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 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.,
2
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 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
3
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.
(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,
4
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.
(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
5
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 (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).
6
(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 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
7
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 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
8
(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 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
9
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.
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
10
(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
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
11
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 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
12
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.
(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.
13
(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 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,
14
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
(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;
15
(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 xxxxxxxxx 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.
16
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 Xxxxxx, 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
17
issue necessary to waive or amend the provisions of this Note, without the
consent of each holder of any Note affected thereby.
(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.
000 Xxxxxxx Xxxxxx
Xxx Xxxx, XX 00000
Attn: Xxxxx X. Xxxxxx
If to the Company: Procept, Inc.
000 Xxxxxxxx Xxxxx
Xxxxxxxxx, XX
Attention: Xxxxxxx X. Xxxx
with a copy to: Paramount Capital Asset Management, Inc.
000 Xxxxxxx Xxxxxx
Xxx Xxxx, XX 00000
Attn: Xxxxxxx X. Xxxxx
(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.
18
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/ Xxxxxxxx Xxxxxx By: /s/ Xxxxxxx X. Xxxx
----------------------- -----------------------------
Name: Xxxxxxx X. Xxxx
Its: President
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