
merge into or consolidate with it, or sell, transfer, lease or otherwise dispose
of (in one transaction or in a series of transactions) all or a substantial part
of its assets (whether now owned or hereafter acquired) or
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purchase, lease or otherwise acquire (in one transaction or a series of
transactions) all or a substantial part of the assets of any other person.
(e) Dividends and Distributions. Declare or pay, directly or
indirectly, any dividend or make any other distribution (by reduction of capital
or otherwise), whether in cash, property, securities or a combination thereof,
with respect to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for value any shares of any class
of its capital stock or set aside any amount for any such purpose, except as
permitted by Section 7.14 of the Purchase Agreement.
(f) No Impairment. By amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Note, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of this
Note against impairment.
SECTION 7. EVENTS OF DEFAULT DEFINED.
The following shall each constitute an "Event of Default"
hereunder:
(a) the failure of the Company to make any payment of
principal of, or interest on, this Note when due and payable;
(b) the failure of the Company to observe or perform any
covenant in this Note or in the Purchase Agreement, and such failure shall have
continued unremedied for a period of five (5) days;
(c) if the Company shall:
(1) admit in writing its inability to pay
its debts generally as they become due,
(2) file a petition in bankruptcy or a
petition to take advantage of any
insolvency act,
(3) make an assignment for the benefit of
its creditors,
(4) consent to the appointment of a receiver
of itself or of the whole or any
substantial part of its property,
(5) on a petition in bankruptcy filed
against, be adjudicated a bankrupt, or
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(6) file a petition or answer seeking
reorganization or arrangement under the
federal bankruptcy laws or any other
applicable law or statute of the United
States of America or any state thereof;
(d) if a court of competent jurisdiction shall enter an order,
judgment or decree appointing, without the consent of the Company, a receiver of
the Company or of the whole or any substantial part of its property, or
approving a petition filed against it seeking reorganization or arrangement of
the Company under the federal bankruptcy laws or any other applicable law or
statute of the United States of America or any State thereof, and such order,
judgment or decree shall not be vacated or set aside or stayed within thirty
(30) days from the date of entry thereof;
(e) if, under the provisions of any other law for the relief
or aid of debtors, any court of competent jurisdiction shall assume custody or
control of the Company or the whole or any substantial part of its property and
such custody or control shall not be terminated or stayed within thirty (30)
days from the date of assumption of such custody or control;
(f) the liquidation, dissolution or winding up of the Company;
(g) the failure to comply with any section of the Purchase
Agreement; or
(h) a final judgment or judgments for the payment of money in
excess of $1,000,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction against
the Company and the same shall not be discharged (or provision shall not be made
for such discharge), or a stay of execution thereof shall not be procured,
within 30 days from the date of entry thereof and the Company shall not, within
such 30-day period, or such longer period during which execution of the same
shall have been stayed, appeal therefrom and cause the execution thereof to be
stayed during such appeal.
SECTION 8. REMEDIES UPON EVENT OF DEFAULT.
(i) Upon the occurrence of an Event of Default, (i) the entire
principal amount of, and all accrued and unpaid interest on, this Note shall
automatically become immediately due and payable without presentment, demand,
protest or other formalities of any kind, all of which are hereby expressly
waived by the Company and (ii) additional interest shall begin to accrue, and
shall be considered immediately due and payable, on the unpaid principal amount
of this Note at the rate of eighteen percent (18%) per annum and shall continue
to accrue until the initial interest and additional interest is paid. In
addition, the Holder may take any action available to it under the Purchase
Agreement or at law or in equity or by statute or otherwise.
(j) No remedy herein conferred upon the Holder of this Note is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
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SECTION 9. NOTE REGISTER.
(a) The Company shall keep at its principal executive office a
register (herein sometimes referred to as the "Note Register"), in which,
subject to such reasonable regulations as it may prescribe, but at its expense
(other than transfer taxes, if any), the Company shall provide for registration
and transfer of this Note.
(b) Whenever this Note shall be surrendered at the principal
executive office of the Company for transfer or exchange, accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed by the Holder hereof or his attorney duly authorized in writing,
the Company shall execute and deliver in exchange therefor a new Note or Notes,
as may be requested by such Holder, in the same aggregate unpaid principal
amount and payable on the same date as the principal amount of the Note or Notes
so surrendered; each such new Note shall be dated as of the date to which
interest has been paid on the unpaid principal amount of the Note or Notes so
surrendered and shall be in such principal amount and registered in such name or
names as such Holder may designate in writing.
(c) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Note
and of indemnity reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of this Note (in case of mutilation) the Company will make and
deliver in lieu of this Note a new Note of like tenor and unpaid principal
amount and dated as of the date to which interest has been paid on the unpaid
principal amount of this Note in lieu of which such new Note is made and
delivered.
SECTION 10. REGISTRATION UNDER SECURITIES ACT OF 1933.
The Holder of this Note shall have registration rights as
provided in Section 8 of the Purchase Agreement, with respect to the shares of
Common Stock issuable upon conversion of the Notes pursuant to the Optional and
Default Conversion Right. If the Holder is not a party to the Purchase
Agreement, by acceptance of this Note, the Holder agrees to comply with
provisions of Section 8 of the Purchase Agreement to the same extent as if it
were a party thereto.
SECTION 11. MISCELLANEOUS.
(a) Amendments and Waivers. The holders of sixty-six and
two-thirds percent (66 2/3%) or more in principal amount of outstanding Notes of
this issue may waive or otherwise consent to the amendment of any of the
provisions hereof, provided that no such waiver or amendment may reduce the
principal amount of or interest on any of the Notes of this issue or change the
stated maturity of the principal or reduce the percentage of holders of Notes of
this issue necessary to waive or amend the provisions of this Note, without the
consent of each holder of any Note affected thereby.
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<PAGE>
(b) Restrictions on Transferability. In addition to the
restrictions set forth in Section 6(a) of this Note, the securities represented
by this Note have been acquired for investment and have not been registered
under the Securities Act of 1933, as amended, or the securities laws of any
state or other jurisdiction. Without such registration, such securities may not
be sold, pledged, hypothecated or otherwise transferred, except pursuant to
exemptions from the Securities Act of 1933, and the securities laws of any state
or other jurisdiction. Notwithstanding the above, the holder of this Note has
been provided the registration rights contained in Section 8 of the Purchase
Agreement with respect to the shares of the Company's Common Stock which may be
acquired upon exercise of the Optional and Default Conversion Right.
(c) Forbearance from Suit. No holder of Notes of this issue
shall institute any suit or proceeding for the enforcement of the payment of
principal or interest unless the holders of at least fifty-one percent (51%) in
principal amount of all of the outstanding Notes of this issue join in such suit
or proceeding.
(d) Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York, excluding the
body of law relating to conflict of laws. Notwithstanding anything to the
contrary contained herein, in no event may the effective rate of interest
collected or received by the Holder exceed that which may be charged, collected
or received by the Holder under applicable law.
(e) Interpretation. If any term or provision of this Note
shall be held invalid, illegal or unenforceable, the validity of all other terms
and provisions hereof shall in no way be affected thereby.
(f) Successors and Assigns. This Note shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of the
Holder and its successors and assigns.
(g) Notices. All notices, requests, consents and demands shall
be made in writing and shall be mailed postage prepaid, or delivered by hand, to
the Company or to the Holder thereof at their respective addresses set forth
below or to such other address as may be furnished in writing to the other party
hereto:
If to the Holder: At the address shown on Schedule A attached hereto.
with a copy to: Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Attn: David R. Walner
If to the Company: Procept, Inc.
840 Memorial Drive
Cambridge, MA
Attention: Stanley C. Erck
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<PAGE>
with a copy to: Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Attn: Michael S. Weiss
(h) Saturdays, Sundays, Holidays. If any date that may at any
time be specified in this Note as a date for the making of any payment of
principal or interest under this Note shall fall on Saturday, Sunday or on a day
which in New York shall be a legal holiday, then the date for the making of that
payment shall be the next subsequent day which is not a Saturday, Sunday or
legal holiday.
(i) Purchase Agreement. This Note is subject to the terms
contained in the Purchase Agreement and the Operative Documents (as defined in
Purchase Agreement) dated the date hereof between the Company and certain
purchasers of the Notes and the holder of this Note is entitled to the benefits
of such Purchase Agreement and the Operative Documents and may, in addition to
any rights hereunder, enforce the agreements of the Company contained therein
and exercise the remedies provided for thereby or otherwise available in respect
thereof.
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<PAGE>
IN WITNESS WHEREOF, this Note has been executed and delivered on the
date first above written by the duly authorized representative of the Company.
ATTEST: PROCEPT, INC.
/s/ Lynnette C. Fallon By: /s/ Stanley C. Erck
- ------------------- -------------------------------
Name: Stanley C. Erck
Its: President
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<PAGE>
EXHIBIT H
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE
STATE SECURITIES LAWS.
PROCEPT, INC.
Class A Warrant for the Purchase of Shares of
Common Stock
No. CA-1 959,944 Shares
FOR VALUE RECEIVED, PROCEPT, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that THE ARIES DOMESTIC FUND, LP or its registered
assigns (the "Holder") is entitled to purchase from the Company, subject to the
provisions of this Warrant (the "Warrant"), at any time commencing upon the date
hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00 P.M., New York City
time, on the date which is five (5) years from the date hereof (the "TERMINATION
DATE"), June 30, 2002 fully paid and non-assessable shares of the Common Stock,
$.01 par value, of the Company ("Common Stock"), at an exercise price of $.01
per share of Common Stock for an aggregate exercise price of NINE THOUSAND FIVE
HUNDRED NINETY-NINE DOLLARS AND FORTY-FOUR CENTS ($9,599.44) (the aggregate
purchase price payable for the Warrant Shares hereunder is hereinafter sometimes
referred to as the "AGGREGATE EXERCISE PRICE"). The number of shares of Common
Stock to be received upon exercise of this Warrant and the price to be paid for
each share of Common Stock are subject to possible adjustment from time to time
as hereinafter set forth. The shares of Common Stock or other securities or
property deliverable upon such exercise as adjusted from time to time is
hereinafter sometimes referred to as the "WARRANT SHARES." The exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "PER SHARE EXERCISE PRICE." The Per
Share Exercise Price is subject to adjustment as hereinafter provided; in the
event of any such adjustment, the number of Warrant Shares shall be adjusted by
dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect
immediately after such adjustment. The Aggregate Exercise Price is not subject
to adjustment.
<PAGE>
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part, at any
time by the Holder commencing on the Initial Exercise Date and prior to the
Termination Date, by presentation and surrender of this Warrant, together with
the duly executed subscription form attached at the end hereof, at the address
set forth in subsection 8(a) hereof, together with payment, by certified or
official bank check or wire transfer payable to the order of the Company, of the
Aggregate Exercise Price or the proportionate part thereof if exercised in part.
(b) If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the certificate for the Warrant Shares purchased) a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions as
herein set forth. Upon proper exercise of this Warrant, the Company promptly
shall deliver certificates for the Warrant Shares to the Holder duly legended as
authorized by the subscription form. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant; provided that
the Company shall pay to the holders of the Warrant cash in lieu of such
fractional shares.
2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES.
The Company hereby represents that it has, and until expiration of this Warrant
agrees that it shall, reserve for issuance or delivery upon exercise of this
Warrant, such number of shares of the Common Stock as shall be required for
issuance and/or delivery upon exercise of this Warrant in full, and agrees that
all Warrant Shares so issued and/or delivered will be validly issued, fully paid
and non-assessable, and further agrees to pay all taxes and charges that may be
imposed upon such issuance and/or delivery.
3. PROTECTION AGAINST DILUTION.
(a) In the event the Company shall, at any time or from time
to time after the date of issuance of this Warrant, issue or distribute to all
of the holders of its shares of Common Stock evidence of its indebtedness, any
other securities of the Company or any cash, property or other assets (any such
event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price
shall be adjusted by multiplying the Per Share Exercise Price then in effect by
a fraction, the numerator of which shall be the then Current Market Price (as
defined in paragraph 3(k) below) of the Common Stock, less the Current Market
Price of the Special Dividend issued or distributed in respect of one share of
Common Stock, and the denominator of which shall be the Current Market Price of
the Common Stock. Such adjustment shall be made successively whenever such a
record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such distribution
unless such distribution is not ultimately made.
(b) In case the Company shall hereafter (i) pay a dividend or
make a distribution on its capital stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of
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Common Stock into a smaller number of shares or (iv) issue by reclassification
of its Common Stock any shares of capital stock of the Company, the Per Share
Exercise Price shall be adjusted to be equal to a fraction, the numerator of
which shall be the Aggregate Exercise Price and the denominator of which shall
be the number of shares of Common Stock or other capital stock of the Company
issuable upon exercise of this Warrant assuming this Warrant had been exercised
immediately prior to such action. An adjustment made pursuant to this subsection
3(b) shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c)(i) Except as provided in subsections 3(a) and 3(b)(i), in
the event the Company shall hereafter issue or sell any Common Stock, any
securities convertible into Common Stock or any rights, options or warrants to
purchase Common Stock or securities convertible into Common Stock, in each case
for a price per share or entitling the holders thereof to purchase Common Stock
at a price per share (determined by dividing (i) the total amount, if any,
received or receivable by the Company in consideration of the issuance or sale
of such securities plus the consideration, if any, payable to the Company upon
exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii)
the number of additional shares of Common Stock issued, sold or issuable upon
exercise or conversion of such securities) which is less than the then Current
Market Price of the Common Stock (as defined below) but not below the current
Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the
Per Share Exercise Price shall be adjusted as of the date of such issuance or
sale by multiplying the Per Share Exercise Price then in effect by a fraction,
the numerator of which shall be (x) the sum of (A) the number of shares of
Common Stock outstanding on the record date of such issuance or sale plus (B)
the Total Consideration divided by the Current Market Price of the Common Stock,
and the denominator of which shall be (y) the number of shares of Common Stock
outstanding on the record date of such issuance or sale plus the maximum number
of additional shares of Common Stock issued, sold or issuable upon exercise or
conversion of such securities.
(ii) Except as provided in subsection 3(a) and 3(b)(i), in the
event the Company shall hereafter issue or sell any Common Stock, any securities
convertible into Common Stock or any rights, options or warrants to purchase
Common Stock or securities convertible into Common Stock, in each case for a
price per share or entitling the holders thereof to purchase Common Stock at a
price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total
Consideration by (ii) the number of additional shares of Common Stock issuable
upon exercise or conversion of such securities) which is less than the then
current Per Share Exercise Price in effect on the record date of such issuance,
the Per Share Exercise Price shall be adjusted to equal the Issue Price.
(d) In the event of any capital reorganization or
reclassification, or any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), the
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<PAGE>
Holder of this Warrant shall have the right thereafter to receive on the
exercise of this Warrant the kind and amount of securities, cash or other
property which the Holder would have owned or have been entitled to receive
immediately after such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the exercise of
this Warrant. The above provisions of this subsection 3(e) shall similarly apply
to successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any shares of stock or
other securities or property thereafter deliverable on the exercise of this
Warrant shall be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so proposed to be made, shall be mailed to the Holders of the
Warrants not less than 30 days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(e) In case any event shall occur as to which the other
provisions of this Section 3 are not strictly applicable but as to which the
failure to make any adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles hereof then, in each such case, the Holders of Warrants representing
the right to purchase a majority of the Warrant Shares subject to all
outstanding Warrants may appoint a firm of independent public accountants of
recognized national standing reasonably acceptable to the Company, which shall
give their opinion as to the adjustment, if any, on a basis consistent with the
essential intent and principles established herein, necessary to preserve the
purchase rights represented by the Warrants. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the Holder of this Warrant and
shall make the adjustments described therein. The fees and expenses of such
independent public accountants shall be borne by the Company.
(f) Whenever the Per Share Exercise Price payable upon
exercise of each Warrant is adjusted pursuant to this Section 3, the number of
shares of Common Stock underlying a Warrant shall simultaneously be adjusted to
equal the number obtained by dividing the Aggregate Exercise Price by the
adjusted Per Share Exercise Price.
(g) No adjustment in the Per Share Exercise Price shall be
required unless such adjustment would require an increase or decrease of at
least $0.01 per share of Common Stock; provided, however, that any adjustments
which by reason of this subsection 3(g) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 3 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this Section 3 to
the contrary notwithstanding, the Company shall be entitled to make such
reductions in the Per Share
4
<PAGE>
Exercise Price, in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible or exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable.
(h) Whenever the Per Share Exercise Price is adjusted as
provided in this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall promptly
obtain, at its expense, a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular auditors of the Company) setting forth the Per Share Exercise
Price and the number of Warrant Shares after such adjustment or the effect of
such modification, a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause copies of such
certificate to be mailed to the Holders of the Warrants.
(i) If the Board of Directors of the Company shall declare any
dividend or other distribution with respect to the Common Stock, the Company
shall mail notice thereof to the Holders of the Warrants not less than 30 days
prior to the record date fixed for determining stockholders entitled to
participate in such dividend or other distribution.
(j) If, as a result of an adjustment made pursuant to this
Section 3, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock or
shares of Common Stock and other capital stock of the Company, the Board of
Directors (whose determination shall be conclusive and shall be described in a
written notice to the Holder of any Warrant promptly after such adjustment)
shall determine the allocation of the adjusted Per Share Exercise Price between
or among shares or such classes of capital stock or shares of Common Stock and
other capital stock.
(k) For the purpose of any computation under Section 3 above,
the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be
deemed to be the last sale price of the Common Stock on the trading day prior to
such date or, in case no such reported sales take place on such day, the average
of the last reported bid and asked prices of the Common Stock on such day, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on any such exchange, the representative closing bid price of the Common Stock
as reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no
longer reporting such information, or, if the Common Stock is not reported on
NASDAQ, the high per share bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization, or if not so available, the fair market value of the Common Stock
as determined by agreement between the Company's Board of Directors, on the one
part, and the Holders of Warrants representing the right to purchase a majority
of the Warrant Shares subject to all outstanding Warrants, on the second part.
If the Board of Directors and such Holders fail to agree on the Current Market
Price within 60 days of the date of the action giving rise to any adjustment
pursuant to this Section 3, such Holders shall be entitled to appoint a firm of
independent public accountants or appraisers of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to such
Current Market Price on
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a basis consistent with the essential intent and principles established herein.
Upon receipt of such opinion, the Company will promptly mail a copy thereof to
the Holder of this Warrant and shall make the adjustments described therein. The
fees and expenses of such independent public accountants or appraisers shall be
borne by the Company.
4. REGISTRATION UNDER SECURITIES ACT OF 1933 . The resale of
the Warrant Shares shall be registered on the Shelf Registration Statement (as
defined in Article 8 of the Securities Purchase Agreement (the "Purchase
Agreement") dated as of June 30, 1997, by and among the Company, The Aries Fund,
a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited
partnership) and certain purchasers and the Holder of this Warrant shall have
the registration rights as provided in Article 8 of the Purchase Agreement. If
the Holder is not a party to the Purchase Agreement, by acceptance of this
Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase
Agreement to the same extent as if it were a party thereto.
5. LIMITED TRANSFERABILITY. This Warrant may not be sold,
transferred, assigned or hypothecated by the Holder except in compliance with
the provisions of the Securities Act of 1933 (the "Act") and the applicable
state securities "blue sky" laws, and is so transferable only upon the books of
the Company which it shall cause to be maintained for such purpose. The Company
may treat the registered Holder of this Warrant as he or it appears on the
Company's books at any time as the Holder for all purposes. The Company shall
permit any Holder of a Warrant or his duly authorized attorney, upon written
request during ordinary business hours, to inspect and copy or make extracts
from its books showing the registered holders of Warrants. All Warrants issued
upon the transfer or assignment of this Warrant will be dated the same date as
this Warrant, and all rights of the holder thereof shall be identical to those
of the Holder.
6. LOSS, ETC., OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
7. STATUS OF HOLDER. This Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a stockholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a stockholder, prior to the exercise hereof.
8. NOTICES. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at 840 Memorial Drive, Cambridge,
Massachusetts, Attention: Stanley C. Erck, or such other address as
the Company has designated in writing to the Holder; or
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<PAGE>
(b) the Holder at the address indicated in the notice
provisions to the Purchase Agreement, or other such address as the
Holder has designated in writing to the Company.
9. OPTIONAL CONVERSION. This Warrant shall be converted (the
"New Warrant Conversion") into a New Warrant (as hereinafter defined) with an
adjusted exercise price as set forth in this Section 9. "New Warrants" shall
mean a new class of warrants entitling the holders thereof to purchase, at any
time on or before the date which is five (5) years from the date hereof, one
share of Common Stock at an exercise price, subject to adjustment, equal to the
lesser of (a) $.29 and (b) fifty percent (50%) of the average closing bid price
of the Common Stock for either (i) the thirty (30) consecutive trading days
preceding the date of the Required Shareholder Approval (the "Approval Date"),
if any, or September 30, 1997, (ii) the five (5) consecutive trading days
preceding the Approval Date, if any, or September 30, 1997 or (iii) the five (5)
consecutive trading days immediately succeeding the Approval Date, if any, or
September 30, 1997 whichever is lowest. Other than the per share exercise
prices, the New Warrants shall have the same terms as the Class A and B Warrants
held by such Holder respectively (including, without limitation, an Aggregate
Exercise Price equal to the Aggregate Exercise Price of the sum of the Class A
and B Warrants Aggregate Exercise Prices prior to the New Warrant Conversion)
and all adjustments required upon an adjustment to the exercise price of the New
Warrants pursuant to the terms thereof shall be made in connection with the New
Warrant Conversion. To the extent that there is no Required Shareholder Approval
(as defined in the Purchase Agreement) necessary, the Initial Warrants shall be
converted into New Warrants on September 30, 1997, with an adjusted exercise
price equal to the lesser of (a) $.29 and (b) fifty percent (50%) of the average
closing bid price of the Common Stock for either (i) the thirty (30) consecutive
trading days preceding September 30, 1997, (ii) the five (5) consecutive trading
days preceding September 30, 1997 or (iii) the five (5) consecutive trading days
immediately succeeding September 30, 1997, whichever is lowest.
Notwithstanding the foregoing, the New Warrants' per share
exercise price shall be adjusted at the time of the Series B Final Closing Date
or the closing of the Company's next Qualified Offering (as these terms are
defined in the Letter of Intent between the Company and Paramount Capital Inc.,
dated June 30, 1997) if (i) the per share exercise price of the Offering
Warrants (as defined below) or (ii) the quotient of (a) the price per unit sold
in the Series B Offering or other Qualified Offering divided by (b) the quantity
of Common Stock (or any securities other than Common Stock viewed on a Common
Stock equivalent basis, collectively, the "Other Securities") included in each
unit sold in such Series B Offering or other Qualified Offering, is less than
twice the per share exercise price of the New Warrants. In such event the New
Warrants per share exercise price shall be reduced to equal 50% of the then
current per share exercise price of the Offering Warrants (as hereafter defined)
or per share exercise or offering price of the Other Securities (viewed on a
Common Stock equivalent basis). "Offering Warrants" shall mean the warrants
described in paragraph 8 of the Letter of Intent between the Company the
Holders, and Paramount Capital, Inc. dated June 30, 1997.
10. HEADINGS. The headings of this Warrant have been inserted
as a matter of convenience and shall not affect the construction hereof.
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<PAGE>
11. APPLICABLE LAW. This Warrant shall be governed by and
construed in accordance with the law of the State of New York without giving
effect to principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary this June 30, 1997.
PROCEPT, INC.
By: /s/ Stanley C. Erck
--------------------------
Name: Stanley C. Erck
Title: President
ATTEST:
/s/ Lynnette C. Fallon
- -----------------------
Secretary
[Corporate Seal]
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SUBSCRIPTION
The undersigned, ____________________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exercise the within
Warrant to the extent of purchasing _____________________ shares of Common Stock
thereunder and hereby makes payment of $_______________ by certified or official
bank check in payment of the per share exercise price therefor.
Dated: Signature:
------------ --------------------------
Address:
--------------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________________________________
hereby sells, assigns and transfers unto _____________________________________
the foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint _____________________________, attorney, to transfer said
Warrant on the books of Procept, Inc.
Dated: Signature:
------------ --------------------------
Address:
--------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby assigns
and transfers unto _________________________ the right to purchase __________
shares of the Common Stock, no par value per share, of Procept Inc. covered by
the foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Procept, Inc.
Dated: Signature:
------------ --------------------------
Address:
--------------------------
9
<PAGE>
EXHIBIT I
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE
STATE SECURITIES LAWS.
PROCEPT, INC.
Class A Warrant for the Purchase of Shares of
Common Stock
No. CA-2 1,782,752 Shares
FOR VALUE RECEIVED, PROCEPT, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that THE ARIES FUND, A CAYMAN ISLANDS TRUST or its
registered assigns (the "Holder") is entitled to purchase from the Company,
subject to the provisions of this Warrant (the "Warrant"), at any time
commencing upon the date hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00
P.M., New York City time, on the date which is five (5) years from the date
hereof (the "TERMINATION DATE"), June 30, 2002 fully paid and non-assessable
shares of the Common Stock, $.01 par value, of the Company ("Common Stock"), at
an exercise price of $.01 per share of Common Stock for an aggregate exercise
price of SEVENTEEN THOUSAND EIGHT HUNDRED TWENTY-SEVEN DOLLARS AND FIFTY-TWO
CENTS ($17,827.52) (the aggregate purchase price payable for the Warrant Shares
hereunder is hereinafter sometimes referred to as the "AGGREGATE EXERCISE
PRICE"). The number of shares of Common Stock to be received upon exercise of
this Warrant and the price to be paid for each share of Common Stock are subject
to possible adjustment from time to time as hereinafter set forth. The shares of
Common Stock or other securities or property deliverable upon such exercise as
adjusted from time to time is hereinafter sometimes referred to as the "WARRANT
SHARES." The exercise price of a share of Common Stock in effect at any time and
as adjusted from time to time is hereinafter sometimes referred to as the "PER
SHARE EXERCISE PRICE." The Per Share Exercise Price is subject to adjustment as
hereinafter provided; in the event of any such adjustment, the number of Warrant
Shares shall be adjusted by dividing the Aggregate Exercise Price by the Per
Share Exercise Price in effect immediately after such adjustment. The Aggregate
Exercise Price is not subject to adjustment.
<PAGE>
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part, at any
time by the Holder commencing on the Initial Exercise Date and prior to the
Termination Date, by presentation and surrender of this Warrant, together with
the duly executed subscription form attached at the end hereof, at the address
set forth in subsection 8(a) hereof, together with payment, by certified or
official bank check or wire transfer payable to the order of the Company, of the
Aggregate Exercise Price or the proportionate part thereof if exercised in part.
(b) If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the certificate for the Warrant Shares purchased) a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions as
herein set forth. Upon proper exercise of this Warrant, the Company promptly
shall deliver certificates for the Warrant Shares to the Holder duly legended as
authorized by the subscription form. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant; provided that
the Company shall pay to the holders of the Warrant cash in lieu of such
fractional shares.
2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES.
The Company hereby represents that it has, and until expiration of this Warrant
agrees that it shall, reserve for issuance or delivery upon exercise of this
Warrant, such number of shares of the Common Stock as shall be required for
issuance and/or delivery upon exercise of this Warrant in full, and agrees that
all Warrant Shares so issued and/or delivered will be validly issued, fully paid
and non-assessable, and further agrees to pay all taxes and charges that may be
imposed upon such issuance and/or delivery.
3. PROTECTION AGAINST DILUTION.
(a) In the event the Company shall, at any time or from time
to time after the date of issuance of this Warrant, issue or distribute to all
of the holders of its shares of Common Stock evidence of its indebtedness, any
other securities of the Company or any cash, property or other assets (any such
event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price
shall be adjusted by multiplying the Per Share Exercise Price then in effect by
a fraction, the numerator of which shall be the then Current Market Price (as
defined in paragraph 3(k) below) of the Common Stock, less the Current Market
Price of the Special Dividend issued or distributed in respect of one share of
Common Stock, and the denominator of which shall be the Current Market Price of
the Common Stock. Such adjustment shall be made successively whenever such a
record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such distribution
unless such distribution is not ultimately made.
(b) In case the Company shall hereafter (i) pay a dividend or
make a distribution on its capital stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of
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<PAGE>
Common Stock into a smaller number of shares or (iv) issue by reclassification
of its Common Stock any shares of capital stock of the Company, the Per Share
Exercise Price shall be adjusted to be equal to a fraction, the numerator of
which shall be the Aggregate Exercise Price and the denominator of which shall
be the number of shares of Common Stock or other capital stock of the Company
issuable upon exercise of this Warrant assuming this Warrant had been exercised
immediately prior to such action. An adjustment made pursuant to this subsection
3(b) shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c)(i) Except as provided in subsections 3(a) and 3(b)(i), in
the event the Company shall hereafter issue or sell any Common Stock, any
securities convertible into Common Stock or any rights, options or warrants to
purchase Common Stock or securities convertible into Common Stock, in each case
for a price per share or entitling the holders thereof to purchase Common Stock
at a price per share (determined by dividing (i) the total amount, if any,
received or receivable by the Company in consideration of the issuance or sale
of such securities plus the consideration, if any, payable to the Company upon
exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii)
the number of additional shares of Common Stock issued, sold or issuable upon
exercise or conversion of such securities) which is less than the then Current
Market Price of the Common Stock (as defined below) but not below the current
Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the
Per Share Exercise Price shall be adjusted as of the date of such issuance or
sale by multiplying the Per Share Exercise Price then in effect by a fraction,
the numerator of which shall be (x) the sum of (A) the number of shares of
Common Stock outstanding on the record date of such issuance or sale plus (B)
the Total Consideration divided by the Current Market Price of the Common Stock,
and the denominator of which shall be (y) the number of shares of Common Stock
outstanding on the record date of such issuance or sale plus the maximum number
of additional shares of Common Stock issued, sold or issuable upon exercise or
conversion of such securities.
(ii) Except as provided in subsection 3(a) and 3(b)(i), in the
event the Company shall hereafter issue or sell any Common Stock, any securities
convertible into Common Stock or any rights, options or warrants to purchase
Common Stock or securities convertible into Common Stock, in each case for a
price per share or entitling the holders thereof to purchase Common Stock at a
price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total
Consideration by (ii) the number of additional shares of Common Stock issuable
upon exercise or conversion of such securities) which is less than the then
current Per Share Exercise Price in effect on the record date of such issuance,
the Per Share Exercise Price shall be adjusted to equal the Issue Price.
(d) In the event of any capital reorganization or
reclassification, or any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), the
3
<PAGE>
Holder of this Warrant shall have the right thereafter to receive on the
exercise of this Warrant the kind and amount of securities, cash or other
property which the Holder would have owned or have been entitled to receive
immediately after such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the exercise of
this Warrant. The above provisions of this subsection 3(e) shall similarly apply
to successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any shares of stock or
other securities or property thereafter deliverable on the exercise of this
Warrant shall be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so proposed to be made, shall be mailed to the Holders of the
Warrants not less than 30 days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(e) In case any event shall occur as to which the other
provisions of this Section 3 are not strictly applicable but as to which the
failure to make any adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles hereof then, in each such case, the Holders of Warrants representing
the right to purchase a majority of the Warrant Shares subject to all
outstanding Warrants may appoint a firm of independent public accountants of
recognized national standing reasonably acceptable to the Company, which shall
give their opinion as to the adjustment, if any, on a basis consistent with the
essential intent and principles established herein, necessary to preserve the
purchase rights represented by the Warrants. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the Holder of this Warrant and
shall make the adjustments described therein. The fees and expenses of such
independent public accountants shall be borne by the Company.
(f) Whenever the Per Share Exercise Price payable upon
exercise of each Warrant is adjusted pursuant to this Section 3, the number of
shares of Common Stock underlying a Warrant shall simultaneously be adjusted to
equal the number obtained by dividing the Aggregate Exercise Price by the
adjusted Per Share Exercise Price.
(g) No adjustment in the Per Share Exercise Price shall be
required unless such adjustment would require an increase or decrease of at
least $0.01 per share of Common Stock; provided, however, that any adjustments
which by reason of this subsection 3(g) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 3 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this Section 3 to
the contrary notwithstanding, the Company shall be entitled to make such
reductions in the Per Share
4
<PAGE>
Exercise Price, in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible or exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable.
(h) Whenever the Per Share Exercise Price is adjusted as
provided in this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall promptly
obtain, at its expense, a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular auditors of the Company) setting forth the Per Share Exercise
Price and the number of Warrant Shares after such adjustment or the effect of
such modification, a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause copies of such
certificate to be mailed to the Holders of the Warrants.
(i) If the Board of Directors of the Company shall declare any
dividend or other distribution with respect to the Common Stock, the Company
shall mail notice thereof to the Holders of the Warrants not less than 30 days
prior to the record date fixed for determining stockholders entitled to
participate in such dividend or other distribution.
(j) If, as a result of an adjustment made pursuant to this
Section 3, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock or
shares of Common Stock and other capital stock of the Company, the Board of
Directors (whose determination shall be conclusive and shall be described in a
written notice to the Holder of any Warrant promptly after such adjustment)
shall determine the allocation of the adjusted Per Share Exercise Price between
or among shares or such classes of capital stock or shares of Common Stock and
other capital stock.
(k) For the purpose of any computation under Section 3 above,
the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be
deemed to be the last sale price of the Common Stock on the trading day prior to
such date or, in case no such reported sales take place on such day, the average
of the last reported bid and asked prices of the Common Stock on such day, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on any such exchange, the representative closing bid price of the Common Stock
as reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no
longer reporting such information, or, if the Common Stock is not reported on
NASDAQ, the high per share bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization, or if not so available, the fair market value of the Common Stock
as determined by agreement between the Company's Board of Directors, on the one
part, and the Holders of Warrants representing the right to purchase a majority
of the Warrant Shares subject to all outstanding Warrants, on the second part.
If the Board of Directors and such Holders fail to agree on the Current Market
Price within 60 days of the date of the action giving rise to any adjustment
pursuant to this Section 3, such Holders shall be entitled to appoint a firm of
independent public accountants or appraisers of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to such
Current Market Price on
5
<PAGE>
a basis consistent with the essential intent and principles established herein.
Upon receipt of such opinion, the Company will promptly mail a copy thereof to
the Holder of this Warrant and shall make the adjustments described therein. The
fees and expenses of such independent public accountants or appraisers shall be
borne by the Company.
4. REGISTRATION UNDER SECURITIES ACT OF 1933 . The resale of
the Warrant Shares shall be registered on the Shelf Registration Statement (as
defined in Article 8 of the Securities Purchase Agreement (the "Purchase
Agreement") dated as of June 30, 1997, by and among the Company, The Aries Fund,
a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited
partnership) and certain purchasers and the Holder of this Warrant shall have
the registration rights as provided in Article 8 of the Purchase Agreement. If
the Holder is not a party to the Purchase Agreement, by acceptance of this
Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase
Agreement to the same extent as if it were a party thereto.
5. LIMITED TRANSFERABILITY. This Warrant may not be sold,
transferred, assigned or hypothecated by the Holder except in compliance with
the provisions of the Securities Act of 1933 (the "Act") and the applicable
state securities "blue sky" laws, and is so transferable only upon the books of
the Company which it shall cause to be maintained for such purpose. The Company
may treat the registered Holder of this Warrant as he or it appears on the
Company's books at any time as the Holder for all purposes. The Company shall
permit any Holder of a Warrant or his duly authorized attorney, upon written
request during ordinary business hours, to inspect and copy or make extracts
from its books showing the registered holders of Warrants. All Warrants issued
upon the transfer or assignment of this Warrant will be dated the same date as
this Warrant, and all rights of the holder thereof shall be identical to those
of the Holder.
6. LOSS, ETC., OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
7. STATUS OF HOLDER. This Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a stockholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a stockholder, prior to the exercise hereof.
8. NOTICES. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at 840 Memorial Drive, Cambridge,
Massachusetts, Attention: Stanley C. Erck, or such other address as
the Company has designated in writing to the Holder; or
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<PAGE>
(b) the Holder at the address indicated in the notice
provisions to the Purchase Agreement, or other such address as the
Holder has designated in writing to the Company.
9. OPTIONAL CONVERSION. This Warrant shall be converted (the
"New Warrant Conversion") into a New Warrant (as hereinafter defined) with an
adjusted exercise price as set forth in this Section 9. "New Warrants" shall
mean a new class of warrants entitling the holders thereof to purchase, at any
time on or before the date which is five (5) years from the date hereof, one
share of Common Stock at an exercise price, subject to adjustment, equal to the
lesser of (a) $.29 and (b) fifty percent (50%) of the average closing bid price
of the Common Stock for either (i) the thirty (30) consecutive trading days
preceding the date of the Required Shareholder Approval (the "Approval Date"),
if any, or September 30, 1997, (ii) the five (5) consecutive trading days
preceding the Approval Date, if any, or September 30, 1997 or (iii) the five (5)
consecutive trading days immediately succeeding the Approval Date, if any, or
September 30, 1997 whichever is lowest. Other than the per share exercise
prices, the New Warrants shall have the same terms as the Class A and B Warrants
held by such Holder respectively (including, without limitation, an Aggregate
Exercise Price equal to the Aggregate Exercise Price of the sum of the Class A
and B Warrants Aggregate Exercise Prices prior to the New Warrant Conversion)
and all adjustments required upon an adjustment to the exercise price of the New
Warrants pursuant to the terms thereof shall be made in connection with the New
Warrant Conversion. To the extent that there is no Required Shareholder Approval
(as defined in the Purchase Agreement) necessary, the Initial Warrants shall be
converted into New Warrants on September 30, 1997, with an adjusted exercise
price equal to the lesser of (a) $.29 and (b) fifty percent (50%) of the average
closing bid price of the Common Stock for either (i) the thirty (30) consecutive
trading days preceding September 30, 1997, (ii) the five (5) consecutive trading
days preceding September 30, 1997 or (iii) the five (5) consecutive trading days
immediately succeeding September 30, 1997, whichever is lowest.
Notwithstanding the foregoing, the New Warrants' per share
exercise price shall be adjusted at the time of the Series B Final Closing Date
or the closing of the Company's next Qualified Offering (as these terms are
defined in the Letter of Intent between the Company and Paramount Capital Inc.,
dated June 30, 1997) if (i) the per share exercise price of the Offering
Warrants (as defined below) or (ii) the quotient of (a) the price per unit sold
in the Series B Offering or other Qualified Offering divided by (b) the quantity
of Common Stock (or any securities other than Common Stock viewed on a Common
Stock equivalent basis, collectively, the "Other Securities") included in each
unit sold in such Series B Offering or other Qualified Offering, is less than
twice the per share exercise price of the New Warrants. In such event the New
Warrants per share exercise price shall be reduced to equal 50% of the then
current per share exercise price of the Offering Warrants (as hereafter defined)
or per share exercise or offering price of the Other Securities (viewed on a
Common Stock equivalent basis). "Offering Warrants" shall mean the warrants
described in paragraph 8 of the Letter of Intent between the Company the
Holders, and Paramount Capital, Inc. dated June 30, 1997.
10. HEADINGS. The headings of this Warrant have been inserted
as a matter of convenience and shall not affect the construction hereof.
7
<PAGE>
11. APPLICABLE LAW. This Warrant shall be governed by and
construed in accordance with the law of the State of New York without giving
effect to principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary this June 30, 1997.
PROCEPT, INC.
By: /s/ Stanley C. Erck
-------------------------
Name: Stanley C. Erck
Title: President
ATTEST:
/s/ Lynette C. Fallon
- ---------------------
Secretary
[Corporate Seal]
8
<PAGE>
SUBSCRIPTION
The undersigned, ____________________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exercise the within
Warrant to the extent of purchasing _____________________ shares of Common Stock
thereunder and hereby makes payment of $_______________ by certified or official
bank check in payment of the per share exercise price therefor.
Dated: Signature:
------------ --------------------------
Address:
--------------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________________________________
hereby sells, assigns and transfers unto _____________________________________
the foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint _____________________________, attorney, to transfer said
Warrant on the books of Procept, Inc.
Dated: Signature:
------------ --------------------------
Address:
--------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby assigns
and transfers unto _________________________ the right to purchase __________
shares of the Common Stock, no par value per share, of Procept Inc. covered by
the foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Procept, Inc.
Dated: Signature:
------------ --------------------------
Address:
--------------------------
9
<PAGE>
EXHIBIT J
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE
STATE SECURITIES LAWS.
PROCEPT, INC.
Class B Warrant for the Purchase of Shares of
Common Stock
No. CB-1 2,660,746 Shares
FOR VALUE RECEIVED, PROCEPT, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that THE ARIES DOMESTIC FUND or its registered
assigns (the "Holder") is entitled to purchase from the Company, subject to the
provisions of this Warrant (the "Warrant"), at any time commencing upon the date
hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00 P.M., New York City
time, on the date which is five (5) years from the date hereof (the "TERMINATION
DATE"), June 30, 2002 fully paid and non-assessable shares of the Common Stock,
$.01 par value, of the Company ("Common Stock"), at an exercise price of $.5859
per share of Common Stock for an aggregate exercise price of ONE MILLION FIVE
HUNDRED FIFTY-EIGHT THOUSAND NINE HUNDRED THIRTY ONE DOLLARS AND EIGHT CENTS
($1,558,931.08) (the aggregate purchase price payable for the Warrant Shares
hereunder is hereinafter sometimes referred to as the "AGGREGATE EXERCISE
PRICE"). The number of shares of Common Stock to be received upon exercise of
this Warrant and the price to be paid for each share of Common Stock are subject
to possible adjustment from time to time as hereinafter set forth. The shares of
Common Stock or other securities or property deliverable upon such exercise as
adjusted from time to time is hereinafter sometimes referred to as the "WARRANT
SHARES." The exercise price of a share of Common Stock in effect at any time and
as adjusted from time to time is hereinafter sometimes referred to as the "PER
SHARE EXERCISE PRICE." The Per Share Exercise Price is subject to adjustment as
hereinafter provided; in the event of any such adjustment, the number of Warrant
Shares shall be adjusted by dividing the Aggregate Exercise Price by the Per
Share Exercise Price in effect immediately after such adjustment. The Aggregate
Exercise Price is not subject to adjustment.
<PAGE>
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part, at any time by
the Holder commencing on the Initial Exercise Date and prior to the Termination
Date, by presentation and surrender of this Warrant, together with the duly
executed subscription form attached at the end hereof, at the address set forth
in subsection 8(a) hereof, together with payment, by certified or official bank
check or wire transfer payable to the order of the Company, of the Aggregate
Exercise Price or the proportionate part thereof if exercised in part.
(b) If this Warrant is exercised in part only, the Company shall, upon
presentation of this Warrant upon such exercise, execute and deliver (along with
the certificate for the Warrant Shares purchased) a new Warrant evidencing the
rights of the Holder hereof to purchase the balance of the Warrant Shares
purchasable hereunder upon the same terms and conditions as herein set forth.
Upon proper exercise of this Warrant, the Company promptly shall deliver
certificates for the Warrant Shares to the Holder duly legended as authorized by
the subscription form. No fractional shares or scrip representing fractional
shares shall be issued upon exercise of this Warrant; provided that the Company
shall pay to the holders of the Warrant cash in lieu of such fractional shares.
2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES. The Company
hereby represents that it has, and until expiration of this Warrant agrees that
it shall, reserve for issuance or delivery upon exercise of this Warrant, such
number of shares of the Common Stock as shall be required for issuance and/or
delivery upon exercise of this Warrant in full, and agrees that all Warrant
Shares so issued and/or delivered will be validly issued, fully paid and
non-assessable, and further agrees to pay all taxes and charges that may be
imposed upon such issuance and/or delivery.
3. PROTECTION AGAINST DILUTION.
(a) In the event the Company shall, at any time or from time to time
after the date of issuance of this Warrant, issue or distribute to all of the
holders of its shares of Common Stock evidence of its indebtedness, any other
securities of the Company or any cash, property or other assets (any such event
being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price shall be
adjusted by multiplying the Per Share Exercise Price then in effect by a
fraction, the numerator of which shall be the then Current Market Price (as
defined in paragraph 3(k) below) of the Common Stock, less the Current Market
Price of the Special Dividend issued or distributed in respect of one share of
Common Stock, and the denominator of which shall be the Current Market Price of
the Common Stock. Such adjustment shall be made successively whenever such a
record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such distribution
unless such distribution is not ultimately made.
(b) In case the Company shall hereafter (i) pay a dividend or make a
distribution on its capital stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares, (iii)
combine its outstanding shares of
2
<PAGE>
Common Stock into a smaller number of shares or (iv) issue by reclassification
of its Common Stock any shares of capital stock of the Company, the Per Share
Exercise Price shall be adjusted to be equal to a fraction, the numerator of
which shall be the Aggregate Exercise Price and the denominator of which shall
be the number of shares of Common Stock or other capital stock of the Company
issuable upon exercise of this Warrant assuming this Warrant had been exercised
immediately prior to such action. An adjustment made pursuant to this subsection
3(b) shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c)(i) Except as provided in subsections 3(a) and 3(b)(i), in the event
the Company shall hereafter issue or sell any Common Stock, any securities
convertible into Common Stock or any rights, options or warrants to purchase
Common Stock or securities convertible into Common Stock, in each case for a
price per share or entitling the holders thereof to purchase Common Stock at a
price per share (determined by dividing (i) the total amount, if any, received
or receivable by the Company in consideration of the issuance or sale of such
securities plus the consideration, if any, payable to the Company upon exercise
or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii) the
number of additional shares of Common Stock issued, sold or issuable upon
exercise or conversion of such securities) which is less than the then Current
Market Price of the Common Stock (as defined below) but not below the current
Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the
Per Share Exercise Price shall be adjusted as of the date of such issuance or
sale by multiplying the Per Share Exercise Price then in effect by a fraction,
the numerator of which shall be (x) the sum of (A) the number of shares of
Common Stock outstanding on the record date of such issuance or sale plus (B)
the Total Consideration divided by the Current Market Price of the Common Stock,
and the denominator of which shall be (y) the number of shares of Common Stock
outstanding on the record date of such issuance or sale plus the maximum number
of additional shares of Common Stock issued, sold or issuable upon exercise or
conversion of such securities.
(ii) Except as provided in subsection 3(a) and 3(b)(i), in the event
the Company shall hereafter issue or sell any Common Stock, any securities
convertible into Common Stock or any rights, options or warrants to purchase
Common Stock or securities convertible into Common Stock, in each case for a
price per share or entitling the holders thereof to purchase Common Stock at a
price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total
Consideration by (ii) the number of additional shares of Common Stock issuable
upon exercise or conversion of such securities) which is less than the then
current Per Share Exercise Price in effect on the record date of such issuance,
the Per Share Exercise Price shall be adjusted to equal the Issue Price.
(d) In the event of any capital reorganization or reclassification, or
any consolidation or merger to which the Company is a party other than a merger
or consolidation in which the Company is the continuing corporation, or in case
of any sale or conveyance to another entity of the property of the Company as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Company), the
3
<PAGE>
Holder of this Warrant shall have the right thereafter to receive on the
exercise of this Warrant the kind and amount of securities, cash or other
property which the Holder would have owned or have been entitled to receive
immediately after such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the exercise of
this Warrant. The above provisions of this subsection 3(e) shall similarly apply
to successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any shares of stock or
other securities or property thereafter deliverable on the exercise of this
Warrant shall be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so proposed to be made, shall be mailed to the Holders of the
Warrants not less than 30 days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(e) In case any event shall occur as to which the other provisions of
this Section 3 are not strictly applicable but as to which the failure to make
any adjustment would not fairly protect the purchase rights represented by this
Warrant in accordance with the essential intent and principles hereof then, in
each such case, the Holders of Warrants representing the right to purchase a
majority of the Warrant Shares subject to all outstanding Warrants may appoint a
firm of independent public accountants of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to the
adjustment, if any, on a basis consistent with the essential intent and
principles established herein, necessary to preserve the purchase rights
represented by the Warrants. Upon receipt of such opinion, the Company will
promptly mail a copy thereof to the Holder of this Warrant and shall make the
adjustments described therein. The fees and expenses of such independent public
accountants shall be borne by the Company.
(f) Whenever the Per Share Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to this Section 3, the number of shares of Common
Stock underlying a Warrant shall simultaneously be adjusted to equal the number
obtained by dividing the Aggregate Exercise Price by the adjusted Per Share
Exercise Price.
(g) No adjustment in the Per Share Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least $0.01
per share of Common Stock; provided, however, that any adjustments which by
reason of this subsection 3(g) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 3 shall be made to the nearest cent or to the nearest 1/100th
of a share, as the case may be. Anything in this Section 3 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Per Share
4
<PAGE>
Exercise Price, in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible or exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable.
(h) Whenever the Per Share Exercise Price is adjusted as provided in
this Section 3 and upon any modification of the rights of a Holder of Warrants
in accordance with this Section 3, the Company shall promptly obtain, at its
expense, a certificate of a firm of independent public accountants of recognized
standing selected by the Board of Directors (who may be the regular auditors of
the Company) setting forth the Per Share Exercise Price and the number of
Warrant Shares after such adjustment or the effect of such modification, a brief
statement of the facts requiring such adjustment or modification and the manner
of computing the same and cause copies of such certificate to be mailed to the
Holders of the Warrants.
(i) If the Board of Directors of the Company shall declare any dividend
or other distribution with respect to the Common Stock, the Company shall mail
notice thereof to the Holders of the Warrants not less than 30 days prior to the
record date fixed for determining stockholders entitled to participate in such
dividend or other distribution.
(j) If, as a result of an adjustment made pursuant to this Section 3,
the Holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock or shares of
Common Stock and other capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be described in a written
notice to the Holder of any Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Per Share Exercise Price between or
among shares or such classes of capital stock or shares of Common Stock and
other capital stock.
(k) For the purpose of any computation under Section 3 above, the then
Current Market Price per share (the "CURRENT MARKET PRICE") shall be deemed to
be the last sale price of the Common Stock on the trading day prior to such date
or, in case no such reported sales take place on such day, the average of the
last reported bid and asked prices of the Common Stock on such day, in either
case on the principal national securities exchange on which the Common Stock is
admitted to trading or listed, or if not listed or admitted to trading on any
such exchange, the representative closing bid price of the Common Stock as
reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no
longer reporting such information, or, if the Common Stock is not reported on
NASDAQ, the high per share bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization, or if not so available, the fair market value of the Common Stock
as determined by agreement between the Company's Board of Directors, on the one
part, and the Holders of Warrants representing the right to purchase a majority
of the Warrant Shares subject to all outstanding Warrants, on the second part.
If the Board of Directors and such Holders fail to agree on the Current Market
Price within 60 days of the date of the action giving rise to any adjustment
pursuant to this Section 3, such Holders shall be entitled to appoint a firm of
independent public accountants or appraisers of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to such
Current Market Price on
5
<PAGE>
a basis consistent with the essential intent and principles established herein.
Upon receipt of such opinion, the Company will promptly mail a copy thereof to
the Holder of this Warrant and shall make the adjustments described therein. The
fees and expenses of such independent public accountants or appraisers shall be
borne by the Company.
4. REGISTRATION UNDER SECURITIES ACT OF 1933 . The resale of the
Warrant Shares shall be registered on the Shelf Registration Statement (as
defined in Article 8 of the Securities Purchase Agreement (the "Purchase
Agreement") dated as of June 30, 1997, by and among the Company, The Aries Fund,
a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited
partnership) and certain purchasers and the Holder of this Warrant shall have
the registration rights as provided in Article 8 of the Purchase Agreement. If
the Holder is not a party to the Purchase Agreement, by acceptance of this
Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase
Agreement to the same extent as if it were a party thereto.
5. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred,
assigned or hypothecated by the Holder except in compliance with the provisions
of the Securities Act of 1933 (the "Act") and the applicable state securities
"blue sky" laws, and is so transferable only upon the books of the Company which
it shall cause to be maintained for such purpose. The Company may treat the
registered Holder of this Warrant as he or it appears on the Company's books at
any time as the Holder for all purposes. The Company shall permit any Holder of
a Warrant or his duly authorized attorney, upon written request during ordinary
business hours, to inspect and copy or make extracts from its books showing the
registered holders of Warrants. All Warrants issued upon the transfer or
assignment of this Warrant will be dated the same date as this Warrant, and all
rights of the holder thereof shall be identical to those of the Holder.
6. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
7. STATUS OF HOLDER. This Warrant does not confer upon the Holder any
right to vote or to consent to or receive notice as a stockholder of the
Company, as such, in respect of any matters whatsoever, or any other rights or
liabilities as a stockholder, prior to the exercise hereof.
8. NOTICES. No notice or other communication under this Warrant shall
be effective unless, but any notice or other communication shall be effective
and shall be deemed to have been given if, the same is in writing and is mailed
by first-class mail, postage prepaid, addressed to:
(a) the Company at 840 Memorial Drive, Cambridge,
Massachusetts, Attention: Stanley C. Erck, or such other address as
the Company has designated in writing to the Holder; or
6
<PAGE>
(b) the Holder at the address indicated in the notice
provisions to the Purchase Agreement, or other such address as the
Holder has designated in writing to the Company.
9. OPTIONAL CONVERSION. This Warrant shall be converted (the "New
Warrant Conversion") into a New Warrant (as hereinafter defined) with an
adjusted exercise price as set forth in this Section 9. "New Warrants" shall
mean a new class of warrants entitling the holders thereof to purchase, at any
time on or before the date which is five (5) years from the date hereof, one
share of Common Stock at an exercise price, subject to adjustment, equal to the
lesser of (a) $.29 and (b) fifty percent (50%) of the average closing bid price
of the Common Stock for either (i) the thirty (30) consecutive trading days
preceding the date of the Required Shareholder Approval (the "Approval Date"),
if any, or September 30, 1997, (ii) the five (5) consecutive trading days
preceding the Approval Date, if any, or September 30, 1997 or (iii) the five (5)
consecutive trading days immediately succeeding the Approval Date, if any, or
September 30, 1997 whichever is lowest. Other than the per share exercise
prices, the New Warrants shall have the same terms as the Class A and B Warrants
held by such Holder respectively (including, without limitation, an Aggregate
Exercise Price equal to the Aggregate Exercise Price of the sum of the Class A
and B Warrants Aggregate Exercise Prices prior to the New Warrant Conversion)
and all adjustments required upon an adjustment to the exercise price of the New
Warrants pursuant to the terms thereof shall be made in connection with the New
Warrant Conversion. To the extent that there is no Required Shareholder Approval
(as defined in the Purchase Agreement) necessary, the Initial Warrants shall be
converted into New Warrants on September 30, 1997, with an adjusted exercise
price equal to the lesser of (a) $.29 and (b) fifty percent (50%) of the average
closing bid price of the Common Stock for either (i) the thirty (30) consecutive
trading days preceding September 30, 1997, (ii) the five (5) consecutive trading
days preceding September 30, 1997 or (iii) the five (5) consecutive trading days
immediately succeeding September 30, 1997, whichever is lowest.
Notwithstanding the foregoing, the New Warrants' per share exercise
price shall be adjusted at the time of the Series B Final Closing Date or the
closing of the Company's next Qualified Offering (as these terms are defined in
the Letter of Intent between the Company and Paramount Capital Inc., dated June
30, 1997) if (i) the per share exercise price of the Offering Warrants (as
defined below) or (ii) the quotient of (a) the price per unit sold in the Series
B Offering or other Qualified Offering divided by (b) the quantity of Common
Stock (or any securities other than Common Stock viewed on a Common Stock
equivalent basis, collectively, the "Other Securities") included in each unit
sold in such Series B Offering or other Qualified Offering, is less than twice
the per share exercise price of the New Warrants. In such event the New Warrants
per share exercise price shall be reduced to equal 50% of the then current per
share exercise price of the Offering Warrants (as hereafter defined) or per
share exercise or offering price of the Other Securities (viewed on a Common
Stock equivalent basis). "Offering Warrants" shall mean the warrants described
in paragraph 8 of the Letter of Intent between the Company the Holders, and
Paramount Capital, Inc. dated June 30, 1997.
10. HEADINGS. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
7
<PAGE>
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the law of the State of New York without giving effect to
principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its President and its corporate seal to be hereunto affixed and attested by its
Secretary this June 30, 1997.
By: /s/ Stanley C. Erck
-------------------------
Name: Stanley C. Erck
Title: President
ATTEST:
/s/ Lynette C. Fallon
- ---------------------
Secretary
[Corporate Seal]
8
<PAGE>
SUBSCRIPTION
The undersigned, ____________________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exercise the within
Warrant to the extent of purchasing _____________________ shares of Common Stock
thereunder and hereby makes payment of $_______________ by certified or official
bank check in payment of the per share exercise price therefor.
Dated: Signature:
------------ -----------------------------------
Address:
-----------------------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________________________________
hereby sells, assigns and transfers unto _____________________________________
the foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint _____________________________, attorney, to transfer said
Warrant on the books of Procept, Inc.
Dated: Signature:
------------ -----------------------------------
Address:
-----------------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby assigns
and transfers unto _________________________ the right to purchase __________
shares of the Common Stock, no par value per share, of Procept Inc. covered by
the foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Procept, Inc.
Dated: Signature:
------------ -----------------------------------
Address:
-----------------------------------
9
<PAGE>
EXHIBIT K
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION THEREFROM. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE
STATE SECURITIES LAWS.
PROCEPT, INC.
Class B Warrant for the Purchase of Shares of
Common Stock
No. CB-2 4,941,386 Shares
FOR VALUE RECEIVED, PROCEPT, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that THE ARIES FUND, A CAYMAN ISLANDS TRUST or its
registered assigns (the "Holder") is entitled to purchase from the Company,
subject to the provisions of this Warrant (the "Warrant"), at any time
commencing upon the date hereof (the "INITIAL EXERCISE DATE"), and prior to 5:00
P.M., New York City time, on the date which is five (5) years from the date
hereof (the "TERMINATION DATE"), June 30, 2002 fully paid and non-assessable
shares of the Common Stock, $.01 par value, of the Company ("Common Stock"), at
an exercise price of $.5859 per share of Common Stock for an aggregate exercise
price of TWO MILLION EIGHT-HUNDRED NINETY-FIVE THOUSAND ONE HUNDRED FIFTY-EIGHT
DOLLARS AND SIX CENTS ($2,895,158.06) (the aggregate purchase price payable for
the Warrant Shares hereunder is hereinafter sometimes referred to as the
"AGGREGATE EXERCISE PRICE"). The number of shares of Common Stock to be received
upon exercise of this Warrant and the price to be paid for each share of Common
Stock are subject to possible adjustment from time to time as hereinafter set
forth. The shares of Common Stock or other securities or property deliverable
upon such exercise as adjusted from time to time is hereinafter sometimes
referred to as the "WARRANT SHARES." The exercise price of a share of Common
Stock in effect at any time and as adjusted from time to time is hereinafter
sometimes referred to as the "PER SHARE EXERCISE PRICE." The Per Share Exercise
Price is subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall be adjusted by dividing the
Aggregate Exercise Price by the Per Share Exercise Price in effect immediately
after such adjustment. The Aggregate Exercise Price is not subject to
adjustment.
<PAGE>
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part, at any
time by the Holder commencing on the Initial Exercise Date and prior to the
Termination Date, by presentation and surrender of this Warrant, together with
the duly executed subscription form attached at the end hereof, at the address
set forth in subsection 8(a) hereof, together with payment, by certified or
official bank check or wire transfer payable to the order of the Company, of the
Aggregate Exercise Price or the proportionate part thereof if exercised in part.
(b) If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the certificate for the Warrant Shares purchased) a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions as
herein set forth. Upon proper exercise of this Warrant, the Company promptly
shall deliver certificates for the Warrant Shares to the Holder duly legended as
authorized by the subscription form. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant; provided that
the Company shall pay to the holders of the Warrant cash in lieu of such
fractional shares.
2. RESERVATION OF WARRANT SHARES; FULLY PAID SHARES; TAXES.
The Company hereby represents that it has, and until expiration of this Warrant
agrees that it shall, reserve for issuance or delivery upon exercise of this
Warrant, such number of shares of the Common Stock as shall be required for
issuance and/or delivery upon exercise of this Warrant in full, and agrees that
all Warrant Shares so issued and/or delivered will be validly issued, fully paid
and non-assessable, and further agrees to pay all taxes and charges that may be
imposed upon such issuance and/or delivery.
3. PROTECTION AGAINST DILUTION.
(a) In the event the Company shall, at any time or from time
to time after the date of issuance of this Warrant, issue or distribute to all
of the holders of its shares of Common Stock evidence of its indebtedness, any
other securities of the Company or any cash, property or other assets (any such
event being herein called a "SPECIAL DIVIDEND"), the Per Share Exercise Price
shall be adjusted by multiplying the Per Share Exercise Price then in effect by
a fraction, the numerator of which shall be the then Current Market Price (as
defined in paragraph 3(k) below) of the Common Stock, less the Current Market
Price of the Special Dividend issued or distributed in respect of one share of
Common Stock, and the denominator of which shall be the Current Market Price of
the Common Stock. Such adjustment shall be made successively whenever such a
record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such distribution
unless such distribution is not ultimately made.
(b) In case the Company shall hereafter (i) pay a dividend or
make a distribution on its capital stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of
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Common Stock into a smaller number of shares or (iv) issue by reclassification
of its Common Stock any shares of capital stock of the Company, the Per Share
Exercise Price shall be adjusted to be equal to a fraction, the numerator of
which shall be the Aggregate Exercise Price and the denominator of which shall
be the number of shares of Common Stock or other capital stock of the Company
issuable upon exercise of this Warrant assuming this Warrant had been exercised
immediately prior to such action. An adjustment made pursuant to this subsection
3(b) shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c)(i) Except as provided in subsections 3(a) and 3(b)(i), in
the event the Company shall hereafter issue or sell any Common Stock, any
securities convertible into Common Stock or any rights, options or warrants to
purchase Common Stock or securities convertible into Common Stock, in each case
for a price per share or entitling the holders thereof to purchase Common Stock
at a price per share (determined by dividing (i) the total amount, if any,
received or receivable by the Company in consideration of the issuance or sale
of such securities plus the consideration, if any, payable to the Company upon
exercise or conversion thereof (collectively, the "TOTAL CONSIDERATION") by (ii)
the number of additional shares of Common Stock issued, sold or issuable upon
exercise or conversion of such securities) which is less than the then Current
Market Price of the Common Stock (as defined below) but not below the current
Per Share Exercise Price (which event is governed by subsection 3(c)(ii)), the
Per Share Exercise Price shall be adjusted as of the date of such issuance or
sale by multiplying the Per Share Exercise Price then in effect by a fraction,
the numerator of which shall be (x) the sum of (A) the number of shares of
Common Stock outstanding on the record date of such issuance or sale plus (B)
the Total Consideration divided by the Current Market Price of the Common Stock,
and the denominator of which shall be (y) the number of shares of Common Stock
outstanding on the record date of such issuance or sale plus the maximum number
of additional shares of Common Stock issued, sold or issuable upon exercise or
conversion of such securities.
(ii) Except as provided in subsection 3(a) and 3(b)(i), in the
event the Company shall hereafter issue or sell any Common Stock, any securities
convertible into Common Stock or any rights, options or warrants to purchase
Common Stock or securities convertible into Common Stock, in each case for a
price per share or entitling the holders thereof to purchase Common Stock at a
price per share (the "ISSUE PRICE"), (determined by dividing (i) the Total
Consideration by (ii) the number of additional shares of Common Stock issuable
upon exercise or conversion of such securities) which is less than the then
current Per Share Exercise Price in effect on the record date of such issuance,
the Per Share Exercise Price shall be adjusted to equal the Issue Price.
(d) In the event of any capital reorganization or
reclassification, or any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), the
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Holder of this Warrant shall have the right thereafter to receive on the
exercise of this Warrant the kind and amount of securities, cash or other
property which the Holder would have owned or have been entitled to receive
immediately after such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the exercise of
this Warrant. The above provisions of this subsection 3(e) shall similarly apply
to successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any shares of stock or
other securities or property thereafter deliverable on the exercise of this
Warrant shall be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so proposed to be made, shall be mailed to the Holders of the
Warrants not less than 30 days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(e) In case any event shall occur as to which the other
provisions of this Section 3 are not strictly applicable but as to which the
failure to make any adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles hereof then, in each such case, the Holders of Warrants representing
the right to purchase a majority of the Warrant Shares subject to all
outstanding Warrants may appoint a firm of independent public accountants of
recognized national standing reasonably acceptable to the Company, which shall
give their opinion as to the adjustment, if any, on a basis consistent with the
essential intent and principles established herein, necessary to preserve the
purchase rights represented by the Warrants. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the Holder of this Warrant and
shall make the adjustments described therein. The fees and expenses of such
independent public accountants shall be borne by the Company.
(f) Whenever the Per Share Exercise Price payable upon
exercise of each Warrant is adjusted pursuant to this Section 3, the number of
shares of Common Stock underlying a Warrant shall simultaneously be adjusted to
equal the number obtained by dividing the Aggregate Exercise Price by the
adjusted Per Share Exercise Price.
(g) No adjustment in the Per Share Exercise Price shall be
required unless such adjustment would require an increase or decrease of at
least $0.01 per share of Common Stock; provided, however, that any adjustments
which by reason of this subsection 3(g) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 3 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this Section 3 to
the contrary notwithstanding, the Company shall be entitled to make such
reductions in the Per Share
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Exercise Price, in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible or exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable.
(h) Whenever the Per Share Exercise Price is adjusted as
provided in this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall promptly
obtain, at its expense, a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular auditors of the Company) setting forth the Per Share Exercise
Price and the number of Warrant Shares after such adjustment or the effect of
such modification, a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause copies of such
certificate to be mailed to the Holders of the Warrants.
(i) If the Board of Directors of the Company shall declare any
dividend or other distribution with respect to the Common Stock, the Company
shall mail notice thereof to the Holders of the Warrants not less than 30 days
prior to the record date fixed for determining stockholders entitled to
participate in such dividend or other distribution.
(j) If, as a result of an adjustment made pursuant to this
Section 3, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock or
shares of Common Stock and other capital stock of the Company, the Board of
Directors (whose determination shall be conclusive and shall be described in a
written notice to the Holder of any Warrant promptly after such adjustment)
shall determine the allocation of the adjusted Per Share Exercise Price between
or among shares or such classes of capital stock or shares of Common Stock and
other capital stock.
(k) For the purpose of any computation under Section 3 above,
the then Current Market Price per share (the "CURRENT MARKET PRICE") shall be
deemed to be the last sale price of the Common Stock on the trading day prior to
such date or, in case no such reported sales take place on such day, the average
of the last reported bid and asked prices of the Common Stock on such day, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on any such exchange, the representative closing bid price of the Common Stock
as reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no
longer reporting such information, or, if the Common Stock is not reported on
NASDAQ, the high per share bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization, or if not so available, the fair market value of the Common Stock
as determined by agreement between the Company's Board of Directors, on the one
part, and the Holders of Warrants representing the right to purchase a majority
of the Warrant Shares subject to all outstanding Warrants, on the second part.
If the Board of Directors and such Holders fail to agree on the Current Market
Price within 60 days of the date of the action giving rise to any adjustment
pursuant to this Section 3, such Holders shall be entitled to appoint a firm of
independent public accountants or appraisers of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to such
Current Market Price on
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a basis consistent with the essential intent and principles established herein.
Upon receipt of such opinion, the Company will promptly mail a copy thereof to
the Holder of this Warrant and shall make the adjustments described therein. The
fees and expenses of such independent public accountants or appraisers shall be
borne by the Company.
4. REGISTRATION UNDER SECURITIES ACT OF 1933 . The resale of
the Warrant Shares shall be registered on the Shelf Registration Statement (as
defined in Article 8 of the Securities Purchase Agreement (the "Purchase
Agreement") dated as of June 30, 1997, by and among the Company, The Aries Fund,
a Cayman Island Trust, and The Aries Domestic Fund, L.P., a Delaware limited
partnership) and certain purchasers and the Holder of this Warrant shall have
the registration rights as provided in Article 8 of the Purchase Agreement. If
the Holder is not a party to the Purchase Agreement, by acceptance of this
Warrant the Holder agrees to comply with provisions of Article 8 of the Purchase
Agreement to the same extent as if it were a party thereto.
5. LIMITED TRANSFERABILITY. This Warrant may not be sold,
transferred, assigned or hypothecated by the Holder except in compliance with
the provisions of the Securities Act of 1933 (the "Act") and the applicable
state securities "blue sky" laws, and is so transferable only upon the books of
the Company which it shall cause to be maintained for such purpose. The Company
may treat the registered Holder of this Warrant as he or it appears on the
Company's books at any time as the Holder for all purposes. The Company shall
permit any Holder of a Warrant or his duly authorized attorney, upon written
request during ordinary business hours, to inspect and copy or make extracts
from its books showing the registered holders of Warrants. All Warrants issued
upon the transfer or assignment of this Warrant will be dated the same date as
this Warrant, and all rights of the holder thereof shall be identical to those
of the Holder.
6. LOSS, ETC., OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
7. STATUS OF HOLDER. This Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a stockholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a stockholder, prior to the exercise hereof.
8. NOTICES. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at 840 Memorial Drive, Cambridge,
Massachusetts, Attention: Stanley C. Erck, or such other address as the
Company has designated in writing to the Holder; or
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(b) the Holder at the address indicated in the notice
provisions to the Purchase Agreement, or other such address as the
Holder has designated in writing to the Company.
9. OPTIONAL CONVERSION. This Warrant shall be converted (the
"New Warrant Conversion") into a New Warrant (as hereinafter defined) with an
adjusted exercise price as set forth in this Section 9. "New Warrants" shall
mean a new class of warrants entitling the holders thereof to purchase, at any
time on or before the date which is five (5) years from the date hereof, one
share of Common Stock at an exercise price, subject to adjustment, equal to the
lesser of (a) $.29 and (b) fifty percent (50%) of the average closing bid price
of the Common Stock for either (i) the thirty (30) consecutive trading days
preceding the date of the Required Shareholder Approval (the "Approval Date"),
if any, or September 30, 1997, (ii) the five (5) consecutive trading days
preceding the Approval Date, if any, or September 30, 1997 or (iii) the five (5)
consecutive trading days immediately succeeding the Approval Date, if any, or
September 30, 1997 whichever is lowest. Other than the per share exercise
prices, the New Warrants shall have the same terms as the Class A and B Warrants
held by such Holder respectively (including, without limitation, an Aggregate
Exercise Price equal to the Aggregate Exercise Price of the sum of the Class A
and B Warrants Aggregate Exercise Prices prior to the New Warrant Conversion)
and all adjustments required upon an adjustment to the exercise price of the New
Warrants pursuant to the terms thereof shall be made in connection with the New
Warrant Conversion. To the extent that there is no Required Shareholder Approval
(as defined in the Purchase Agreement) necessary, the Initial Warrants shall be
converted into New Warrants on September 30, 1997, with an adjusted exercise
price equal to the lesser of (a) $.29 and (b) fifty percent (50%) of the average
closing bid price of the Common Stock for either (i) the thirty (30) consecutive
trading days preceding September 30, 1997, (ii) the five (5) consecutive trading
days preceding September 30, 1997 or (iii) the five (5) consecutive trading days
immediately succeeding September 30, 1997, whichever is lowest.
Notwithstanding the foregoing, the New Warrants' per share
exercise price shall be adjusted at the time of the Series B Final Closing Date
or the closing of the Company's next Qualified Offering (as these terms are
defined in the Letter of Intent between the Company and Paramount Capital Inc.,
dated June 30, 1997) if (i) the per share exercise price of the Offering
Warrants (as defined below) or (ii) the quotient of (a) the price per unit sold
in the Series B Offering or other Qualified Offering divided by (b) the quantity
of Common Stock (or any securities other than Common Stock viewed on a Common
Stock equivalent basis, collectively, the "Other Securities") included in each
unit sold in such Series B Offering or other Qualified Offering, is less than
twice the per share exercise price of the New Warrants. In such event the New
Warrants per share exercise price shall be reduced to equal 50% of the then
current per share exercise price of the Offering Warrants (as hereafter defined)
or per share exercise or offering price of the Other Securities (viewed on a
Common Stock equivalent basis). "Offering Warrants" shall mean the warrants
described in paragraph 8 of the Letter of Intent between the Company the
Holders, and Paramount Capital, Inc. dated June 30, 1997.
10. HEADINGS. The headings of this Warrant have been inserted
as a matter of convenience and shall not affect the construction hereof.
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11. APPLICABLE LAW. This Warrant shall be governed by
and construed in accordance with the law of the State of New York without giving
effect to principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its _______________________ and its corporate seal to be hereunto
affixed and attested by its Secretary this June 30, 1997.
PROCEPT, INC.
By: /s/ Stanley C. Erck
------------------------------
Name: Stanley C. Erck
Title: President
ATTEST:
/s/ Lynette C. Fallon
- --------------------
Secretary
[Corporate Seal]
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SUBSCRIPTION
The undersigned, ____________________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exercise the within
Warrant to the extent of purchasing _____________________ shares of Common Stock
thereunder and hereby makes payment of $_______________ by certified or official
bank check in payment of the per share exercise price therefor.
Dated: Signature:
-------------- ---------------------------
Address:
---------------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________________________________
hereby sells, assigns and transfers unto _____________________________________
the foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint _____________________________, attorney, to transfer said
Warrant on the books of Procept, Inc.
Dated: Signature:
-------------- ---------------------------
Address:
---------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby assigns
and transfers unto _________________________ the right to purchase __________
shares of the Common Stock, no par value per share, of Procept Inc. covered by
the foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Procept, Inc.
Dated: Signature:
-------------- ---------------------------
Address:
---------------------------
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EXHIBIT L
June 29, 1997
VIA FACSIMILE
(617) 491-1521
Mr. Stanley C. Erck
President and Chief Executive Officer
Procept, Inc.
840 Memorial Drive
Cambridge, MA 02139
Dear Sirs:
Reference is made to our recent discussions relating to (i) a
proposed investment (the "Series A Transaction") by the Aries Domestic Fund,
L.P. (the "Partnership") and The Aries Trust (the "Trust") in Procept, Inc. (the
"Company") and (ii) a proposed offering (the "Offering") of units (the "Units")
of Series B Preferred Stock and Warrants (the "Series B Offering") to be issued
by Procept, Inc. (the "Company") as hereinafter described. Based upon our
discussions, financial materials which you have submitted to us and
representations which you have made to us describing the Company and its
principals, the present and proposed business activities of the Company and the
Company's operations and financial condition, we hereby confirm in principle our
interest in (i) the Series A Transaction and (ii) Paramount Capital, Inc. acting
as placement agent (the "Placement Agent"), on a "best efforts" basis, for the
Series B Offering, upon the following basic terms and conditions:
1. (a) The Company shall sell to the Partnership and the
Trust, $3,000,000 of Units (the "Series A Units"), the Series A Unit consisting
in the aggregate of (a) 30,061 shares of Series A Preferred Stock, stated value
$100.00 per share, of the Company (also referred to herein as the "Series A
Preferred Stock") and (b) in the aggregate 2,742,696 Class A warrants (the
"Class A Warrants") at an exercise price of $.01 and (c) 7,602,132 Class B
warrants (the "Class B Warrants") at an exercise price equal to $.5859 (the
Class A Warrants and the Class B Warrants being collectively referred to as the
"Initial Warrants"). The rights and preferences of the Series A Preferred Stock
are substantially as set forth in Exhibit A hereto. The Initial Warrants shall
include the terms described in paragraph 1(e) below.
(b) The Series A Transaction shall be subject to the
completion of necessary corporate and legal due diligence and the execution of
definitive
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documentation satisfactory to the Aries Domestic Fund, L.P. (the "Partnership")
and The Aries Trust (the "Trust"), in their sole discretion.
(c) The date of the closing of the purchase of the Series A
Preferred Stock (the "Series A Closing Date") shall occur no later than June 30,
1997.
(d) The Company (i) shall amend its current proxy statement
(the "Proxy Statement") by no later than July 3, 1997, and (ii) with the
assistance of a proxy solicitor acceptable to the Trust and the Partnership,
shall use best efforts to obtain approval of the inclusion of blank check
Preferred Stock in its Certificate of Incorporation by no later than July 15,
1997. In the event that the Company fails to obtain approval from its
stockholders of the inclusion in the Company's Charter of blank check Preferred
Stock in connection with the Proxy Statement, the Company shall obtain such
approval as set forth in paragraph 1(e) below.
(e) In addition to the obligations set forth in paragraph 1(d)
above, as soon as possible and, in any event, no later than September 30, 1997,
the Company shall hold a shareholders meeting to obtain (i) any requisite
shareholder approvals (the "Required Shareholder Approvals") necessary to
consummate the Series A Transaction and related transactions as contemplated by
this Letter of Intent and (ii) approval of the Series A Preferred Stock, to the
extent not previously approved in connection with the Proxy Statement. The
Company shall, as promptly as possible, engage a nationally recognized
independent investment banking firm to render a fairness opinion on the
transactions contemplated herein and in the Purchase Agreement and such fairness
opinion shall be included in the proxy statement circulated by the Company to
its shareholders in connection with obtaining the Required Shareholder
Approvals. "Required Shareholder Approvals" shall include, at least to the
extent required by law or the Nasdaq National or SmallCap Market, (x) any
approval required to the extent a change of control of the Company may be deemed
to occur, (y) any approval that may be deemed to be required in light of the
number, the voting rights, the price and any other terms of the securities being
issued by the Company, and (z) any approval that may be deemed to be required in
order to authorize any securities being issued by the Company. Upon the receipt
of the Required Shareholder Approvals or in the event that the Required
Shareholder Approvals are not obtained by September 30, 1997, each Initial
Warrant shall be converted into a New Warrant (as hereinafter defined). "New
Warrants" shall mean a new class of warrants entitling the holders thereof to
purchase, at any time over a five year period one share of Common Stock at an
exercise price equal to the lesser of (x) $.29 or (y) 50% of the average closing
bid price of the Common Stock for either (i) the five (5) consecutive trading
days immediately succeeding the date of the shareholder approval (the "Approval
Date") or September 30, 1997, or (ii) the thirty (30) consecutive trading days
immediately preceding the Approval Date or September 30, 1997 or (iii) the five
(5) consecutive trading days immediately preceding the Approval Date or
September 30, 1997, whichever is lowest. In addition, to the extent that there
are no shareholder approvals required, the Initial Warrants shall convert into
New Warrants and the exercise price of the New Warrants shall be adjusted to
equal the lesser of (x) $.29, (y) the Series
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A Preferred Conversion Price (as defined in Exhibit A hereto) or (z) 50% of the
average closing bid price of the Common Stock for either (i) the five (5)
consecutive trading days immediately succeeding September 30, 1997, or (ii) the
thirty (30) consecutive trading days preceding September 30, 1997 or (iii) the
five (5) consecutive trading days immediately preceding September 30, 1997,
whichever is lowest. Notwithstanding the foregoing, the exercise price of the
New Warrants is subject to an additional one time reset adjustment at the time
of the Series B Final Closing Date (as defined in paragraph 3 below), if the
exercise price of the Class C Warrants (as defined in paragraph 3 below) is less
than twice the exercise price of the New Warrants. In such event the New
Warrants exercise price shall be reduced to equal a 50% discount to the Class C
Warrants exercise price.
(f) In addition to the foregoing, in the event that the
Company fails to obtain approval from its stockholders of the inclusion in the
Company's Charter of blank check Preferred Stock in connection with the Proxy
Statement prior to June 30, 1997, the Series A Preferred Stock included in the
Units shall be replaced by $200,000 principal amount of 12% Convertible Notes
and shares of the Company's Common Stock (the "Alternate Offering") (the terms
of the Initial and New Warrants included in the Units shall remain as set forth
herein), such Alternate Offering to occur as set forth in accordance with the
terms and conditions of, and such Notes and shares of the Company's Company
stock to have the terms set forth in, the form of Securities Purchase Agreement
attached as Exhibit B hereto (including any changes that are included in any
final execution copy of the Purchase Agreement) (the "Purchase Agreement"). The
holders of the Common Stock shall have a put right (the "Call Right") with
respect to the Series A Preferred Stock upon approval of the stockholders of the
Company of the inclusion of blank check or Series A Preferred Stock in the
Company's Certificate of Incorporation.
2. At any time after October 1, 1997, in addition to the
Series A Transaction, subject to the completion of necessary corporate and legal
due diligence (as to which the Placement Agent shall be the sole judge), the
Placement Agent, at the Company's request, shall serve as placement agent, on a
"best efforts" basis, of a private placement to "accredited investors" as
defined in Regulation D promulgated under the Securities Act of 1933, as amended
(the "Act") for the purchase of Units (the "Series B Units") and the Company
will sell directly to such purchasers a minimum of 25 Series B Units (the
"Minimum Offering") and a maximum of 100 Series B Units (the "Maximum
Offering"), with an option in favor of the Placement Agent to offer up to an
additional 50 Series B Units to cover over-allotments. Each Unit will consist of
(a) 1,000 shares of Series B Preferred Stock, stated value $100.00 per share, of
the Company (also referred to herein as the "Series B Preferred Stock") and (b)
333,333 Class C Warrants (the "Class C Warrants"). The rights and preferences of
the Series B Preferred Stock are substantially the same as the Series A
Preferred Stock except that the initial conversion price of the Series B shall
be equal to the lesser of (a) the closing bid price of the Common Stock at the
time the Series B Offering is commenced and (b) 75% of the average closing bid
price of the Common Stock for either (i) the thirty (30) consecutive trading
days immediately preceding any
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Series B closing date, or (ii) the five (5) consecutive trading days immediately
preceding any Series B closing date, whichever is the lowest. Subject to
restrictions on transferability under applicable securities laws, the components
of the Units will be immediately separable.
3. Subject to market and other conditions at the time of the
Series B Offering contemplated herein, the Series B Units will be offered at
$100,000 per Unit.
4. An escrow agent reasonably acceptable to the Company shall
be designated by the Placement Agent to hold subscriptions for the benefit of
customers pending the closing of the Series B Offering. The final closing date
of the Series B Offering will occur no later than sixty (60) days following the
date of the offering memorandum (the "Memorandum") for the Series B Offering,
subject to extension at the option of the Placement Agent for an additional
sixty (60) days (the "Final Closing Date"). In the event that valid
subscriptions for at least 25 Units are not received by the Final Closing Date,
subscriptions will be released from escrow and returned to customers, with
interest. Upon receipt of the Minimum Offering amount, the Placement Agent may
hold a closing (the "Initial Closing") and may hold subsequent closings on an
interim basis until the Maximum Offering amount (including any over-allotment
amount) has been reached or until the Series B Final Closing Date, whichever is
earlier.
5. Pending completion or termination (pursuant to paragraph 10
below) of the Offerings, the Company agrees that it will not, directly or
indirectly, through any officer, director, agent or otherwise, initiate,
solicit, encourage, negotiate or discuss with any third party (including by way
of furnishing non-public information concerning the Company or its businesses,
assets or properties), or take any other action to facilitate any inquiries with
respect to the making of, any proposal that constitutes or may reasonably be
expected to lead to, a Competing Transaction provided, however, that the
foregoing prohibitions shall terminate either (x) on the date that is 210 days
after the Series A Closing Date if the Company does not proceed with the Series
B Offering or (y) upon the Series B Final Closing Date if the Company does
proceed with the Series B Offering. For purposes hereof the term "Competing
Transaction" shall mean any proposal with respect to (a) a possible public or
private offering or placement of its securities, (b) a recapitalization, merger
or other business combination involving the Company or any of its subsidiaries
or (c) the acquisition of a substantial portion of the assets of the Company.
Notwithstanding the foregoing, nothing shall prohibit the Board of Directors of
the Company from (i) furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited proposal with
respect to a Competing Transaction, if, and only to the extent that, (A) the
Board of the Directors of the Company, after consultation with and based upon
the written advice of independent legal counsel, determines in good faith that
such action is necessary for the Board of Directors of the Company to comply
with its fiduciary duties to stockholders under applicable law, but only in
response to a written, bona fide proposal with respect to a Competing
Transaction that the Board of Directors of the Company, after consultation with
its
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financial advisors, determines is superior (including financially superior) to
the Company, than the Series A Transaction and Series B Offering and related
transactions (considered together as a complete transaction), taking into
account the ability of the party making such proposal to finance such proposal
and such party's ability to obtain any required regulatory and third party
approvals for such Competing Transaction (a "Superior Proposal") and (B) the
Company, prior to furnishing such information to, or entering into discussions
or negotiations with, such person or entity (x) provides notice to the
Partnership and the Trust or the Placement Agent to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity and (y) receives from such person or entity an executed
confidentiality agreement in reasonably customary form; or (ii) complying with
its obligations, if any, under applicable law to disclose the existence and
terms of any proposal for a Competing Transaction. In addition, pending
completion or termination (pursuant to paragraph 10 below) of the Series B
Offering, the Company agrees that it will not dispose of any assets of the
Company (including, without limitation, creating, suffering to exist or
permitting the imposition of any liens).
6. The Company will, as soon as practicable, but not later
than the earlier of (a) 30 days after the Series B Final Closing Date or a
Qualified Offering (as defined below) and (b) 210 days after the Series A
Closing Date (each of (a) and/or (b) referred to herein as a "Filing Target
Date"), (i) file a shelf registration statement (the "Shelf Registration
Statement") with respect to (x) the resale of the shares of Common Stock
issuable upon conversion of the Series A and Series B Preferred Stock, (y) the
Class C Warrants and (z) the shares of Common Stock issuable upon exercise of
the Class A, Class B and Class C Warrants (including the New Warrants (as
defined in paragraph 1(d) hereof), as the case may be) (together, the
"Registrable Capital Stock") with the SEC and use its best efforts to have such
Shelf Registration Statement declared effective by the SEC prior to the date
which is 75 days after the Series B Final Closing Date or other applicable
Filing Target Date (subject to penalties for failure to effect such registration
in the time frames required) and (b) cause such Shelf Registration Statement to
remain effective until such date as the holders of the securities have completed
the distribution described in the Shelf Registration Statement or at such time
that such shares are no longer, by reason of Rule 144(k) under the Securities
Act, required to be registered for the sale thereof by such holders. If
requested by the Trust, the Partnership and/or the Placement Agent, and in
accordance with applicable securities laws, the Shelf Registration Statement
shall cover the direct sale of such Registrable Capital Stock to the holders of
such securities. The Registrable Capital Stock issued in any Series B Offering
(excluding any Registrable Capital Stock purchased by the Trust, the Partnership
or the Placement Agent in the Series A Transaction and any other shares of
capital stock owned at any time by any of the foregoing) will be subject to a
staggered "lock-up" (the "Lock-Up") PURSUANT TO WHICH: (I) SEVENTY-FIVE PERCENT
(75%) OF EACH HOLDER'S REGISTRABLE SECURITIES SHALL BE SUBJECT TO A LOCK-UP FOR
THE FIRST THREE MONTHS FOLLOWING THE EFFECTIVE DATE (THE "EFFECTIVE DATE") OF
THE SHELF REGISTRATION STATEMENT; (II) FIFTY PERCENT (50%) OF SUCH SECURITIES
WILL BE SUBJECT TO SUCH A LOCK-UP UNTIL SIX MONTHS FOLLOWING THE EFFECTIVE DATE;
AND (III) THE REMAINING TWENTY-FIVE PERCENT (25%) OF SUCH
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SECURITIES WILL BE LOCKED-UP UNTIL NINE MONTHS FOLLOWING THE EFFECTIVE DATE.
TWENTY- FIVE PERCENT (25%) OF THE REGISTRABLE SECURITIES WILL NOT BE SUBJECT TO
ANY LOCK-UP. THE LOCK-UP MAY BE MODIFIED AS MAY BE DEEMED ADVISABLE BY THE
PLACEMENT AGENT. A "QUALIFIED OFFERING" SHALL MEAN AN EQUITY OFFERING (OTHER
THAN THE SERIES A TRANSACTION) OR SERIES OF EQUITY OFFERINGS WITH GROSS PROCEEDS
IN EXCESS OF $2,000,000 (A "QUALIFIED OFFERING").
7. The Placement Agent will receive cash commissions equal to
9% of the price of the Units issued in the Series B Offering (the "Cash
Commissions"). The Placement Agent may, in its discretion, retain other
placement agents, who shall be members in good standing of the National
Association of Securities Dealers, Inc. ("NASD"), to act as selected dealers in
placing the Units. Such other placement agents will be compensated by the
Placement Agent out of its commissions. The Company has advised the Trust, the
Partnership and the Placement Agent that no person is entitled, directly or
indirectly, to compensation or success fees from the Company for services as a
finder, placement agent, investment banker or otherwise in connection with the
proposed Offering or any other transaction contemplated by this Letter of Intent
except for pre-existing agreements provided to the Trust and the Partnership
prior to the date hereof.
8. Each Class C Warrant entitles the holder thereof to
purchase, at any time over a five year period one share of Common Stock at an
exercise price equal to the lesser of (a) the market price at the time the
Series B Offering is commenced and (b) 75% of the average closing bid price of
the Common Stock for either (i) the thirty consecutive trading days immediately
preceding any Series B Offering closing date or (ii) the five consecutive
trading days immediately preceding any Series B Offering closing date, whichever
is the lowest. The Class C Warrant exercise price is subject to adjustment under
certain customary circumstances, including, without limitation, upon the
occurrence of a merger, reorganization, consolidation, reclassification, stock
dividend or stock split which will result in an increase or decrease in the
number of shares of Common Stock outstanding and upon below market and/or
exercise price issuances. The Class C Warrants are subject to redemption by the
Company at $.01 per share for each share subject to each Warrant on 60 days'
prior written notice, provided that the closing bid quotation for the Common
Stock as reported on the NASDAQ, or on such exchange on which the Common Stock
is then traded or listed, exceeds 250% of the exercise price per share for 20
consecutive trading days ending three days prior to the date of the notice of
redemption. The Class C Warrants are not redeemable on or prior to the first
anniversary of their issuance. The Company will pay the Placement Agent a
commission of 5% upon the exercise of any of the Class A, Class B or Class C
Warrants. The Placement Agent may allow a portion of this commission to members
in good standing of the NASD. Any costs incurred by the Placement Agent in
connection with the solicitation of Warrant exercises or the redemption of
Warrants shall be borne by the Company.
9. Pending completion of each the Series A Transaction
and Series
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B Offering and for a 30 day period thereafter, the Company will not issue press
releases or other communication, hold any press conference or engage in other
publicity without obtaining the prior written consent of the Partnership and the
Trust or the Placement Agent, as the case may be, except to the extent required
by law, the rules of the Nasdaq National or SmallCap Markets or as necessary to
obtain the Required Shareholder Approvals. The Company shall make a Rule 135(c)
(under the Securities Act of 1933, as amended) announcement prior to the
commencement of the Series B Offering. During the 36 months following the
closing of the Series A Transaction, the Company shall not, without the prior
written consent of the Partnership and the Trust or, to the extent such consent
right is not exercised by the Partnership or the Trust, the Placement Agent,
offer or sell any of its securities in reliance on Regulation S of the
Securities Act of 1933, as amended. During the 24 month period following the
earlier of (x) October 1, 1997 and (y) the closing of the Series B Offering, the
Placement Agent shall have the right of first refusal to act as placement agent
for the private offering of any securities of the Company (such right of first
refusal shall have a standard twenty day notice requirement, pursuant to which
the Placement Agent shall have twenty days to determine whether or not it wishes
to exercise such right, which notice requirement will only be triggered in the
event that the Company has received a bona fide offer from any third party to
serve as placement agent which it is willing to accept). During the 36 month
period following the closing of the Series A Transaction (as defined in
paragraph 14 below), the Company will not extend the expiration date or lower
the exercise or the conversion price of any options, warrants or convertible
securities, without the prior written consent of the Partnership and the Trust
or, to the extent such consent right is not exercised by the Partnership or the
Trust, the Placement Agent. During the 5 year period following the closing of
the Series A Transaction, the Partnership and the Trust, or, to the extent such
right is not exercised by the Partnership or the Trust, the Placement Agent,
shall be entitled to designate (the "Board Right") a majority of the Directors
or observers to the Board of Directors of the Company provided, however, that to
the extent such right would cause the Company to violate Rule 4460(i) of the
National Association Securities Dealers's Marketplace Rules, the Partnership,
the Trust, or the Placement Agent, as the case may be, shall not elect such
number of directors as would violate such rule until the earlier of (x) the date
of approval by the holders of the Company of the transactions contemplated
herein and in the Letter of Intent, (y) the date that Rule 4460(i) no longer
applies to such transactions and (z) September 30, 1997. Notwithstanding the
foregoing, the Partnership and the Trust or, to the extent such right is not
exercised by the Partnership or the Trust, the Placement Agent, shall
immediately and during the entirety of such 5 year period have the right to
appoint at least 3 designees to the Board of Directors. The Company agrees to
nominate the Trust's, the Partnership's and/or the Placement's Agent's Board
designees for election to the Board of Directors and to use best efforts to
ensure that such nominees are elected to the Board. The Company shall take all
action necessary to limit the size of the Board of Directors to no greater than
7 members or such lesser or greater amount as designated by the Trust, the
Partnership and/or the Placement Agent. The Company shall not use the name of
the Placement Agent, the Trust, the Partnership or any officer, director,
employee or shareholder of the foregoing without the express
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written consent of the Placement Agent, the Trust, the Partnership and any such
person except to the extent required by law as a result of consummation of the
transactions specifically described herein, in which case any disclosure shall
still require prior written consent of each of the named persons however consent
to such use shall not be unreasonably withheld.
10. The Company shall be responsible for and shall bear all
expenses directly and necessarily incurred in connection with the proposed
Series A Transaction and Series B Offering, including but not limited to the
costs of preparing and printing the Memorandum and all exhibits thereto;
preparing, printing and delivering exhibits thereto and copies of the
preliminary, final and supplemental prospectus; the costs of preparing, printing
and filing with the Securities and Exchange Commission (the "SEC") the Shelf
Registration Statement and amendments, post-effective amendments and supplements
thereto; preparing, printing and delivering exhibits thereto and copies of the
preliminary, final and supplemental prospectus; preparing, printing and
delivering all selling documents, including but not limited to the Placement
Agency Agreement, subscription agreements, warrant agreements, blue sky
memorandum and stock and warrant certificates; blue sky fees, filing fees and
legal fees and disbursements of blue sky counsel for the offerings; fees and
disbursements of the transfer and warrant agent; the cost of a total of two sets
of bound closing volumes for the Placement Agent and its counsel; and the cost
of three tombstone advertisements, at least one of which shall be in a national
business newspaper and one of which shall be in a major New York newspaper (OR
AT THE PLACEMENT AGENT'S OPTION, 40 LUCITE DEAL MEMENTOS)(COLLECTIVELY, THE
"COMPANY EXPENSES"). THE COMPANY SHALL PAY TO THE PLACEMENT AGENT A
NON-ACCOUNTABLE EXPENSE ALLOWANCE EQUAL TO 4% OF THE TOTAL PROCEEDS OF THE
SERIES B OFFERING (THE "EXPENSE ALLOWANCE") TO COVER THE COST OF OUR MAILING,
TELEPHONE, TELEGRAPH, TRAVEL, DUE DILIGENCE MEETINGS AND OTHER SIMILAR EXPENSES
INCLUDING LEGAL FEES AND COSTS OF THE PLACEMENT AGENT'S COUNSEL (OTHER THAN
LEGAL FEES AND COSTS INCURRED IN CONNECTION WITH BLUE SKY MATTERS AS TO WHICH
FEES, AS SET FORTH ABOVE, THE COMPANY SHALL BE RESPONSIBLE) OF WHICH $20,000
SHALL BE DUE AND PAYABLE UPON THE DATE THAT THE MEMORANDUM IS COMPLETED (WHICH
$20,000 PAYMENT SHALL BE CREDITED TO THE COMPANY AND OFFSET AGAINST THE TOTAL
EXPENSE ALLOWANCE DUE THE PLACEMENT AGENT IN CONNECTION WITH THE SERIES B
OFFERING). SUCH PREPAID EXPENSE ALLOWANCE SHALL BE NON-REFUNDABLE. IF THE
PROPOSED SERIES A TRANSACTION OR SERIES B OFFERING IS NOT COMPLETED BECAUSE THE
COMPANY PREVENTS IT OR BECAUSE OF A BREACH BY THE COMPANY OF ANY COVENANTS,
REPRESENTATIONS OR WARRANTIES CONTAINED HEREIN, THE COMPANY SHALL PAY TO THE
TRUST, THE PARTNERSHIP AND/OR THE PLACEMENT AGENT, AS THE CASE MAY BE, A FEE OF
$100,000 (IN ADDITION TO THE COMPANY EXPENSES FOR WHICH THE COMPANY SHALL IN ALL
EVENTS REMAIN LIABLE). IF, AFTER THE SERIES A CLOSING DATE, THE REQUIRED
SHAREHOLDER APPROVALS ARE NOT OBTAINED BY SEPTEMBER 30, 1997 ON THE TERMS AND
CONDITIONS CONTEMPLATED HEREIN AND IN THE LETTER OF INTENT, OR IF THE REQUIRED
ADJUSTMENTS TO THE SERIES A CONVERSION PRICE OR THE CONVERSION OF THE CLASS A
AND CLASS B WARRANTS INTO NEW WARRANTS HAS NOT BEEN APPROVED OR HAS NOT OCCURRED
OR, IN THE CASE OF THE ALTERNATE OFFERING, THE APPROVAL ISSUANCE (AS DEFINED IN
THE PURCHASE AGREEMENT) HAS NOT BEEN APPROVED OR HAS NOT OCCURRED, OR IF THE
PARTNERSHIP, THE TRUST AND/OR THE PLACEMENT AGENT HAVE NOT
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APPOINTED A MAJORITY OF THE COMPANY'S BOARD OF DIRECTORS, OR PURCHASERS HAVE NOT
ACQUIRED CAPITAL STOCK OF THE COMPANY REPRESENTING IN EXCESS IN THE AGGREGATE OF
51% OF THE TOTAL VOTING SHARES (AS DEFINED IN PARAGRAPH 14 HEREOF), AS A RESULT
OF THE FAILURE OF THE COMPANY TO OBTAIN THE REQUIRED SHAREHOLDER APPROVAL OR FOR
ANY OTHER REASON, THEN, IN ADDITION TO ANY OTHER RIGHTS OF THE PARTNERSHIP, THE
TRUST AND THE PLACEMENT AGENT OR OBLIGATIONS OF THE COMPANY HEREUNDER, THE
COMPANY SHALL PAY TO THE PARTNERSHIP AND THE TRUST A FEE OF $500,000. IN
ADDITION TO AND NOTWITHSTANDING THE FOREGOING, WHETHER OR NOT THE PROPOSED
FINANCINGS ARE COMPLETED AND IRRESPECTIVE OF THE REASON THAT THE PROPOSED
FINANCINGS ARE NOT COMPLETED (INCLUDING A DETERMINATION BY THE PLACEMENT AGENT,
THE TRUST AND/OR THE PARTNERSHIP NOT TO PROCEED WITH THE TRANSACTION FOR ANY
REASON) THE COMPANY SHALL BE RESPONSIBLE FOR AND SHALL REIMBURSE THE TRUST AND
THE PARTNERSHIP FOR ALL COSTS INCURRED IN CONNECTION WITH THE SERIES A
TRANSACTION AND THE TRANSACTIONS CONTEMPLATED HEREWITH (INCLUDING, WITHOUT,
LIMITATION, ATTORNEY'S FEES, EXPENSES AND DISBURSEMENTS).
11. UPON THE FINAL CLOSING OF THE SALE OF THE SERIES B UNITS
BEING OFFERED, THE COMPANY WILL GRANT TO THE PLACEMENT AGENT AND/OR ITS
DESIGNEES WARRANTS (THE "PLACEMENT WARRANTS") TO PURCHASE ADDITIONAL UNITS EQUAL
TO 10% OF THE UNITS SOLD IN EACH SUCH OFFERING EXERCISABLE FOR A PERIOD OF FIVE
YEARS COMMENCING SIX MONTHS AFTER THE FINAL CLOSING DATE AT AN EXERCISE PRICE
EQUAL TO 110% OF THE INITIAL OFFERING PRICE OF THE UNITS OR THE QUALIFIED
OFFERING PRICE, AS THE CASE MAY BE. THE SECURITIES UNDERLYING THE PLACEMENT
WARRANTS WILL NOT BE SUBJECT TO MANDATORY CONVERSION OR REDEMPTION BY THE
COMPANY NOR WILL THEY BE CALLABLE BY THE COMPANY. THE PLACEMENT WARRANTS CANNOT
BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED FOR SIX MONTHS EXCEPT THAT THEY
MAY BE ASSIGNED IN WHOLE OR IN PART DURING SUCH PERIOD TO ANY NASD MEMBER
PARTICIPATING IN THE OFFERING OR ANY OFFICER OR EMPLOYEE OF THE PLACEMENT AGENT
OR ANY SUCH NASD MEMBER. THE PLACEMENT WARRANTS WILL CONTAIN A CASHLESS EXERCISE
FEATURE, ANTIDILUTION PROVISIONS AND THE RIGHT TO HAVE THE RESALE OF THE
SECURITIES UNDERLYING THE PLACEMENT WARRANTS INCLUDED ON THE SHELF REGISTRATION
STATEMENT.
12. IF REQUESTED BY THE TRUST, THE PARTNERSHIP AND/OR THE
PLACEMENT AGENT, AS THE CASE MAY BE, THE COMPANY WILL OBTAIN FROM THE EXECUTIVE
OFFICERS, DIRECTORS AND 5% STOCKHOLDERS OF THE COMPANY, AN AGREEMENT THAT, FOR A
PERIOD OF UP TO TWENTY-FOUR MONTHS FROM THE CLOSING OF THE SERIES A TRANSACTION
AND/OR SERIES B OFFERING, THEY WILL NOT SELL, ASSIGN OR TRANSFER ANY OF THEIR
SHARES OF THE COMPANY'S SECURITIES WITHOUT THE PLACEMENT AGENT'S PRIOR WRITTEN
CONSENT.
13. THE CASH COMMISSIONS, EXPENSES ALLOWANCE AND PLACEMENT AND
ADVISORY WARRANTS (AS DEFINED BELOW) AS SET FORTH IN THIS LETTER OF INTENT WILL
APPLY TO INVESTORS INTRODUCED TO THE COMPANY BY THE PLACEMENT AGENT WHO INVEST
IN THE COMPANY DURING THE TWELVE MONTHS FOLLOWING THE FINAL CLOSING DATE OF THE
SERIES A TRANSACTION AND SERIES B OFFERING. IN ADDITION, UPON THE CLOSING OF THE
SERIES A TRANSACTION, THE COMPANY AND THE PLACEMENT AGENT WILL ENTER INTO AN
ENGAGEMENT AGREEMENT WHEREBY PARAMOUNT WILL ACT AS THE COMPANY'S NON-EXCLUSIVE
FINANCIAL ADVISOR. SUCH ENGAGEMENT AGREEMENT WILL PROVIDE THAT THE PLACEMENT
AGENT RECEIVE
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A MONTHLY RETAINER OF $4,000 (MINIMUM ENGAGEMENT OF TWENTY-FOUR MONTHS), OUT-OF-
POCKET EXPENSES AND CUSTOMARY CASH AND EQUITY SUCCESS FEES. IN ADDITION, UPON
COMPLETION OF THE SERIES B OFFERING OR THE CLOSING OF A QUALIFIED OFFERING AND
PURSUANT TO THE TERMS OF SUCH ENGAGEMENT AGREEMENT, THE COMPANY WILL SELL TO THE
PLACEMENT AGENT AND/OR ITS DESIGNEES, FOR $.001 PER WARRANT SHARE, WARRANTS (THE
"ADVISORY WARRANTS") TO PURCHASE ADDITIONAL UNITS EQUAL TO 15% OF THE UNITS SOLD
IN THE SERIES B OFFERING OR THE QUALIFIED OFFERING EXERCISABLE FOR A PERIOD OF
FIVE YEARS COMMENCING SIX MONTHS AFTER THE SERIES B FINAL CLOSING DATE OR THE
QUALIFIED OFFERING, AT AN EXERCISE PRICE EQUAL TO 110% OF THE INITIAL OFFERING
PRICE OF THE SERIES B UNITS. THE SECURITIES UNDERLYING THE ADVISORY WARRANTS
WILL NOT BE SUBJECT TO MANDATORY CONVERSION OR REDEMPTION BY THE COMPANY NOR
WILL THEY BE CALLABLE BY THE COMPANY. THE ADVISORY WARRANTS WILL CONTAIN A
CASHLESS EXERCISE FEATURE, ANTIDILUTION PROVISIONS AND THE RIGHT TO HAVE THE
SECURITIES UNDERLYING THE ADVISORY WARRANTS INCLUDED ON THE SHELF REGISTRATION
STATEMENT.
14. THE COMPANY SHALL NOT USE ANY PROCEEDS FROM THE SERIES A
TRANSACTION OR SERIES B OFFERING TO REPURCHASE, REDEEM OR OTHERWISE ACQUIRE ANY
SHARES OF CAPITAL STOCK OF THE COMPANY OR TO REPAY ANY INDEBTEDNESS OF THE
COMPANY, INCLUDING BUT NOT LIMITED TO ANY INDEBTEDNESS TO CURRENT EXECUTIVE
OFFICERS, EMPLOYEES, DIRECTORS OR PRINCIPAL STOCKHOLDERS OF THE COMPANY, BUT
EXCLUDING ACCOUNTS PAYABLE INCURRED IN THE ORDINARY COURSE AND PAID IN
ACCORDANCE WITH ROMAN NUMERAL (IV) BELOW, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE TRUST, THE PARTNERSHIP AND/OR PLACEMENT AGENT, AS THE CASE MAY BE. UNTIL
SUCH TIME AS THE PLACEMENT AGENT, THE PARTNERSHIP, THE TRUST AND THEIR
AFFILIATES, IN THE AGGREGATE, OWN LESS THAN FIVE PERCENT (5%) OF THE TOTAL
VOTING SHARES OF THE COMPANY'S CAPITAL STOCK (TAKING INTO ACCOUNT SHARES
ISSUABLE UPON CONVERSION OR EXERCISE OF SHARES HELD BY THEM), THE PRIOR WRITTEN
CONSENT OF THE TRUST, THE PARTNERSHIP AND, TO THE EXTENT SUCH CONSENT RIGHT IS
NOT EXERCISED BY THE PARTNERSHIP OR THE TRUST, THE PLACEMENT AGENT, WILL BE
REQUIRED TO APPROVE (I) THE INCORPORATION OF ANY SUBSIDIARY, (II) ANY
TRANSACTION BETWEEN THE COMPANY AND ITS AFFILIATES, (III) THE INCURRENCE OF ANY
INDEBTEDNESS BY THE COMPANY (INCLUDING BUT NOT LIMITED TO ANY INDEBTEDNESS TO
CURRENT EXECUTIVE OFFICERS, EMPLOYEES, DIRECTORS OR PRINCIPAL STOCKHOLDERS OF
THE COMPANY, BUT EXCLUDING ACCOUNTS PAYABLE INCURRED IN THE ORDINARY COURSE AND
PAID IN ACCORDANCE WITH ROMAN NUMERAL (IV) AS FOLLOWS IMMEDIATELY HEREAFTER) AND
(IV) PRIOR TO AUGUST 15, 1997, ANY PAYMENTS BY THE COMPANY IN EXCESS OF $25,000
AND THEREAFTER, ANY PAYMENTS BY THE COMPANY IN EXCESS OF $50,000. THE "TOTAL
VOTING SHARES" SHALL MEAN ALL OUTSTANDING SHARES OF ANY CLASS OR CLASSES
(HOWEVER DESIGNATED) OF CAPITAL STOCK ENTITLED TO VOTE GENERALLY IN THE ELECTION
OF MEMBERS OF THE BOARD OF DIRECTORS.
15. (A) THE COMPANY AGREES TO INDEMNIFY AND HOLD HARMLESS THE
PLACEMENT AGENT AND EACH SELECTED DEALER SELECTED BY THE PLACEMENT AGENT, IF
ANY, THE PARTNERSHIP AND THE TRUST AND THEIR RESPECTIVE PARTNERS, AFFILIATES,
SHAREHOLDERS, DIRECTORS, OFFICERS, AGENTS, ADVISORS, REPRESENTATIVES, EMPLOYEES,
COUNSEL AND CONTROLLING PERSONS WITHIN THE MEANING OF THE ACT (A "PARAMOUNT
INDEMNIFIED PARTY") AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES AND
EXPENSES WHATSOEVER (AND ALL ACTIONS IN RESPECT THEREOF), AND TO PROMPTLY
REIMBURSE ANY SUCH PARAMOUNT
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INDEMNIFIED PARTY FOR LEGAL FEES AND RELATED EXPENSES AS INCURRED (INCLUDING,
BUT NOT LIMITED TO THE COSTS OF GIVING TESTIMONY OR FURNISHING DOCUMENTS IN
RESPONSE TO A SUBPOENA OR OTHERWISE, THE COSTS OF INVESTIGATING, PREPARING,
PURSUING OR DEFENDING ANY SUCH ACTION OR CLAIM WHETHER OR NOT PENDING OR
THREATENED AND WHETHER OR NOT THE PLACEMENT AGENT OR ANY PARAMOUNT INDEMNIFIED
PARTY IS A PARTY THERETO), INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES
OR EXPENSES ARISE OUT OF, RELATE TO, ARE IN INCURRED IN CONNECTION WITH OR ARE
IN ANY WAY A RESULT OF (I) THE ENGAGEMENT OF THE PLACEMENT AGENT PURSUANT TO
THIS LETTER OF INTENT, THE PLACEMENT AGENCY AGREEMENT, ADVISORY AGREEMENT, OR
OTHER OFFERING DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT AND THE OTHER OFFERING DOCUMENTS (THE "ENGAGEMENT"), INCLUDING ANY
MODIFICATIONS OR FUTURE ADDITIONS TO SUCH ENGAGEMENT AND RELATED ACTIVITIES
PRIOR TO THE DATE HEREOF, (II) ANY ACT BY THE PLACEMENT AGENT, THE PARTNERSHIP,
THE TRUST OR ANY OTHER PARAMOUNT INDEMNIFIED PARTY TAKEN IN CONNECTION WITH THE
ENGAGEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN (INCLUDING, WITHOUT
LIMITATION, THE PURCHASE OF SERIES A UNITS, THE SHARES OF COMMON STOCK AND
WARRANTS IN THE ALTERNATE OFFERING OR THE EXERCISE OF BOARD RIGHTS AS CONTAINED
IN PARAGRAPH 9 HEREIN), (III) A BREACH OF ANY REPRESENTATION, WARRANTY,
COVENANT, OR AGREEMENT OF THE COMPANY CONTAINED IN THIS LETTER OF INTENT, THE
PLACEMENT AGENCY AGREEMENT, THE PURCHASE AGREEMENTS BETWEEN THE COMPANY, THE
PARTNERSHIP AND THE TRUST OR ANY OF THE OTHER OFFERING DOCUMENTS, (IV) THE
EMPLOYMENT BY THE COMPANY OF ANY DEVICE, SCHEME OR ARTIFICE TO DEFRAUD, OR THE
ENGAGING BY THE COMPANY IN ANY ACT, PRACTICE OR COURSE OF BUSINESS WHICH
OPERATES OR WOULD OPERATE AS A FRAUD OR DECEIT, OR ANY CONSPIRACY WITH RESPECT
THERETO, IN CONNECTION WITH THE SALE OF THE UNITS, OR (V) ANY UNTRUE STATEMENT
OR ALLEGED UNTRUE STATEMENT OF A MATERIAL FACT CONTAINED IN ANY OF THE SERIES A
OR SERIES B OFFERING DOCUMENTS OR THE OMISSION OR ALLEGED OMISSION THEREFROM OF
A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS THEREIN, IN LIGHT OF
THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING;
(B) THE COMPANY AGREES TO INDEMNIFY AND HOLD HARMLESS A
PARAMOUNT INDEMNIFIED PARTY TO THE SAME EXTENT AS THE FOREGOING INDEMNITY, AND
SUBJECT TO THE LIMITATIONS SET FORTH THEREIN, AGAINST ANY AND ALL LOSS,
LIABILITY, CLAIM, DAMAGE AND EXPENSE WHATSOEVER DIRECTLY ARISING OUT OF THE
EXERCISE BY ANY PERSON OF ANY RIGHT UNDER THE SECURITIES ACT OR THE EXCHANGE ACT
OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE ON ACCOUNT OF VIOLATIONS OF THE
REPRESENTATIONS, WARRANTIES OR AGREEMENTS SET FORTH HEREIN AND IN THE SERIES A
AND/OR SERIES B OFFERING DOCUMENTS.
16. IT IS CURRENTLY INTENDED THAT THE GENERAL TERMS OF A SIX
MONTH OPERATING PLAN ("OPERATING PLAN") OF THE COMPANY SHALL BE AS SET FORTH IN
EXHIBIT C ATTACHED HERETO. THE PARTIES AGREE THAT THE OPERATING PLAN SHALL
REMAIN AT ALL TIMES SUBJECT TO THE APPROVAL OF THE PARTNERSHIP, THE TRUST AND
THE PLACEMENT AGENT, AND THE DISCRETION AND BUSINESS JUDGMENT OF THE BOARD OF
DIRECTORS AND, THAT THE PARTNERSHIP'S, THE TRUST'S AND THE PLACEMENT'S AGENT'S
INTENTION REGARDING SUCH PLAN MAY CHANGE FROM TIME TO TIME BASED ON
CONSIDERATIONS RELATED TO AND AFFECTING THE COMPANY'S BUSINESS.
THE FOREGOING IS ONLY A BRIEF OUTLINE OF THE PROPOSED SERIES A
TRANSACTION
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AND SERIES B OFFERING AND EACH OF THE FOREGOING TERMS MUST BE INTERPRETED IN THE
FORM IN WHICH IT FINALLY APPEARS IN THE PROPOSED DEFINITIVE TRANSACTION
DOCUMENTS AND PLACEMENT AGENCY AGREEMENT AND RELATED DOCUMENTS RESPECTIVELY. WE
WILL, OF COURSE, CONTINUE TO CONDUCT OUR DUE DILIGENCE INVESTIGATION OF THE
COMPANY UNTIL THE SERIES A TRANSACTION AND THE SERIES B OFFERING ARE COMPLETED,
AND SUCH DUE DILIGENCE INVESTIGATION SHALL, IN ALL EVENTS, BE SUBJECT TO OUR
SATISFACTION AS TO WHICH WE SHALL BE THE SOLE JUDGE. WHILE IT IS THE INTENTION
OF THE PARTIES HERETO THAT THE SERIES A TRANSACTION AND THE SERIES B OFFERING OF
THE COMPANY'S UNITS BE MADE, THIS LETTER CANNOT IN ANY WAY BE CONSTRUED AS A
COMMITMENT BY US TO COMPLETE THE SERIES A TRANSACTION OR SERIES B PLACEMENT OF
THE UNITS AND WE MAY, IN OUR SOLE JUDGEMENT AND DISCRETION, DETERMINE AT ANY
TIME NOT TO PROCEED WITH THE TRANSACTIONS. THIS LETTER SHALL BE CONDITIONED IN
ITS ENTIRETY UPON THE EXECUTION AND DELIVERY OF A SATISFACTORY (I) PLACEMENT
AGENCY AGREEMENT BETWEEN THE COMPANY AND THE PLACEMENT AGENT AND (II) PURCHASE
AGREEMENTS BETWEEN THE COMPANY, THE PARTNERSHIP AND THE TRUST (AND THIS LETTER
IS NOT TO BE CONSTRUED AS SUCH CONTRACTS NOR AS AN AGREEMENT TO ENTER INTO SUCH
CONTRACTS) TO BE ENTERED INTO IMMEDIATELY PRIOR TO THE TIME OF THE SERIES A
TRANSACTION AND/OR SERIES B OFFERING AND SHALL BE CONDITIONED FURTHER UPON
COMPLIANCE BY THE COMPANY WITH THE TERMS CONTAINED IN THIS LETTER AND IN SUCH
PLACEMENT AGENCY AGREEMENT AND OTHER AGREEMENTS. NOTWITHSTANDING THE FOREGOING,
THE PROVISIONS OF PARAGRAPHS 5, 9, 10, AND 15 HEREOF, HOWEVER, SHALL BE
EFFECTIVE AND BINDING UPON THE COMPANY UPON THE EXECUTION HEREOF.
12
<PAGE>
IF THE FOREGOING CONFORMS TO YOUR UNDERSTANDING, PLEASE SIGN,
DATE AND RETURN TO US THE ENCLOSED COPY OF THIS LETTER.
VERY TRULY YOURS,
PARAMOUNT CAPITAL, INC.
BY: /s/ Lindsay A. Rosenwald, M.D.
------------------------------------
LINDSAY A. ROSENWALD, M.D.
CHAIRMAN
THE FOREGOING IS IN CONFORMITY
WITH OUR UNDERSTANDING:
PROCEPT, INC.
BY: /s/ Stanley C. Erck
----------------------------------------------------
STANLEY C. ERCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FOR PURPOSES OF PARAGRAPHS 1, 10, 14 AND 15 ONLY:
ARIES DOMESTIC FUND, L.P.
BY: /s/ Lindsay A. Rosenwald, M.D.
----------------------------------------------------
LINDSAY A. ROSENWALD, M.D.
PRESIDENT, PARAMOUNT CAPITAL ASSET MANAGEMENT, INC.
GENERAL PARTNER OF ARIES DOMESTIC FUND, L.P.
FOR PURPOSES OF PARAGRAPHS 1, 10, 14 AND 15 ONLY:
THE ARIES TRUST
BY: /s/ Lindsay A. Rosenwald, M.D.
----------------------------------------------------
LINDSAY A. ROSENWALD, M.D.
PRESIDENT, PARAMOUNT CAPITAL ASSET MANAGEMENT, INC
INVESTMENT ADVISER TO THE ARIES TRUST
13
<PAGE>
EXHIBIT A
RIGHTS AND PREFERENCES OF SERIES A PREFERRED STOCK(TM)
SERIES A PREFERRED STOCK
The Company will file a Certificate of Designation designating 30,000 shares of
Preferred Stock as Series A Preferred Stock (the "Series A Preferred Stock").
Giving effect to completion of the Series A Transaction, 30,000 shares of Series
A Preferred Stock will be fully paid, validly issued and non-assessable. The
stated value per share of Series A Preferred Stock shall be $100.00.
VOTING
The holders of the Series A Preferred Stock will have the right at all meetings
of the stockholders to that number of votes equal to the number of shares of
Common Stock issuable upon conversion of such shares at the record date for the
determination of the stockholders entitled to vote on such matters or, if no
such record date is established, at the date such vote is taken. As long as a
majority of the shares of Series A Preferred Stock remain outstanding, the
holders of 50% of the outstanding shares of the Series A Preferred Stock will be
entitled to (i) approve any securities issued by the Company which are senior to
or on parity with the Series A Preferred Stock with respect to liquidation or
dividends (other than the Series B Preferred Stock which shall be on parity),
(ii) approve any securities issued by the Company which are senior to or on
parity with the Series A Preferred Stock with respect to voting (except for (x)
class voting rights required by law, (y) issuances of Common Stock and (z)
issuances of the Series B Preferred Stock which shall be on parity), (iii)
approve any alteration or change to the rights, preferences or privileges of the
Series A Preferred Stock, or (iv) approve any liquidation, dissolution or sale
of all or substantially all of the assets of the Company.
DIVIDENDS
The holders of the Series A Preferred Stock shall be entitled to receive
dividends as, when and if declared by the Board of Directors out of funds
legally available therefor. No dividend or distribution, as the case may be,
shall be declared or paid on any junior stock unless the same is paid to the
Series A Preferred Stock. In addition, following the Reset Date as defined
below, the Preferred Stock will be entitled to a cumulative, compounded
payment-in-kind dividend of 10% per annum, which shall accrue on a monthly basis
and be payable annually or at such time that the Preferred Stock is converted by
any holder.
LIQUIDATION
Upon (i) a liquidation, dissolution, or winding up of the Company, whether
voluntary or involuntary or (ii) a sale or other disposition of all or
substantially all of the assets
<PAGE>
ii
of the Company (a "Liquidation Event"), after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Series A
Preferred Stock then outstanding will first be entitled to receive, pro rata (on
the basis of the number of shares of the Series A Preferred Stock then
outstanding), on a pari passu basis with the shares of Series B Preferred Stock
and in preference to the holders of the Common Stock and any series of junior
preferred stock, an amount per share equal to $14 plus accrued but unpaid
dividends, if any. Mergers and similar events in which a majority of the voting
control of the Company's capital stock is transferred will be treated similarly
with respect to the merger consideration.
CONVERSION
The Series A Preferred Stock will be converted into Common Stock at an initial
conversion price, subject to adjustment as set forth below, equal to $.46875
(the "Series A Preferred Conversion Price"), representing an initial conversion
rate of 213.333333 per share. Upon the earlier of the Approval Date or September
30, 1997, the Series A Preferred Conversion Price shall be reset to equal the
lesser of (i) $.29 and (ii) 50% of the average closing bid price of the Common
Stock for either (i) the five (5) consecutive trading days immediately
succeeding the date of shareholder approval (the "Approval Date") or September
30, 1997, or (ii) the thirty (30) consecutive trading days preceding the
Approval Date or September 30, 1997 or (iii) the five (5) consecutive trading
days immediately preceding the Approval Date or September 30, 1997, whichever is
lowest. In addition, to the extent that there are no shareholder approvals
required, the Series A Preferred Conversion Price shall be reset to equal the
lesser of (x) $.29 or (y) 50% of the average closing bid price of the Common
Stock for either (i) the thirty (30) consecutive trading days preceding
September 30, 1997, or (ii) the five (5) consecutive trading days preceding
September 30, 1997 or (iii) the five (5) consecutive trading days immediately
succeeding September 30, 1997, whichever is lowest.
If, upon any of the closings of the Series B Offering or the Company's next
Qualified Offering, the resulting Series B Preferred Conversion Price or
effective price per share of Common Stock ("Qualified Offering Price") of the
Company in such Qualified Offering is less then twice the Series A Preferred
Conversion Price at such time, the Series A Preferred Conversion Price shall be
reset at such time to equal fifty (50%) of such resulting Series B Preferred
Conversion Price or Qualified Offering Price.
The Series A Preferred Stock may be converted at the option of the holder at any
time after the initial issuance date of the Series A Preferred Stock for fully
paid nonassessable shares of Common Stock. The Series A Preferred Conversion
Price is subject to adjustment upon the occurrence of a merger, reorganization,
consolidation, reclassification, stock dividend or stock split which will result
in an increase or decrease in the number of shares of Common Stock outstanding
and upon below market and/or exercise price issuances.
<PAGE>
iii
In addition, the conversion price in effect immediately prior to the date that
is 12 months after the Series A Final Closing Date (the "Series A Reset Date")
will be adjusted and reset effective as of the Series A Reset Date if the
average closing price for the 20 consecutive trading days immediately preceding
the Series A Reset Date (the "12-Month Trading Price") is less than 140% of the
then applicable Series A Preferred Conversion Price (a "Series A Reset Event").
Upon the occurrence of a Series A Reset Event, the then applicable Series A
Preferred Conversion Price will be reduced to be equal to the greater of (i) the
12-Month Trading Price divided by 1.4 and (ii) 25% of the then applicable Series
A Preferred Conversion Price.
The Series A Preferred Conversion Price will similarly be reset in connection
with any Series B Reset Event in accordance with the terms of the Series B
Preferred Stock.
MANDATORY CONVERSION
Unless converted earlier, the Company has the right at any time after the Series
A Reset Date to cause the Series A Preferred Stock to be converted, in whole or
in part, on a pro rata basis, into shares of Common Stock on 60 days' prior
written notice, provided that the closing bid quotation for the Common Stock as
reported on the NASDAQ, or on such exchange on which the Common Stock is then
traded or listed, exceeds 300% of the Series A Preferred Conversion Price for 20
consecutive trading days ending three days prior to the date of the notice of
mandatory conversion.
SERIES A PREFERRED STOCK REPURCHASE
In the event that the Required Shareholder Approval (as defined in Section 1 of
the Letter of Intent) is not obtained by September 30, 1997 (the "Required
Approval Date") of the Series A Final Closing Date, the holders of a majority of
the outstanding shares of Series A Preferred Stock may, by vote of such
majority, immediately elect to require the Company to repurchase the Series A
Preferred Stock at $14 per share (the "Repurchase Election"). In the event that
the Company fails to repurchase such shares within three days of a Repurchase
Election, the Series A Preferred Stock shall, at the option of the holders of a
majority of the outstanding shares of Series A Preferred Stock, be converted
into a senior secured convertible note in amount equal to the extent of the
repurchase obligation, with the Series A Preferred Stock holders obtaining a
first priority perfected security interest for such amount in all of the assets
of the Company. Notwithstanding the previous sentence, at any time after receipt
by the Company of a Repurchase Election, the Company shall at all times be
obligated to repurchase, on a pro rata basis, the shares of Series A Preferred
Stock required to be repurchased, to the extent that it has available funds to
do so.
<PAGE>
EXHIBIT M
CERTIFICATE OF DESIGNATION
for
SERIES A CONVERTIBLE PREFERRED STOCK
of
PROCEPT, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
PROCEPT, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), does hereby certify that,
pursuant to the authority conferred on the board of directors of the Corporation
(the "Board of Directors") by the Restated Certificate of Incorporation, as
amended to date (the "Certificate of Incorporation"), of the Corporation and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors adopted the following resolution establishing a
series of 30,061 shares of Preferred Stock of the Corporation designated as
"Series A Convertible Preferred Stock":
RESOLVED, that pursuant to the authority conferred on the
Board of Directors by the Certificate of Incorporation, a series of
Preferred Stock, par value $.01 per share, of the Corporation is hereby
established and created, and that the designation and number of shares
thereof and the voting and other powers, preferences and relative
participating, optional or other special rights of, the shares of such
series and the qualifications, limitations and restrictions thereof are
as follows:
Series A Convertible Preferred Stock
I. Designation and Amount and Definitions.
A. There shall be a series of Preferred Stock designated as
"Series A Convertible Preferred Stock" and the number of shares constituting
such series shall be 30,061. Such series is referred to herein as the "Series A
Preferred Stock." Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, however, that no decrease shall
reduce the number of shares of Series A Preferred Stock to fewer than the number
of shares then issued and outstanding.
<PAGE>
B. As used in this Certificate of Designation, the following
terms shall have the following meanings:
1. The "Closing Bid Price" for any security for each
trading day shall be the reported per share closing bid price
of such security regular way on the Stock Market on such
trading day, or, if there were no transactions on such trading
day, the average of the reported closing bid and asked prices,
regular way, of such security on the relevant Stock Market on
such trading day.
2. "Fair Market Value" of any asset (including any
security) means the fair market value thereof as mutually
determined by the Corporation and the holders of a majority of
the Series A Preferred Stock then outstanding. If the
Corporation and the holders of a majority of the Series A
Preferred Stock then outstanding are unable to reach agreement
on any valuation matter, such valuation shall be submitted to
and determined by a nationally recognized independent
investment bank selected by the Board of Directors and the
holders of a majority of the Series A Preferred Stock then
outstanding (or, if such selection cannot be agreed upon
promptly, or in any event within ten days, then such valuation
shall be made by a nationally recognized independent
investment banking firm selected by the American Arbitration
Association in New York City in accordance with its rules),
the costs of which valuation shall be paid for by the
Corporation.
3. "Market Price" shall mean the average Closing Bid
Price for twenty (20) consecutive trading days, ending with
the trading day prior to the date as of which the Market Price
is being determined (with appropriate adjustments for
subdivisions or combinations of shares effected during such
period), provided that if the prices referred to in the
definition of Closing Bid Price cannot be determined for such
period, "Market Price" shall mean Fair Market Value.
4. "Registered Holders" shall mean, at any time, the
holders of record of the Series A Preferred Stock.
5. The "Stock Market" shall mean, with respect to any
security, the principal national securities exchange on which
such security is listed or admitted to trading or, if such
security is not listed or admitted to trading on any national
securities exchange, shall mean The Nasdaq National Market
System ("NNM") or The Nasdaq SmallCap Market ("SCM" and,
together with NNM, "Nasdaq") or, if such security is not
quoted on Nasdaq, shall mean the OTC Bulletin Board or, if
such security is not quoted on the OTC Bulletin Board, shall
mean the over-the-counter market as furnished by any NASD
member firm selected from time to time by the Corporation for
that purpose.
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<PAGE>
6. A "trading day" shall mean a day on which the
relevant Stock Market is open for the transaction of business.
7. "Trading Price" shall mean the lower of (i) the
average Closing Bid Price of the Common Stock (with
appropriate adjustments for subdivisions or combinations of
shares effected during such period) for the thirty (30)
consecutive trading days immediately preceding the date as of
which the Trading Price is being determined, (ii) the average
Closing Bid Price of the Common Stock (with appropriate
adjustments for subdivisions or combinations of shares
effected during such period) for five (5) consecutive trading
days, immediately preceding the date as of which the Trading
Price is being determined, and (iii) the average Closing Bid
Price of the Common Stock (with appropriate adjustments for
subdivisions or combinations of shares effected during such
period) for five (5) consecutive trading days, immediately
succeeding the date as of which the Trading Price is being
determined, provided that if the prices referred to in the
definition of Closing Bid Price cannot be determined for any
of such periods, "Trading Price" shall mean Fair Market Value.
II. Dividends and Distributions.
A. Commencing on the Reset Date (as defined in Subsection
4(a)), the holders of the Series A Preferred Stock shall be entitled to receive
cumulative dividends on each share of Series A Preferred Stock, at the rate of
10% per annum (computed on the basis of a 360-day year of twelve 30 day months)
of the Dividend Base Amount (as defined below), payable annually in arrears or
at such time as the conversion of, and with respect to, any shares of Series A
Preferred Stock that are converted. Such dividends shall be paid in cash, or at
the option of the Company, in kind, with duly authorized, fully paid and non
assessable shares of Series A Preferred Stock. Such dividends shall accrue
monthly and accumulate whether or not they have been declared and whether or not
there are profits, surplus or other funds of the Corporation legally available
for the payment of dividends. The "Dividend Base Amount" shall be $140.00 plus
all accrued but unpaid dividends (subject to appropriate adjustment to reflect
any stock split, combination, reclassification or reorganization of the Series A
Preferred Stock).
B. In addition to the foregoing, subject to the rights of the
holders of any shares of any series or class of capital stock ranking prior, and
superior to, or pari passu with, the shares of Series A Preferred Stock with
respect to dividends, the holders of shares of Series A Preferred Stock shall be
entitled to receive, as, when and if declared by the Board of Directors, out of
assets legally available for that purpose, dividends or distributions in cash,
stock or otherwise.
C. The Corporation shall not declare any dividend or
distribution on any Junior Stock (as defined below) of the Corporation unless
and until a special dividend or distribution of $140.00 per share (subject to
appropriate adjustment to reflect any stock split,
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<PAGE>
combination, reclassification or reorganization of the Series A Preferred Stock)
has been declared and paid on the Series A Preferred Stock. In the event that
such special dividend or distribution is declared and paid on the Series A
Preferred Stock, an aggregate per share dividend or distribution equal to (i)
$140.00 divided by (ii) the effective Conversion Rate (as defined below) at the
time of such special dividend or distribution on the Series A Preferred Stock
may be declared and paid on the Common Stock. Except as aforesaid, the
Corporation shall not declare any dividend or distribution on any Junior Stock
or stock on a parity with the Series A Preferred Stock, unless the Corporation
shall, concurrently with the declaration of such dividend or distribution on the
Junior Stock or stock on a parity with the Series A Preferred Stock, declare a
like dividend or distribution, as the case may be, on the Series A Preferred
Stock.
D. Any dividend or distribution (other than that referenced in
the first sentence of Subsection II.C. payable to the holders of the Series A
Preferred Stock pursuant to this Section II shall be paid to such holders at the
same time as the dividend or distribution on the Junior Stock or any other
capital stock of the Corporation by which it is measured is paid.
E. All dividends or distributions declared upon the Series A
Preferred Stock shall be declared pro rata per share.
F. Any reference to "distribution" contained in this Section
II shall not be deemed to include any distribution made in connection with or in
lieu of any Liquidation Event (as defined below).
G. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock which may be in arrears.
H. So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on any class or series of
stock of the Corporation ranking, as to dividends, on a parity with the Series A
Preferred Stock, for any period unless all dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof set apart for such payment, on the Series A Preferred Stock.
When dividends are not paid in full or a sum sufficient for such payment is not
set apart, as aforesaid, upon the shares of the Series A Preferred Stock and any
other class or series of stock ranking on a parity as to dividends with the
Series A Preferred Stock, all dividends declared upon such other stock shall be
declared pro rata so that the amounts of dividends per share declared on the
Series A Preferred Stock and such other stock shall in all cases bear to each
other the same ratio that accrued dividends per share on the shares of the
Series A Preferred Stock and on such other stock bear to each other.
I. So long as any shares of the Series A Preferred Stock are
outstanding, no other stock of the Corporation ranking on a parity with the
Series A Preferred Stock as to
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<PAGE>
dividends or upon liquidation, dissolution or winding up shall be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund or otherwise for the purchase or redemption
of any shares of any such stock) by the Corporation unless the dividends, if
any, accrued on all outstanding shares of the Series A Preferred Stock shall
have been paid or set apart for payment.
J. "Junior Stock" shall mean the Common Stock and any shares
of preferred stock of any series or class of the Corporation, whether presently
outstanding or hereafter issued, which are junior to the shares of Series A
Preferred Stock with respect to (i) the distribution of assets on any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, (ii)
dividends or (iii) voting.
III. Liquidation Preference.
A. In the event of a (i) liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, (ii) a sale or other
disposition of all or substantially all of the assets of the Corporation or
(iii) any consolidation, merger, combination, reorganization or other
transaction in which the Corporation is not the surviving entity or shares of
Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into stock or securities of another
entity, cash and/or any other property (a "Merger Transaction") (items (i), (ii)
and (iii) of this sentence being collectively referred to as a "Liquidation
Event"), after payment or provision for payment of debts and other liabilities
of the Corporation the holders of the Series A Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, whether such assets are capital, surplus, or
earnings, before any payment or declaration and setting apart for payment of any
amount shall be made in respect of any Junior Stock of the Corporation, an
amount equal to $140.00 per share plus an amount equal to all declared and/or
accrued unpaid dividends thereon; provided, however, in the case of a Merger
Transaction, such $140.00 per share may be paid in cash, property (valued as
provided in Subsection III.B.) and/or securities (valued as provided in
Subsection III.B.) of the entity surviving such Merger Transaction. In the case
of property or in the event that any such securities are subject to an
investment letter or other similar restriction on transferability, the value of
such property or securities shall be determined by agreement between the
Corporation and the holders of a majority of the Series A Preferred Stock then
outstanding. If upon any Liquidation Event, whether voluntary or involuntary,
the assets to be distributed to the holders of the Series A Preferred Stock
shall be insufficient to permit the payment to such shareholders of the full
preferential amounts aforesaid, then all of the assets of the Corporation to be
distributed shall be so distributed ratably to the holders of the Series A
Preferred Stock on the basis of the number of shares of Series A Preferred Stock
held. Notwithstanding item (iii) of the first sentence of this Subsection
III.A., any consolidation, merger, combination, reorganization or other
transaction in which the Corporation is not the surviving entity but the
stockholders of the Corporation immediately prior to such transaction own in
excess of 50% of the voting power of the corporation surviving such transaction
and own such interest in substantially the same
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<PAGE>
proportions as prior to such transaction, shall not be considered a Liquidation
Event provided that the surviving corporation shall make appropriate provisions
to ensure that the terms of this Certificate of Designation survive any such
transaction as provided in Subsection IV.C.2. All shares of Series A Preferred
Stock shall rank as to payment upon the occurrence of any Liquidation Event
senior to the Common Stock as provided herein and, unless the terms of such
series shall provide otherwise, senior to all other series of the Corporation's
preferred stock.
B. Any securities or other property to be delivered to the
holders of the Series A Preferred Stock pursuant to Subsection III.A. hereof
shall be valued as follows:
1. Securities not subject to an investment letter or
other similar restriction on free marketability:
(a) If actively traded on a Stock Market, the
value shall be deemed to be the Market Price as of the
third day prior to the date of valuation.
(b) If not actively traded on a Stock Market, the
value shall be the Fair Market Value.
2. For securities for which there is an active public
market but which are subject to an investment letter or other
restrictions on free marketability, the value shall be the
Fair Market Value thereof, determined by discounting
appropriately the Market Price thereof.
3. For all other securities, the value shall be the Fair
Market Value thereof.
IV. Conversion.
A. Right of Conversion. The shares of Series A Preferred Stock
shall be convertible, in whole or in part, at the option of the holder thereof
and upon notice to the Corporation as set forth in Subsection IV.B., into fully
paid and nonassessable shares of Common Stock and such other securities and
property as hereinafter provided. The initial conversion price per share of
Common Stock shall be equal to $0.48675 (the "Conversion Price") and shall be
subject to adjustment as provided herein. The rate at which each share Series A
Preferred Stock is convertible at any time into Common Stock (the "Conversion
Rate") shall be determined by dividing the then existing Conversion Price into
$100.00.
The Conversion Price is subject to adjustment immediately upon
the earliest of (i) the approval by the holders of Common Stock of the
Corporation of the transactions contemplated by the Purchase Agreement (as
defined below) and the Letter of Intent between the Corporation and Paramount
Capital, Inc., dated June 29, 1997 (the "Letter of Intent"), to
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<PAGE>
the extent such approval is necessary pursuant to Rule 4460(i) of the National
Association of Securities Dealers' Marketplace Rules, (ii) any event which
renders such stockholder approval unnecessary or which renders such rule
inapplicable and (iii) September 30, 1997 (such earliest date, the "Approval
Date"). In such event, the Conversion Price shall be reduced to equal the lesser
of (x) $0.29 and (y) 50% of the Trading Price at such Approval Date. The
Conversion Price is further subject to adjustment, upon the Series B Final
Closing Date (as defined in the Letter of Intent), if the conversion price of
the preferred stock (the "Series B Preferred Stock") sold in the Series B
Offering (as defined in the Letter of Intent) is less than two times the
Conversion Price. In such event, the Conversion Price shall be reduced to equal
50% of the conversion price of such Series B Preferred Stock as in effect on any
of the respective closing dates in the Series B Offering. In the event that
there is no Series B Final Closing Date, or the above referenced Series B
Offering is not commenced or otherwise terminated, if the price per share of
Common Stock (or the effective price, conversion price or exercise price per
share of Common Stock, as the case may be, of a security convertible into or
exchangeable for Common Stock) offered to investors in the next offering or
series of related offerings of equity securities of the Corporation (or any
securities convertible into or exercisable for equity securities), whether in a
public offering or a private placement, following the offering of Series A Units
which yields gross proceeds to the Corporation in excess of $2,000,000 in the
aggregate (a "Qualified Offering") shall be less than two times the Conversion
Price then in effect, the Conversion Price shall be reduced to equal 50% of the
lowest of any such offering price (or effective price, conversion price or
exercise price, as the case may be) per share of Common Stock to investors in
such Qualified Offering.
The Board of Directors, or a committee designated by it for
such purpose, may specify an initial conversion price applicable to the shares
of Series A Preferred Stock issued at any closing lower than the initial
conversion price that would otherwise obtain pursuant to the preceding
paragraphs of this Subsection IV.A. and, in the event an initial conversion
price is so specified, it shall be applicable to all shares of the Series A
Preferred Stock.
The Corporation shall prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Corporation setting forth the
Conversion Rate as of the Final Closing Date, showing in reasonable detail the
facts upon which such adjusted Conversion Rate is based, and such certificate
shall forthwith be filed with the transfer agent of the Series A Preferred
Stock. A notice stating that the Conversion Rate has been adjusted pursuant to
the second preceding paragraph of this Subsection IV.A., or that no adjustment
is necessary, and setting forth the Conversion Rate in effect as of the Series B
Final Closing Date (as defined in the Letter of Intent), the final closing date
of any Qualified Offering or the Approval Date shall be mailed as promptly as
practicable after the Series B Final Closing Date, the final closing date of any
Qualified Offering or the Approval Date by the Corporation to all record holders
of the Series A Preferred Stock at their last addresses as they shall appear in
the stock transfer books of the Corporation.
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<PAGE>
The Conversion Price (subject to adjustment pursuant to the
provisions of Subsection IV.C.) in effect immediately prior to June 30, 1998
(the "Reset Date") shall be adjusted and reset effective as of the Reset Date if
the Market Price as of the Reset Date (the "12-Month Trading Price") is less
than 140% of the then applicable Conversion Price (a "Reset Event"). Upon the
occurrence of a Reset Event, the Conversion Price shall be reduced to be equal
to the greater of (A) the 12-Month Trading Price divided by 1.40, and (B) 25% of
the then applicable Conversion Price. If there is any change in the Conversion
Price as a result of the preceding sentence, then the Conversion Rate shall be
changed accordingly as set forth above. The Corporation shall prepare a
certificate signed by the principal financial officer of the Corporation setting
forth the Conversion Rate as of the Reset Date, showing in reasonable detail the
facts upon which such Conversion Rate is based, and such certificate shall
forthwith be filed with the transfer agent of the Series A Preferred Stock. A
notice stating that the Conversion Rate has been adjusted pursuant to this
paragraph, or that no adjustment is necessary, and setting forth the Conversion
Rate in effect as of the Reset Date shall be mailed as promptly as practicable
after the Reset Date by the Corporation to all record holders of the Series A
Preferred Stock at their last addresses as they shall appear in the stock
transfer books of the Corporation.
Furthermore, in the event that the terms of the Series B
Preferred Stock or of any Qualified Offering Security requires that such
security's conversion price, exercise price or effective price (the "B or
Qualified Share Price") be reduced in a manner analogous to the above described
reset (a "B or Qualified Reset"), the Conversion Price then in effect shall be
adjusted on the date of such B or Qualified Reset (the "Second Reset Date") to
be the lesser of (a) the product of (i) the Conversion Price at such time
multiplied by (ii) a fraction, the numerator of which shall be the B or
Qualified Share Price immediately succeeding such B or Qualified Reset and the
denominator of which shall be the B or Qualified Share Price immediately
preceding such B or Qualified Reset and (b) the B or Qualified Share Price
immediately following such B or Qualified Reset. In addition, if there is no B
or Qualified Reset by June 30, 1999, then the Conversion Price in effect
immediately prior to June 30, 1999 (the "Alternative Second Reset Date") shall
be adjusted and reset effective as of the Alternative Second Reset Date if the
Market Price as of the Second Reset Date (the "24-Month Trading Price") is less
than 200% of the applicable Conversion Price (a "Second Reset Event") provided,
however, that there shall be no reset of the Conversion Price pursuant to this
paragraph if (i) the Company conducts a B or Qualified Offering; (ii) the
securities issued by the Company in such B or Qualified Offering contain a reset
provision analogous to the one described in the previous paragraph and (iii) no
B or Qualified Reset is required pursuant to the terms of such B or Qualified
securities because the Market Price is in excess of the applicable target price
as of the date prescribed for such reset pursuant to the terms of the B or
Qualified securities. Upon the occurrence of a Second Reset Event, the
Conversion Price shall be reduced to be equal to the greater of (A) the 24-
Month Trading Price divided by 2.00, and (B) 25% of the then applicable
Conversion Price. If there is any change in the Conversion Price as a result of
the preceding sentence, then the Conversion Rate shall be changed accordingly as
set forth above. The Corporation shall prepare a certificate signed by the
principal financial officer of the Corporation setting forth the
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Conversion Rate as of the Second Reset Date or the Alternative Second Reset
Date, as the case may be, showing in reasonable detail the facts upon which such
Conversion Rate is based, and such certificate shall forthwith be filed with the
transfer agent of the Series A Preferred Stock. A notice stating that the
Conversion Rate has been adjusted pursuant to this paragraph, or that no
adjustment is necessary, and setting forth the Conversion Rate in effect as of
the Second Reset Date or the Alternative Second Reset Date, as the case may be,
shall be mailed as promptly as practicable after the Second Reset Date or the
Alternative Second Reset Date, as the case may be, by the Corporation to all
record holders of the Series A Preferred Stock at their last addresses as they
shall appear in the stock transfer books of the Corporation.
B. Conversion Procedures. Any holder of shares of Series A
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates evidencing such shares of Series A
Preferred Stock at the office of the transfer agent for the Series A Preferred
Stock, which certificate or certificates, if the Corporation shall so require,
shall be duly endorsed to the Corporation or in blank, or accompanied by proper
instruments of transfer to the Corporation or in blank, accompanied by
irrevocable written notice to the Corporation that the holder elects so to
convert such shares of Series A Preferred Stock and specifying the name or names
(with address) in which a certificate or certificates evidencing shares of
Common Stock are to be issued. The Corporation need not deem a notice of
conversion to be received unless the holder complies with all the provisions
hereof. The Corporation will instruct the transfer agent (which may be the
Corporation) to make a notation of the date that a notice of conversion is
received, which date shall be deemed to be the date of receipt for purposes
hereof.
The Corporation shall, as soon as practicable after such
deposit of certificates evidencing shares of Series A Preferred Stock
accompanied by the written notice and compliance with any other conditions
herein contained, deliver at such office of such transfer agent to the person
for whose account such shares of Series A Preferred Stock were so surrendered,
or to the nominee or nominees of such person, certificates evidencing the number
of full shares of Common Stock to which such person shall be entitled as
aforesaid, together with a cash adjustment of any fraction of a share as
hereinafter provided. Subject to the following provisions of this paragraph,
such conversion shall be deemed to have been made as of the date of such
surrender of the shares of Series A Preferred Stock to be converted, and the
person or persons entitled to receive the Common Stock deliverable upon
conversion of such Series A Preferred Stock shall be treated for all purposes as
the record holder or holders of such Common Stock on such date; provided,
however, that the Corporation shall not be required to convert any shares of
Series A Preferred Stock while the stock transfer books of the Corporation are
closed for any purpose, but the surrender of Series A Preferred Stock for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books as if the
surrender had been made on the date of such reopening, and the conversion shall
be at the conversion rate in effect on such date. No adjustments in respect of
any dividends on shares surrendered for conversion or any dividend on the Common
Stock
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issued upon conversion shall be made upon the conversion of any shares of Series
A Preferred Stock.
All notices of conversion shall be irrevocable; provided,
however, that if the Corporation has sent notice of an event pursuant to
Subsection 4(g) hereof, a holder of Series A Preferred Stock may, at its
election, provide in its notice of conversion that the conversion of its shares
of Series A Preferred Stock shall be contingent upon the occurrence of the
record date or effectiveness of such event (as specified by such holder),
provided that such notice of conversion is received by the Corporation prior to
such record date or effective date, as the case may be.
C. Adjustment of Conversion Rate and Conversion Price.
1. Except as otherwise provided herein, in the event
the Corporation shall, at any time or from time to time after the date hereof,
(1) sell or issue any shares of Common Stock for a consideration per share less
than either (i) the Conversion Price in effect on the date of such sale or
issuance or (ii) the Market Price of the Common Stock as of the date of the sale
or issuance, (2) issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or (3) subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Conversion Price in effect
immediately prior to such Change of Shares shall be changed to a price (rounded
to the nearest cent) determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
sale or issuance of such additional shares or such subdivision or combination
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subparagraph IV.C.4.(e)) for the issuance of
such additional shares would purchase at the greater of (i) the Conversion Price
in effect on the date of such issuance or (ii) the Market Price of the Common
Stock as of such date, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately after the sale or issuance of
such additional shares or such subdivision or combination. Such adjustment shall
be made successively whenever such an issuance is made.
2. In case of any reclassification, capital
reorganization or other change of outstanding shares of Common Stock, or in case
of any consolidation or merger of the Corporation with or into another entity
(other than a consolidation or merger in which the Corporation is the continuing
entity and which does not result in any reclassification, capital reorganization
or other change of outstanding shares of Common Stock other than the number
thereof), or in case of any sale or conveyance to another entity of the property
of the Corporation as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the Corporation shall
cause effective provision to be made so that each holder of a share of Series A
Preferred Stock shall be entitled to receive, upon conversion of
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such share of Series A Preferred Stock, the kind and number of shares of stock
or other securities or property (including cash) receivable upon such
reclassification, capital reorganization or other change, consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such share of Series A Preferred Stock was convertible immediately prior
to such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Subsection IV.C. The Corporation shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof the successor (if other than the Corporation)
resulting from such consolidation or merger or the entity purchasing assets or
other appropriate entity shall assume, by written instrument executed and
delivered to the transfer agent for the Series A Preferred Stock (the "Transfer
Agent"), the obligation to deliver to the holder of each share of Series A
Preferred Stock such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holders may be entitled to receive and the
other obligations under this Agreement. The foregoing provisions shall similarly
apply to successive reclassifications, capital reorganizations and other changes
of outstanding shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
3. After each adjustment of the Conversion Price
pursuant to this Subsection IV.C., the Corporation will promptly prepare a
certificate signed by the Chairman or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the
Corporation setting forth: (i) the Conversion Price as so adjusted, (ii) the
Conversion Rate corresponding to such Conversion Price and (iii) a brief
statement of the facts accounting for such adjustment. The Corporation will
promptly file such certificate with the Transfer Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each registered holder of
Series A Preferred Stock at his or her last address as it shall appear on the
registry books of the Transfer Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity of such
adjustment. The affidavit of an officer of the Transfer Agent or the Secretary
or an Assistant Secretary of the Corporation that such notice has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. The Transfer Agent may rely on the information in the certificate as
true and correct and has no duty or obligation to independently verify the
amounts or calculations set forth therein.
4. For purposes of Subsection IV.C.1 hereof, the following
provisions (a) to (e) shall also be applicable:
(a) No adjustment of the Conversion
Price shall be made unless such adjustment would
require an increase or decrease of at least $.01
in such price; provided that any adjustments which
by reason of this Subparagraph (a) are not
required to be made shall be carried forward and
shall be made at the time of and together with the
next subsequent adjustment which, together with
adjustments so carried forward, shall
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require an increase or decrease of at least $.01
in the Conversion Price then in effect hereunder.
(b) In case of (i) the sale or other
issuance by the Corporation (including as a
component of a unit) of any rights or warrants to
subscribe for or purchase, or any options for the
purchase of, Common Stock or any securities
convertible into or exchangeable for Common Stock
(such securities convertible, exercisable or
exchangeable into Common Stock being herein called
"Convertible Securities"), or (ii) the issuance by
the Corporation, without the receipt by the
Corporation of any consideration therefor, of any
rights or warrants to subscribe for or purchase,
or any options for the purchase of, Common Stock
or Convertible Securities, whether or not such
rights, warrants or options, or the right to
convert or exchange such Convertible Securities,
are immediately exercisable, and the consideration
per share for which Common Stock is issuable upon
the exercise of such rights, warrants or options
or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x)
the minimum aggregate consideration, as set forth
in the instrument relating thereto without regard
to any antidilution or similar provisions
contained therein for a subsequent adjustment of
such amount, payable to the Corporation upon the
exercise of such rights, warrants or options, plus
the consideration received by the Corporation for
the issuance or sale of such rights, warrants or
options, plus, in the case of such Convertible
Securities, the minimum aggregate amount, as set
forth in the instrument relating thereto without
regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of
such amount, of additional consideration, if any,
other than such Convertible Securities, payable
upon the conversion or exchange thereof, by (y)
the total maximum number, as set forth in the
instrument relating thereto without regard to any
antidilution or similar provisions contained
therein for a subsequent adjustment of such
amount, of shares of Common Stock issuable upon
the exercise of such rights, warrants or options
or upon the conversion or exchange of such
Convertible Securities issuable upon the exercise
of such rights, warrants or options) is less than
either the Conversion Price or the Market Price of
the Common Stock as of the date of the issuance or
sale of such rights, warrants or options, then
such total maximum number of shares of Common
Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or
exchange of such Convertible Securities (as of the
date of the issuance or sale of such rights,
warrants or options) shall be deemed to be "Common
Stock" for purposes of Subsection IV.C.1 and shall
be deemed to have been sold for an amount equal to
such consideration per share and shall cause an
adjustment to be made in accordance with
Subsection IV.C.1.
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<PAGE>
(c) In case of the sale by the
Corporation of any Convertible Securities, whether
or not the right of conversion or exchange
thereunder is immediately exercisable, and the
price per share for which Common Stock is issuable
upon the conversion or exchange of such
Convertible Securities (determined by dividing (x)
the total amount of consideration received by the
Corporation for the sale of such Convertible
Securities, plus the minimum aggregate amount, as
set forth in the instrument relating thereto
without regard to any antidilution or similar
provisions contained therein for a subsequent
adjustment of such amount, of additional
consideration, if any, other than such Convertible
Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number,
as set forth in the instrument relating thereto
without regard to any antidilution or similar
provisions contained therein for a subsequent
adjustment of such amount, of shares of Common
Stock issuable upon the conversion or exchange of
such Convertible Securities) is less than either
the Conversion Price or the Market Price of the
Common Stock as of the date of the sale of such
Convertible Securities, then such total maximum
number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible
Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be
"Common Stock" for purposes of Subsection IV.C.1
and shall be deemed to have been sold for an
amount equal to such consideration per share and
shall cause an adjustment to be made in accordance
with Subsection IV.C.1.
(d) In case the Corporation shall modify
the rights of conversion, exchange or exercise of
any of the securities referred to in (b) and (c)
above or any other securities of the Corporation
convertible, exchangeable or exercisable for
shares of Common Stock, for any reason other than
an event that would require adjustment to prevent
dilution pursuant to the terms of any such
convertible, exchangeable or exercisable
instrument, so that the consideration per share
received by the Corporation after such
modification is less than either the Conversion
Price or the Market Price as of the date prior to
such modification, then such securities, to the
extent not theretofore exercised, converted or
exchanged, shall be deemed to have expired or
terminated immediately prior to the date of such
modification and the Corporation shall be deemed
for purposes of calculating any adjustments
pursuant to this Subsection IV.C. to have issued
such new securities upon such new terms on the
date of modification. Such adjustment shall become
effective as of the date upon which such
modification shall take effect. On the expiration
or cancellation of any such right, warrant or
option or the termination or cancellation of any
such right to convert or exchange any such
Convertible Securities, the Conversion Price then
in effect hereunder shall forthwith
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be readjusted to such Conversion Price as would
have obtained (i) had the adjustments made upon
the issuance or sale of such rights, warrants,
options or Convertible Securities been made upon
the basis of the issuance of only the number of
shares of Common Stock theretofore actually
delivered (and the total consideration received
therefor) upon the exercise of such rights,
warrants or options or upon the conversion or
exchange of such Convertible Securities and (ii)
had adjustments been made on the basis of the
Conversion Price as adjusted under clause (i) of
this sentence for all transactions (which would
have affected such adjusted Conversion Price) made
after the issuance or sale of such rights,
warrants, options or Convertible Securities.
(e) In case of the sale of any shares of
Common Stock, any Convertible Securities, any
rights or warrants to subscribe for or purchase,
or any options for the purchase of, Common Stock
or Convertible Securities, the consideration
received by the Corporation therefor shall be
deemed to be the gross sales price therefor
without deducting therefrom any expense paid or
incurred by the Corporation or any underwriting
discounts or commissions or concessions paid or
allowed by the Corporation in connection
therewith. In the event that any securities shall
be issued in connection with any other securities
of the Corporation, together comprising one
integral transaction in which no specific
consideration is allocated among the securities,
then each of such securities shall be deemed to
have been issued for such consideration as the
Board of Directors of the Corporation determines
in good faith; provided, however that if the
Registered Holders of in excess of 10% of the then
outstanding Series A Preferred Stock disagree with
such determination, the Corporation shall retain,
at its own expense, an independent investment
banking firm for the purpose of obtaining an
appraisal.
5. Notwithstanding any other provision hereof, no adjustment
to the Conversion Price will be made:
(a) upon the exercise of any of the
options or warrants outstanding on the date hereof
under the Corporation's existing stock option
plans; or
(b) upon the issuance or exercise of
options which may hereafter be granted with the
approval of the Board of Directors, or exercised,
under any employee benefit plan of the Corporation
to officers, directors, consultants or employees,
but only with respect to such options as are
exercisable at prices no lower than the Closing
Bid Price (or, if the
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price referenced in the definition of Closing Bid
Price cannot be determined, the Fair Market Value)
of the Common Stock as of the date of grant
thereof; or
(c) upon the issuance of stock which may
hereafter be purchased or sold with the approval
of the Board of Directors, under the 1993 Employee
Stock Purchase Plan of the Corporation to
officers, directors, consultants or employees, but
only with respect to such shares as are purchased
and/or sold in accordance with the current plan
and at prices no lower than 85% of the Closing Bid
Price (or, if the prices referenced in the
definition of Closing Bid Price cannot be
determined, 85% of the Fair Market Value) of the
Common Stock as of the date of purchase and/or
sale thereof; or
(d) upon issuance or exercise of the
Placement Warrants, or the Advisory Warrants, (as
defined in the Letter of Intent between the
Corporation, Paramount Capital, Inc. (the
"Placement Agent"), the Aries Domestic Fund, L.P.
and The Aries Trust, dated as of June 29, 1997
(the "Letter of Intent")) (collectively, the
"Paramount Warrants"), upon the exercise or
conversion of the Class A and Class B Warrants (as
defined in the Securities Purchase Agreement dated
as of June 30, 1997 (the "Purchase Agreement")) or
any A Notes (as defined in the Purchase Agreement)
or upon the issuance, conversion or exercise of
the Series B Preferred Stock or the Class C
Warrants to be issued (i) on or prior to the
Series B Final Closing Date or (ii) pursuant to
the exercise of the Paramount Warrants, or upon
the issuance, conversion or exercise of any Series
A or Series B Preferred Stock or Class A, Class B
or Class C Warrants approved in writing by the
Placement Agent, or upon the issuance of any other
equity securities of the Corporation to the extent
that such issuance causes an adjustment to the
Conversion Price pursuant to the second paragraph
of Subsection IV.A.; or
(e) upon the issuance or sale of Common
Stock or Convertible Securities pursuant to the
exercise of any rights, options or warrants to
receive, subscribe for or purchase, or any options
for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants
or options were outstanding on the date of the
original issuance of the Series A Preferred Stock
or were thereafter issued or sold, provided that
an adjustment was either made or not required to
be made in accordance with Subsection IV.C.1 in
connection with the issuance or sale of such
securities or any modification of the terms
thereof; or
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<PAGE>
(f) upon the issuance or sale of Common
Stock upon conversion or exchange of any
Convertible Securities, provided that any
adjustments required to be made upon the issuance
or sale of such Convertible Securities or any
modification of the terms thereof were so made,
and whether or not such Convertible Securities
were outstanding on the date of the original sale
of the Series A Preferred Stock or were thereafter
issued or sold.
Subparagraph IV.C.4.(d) shall nevertheless apply to any modification of the
rights of conversion, exchange or exercise of any of the securities referred to
in Subparagraphs (a), (b), (c), (e), (f) and, to the extent effected with
respect to fewer than all of such securities, Subparagraph (c) of this Paragraph
IV.C.5. Notwithstanding the foregoing, IV.C.4.(d) shall not apply to any
modification of the exercise price of, or number of shares of Common Stock
subject to, the Class A, Class B or Class C Warrants that are required by the
terms of those respective instruments.
6. As used in this Subsection IV.C., the term "Common Stock"
shall mean and include the Corporation's Common Stock authorized on the date of
the original issue of the Series A Preferred Stock and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends and in the distribution of assets
upon the voluntary liquidation, dissolution or winding up of the Corporation;
provided, however, that the shares issuable upon conversion of the Series A
Preferred Stock shall include only shares of such class designated in the
Certificate of Incorporation as Common Stock on the date of the original issue
of the Series A Preferred Stock or (i), in the case of any reclassification,
change, consolidation, merger, sale or conveyance of the character referred to
in Subsection IV.C.2 hereof, the stock, securities or property provided for in
such section or (ii), in the case of any reclassification or change in the
outstanding shares of Common Stock issuable upon conversion of the Series A
Preferred Stock as a result of a subdivision or combination or consisting of a
change in par value, or from par value to no par value, or from no par value to
par value, such shares of Common Stock as so reclassified or changed.
7. Any determination as to whether an adjustment in the
Conversion Price in effect hereunder is required pursuant to Subsection IV.A. or
IV.C, or as to the amount of any such adjustment, if required, shall be binding
upon the holders of the Series A Preferred Stock and the Corporation if made in
good faith by the Board of Directors of the Corporation.
D. No Fractional Shares. No fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon conversion
of Series A Preferred Stock. If more than one certificate evidencing shares of
Series A Preferred Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A Preferred
Stock so surrendered. Instead of any fractional share of Common Stock which
would otherwise
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be issuable upon conversion of any shares of Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to the same fraction of the Market Price as of the close of
business on the day of conversion.
E. Concurrent Grant. If, at any time or from time to time, the
Corporation shall issue or distribute to the holders of shares of Common Stock
evidence of its indebtedness, any other securities of the Corporation or any
cash, property or other assets (excluding an issuance or distribution governed
by Subsection IV.C. and also excluding cash dividends or cash distributions paid
out of net profits legally available therefor in the full amount thereof (any
such non-excluded event being herein called a "Special Dividend")), then in each
case the holders of the Series A Preferred Stock shall be entitled to a
proportionate share of any such Special Dividend as though they were the holders
of the number of shares of Common Stock of the Corporation into which their
shares of Series A Preferred Stock are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Corporation entitled
to receive such Special Dividend.
F. Reservation of Shares; Transfer Taxes, Etc. The Corporation
shall at all times reserve and keep available, out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series A Preferred Stock, such number of shares of its Common
Stock free of preemptive rights as shall be sufficient to effect the conversion
of all shares of Series A Preferred Stock from time to time outstanding
(including, without limitation, shares of Common Stock issuable upon conversion
of the Series A Preferred Stock in the case of a Reset Event). The Corporation
shall use its best efforts from time to time, in accordance with the laws of the
State of Delaware to increase the authorized number of shares of Common Stock if
at any time the number of shares of authorized, unissued and unreserved Common
Stock shall not be sufficient to permit the conversion of all the
then-outstanding shares of Series A Preferred Stock.
The Corporation shall pay any and all issue or other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of the Series A Preferred Stock. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of Common Stock (or other securities
or assets) in a name other than that in which the shares of Series A Preferred
Stock so converted were registered. and no such issue or delivery shall be made
unless and until the person requesting such issue has paid to the Corporation
the amount of such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.
G. Prior Notice of Certain Events. In case:
1. the Corporation shall declare any dividend (or
any other distribution); or
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2. the Corporation shall authorize the granting to
the holders of Common Stock of rights or warrants to
subscribe for or purchase any shares of stock of any class
or of any other rights or warrants; or
3. of any reclassification of Common Stock (other
than a subdivision or combination of the outstanding Common
Stock, or a change in par value, or from par value to no par
value, or from no par value to par value); or
4. of any consolidation or merger (including,
without limitation, a Merger Transaction) to which the
Corporation is a party and for which approval of any
stockholders of the Corporation shall be required, or of the
sale or transfer of all or substantially all of the assets
of the Corporation or of any compulsory share exchange
whereby the Common Stock is converted into other securities,
cash or other property; or
5. of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation (including,
without limitation, a Liquidation Event);
then the Corporation shall cause to be filed with the transfer agent for the
Series A Preferred Stock, and shall cause to be mailed to the Registered
Holders, at their last addresses as they shall appear upon the stock transfer
books of the Corporation, at least 20 days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record (if any)
is to be taken for the purpose of such dividend, distribution or granting of
rights or warrants or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend, distribution,
rights or warrants are to be determined and a description of the cash,
securities or other property to be received by such holders upon such dividend,
distribution or granting of rights or warrants or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up or other Liquidation Event is expected to
become effective, the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such exchange, dissolution,
liquidation or winding up or other Liquidation Event and the consideration,
including securities or other property, to be received by such holders upon such
exchange; provided, however, that no failure to mail such notice or any defect
therein or in the mailing thereof shall affect the validity of the corporate
action required to be specified in such notice.
H. Other Changes in Conversion Rate. The Corporation from time
to time may increase the Conversion Rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the Conversion Rate is so increased, the Corporation shall mail
to the Registered Holders a notice of the increase at least 15 days before the
date the increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period it will be in effect.
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The Corporation may make such increases in the Conversion
Rate, in addition to those required or allowed by this Section IV, as shall be
determined by it, as evidenced by a resolution of the Board of Directors, to be
advisable in order to avoid or diminish any income tax to holders of Common
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
Notwithstanding anything to the contrary herein, in no case
shall the Conversion Price be adjusted to an amount less than $.01 per share,
the current par value of the Common Stock into which the Series A Preferred
Stock is convertible.
I. Ambiguities/Errors. The Board of Directors of the
Corporation shall have the power, subject to the approval of the Placement
Agent, to resolve any ambiguity or correct any error in the provisions relating
to the convertibility of the Series A Preferred Stock.
V. Mandatory Conversion. At any time on or after the Reset Date, the
Corporation at its option, may cause the Series A Preferred Stock to be
converted in whole or in part, on a pro rata basis, into fully paid and
nonassessable shares of Common Stock at the then effective Conversion Rate if
the Closing Bid Price (or, if the price referenced in the definition of Closing
Bid Price cannot be determined, the Fair Market Value) of the Common Stock shall
have exceeded 300% of the then applicable Conversion Price for the 20
consecutive trading days ending three days prior to the date of notice of
conversion. Any shares of Series A Preferred Stock so converted shall be treated
as having been surrendered by the holder thereof for conversion pursuant to
Section IV on the date of such mandatory conversion (unless previously converted
at the option of the holder).
No greater than 60 nor fewer than 20 days prior to the date of
any such mandatory conversion, notice by first class mail, postage prepaid,
shall be given to the holders of record of the Series A Preferred Stock to be
converted, addressed to such holders at their last addresses as shown on the
stock transfer books of the Corporation. Each such notice shall specify the date
fixed for conversion, the place or places for surrender of shares of Series A
Preferred Stock, and the then effective Conversion Rate pursuant to Section IV.
Any notice which is mailed as herein provided shall be
conclusively presumed to have been duly given by the Corporation on the date
deposited in the mail, whether or not the holder of the Series A Preferred Stock
receives such notice; and failure properly to give such notice by mail, or any
defect in such notice, to the holders of the shares to be converted shall not
affect the validity of the proceedings for the conversion of any other shares of
Series A Preferred Stock. On or after the date fixed for conversion as stated in
such notice, each holder of shares called to be converted shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such notice for conversion. Notwithstanding that the certificates evidencing any
shares properly called for conversion shall not have been surrendered, the
shares shall no longer be deemed outstanding and all rights whatsoever with
respect to the
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shares so called for conversion (except the right of the holders to convert such
shares upon surrender of their certificates therefor) shall terminate.
VI. [Reserved]
VII. Voting Rights.
A. General. Except as otherwise provided herein, in the
Certificate of Incorporation or the By-laws of the Corporation or as required by
applicable law, the holders of shares of Series A Preferred Stock, the holders
of shares of Common Stock and the holders of any other class or series of shares
entitled to vote with the Common Stock shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation. In any such
vote, each share of Series A Preferred Stock shall entitle the holder thereof to
cast the number of votes equal to the number of votes which could be cast in
such vote by a holder of the Common Stock into which such share of Series A
Preferred Stock is convertible on the record date for such vote, or if no record
date has been established, on the date such vote is taken. Any shares of Series
A Preferred Stock held by the Corporation or any entity controlled by the
Corporation shall not have voting rights hereunder and shall not be counted in
determining the presence of a quorum. Notwithstanding the above, until the
Approval Date, the holders of Series A Preferred Stock shall not be entitled to
vote in any election of directors of the Corporation, except to the extent that
exercise of such voting rights would not cause a violation of Rule 4460(i) of
the National Association of Securities Dealers Market Place Rules.
B. Class Voting Rights. In addition to any vote specified in
Section VII.A., so long as at least 5% of the shares of Series A Preferred Stock
shall be outstanding, the Corporation shall not, without the affirmative vote or
consent of the holders of at least 50% of all outstanding Series A Preferred
Stock, voting separately as a class, (i) amend, alter or repeal any provision of
the Certificate of Incorporation or the Bylaws of the Corporation so as
adversely to affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series A Preferred Stock, (ii) approve the
alteration or change to the rights, preferences or privileges of the Series A
Preferred Stock, (iii) incur or voluntarily repay prior to the maturity thereof
any indebtedness in excess of $100,000 or (iv) authorize or issue, or increase
the authorized amount of, any equity security ranking prior to, or on a parity
with, the Series A Preferred Stock (other than additional Series A Preferred
Stock approved in writing by the holders of greater than 50% of the outstanding
shares of Series A Preferred Stock) (A) upon a Liquidation Event, (B) with
respect to the payment of any dividends or distributions or (C) with respect to
voting rights (except for class voting rights required by law).
VIII. Outstanding Shares. For purposes of this Certificate of
Designation, a share of Series A Preferred Stock, when issued, shall be deemed
outstanding except (i) from the date, or the deemed date, of surrender of
certificates evidencing shares of Series A Preferred Stock, all shares of Series
A Preferred Stock converted into Common Stock and (ii) from the date of
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registration of transfer, all shares of Series A Preferred Stock held of record
by the Corporation or any subsidiary of the Corporation.
IX. Status of Acquired Shares. Shares of Series A Preferred Stock
received upon conversion pursuant to Section IV or Section V or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Series A Preferred Stock.
X. Preemptive Rights. The Series A Preferred Stock is not entitled to
any preemptive or subscription rights in respect of any securities of the
Corporation.
XI. Severability of Provisions. Whenever possible, each provision
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such changes as
shall be necessary to render the provision in question effective and valid under
applicable law.
XII. No Amendment nor Impairment. The Corporation shall not amend its
Certificate of Incorporation nor participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the rights of the holders of the Series A Preferred Stock
against impairment.
XIII. Repurchase Requirement. The holders of Series A Preferred Stock
may, pursuant to the Non-Approval Put (as defined and contained in the Purchase
Agreement), elect to require the Corporation to repurchase any or all of their
respective shares of the Series A Preferred Stock under the circumstances set
forth in Section 7.27 of the Purchase Agreement.
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IN WITNESS WHEREOF, Stanley C. Erck, President of the
Corporation, acting for and on behalf of the Corporation, has hereunto
subscribed his name on August 1, 1997.
By: /s/ Stanley C. Erck
-------------------------
Name: Stanley C. Erck
Title: President
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