-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CwN57fcoSzQu0rCGf0cu+mTaQ53IXvF4f0QSKL43ebjkdpZjdUWNs7eyURdDeR5V bHQqZV7BZONaCT20aZh0Aw== 0001104659-05-061859.txt : 20051221 0001104659-05-061859.hdr.sgml : 20051221 20051220214956 ACCESSION NUMBER: 0001104659-05-061859 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20051221 DATE AS OF CHANGE: 20051220 GROUP MEMBERS: OCM PRINCIPAL OPPORTUNITIES FUND, L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGENEX PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001012270 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521758016 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-47825 FILM NUMBER: 051276883 BUSINESS ADDRESS: STREET 1: 41 UNIVERSITY DRIVE CITY: NEWTON STATE: PA ZIP: 18940 BUSINESS PHONE: 2155797388 MAIL ADDRESS: STREET 1: 41 UNIVERSITY DRIVE CITY: NEWTON STATE: PA ZIP: 18940 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: OAKTREE CAPITAL MANAGEMENT LLC CENTRAL INDEX KEY: 0000949509 IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 333 S GRAND AVENUE 28TH FL CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2138306300 MAIL ADDRESS: STREET 2: 333 S GRAND AVE 28TH FL CITY: LOS ANGLES STATE: CA ZIP: 90071 SC 13D/A 1 a05-22160_1sc13da.htm AMENDMENT

	UNITED STATES
	SECURITIES AND EXCHANGE COMMISSION
	Washington, D.C. 20549

	SCHEDULE 13D (Rule 13d-101)

INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT

TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO

RULE 13d-2(a)

Under the Securities Exchange Act of 1934
(Amendment No. 6 )*

CollaGenex Pharmaceuticals, Inc.

(Name of Issuer)

Common Stock, par value $0.01 per share

(Title of Class of Securities)

19419B100

(CUSIP Number)

John Frank

Principal and General Counsel

333 South Grand Avenue, 28th Floor

Los Angeles, California 90071

(213) 830-6300

(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)

December 15, 2005

(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 that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. o

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 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).

CUSIP No. 19419B100

	1.	Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only) Oaktree Capital Management, LLC

	2.	Check the Appropriate Box if a Member of a Group (See Instructions)
		(a)			o
		(b)			ý

	3.	SEC Use Only

	4.	Source of Funds (See Instructions) Not applicable.

	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) o

	6.	Citizenship or Place of Organization California

Number of Shares Beneficially Owned by Each Reporting Person With			7.	Sole Voting Power 2,167,875 (2,082,353 of which are issuable upon the conversion of 177,000 shares of Series D-1 Cumulative Preferred Stock)

			8.	Shared Voting Power -0-

			9.	Sole Dispositive Power 2,167,875 (2,082,353 of which are issuable upon the conversion of 177,000 shares of Series D-1 Cumulative Preferred Stock)

			10.	Shared Dispositive Power -0-

	11.	Aggregate Amount Beneficially Owned by Each Reporting Person 2,167,875 (2,082,353 of which are issuable upon the conversion of 177,000 shares of Series D-1 Cumulative Preferred Stock)

	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) o

	13.	Percent of Class Represented by Amount in Row (11) 13.08%

	14.	Type of Reporting Person (See Instructions) IA, OO

	1.	Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only) OCM Principal Opportunities Fund, L.P.

	2.	Check the Appropriate Box if a Member of a Group (See Instructions)
		(a)			o
		(b)			ý

	3.	SEC Use Only

	4.	Source of Funds (See Instructions) OO

	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) o

	6.	Citizenship or Place of Organization Delaware

Number of Shares Beneficially Owned by Each Reporting Person With			7.	Sole Voting Power 2,167,875 (2,082,353 of which are issuable upon the conversion of 177,000 shares of Series D-1 Cumulative Preferred Stock)

			8.	Shared Voting Power -0-

			9.	Sole Dispositive Power 2,167,875 (2,082,353 of which are issuable upon the conversion of 177,000 shares of Series D-1 Cumulative Preferred Stock)

			10.	Shared Dispositive Power -0-

	11.	Aggregate Amount Beneficially Owned by Each Reporting Person 2,167,875 (2,082,353 of which are issuable upon the conversion of 177,000 shares of Series D-1 Cumulative Preferred Stock)

	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) o

	13.	Percent of Class Represented by Amount in Row (11) 13.08%

	14.	Type of Reporting Person (See Instructions) PN

Item 1.	Security and Issuer
This Amendment No. 6 (this “Amendment”) amends and supplements, pursuant to Rule 13d-2(a), the Schedule 13D (the “Schedule 13D”) of Oaktree Capital Management, LLC (“Oaktree”) and OCM Principal Opportunities Fund, L.P. (the “Principal Opportunities Fund”), filed with the Securities and Exchange Commission on May 21, 1999. This Amendment relates to the Common Stock, par value $0.01 per share (“Common Stock”), and the Series D-1 Cumulative Preferred Stock, par value $0.01 per share (the “Series D-1 Preferred Stock”) of CollaGenex Pharmaceuticals, Inc., a Delaware corporation, (the “Issuer”). Unless otherwise defined herein, all capitalized terms shall have the meanings ascribed to them in the Schedule 13D.
The Executive Officers & Members of Oaktree listed in Item 2 are hereby amended as follows:
Item 2.	Identity and Background
Executive Officers & Members

Howard S. Marks		Chairman and Principal
Bruce A. Karsh		President and Principal
Sheldon M. Stone		Principal
David Richard Masson		Principal
Larry W. Keele		Principal
Stephen A. Kaplan		Principal
David Kirchheimer		Principal and Chief Financial and Administrative Officer
John Frank		Principal and General Counsel
Kevin Clayton		Principal

Item 3 is hereby amended and restated in its entirety as follows:

Item 3.	Source and Amount of Funds or Other Consideration
The Principal Opportunities Fund, the Issuer and certain other persons entered into a certain Stock Purchase Agreement dated March 19, 1999 (the “Purchase Agreement”), pursuant to which the Principal Opportunities Fund agreed to purchase from the Issuer and the Issuer agreed to sell to the Principal Opportunities Fund 177,000 shares of the Series D Cumulative Convertible Preferred Stock of the Issuer, $0.01 par value per share (the “Series D Preferred Stock”), subject to the terms and conditions set forth in the Purchase Agreement. The Principal Opportunities Fund used $17,700,000 of funds obtained from its working capital for the acquisition of such shares of Series D Preferred Stock. The Series D Preferred Stock had a conversion price of $11.00 per share, which was subsequently reduced to $9.89 per share.
On December 15, 2005 each of the holders of the outstanding shares of the Series D Preferred Stock (including the Principal Opportunities Fund) and the Issuer entered into a

restructuring and exchange agreement, (the “Restructuring and Exchange Agreement”) pursuant to which, among other things, the parties agreed to effect an exchange (the “Exchange”), whereby the Issuer shall exchange all 200,000 outstanding shares of the Issuer’s Series D Preferred Stock for 200,000 shares of the Issuer’s Series D-1 Preferred Stock, which has substantially the same terms as the Series D Preferred Stock, except that the conversion price is $8.50 per share.
As a result of the Exchange, the Principal Opportunities Fund now holds 177,000 shares of the Series D-1 Preferred Stock which may be converted, at the option of the Principal Opportunities Fund, at any time and from time to time, in whole or in part, into 2,082,353, fully paid and nonassessable shares of Common Stock. The number of shares of Common Stock that would been issuable upon conversion of the Series D Preferred Stock was 1,789,072.
Pursuant to the Certificate of Designation, Preference and Rights of the Series D-1 Preferred Stock (the “D-1 Certificate of Designation”), the holders of Series D-1 Preferred Stock are entitled to receive when, as and if declared by the Board of Directors of the Issuer, dividends on each share of Series D-1 Preferred Stock. The Principal Opportunities Fund has not received any dividend payments pursuant to the D-1 Certificate of Designation, but has, in the past, received seven dividend payments of Common Stock pursuant to the Certificate of Designation, Preference and Rights of the Series D Preferred Stock totaling 638,733 shares, and has sold an aggregate of 575,800 of these shares, all of which sales have been previously reported on this Schedule 13D.
Item 4 is hereby amended and restated in its entirety as follows:
Item 4.	Purpose of Transaction
The Principal Opportunities Fund currently holds shares of the Issuer’s Series D-1 Preferred Stock and Common Stock for investment purposes subject to the next paragraph.
Oaktree, as the general partner of the Principal Opportunities Fund, continuously evaluates the Issuer’s businesses and prospects, alternative investment opportunities and all other factors deemed relevant in determining whether additional shares of the Issuer’s Series D-1 Preferred Stock and Common Stock will be acquired by the Principal Opportunities Fund, or by other accounts and funds of which Oaktree is the general partner and/or investment manager or whether the Principal Opportunities Fund or any such other accounts or funds will dispose of shares of the Issuer’s Series D-1 Preferred Stock and Common Stock. At any time, additional shares of the Series D-1 Preferred Stock and Common Stock may be acquired or some or all of the shares of the Issuer’s Series D-1 Preferred Stock and Common Stock beneficially owned by Oaktree and the Principal Opportunities Fund may be sold, in either case in the open market, in privately negotiated transactions or otherwise.
Pursuant to the Restructuring and Exchange Agreement, the holders of the Series D Preferred Stock have agreed to, among other things (i) permanently waive their right to approve the Company’s research and development expenditures in excess of $7.0 million annually in

exchange for a reduction in the conversion price of the Series D Preferred Stock from $9.89 per share to $8.50 per share for the Series D-1 Preferred Stock and (ii) a reduction in the number of consecutive trading days during which the closing price of the Company’s common stock must exceed two times the conversion price of the Series D-1 Preferred Stock before the Company can require mandatory conversion of the Series D-1 Preferred Stock into common stock from 40 trading days to 30 trading days.
Except as otherwise disclosed herein, Oaktree currently has no agreements, beneficially or otherwise, which would be related to or would result in any of the matters described in Items 4(a)-(j) of Schedule 13D; however, as part of its ongoing evaluation of this investment and investment alternatives, Oaktree may consider such matters and, subject to applicable law, may formulate a plan with respect to such matters, and, from time to time, Oaktree may hold discussions with or make formal proposals to management or the Board of Directors of the Issuer, other shareholders of the Issuer or other third parties regarding such matters.
Item 5 is hereby amended and restated as follows:
Item 5.	Interest in Securities of the Issuer
(a) The Principal Opportunities Fund owns and has sole power to vote and dispose of 177,000 shares of Series D-1 Preferred Stock, which shares are convertible into 2,082,353 shares of the Issuer’s Common Stock (approximately 12.57%(1) of the outstanding shares of Common Stock). The Principal Opportunities Fund owns and has the sole power to vote and dispose of 62,933 shares of Common Stock (approximately 0.38%(1) of the outstanding shares of Common Stock). In addition, the Principal Opportunities Fund has the sole power to vote and dispose of 22,589 shares of the Issuer’s Common Stock (approximately 0.14%(1) of the outstanding shares of Common Stock) upon the exercise of certain stock options granted to Stephen A. Kaplan, a former non-employee director of the Issuer. Mr. Kaplan is currently and was, at the time of the issuance of the stock options, a Principal of Oaktree and the co-portfolio manager of the Principal Opportunities Fund. Pursuant to the policies of Oaktree, Mr. Kaplan could not retain any stock options granted to him by the Issuer while serving as a director of the Issuer. Mr. Kaplan assigned all beneficial and voting interests of the stock options and the underlying common shares to the Principal Opportunities Fund. If the Principal Opportunities Fund converted all of its shares of Series D-1 Preferred Stock into shares of Common Stock and exercised the stock options referenced above, then the Principal Opportunities Fund would own and have the sole power to vote and dispose of 2,167,875 shares of Common Stock (approximately 13.08% of the outstanding shares of Common Stock).
Oaktree, in its capacity as the general partner of the Principal Opportunities Fund, may be deemed to beneficially own the 177,000 shares of Series D-1 Preferred Stock owned by the Principal

(1) For the purpose of reporting percentages herein, as of December 15, 2005, there are 16,570,900 shares of the Issuer’s Common Stock outstanding, represented by (i) 14,488,547 shares reported outstanding by the Issuer in its most recent 10-Q filed October 31, 2005 and (ii) 2,082,353 shares of Common Stock issuable to the Principal Opportunities Fund upon conversion of the Series D-1 Preferred Stock.

Opportunities Fund, the 62,933 shares of Common Stock owned by the Principal Opportunities Fund, and the 22,589 shares of the Common Stock upon exercise of the stock options referenced above. Oaktree and each of the individuals listed in Item 2 disclaim ownership of the shares of the Issuer’s Series D-1 Preferred Stock and Common Stock (including any option shares) held by the Principal Opportunities Fund and the filing of this Schedule 13D shall not be construed as an admission that any such person is the beneficial owner of any securities covered by this Schedule 13D.
Stephen A. Kaplan, a principal of Oaktree and a portfolio manager of the Principal Opportunities Fund, individually owns and has the sole power to vote and dispose of approximately Three Thousand (3,000) shares of Common Stock of the Issuer. Mr. Kaplan acquired these securities in transactions prior to and unrelated to the Purchase Agreement. The securities owned by Mr. Kaplan in his capacity as an individual are not covered by this Schedule 13D
(b) Oaktree has discretionary authority and control over all of the assets of the Principal Opportunities Fund pursuant to its status as general partner, including power to vote and dispose of the Issuer’s Series D Preferred Stock or the Issuer’s Common Stock. Therefore, as of the date hereof, Oaktree has the power to vote and dispose of 177,000 shares of the Series D Preferred Stock and 62,933 shares of Common Stock. Alternatively, upon the conversion of the shares of Series D-1 Preferred Stock into shares of Common Stock, and the exercise of the options granted to Mr. Kaplan convertible into 22,589 shares of Common Stock, Oaktree will have the power to vote and dispose of 2,167,875 shares of Common Stock.
(c) In connection with the Exchange under the Restructuring and Exchange Agreement (attached hereto as Exhibit 2) and pursuant to the Certificate of Incorporation and the D-1 Certificate of Designation (attached hereto as Exhibit 3), the Issuer issued 200,000 shares and fixed the designations and preferences of the Series D-1 Preferred Stock.
(d) Except as disclosed in this Schedule 13D, to the knowledge of Oaktree and the Principal Opportunities Fund, none of the persons named in Item 2 beneficially owns any shares of the Issuer’s Common Stock, nor have any transactions in Issuer’s Common Stock been effected by any of the persons named in Item 2 during the past 60 days. In addition, no other person is known by Oaktree and Principal Opportunities Fund to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities covered by this Schedule 13D.
(e) Not applicable
Item 6 is hereby supplemented to add the following:
Item 6.	Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer
On December 15, 2005, the Principal Opportunities Fund and other holders of the Series D Preferred Stock entered into the Restructuring and Exchange Agreement with the Issuer, the form of which is attached hereto as Exhibit 2 to this Amendment 6.
Item 7 is hereby supplemented to add the following:

Item 7.

Material to Be Filed as Exhibits

Exhibit 2		The Restructuring and Exchange Agreement, dated as of December 15, 2005 between each of the holders of the outstanding shares of the Series D Preferred Stock and the Issuer.

Exhibit 3		CollaGenex Pharmaceuticals, Inc. Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock.

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

Dated as of December 20, 2005.

OAKTREE CAPITAL MANAGEMENT, LLC


By:	/s/ John Frank
	John Frank
	Principal and General Counsel

By:	/s/ Alan Adler
	Alan Adler
	Vice President, Legal


OCM PRINCIPAL OPPORTUNITIES FUND, L.P.
By:	Oaktree Capital Management, LLC, its general partner

By:	/s/ John Frank
	John Frank
	Principal and General Counsel


By:	/s/ Alan Adler
	Alan Adler
	Vice President, Legal

Exhibit 1

JOINT FILING AGREEMENT

Each of the undersigned acknowledges and agrees that the foregoing statement on Schedule 13D is filed on behalf of the undersigned and that all subsequent amendments to this statement on Schedule 13D shall be filed on behalf of the undersigned without the necessity of filing additional joint acquisition statements. Each of the undersigned acknowledges that it shall be responsible for the timely filing of such amendments, and for the completeness and accuracy of the information concerning it contained therein, but shall not be responsible for the completeness and accuracy of the information concerning the other, except to the extent that he or it knows or has reason to believe that such information is inaccurate.

Dated as of December 20, 2005

OAKTREE CAPITAL MANAGEMENT, LLC

By:	/s/ John Frank
	John Frank
	Principal and General Counsel

By:	/s/ Alan Adler
	Alan Adler
	Vice President, Legal

OCM PRINCIPAL OPPORTUNITIES FUND, L.P.
By:	Oaktree Capital Management, LLC,
its general partner

By:	/s/ John Frank
	John Frank
	Principal and General Counsel

By:	/s/ Alan Adler
	Alan Adler
	Vice President, Legal

EX-2 2 a05-22160_1ex2.htm PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION

Exhibit 2

Execution Copy

COLLAGENEX PHARMACEUTICALS, INC.

Restructuring and Exchange Agreement

This Restructuring and Exchange Agreement (this “Agreement”) is dated as of December 15, 2005, by and among CollaGenex Pharmaceuticals, Inc., a Delaware corporation (the “Company”) and the holders of outstanding Series D Cumulative Convertible Preferred Stock, $0.01 par value per share (the “Series D Preferred Stock”) of the Company set forth on the signature pages hereto (each a “Series D Holder” and collectively the “Series D Holders”).

W I T N E S S E T H:

WHEREAS, as of the date hereof, there are outstanding 200,000 shares of Series D Preferred Stock held by the Series D Holders; and

WHEREAS, the Series D Holders have agreed to, among other things, waive certain voting rights pursuant to the terms and conditions more fully set forth in this Agreement, and in consideration therefor, the Company has agreed to, among other things, reduce the conversion price of the shares of preferred stock of the Company held by such Holders from $9.89 to $8.50; and

WHEREAS, in order to achieve the foregoing, each Series D Holder has been granted the right by the Company to surrender for exchange his, her or its Series D Preferred for the Company’s Series D-1 Cumulative Convertible Preferred Stock, par value $0.01 per share (the “Series D-1 Preferred”) on the terms set forth herein; and

WHEREAS, reference is hereby made to that certain Stockholders and Registration Rights Agreement, dated as of March 19, 1999, as amended, by and among the Company, OCM Principal Opportunities Fund, L.P. (“OCM”) and the purchasers named therein (the “Stockholders Agreement”); and

WHEREAS, reference is hereby made to that certain Stock Purchase Agreement, dated as of March 19, 1999, by and among the Company, OCM and the purchasers named therein (the “Stock Purchase Agreement”); and

WHEREAS, pursuant to Section 10 of the Stockholders Agreement (i) any terms and provisions of the Stockholders Agreement may be modified, amended or waived with the written consent of the holders of at least sixty-six and 67/100 percent (66.67%) of the shares of Series D Preferred Stock, and (ii) any rights under the Stockholders Agreement applicable to OCM may be waived without the consent of the Company, the other Series D Holders or any other stockholders of the Company; and

WHEREAS, on September 15, 2005, the Company filed a Registration Statement on Form S-3 (the “Shelf Registration Statement”) with the Securities and Exchange Commission (the “Commission”) with respect to a total dollar amount of $50.0 million of common stock, $.01 par value per share (the “Common Stock”), of the Company (the “Shares”).

NOW, THEREFORE, in consideration of the conditions and mutual covenants set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Company, the Series D Holders, and OCM individually, where applicable, agree as follows:

1. Agreement to Exchange Shares. Pursuant to the terms and conditions set forth in this Agreement, at the Closing (as defined in Section 3.1 below), each Series D Holder agrees to surrender to the Company certificates representing the number of shares of Series D Preferred set forth opposite such Holder’s name on the attached Schedule I, and the Company agrees to accept such certificates and, in exchange therefor, issue to each such Series D Holder that number of shares of Series D-1 Preferred set forth opposite such Holder’s name on the attached Schedule I.

2. Series D-1 Preferred. The terms, limitations and relative rights, privileges and preferences of the Series D-1 Preferred issued in connection with the transactions contemplated by Section 1 are set forth in the Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock, the form of which is attached hereto as Exhibit A.

3. Closing, Delivery.

3.1 Closing. Subject to the terms and conditions hereof, the closing of the transactions contemplated by Section 1 above (the “Closing”) shall be made at the offices of Wilmer Cutler Pickering Hale and Dorr, LLP, 60 State Street, Boston, MA 02109 (or at such other place as shall be agreed upon by the Series D Holders and the Company), at

10:00 A.M., New York City time, on December 21, 2005 (unless another time shall be agreed to by the Series D Holders and the Company).

3.2 Delivery. At the Closing, subject to the terms and conditions hereof, each Series D Holder shall deliver to the Company the certificate(s) evidencing the ownership of the shares of Series D Preferred to be surrendered by such Holder at the Closing as set forth opposite such Holder’s name on Schedule I attached hereto and, only in exchange therefor, the Company shall deliver to each such Holder the certificate(s) evidencing ownership of the number of shares of Series D-1 Preferred to be issued to each such Holder at such Closing as set forth opposite such Holder’s name on Schedule I attached hereto. In the event that any Series D Holder that is a party to this Agreement does not deliver to the Company at the Closing certificate(s) evidencing ownership of the Series D Preferred, the Company shall cancel any such certificates on the Company’s books and records and the Company shall withhold delivery to any such Holder any certificates evidencing ownership of the number of shares of Series D-1 Preferred to be issued to such Holder at the Closing until such time as any such Holder delivers the certificates for the Series D Preferred to the Company.

3.3 Retirement. All certificates evidencing Series D Preferred shall, once surrendered to the Company for exchange in accordance with this Agreement, be forthwith retired and canceled and shall not be reissued, and, except as contemplated hereby, no other securities of the Company shall be issued in place thereof, but the Company may, nevertheless, from time to time thereafter increase its capital stock in the manner and to the extent permitted by law and by the Company’s Amended and Restated Certificate of Incorporation, as amended.

4. OCM Waiver of Certain Provisions of the Stockholder Agreement. Subject to the terms and conditions hereof, OCM agrees: (i) to waive its right of first refusal under Section 4 of the Stockholders Agreement, if any, with respect to the sale by the Company of the Shares; and (ii) to waive any breach by the Company prior to the date hereof, if any, under Sections 2 and 3 of the Stockholders Agreement. OCM further agrees, if requested, to execute an amendment to the Stockholders Agreement to reflect the provisions of this Section 4.

5. Waiver of Registration Rights. Subject to the terms and conditions hereof, each Series D Holder waives those provisions of the Stockholders Agreement with respect to the undersigned’s right, if any, to register shares of the Company’s capital stock held by each such Series D Holder under the Shelf Registration Statement or in connection with the sale of the Shares.

6. Registration of Shares of Common Stock Underlying Series D-1 Preferred Stock. The Company shall use commercially reasonable efforts to prepare and file with the Commission a registration statement (the “Registration Statement”) within 100 days of the date hereof covering the resale of all of the shares of Common Stock issuable upon conversion of the Series D-1 Preferred Stock (collectively, the “Conversion Shares”) and shares of Common Stock issued to the Series D Holders in connection with certain dividends for the period May 12, 1999 through June 30, 1999 (the “Dividend Shares”). The Registration Statement required hereunder shall be on Form S-3 (except if the Company is not then eligible to register the Conversion Shares and the Dividend Shares on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith). In addition, the Company shall prepare, execute and file with the Commission such amendments (including pre-effective and post-effective amendments) and supplements to the Registration Statement, as may be required under the Securities Act of 1933, as amended (the “Securities Act”). The Company shall use its commercially reasonable efforts to keep the Registration Statement effective in order to permit the prospectus included therein to be lawfully delivered by the Series D Holders until the expiration of the holding period set forth in clause (k) of Rule 144 promulgated under the Securities Act or such shorter period if all such Conversion Shares and Dividend Shares have been sold pursuant to the Registration Statement. It is understood and agreed by the parties hereto that upon effectiveness of the aforementioned registration statement that the Company shall immediately withdraw the Company’s Registration Statement on Form S-3 (Reg. No. 333-88697).

7. Amendment to Stock Purchase Agreement and Stockholders Agreement. All references to “Series D Preferred Stock” contained in the Stock Purchase Agreement and the Stockholders Agreement, where applicable, shall hereafter instead mean the Series D-1 Preferred Stock. On and after the date hereof, each reference to “Stock Purchase Agreement” or the “Stockholders Agreement,” as the case may be, shall mean and be a reference to those agreements as amended hereby. No reference to this Section 7 need be made in any instrument or document at any time referring to the Stock Purchase Agreement or the Stockholders Agreement, a reference to the Stock Purchase Agreement or the Stockholders Agreement, as applicable, in any of such instrument or document to be deemed to be a reference to the Stock Purchase Agreement and the Stockholders Agreement as amended hereby. Except as expressly amended by this Section 7, the provisions of the Stock Purchase Agreement and the Stockholders Agreement shall remain in full force and effect.

8. Reservation of Shares of Common Stock. The Company shall at all times take appropriate steps to reserve and keep available out of its authorized but unissued shares of Common Stock, shares of Common Stock for the purpose of effecting the conversion of the shares of Series D-1 into the Conversion Shares. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the shares of Series D-1 Preferred Stock, the Company shall forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. Notwithstanding the foregoing, the Company agrees to seek an increase in the number of authorized shares of Common Stock available for issuance under its Amended and Restated Certificate of Incorporation, as amended, at the Company’s Annual Meeting of Stockholders to be held in fiscal year 2006. Each Series D Holder agrees to vote, whether in person or by proxy, in favor of such proposal when presented at the Company’s Annual Meeting of Stockholders to be held in fiscal year 2006.

9. Representations and Warranties of the Company.

9.1 Authorization. The Company has all requisite corporate power and authority to execute and deliver this Agreement and any and all instruments necessary or appropriate in order to effectuate fully the terms and conditions contained herein and all related transactions and to perform its obligations hereunder. This Agreement has been duly authorized by all necessary action on the part of the Company, has been duly executed and delivered by the Company and constitutes the valid and legally binding obligation of the Company enforceable in accordance with its terms and conditions. The authorization, issuance, exchange and delivery of the Series D-1 Preferred issued hereunder, the reservation of the Conversion Shares and the Dividend Shares have been duly authorized by all requisite corporate action on the part of the Company.

9.2 Valid Issuance of the Series D-1 Preferred. The shares of Series D-1 Preferred, when issued in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and nonassessable and, assuming the accuracy of the Series D Holders’ representations in this Agreement at the time of each such issuance, issued in compliance with all applicable federal and state securities laws.

10. Representations and Warranties of the Series D Holders. Each Series D Holder, severally but not jointly, hereby represents and warrants to the Company as follows:

10.1 Enforceability. This Agreement and any and all agreements to be executed by each such Series D Holder pursuant to this Agreement and the transactions contemplated hereby, when executed and delivered by each such Series D Holder, will constitute the valid, binding and enforceable obligation of each Series D Holder.

10.2 Authorization; No Contravention. The execution, delivery and performance of the obligations of each Series D Holder hereunder (i) has been duly authorized by all necessary action of each Series D Holder, (ii) does not violate, conflict with or result in any breach or contravention of, or the creation of any lien under, any material contractual obligation of each Series D Holder or any requirement of law applicable to such Series D Holder, and (iii) does not violate any orders of any governmental authority against, or binding upon, such Series D Holder.

10.3 Governmental Authorization; Third Party Consents. No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any governmental authority or any other person, and no lapse of a waiting period under any requirement of law, is necessary or required in connection with the execution by, delivery or performance by, or enforcement against, the Series D Holders of this Agreement and each of the other documents to which they are parties or the transactions contemplated hereby and thereby.

10.4 Ownership. Each Series D Holder is the lawful record owner of the shares of Series D Preferred Stock held by such Series D Holder subject to this Agreement, and of all rights thereto, free and clear of all liens, claims, charges, encumbrances, restrictions, rights, options to purchase, proxies, voting trust and other voting agreements, calls or commitments of every kind, except as contemplated hereby.

10.5 Investment. Each Series D Holder is acquiring the Series D-1 Preferred and the Conversion Shares for his, her or its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same.

10.6 Accredited Investor. Such Series D Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act.

10.7 Legends. It is understood that the certificates evidencing the Series D-1 Preferred issued hereunder shall bear a legend substantially in the following form and such other legends that may be required under the laws of any applicable jurisdiction:

“These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act.”

10.8 Acknowledgements.

(a) The Series D Holders are fully aware of the Company’s business, operations and financial condition and has received or have had full access to all of the information, including the Company’s financial statements, they consider necessary or appropriate to make an informed decision with respect to the transactions discussed above.

(b) The Series D Holders have had the opportunity to ask questions of and receive answers from the Company and its executive officers and financial and legal advisors concerning the Company and have been furnished with all documents and other information about the Company that they have requested. The Series D Holders believe that they have been fully apprised of all facts and circumstances necessary to permit them to make an informed decision relating to the transactions contemplated hereby, that they have sufficient knowledge and experience in business and financial matters, are capable of evaluating the merits and risks of the transactions contemplated hereby and have the capacity to protect their own interests in connection with the transactions contemplated hereby.

11. Conditions to Closing.

11.1 Conditions to each Series D Holder’s Obligations at the Closing. Each Series D Holder’s obligations to surrender shares of Series D Preferred to be exchanged for shares of Series D-1 Preferred are subject to the satisfaction, at or prior to the Closing, of the following conditions:

(a) Representations and Warranties. The representations and warranties made by the Company in Section 9 hereof shall be true and correct in all material respects as of the date of Closing.

(b) Filing of Certificate Of Designation. The Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock shall have been filed with the Secretary of State of the State of Delaware and shall be in full force and effect and shall not have been modified in any manner.

11.2 Conditions to Obligations of the Company at the Closing. The Company’s obligation (i) to accept the shares of Series D Preferred surrendered at the Closing by the Series D Holders hereunder and (ii) to issue shares of the Series D-1 Preferred to the Series D Holders, in exchange therefor, is subject to the satisfaction, on or prior to the Closing, of the following conditions:

(a) Representations and Warranties. The representations and warranties made by each Series D Holder in Section 10 hereof shall be true and correct in all material respects as of the date of the Closing.

(b) Filing of Certificate Of Designation. The Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock shall have been filed with the Secretary of State of the State of Delaware and shall be in full force and effect and shall not have been modified in any manner.

12. Miscellaneous.

12.1 Governing Law; Jurisdiction. This Agreement shall be governed by and construed according to the laws of the State of Delaware, without regard to the conflict of laws provisions thereof. Any dispute arising under or in relation to this Agreement shall be resolved in a competent court in the State of Delaware, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.

12.2 Successors and Assigns; Assignment. Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the

parties hereto. None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned by a Series D Holder without the prior consent in writing of the Company.

12.3 Entire Agreement. This Agreement and all exhibits hereto, contain the entire understanding of the parties hereto, shall be binding on the parties hereto, their parents, subsidiaries, affiliates, heirs, executors, administrators and assigns. It is the only agreement between the parties with respect to the subject matter hereof and shall not be modified or varied by oral understandings. Any term of this Agreement may be amended and the observance of any term hereof may be waived only with the written consent of the Company.

12.4 Notices, etc. All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be faxed or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed to such party’s address as set forth below or at such other address as the party shall have furnished to each other party in writing in accordance with this provision:

	if to a Series D Holder:	To the address or facsimile number set forth on the signature page hereto

	if to the Company:	CollaGenex Pharmaceuticals, Inc.
		41 University Drive
		Newtown, PA 18940
		Facsimile: (215) 579-7388
		Attn: Andrew K.W. Powell

		with a copy to:

		Tod Reichert, Esq.
		Wilmer Cutler Pickering Hale and Dorr LLP
		60 State Street
		Boston, MA 02109
		Facsimile: (617) 526-5000

or such other address with respect to a party as such party shall notify each other party in writing as above provided. Any notice sent in accordance with this Section 12.4 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if sent by messenger, one (1) business day after delivery, and (iii) if sent via facsimile, one (1) business day after transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the second business day following transmission and electronic confirmation of receipt (provided, however, that any notice of change of address shall only be valid upon receipt).

12.5 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative.

12.6 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.

12.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.

*****

IN WITNESS WHEREOF, the parties have executed this Restructuring and Exchange Agreement as of the date first herein above set forth.

COLLAGENEX PHARMACEUTICALS, INC.


By:
Name:
Title:

HOLDERS OF SERIES D PREFERRED STOCK:

OCM Principal Opportunities Fund, L.P.		Pebblebrook Partners Ltd.
By: Oaktree Capital Management, LLC, its general partner
		By:
			Name:
By:			Title:
	Name: Stephen A. Kaplan		Date:
	Title: Principal		Facsimile:
	Date:
	Facsimile:

By:
	Name: Vincent J. Cebula
	Title: Managing Director
	Date:
	Facsimile:


MVP II Affiliates Fund, L.P.		Marquette Venture Partners II, L.P.


By:		By:
	Name:		Name:
	Title:		Title:
	Date:		Date:
	Facsimile:		Facsimile:



Robert J. Easton		Richard A. Horstmann
Date:		Date:
Facsimile:		Facsimile:

Schedule I

Name and Address of Series D Holders	No. of Shares of Series D Preferred Surrendered	No. of Shares of Series D-1 Preferred Issued in Exchange for Series D Preferred

OCM Principal Opportunities Fund, L.P. c/o Oaktree Capital Management, LLC 333 South Grand Avenue, 28^th Floor Los Angeles, CA 90071	177,000	177,000

Pebblebrook Partners Ltd. c/o Stuart Schube 6234 Rutgers Street Houston, Texas 77005	1,000	1,000

MVP II Affiliates Fund, L.P. Marquette Venture Partners 520 Lake Cook Road, Suite 450 Deerfield, Illinois 60015	278	278

Marquette Venture Partners II, L.P. Marquette Venture Partners 520 Lake Cook Road, Suite 450 Deerfield, Illinois 60015	9,722	9,722

Robert J. Easton Easton Associates 555 Fifth Avenue, 7^th Floor New York, New York 10110	2,000	2,000

Richard A. Horstmann 31 Boulderwood Drive Bernardsville, New Jersey 07924	10,000	10,000

EXHIBIT A

CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES D-1 CUMULATIVE CONVERTIBLE PREFERRED STOCK

EX-3 3 a05-22160_1ex3.htm (I) ARTICLES OF INCORPORATION; (II) BYLAWS

Exhibit 3

COLLAGENEX PHARMACEUTICALS, INC.
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS
OF THE
SERIES D-1 CUMULATIVE CONVERTIBLE PREFERRED STOCK

CollaGenex Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter referred to as the “Corporation”), pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware (the “DGCL”), does hereby make this Certificate of Designation under the corporate seal of the Corporation and does hereby state and certify that pursuant to the authority vested in the Board of Directors of the Corporation by the Corporation’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) the Board of Directors has duly adopted the following resolutions:

RESOLVED, that pursuant to Article Fifth of the Certificate of Incorporation (which authorizes five million (5,000,000) shares of Preferred Stock, par value $0.01 per share, of which 200,000 shares of Series D Cumulative Convertible Preferred Stock are presently issued and outstanding and 150,000 shares of which are designated as Series A Participating Preferred Stock), the Board of Directors hereby fixes the designations and preferences and relative participating, optional and other special rights and qualifications, limitations and restrictions of a series of Preferred Stock consisting of 200,000 shares to be designated as Series D-1 Cumulative Convertible Preferred Stock.

Series D-1 Cumulative Convertible Preferred Stock

RESOLVED, that the holders of Series D-1 Cumulative Convertible Preferred Stock, except as otherwise provided by law, shall have and possess the following rights and preferences.

A. Series D-1 Convertible Cumulative Preferred Stock.

1. Designation, Number of Shares. This series of Preferred Stock shall be designated as Series D-1 Cumulative Convertible Preferred Stock (“Series D-1 Preferred Stock”), and the number of shares that shall constitute such series shall be 200,000. The par value of Series D-1 Preferred Stock shall be $0.01 per share.

2. Rank. With respect to dividend rights and rights on liquidation, winding up and dissolution of the Corporation, Series D-1 Preferred Stock shall rank senior to:

(i) the Common Stock, par value $0.01 per share (“Common Stock”), of the Corporation; and

(ii) each other class of capital stock or class or series of preferred stock issued by the Corporation after the date hereof (in accordance with Paragraph A.8.(b)(ii) hereof), the terms of which shall specifically provide that such class or series shall rank junior to Series D-1 Preferred Stock as to dividend distributions or distributions upon liquidation, winding up and dissolution of the Corporation (each of the securities in clauses (i) and (ii) above collectively referred to as “Junior Securities”).

3. Dividend Provisions.

(a) Each holder of Series D-1 Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cash dividends on each

share of Series D-1 Preferred Stock at a rate equal to nine percent (9%) per share per annum, subject to increase as set forth in Section A.3.(b) and Section A.3.(g).

(b) All dividends shall be cumulative, whether or not earned or declared, and shall accrue on a daily basis beginning on July 1, 2005 (whether or not funds are legally available for the declaration and/or payment of such dividends), and shall be payable semi-annually in arrears on each Dividend Payment Date (as defined in Paragraph B. hereof), commencing on the first Dividend Payment Date after the date of the original issuance of such Series D-1 Preferred Stock. Each dividend on Series D-1 Preferred Stock shall be payable to the holders of record of Series D-1 Preferred Stock as they appear on the stock register of the Corporation on such record date as may be fixed by the Board of Directors, which record date shall not be less than ten (10) nor more than sixty (60) calendar days prior to the applicable Dividend Payment Date. The annual dividend rate referenced above in Paragraph A.3.(a) shall increase by one percent (1%) per annum on May 19, 2006 and each subsequent anniversary thereof until the earlier of the date that all of the shares of Series D-1 Preferred Stock are (i) converted into shares of Common Stock in accordance with Paragraph A.5. hereof, or (ii) redeemed in accordance with Paragraph A.6. hereof.

(c) Dividends shall cease to accrue in respect of any shares of Series D-1 Preferred Stock on the date such shares are (i) converted into shares of Common Stock in accordance with Paragraph A.5. hereof, or (ii) are redeemed in accordance with Paragraph A.6. hereof.

(d) Accrued dividends on the Series D-1 Preferred Stock, if not paid on the first or any subsequent Dividend Payment Date following accrual, shall thereafter accrue additional dividends (“Additional Dividends”) in respect thereof, compounded semi-annually, at the rate specified hereinabove in Paragraph A.3.(a) hereof or as specified hereinbelow in Paragraph A.3.(g) hereof.

(e) All dividends paid with respect to shares of Series D-1 Preferred Stock pursuant to Paragraph A.3.(a) shall be paid pro rata to the holders of Series D-1 Preferred Stock of record entitled thereto.

(f) Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the holders of Series D-1 Preferred Stock of record on any date as may be fixed by the Board of Directors, which date is not more than thirty (30) calendar days prior to the payment of such dividends.

(g) The dividend payable to holders of Series D-1 Preferred Stock as set forth above in Paragraph A.3.(a) shall be doubled (the “Default Dividends”), which Default Dividends shall be payable in either cash or Common Stock at the choosing of each holder of Series D-1 Preferred Stock upon the occurrence and during the continuance of any of the following events (each an “Event of Default” and collectively the “Events of Default”) not cured or not curable, upon the giving of written notice thereof to the Corporation by the holders of a majority of the shares of Series D-1 Preferred Stock then outstanding:

(i) in the event that the Corporation does not (A) declare the dividend payable on the shares of Series D-1 Preferred Stock within thirty (30) calendar days of the Dividend Declaration Date, (B) fulfill its dividend payment obligation in full for the Series D-1 Preferred Stock, as set forth herein, within thirty (30) calendar days after said dividend payment is due and payable, or (C) fulfill its dividend payment obligation in the form of either cash or stock as required herein; or

(ii) in the event that the Corporation shall have materially breached any of the representations and warranties contained in any of the Stock Purchase Agreement, the Stockholders and Registration Rights Agreement or the Exchange Agreement and any registration statement filed by the Company in relation thereto; or

(iii) in the event that the Corporation shall have materially breached any of the covenants or agreements contained in any of the Stock Purchase Agreement, the Stockholders and Registration Rights Agreement, the Exchange Agreement or Section A.5(m) of this Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock and such breach shall not have been cured to the satisfaction of the holders of record of a majority of the shares of Series D-1 Preferred Stock then outstanding within thirty (30) calendar days after the date of giving of notice of such breach to the Corporation; or

(iv) in the event of the acceleration of any indebtedness of the Corporation with a principal amount in excess of One Million Dollars ($1,000,000); or

(v) in the event of the receipt of a final non-appealable judgment against the Corporation in an amount that is uninsured in excess of One Million Dollars ($1,000,000); or

(vi) in the event that the Corporation shall (A) apply for or consent to the appointment of a receiver, trustee or liquidator for the Corporation or any of its property; (B) admit in writing its inability to pay debts as they mature; (C) make a general assignment for the benefit of Creditors; (D) be adjudicated bankrupt or insolvent; (E) file a voluntary petition in bankruptcy, a petition or answer seeking reorganization or an arrangement with creditors to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law; or (F) have failed to have an involuntary petition in bankruptcy filed against it dismissed and discharged within sixty (60) calendar days after the date of such filing; corporate actions shall be taken for the purpose of effecting any of the foregoing; or an order, judgment or decree shall be entered without the application, approval or consent of the Corporation, by any court of competent jurisdiction, approving a petition seeking reorganization of the Corporation or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for sixty (60) calendar days (a “Bankruptcy”); or

(vii) in the event that either (A) any court of competent jurisdiction finds that any of the patents owned or licensed by the Corporation are invalid in any material respect; or (B) any of the patents owned or licensed by the Corporation materially infringe upon any other patent; provided, however, that in the event of either (A) or (B), Investor, in good faith, determines that such finding will have a Material Adverse Effect on the Corporation; or

(viii) if at any time after the date the first share of Series D-1 Preferred Stock is issued, shares of Common Stock are not actively publicly traded on the American Stock Exchange, NASDAQ or NYSE; or

(ix) in the event that the Corporation consolidates or merges the Corporation with or into any other corporation or corporations, or sells, conveys or disposes of all or substantially all of the assets of the Corporation or enters into a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is sold or otherwise disposed of (a “Change in Control”).

In addition to the foregoing, in the event that the Board of Directors continues to fail to declare and pay accrued dividends and/or Default Dividends on the shares of Series D-1 Preferred Stock after the Corporation has been notified of an Event of Default in accordance with Paragraph A.3.(g)(i) hereof, which is not curable or has not been cured within the period of time prescribed for the Corporation to effectuate such a cure, the holders of record of a majority of shares of Series D-1 Preferred Stock shall have the option, during the continuance of such an Event of Default, to elect to have the Conversion Price reset to the then fair market value of the Common Stock of the Corporation, as determined by using the five (5) day trailing average closing price of the Common Stock of the Corporation, as reported on

NASDAQ. Any reset of the Conversion Price hereunder shall be effective on the day immediately after the date of the holders’ notice to the Corporation.

Notwithstanding the foregoing, in the event that the Corporation is unable to meet its obligation to pay cash dividends in the form of cash because of (a) a deficiency in the cash position of the Corporation such that the payment of such dividends in cash would have a Material Adverse Effect on the Corporation, or (b) a prohibition by the DGCL, then the Corporation shall be permitted to pay Default Dividends in shares of Common Stock during such time the condition described in this paragraph continues.

(h) The holders of Series D-1 Preferred Stock shall be entitled to receive the dividends provided for in Paragraph A.3.(a) hereof in preference to and in priority over any dividends upon any of the Junior Securities. Such dividends on the Series D-1 Preferred Stock shall be cumulative, whether or not earned or declared, so that if at any time full Accumulated Dividends (as defined in Paragraph B. of this Agreement) on all shares of Series D-1 Preferred Stock then outstanding have not been paid for all Dividend Periods then elapsed and a prorated dividend on the Series D-1 Preferred Stock at the rate aforesaid from the Dividend Payment Date immediately preceding the Junior Payment Date (as defined below) to the Junior Payment Date have not been paid or set aside for payment, the amount of such unpaid dividends shall be paid before any sum shall be set aside for or applied by the Corporation to the purchase, redemption or other acquisition for value of any shares of Junior Securities (either pursuant to any applicable sinking fund requirement or otherwise) or any dividend or other distribution shall be paid or declared and set apart for payment on any Junior Securities (the date of any such actions to be referred to as the “Junior Payment Date”); provided, however, that the restrictions set forth in this sentence shall not apply to the purchase or other acquisition of Junior Securities pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted.

(i) Dividends payable on Series D-1 Preferred Stock for any period less than one (1) year shall be computed on the basis of a 360-day year consisting of twelve 30-day months plus the actual number of calendar days elapsed in the month for which such dividends are payable.

4. Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of all shares of Series D-1 Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount in cash equal to One Hundred Dollars ($100.00) in cash per share, plus an amount equal to full cumulative dividends (whether or not earned or declared) accrued and unpaid thereon, including Default Dividends and Additional Dividends, to the date of final distribution and no more, before any distribution is made on any Junior Securities. After payment in full pursuant to this Paragraph A.4., the holders of Series D-1 Preferred Stock shall not be entitled to any further participation in any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation.

5. Conversion.

(a) Right of Conversion. Each share of Series D-1 Preferred Stock shall be convertible, at the option of the holder thereof, at any time, and from time to time, after the date of issuance of such share, at the office of the Corporation or any transfer agent for the Series D-1 Preferred Stock, into such number of fully paid, registered, non-assessable shares of Common Stock as is determined by dividing One Hundred Dollars ($100.00) by the Conversion Price. The “Conversion Price” for the Series D-1 Preferred Stock shall be Eight Dollars and Fifty Cents ($8.50) per share. The Conversion Price for the Series D-1 Preferred Stock shall be subject to adjustment as set forth in Paragraph A.5.(c) hereof.

(b) Procedures for Voluntary Conversion. Before any holder of shares of Series D-1 Preferred Stock shall be entitled to convert any of such shares into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series D-1 Preferred Stock, and shall give written notice by mail, postage prepaid, or hand delivery, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holders of shares of Series D-1 Preferred Stock, or to the nominee or nominees of such holders, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series D-1 Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering the Series D-1 Preferred Stock for conversion, be conditioned upon the effectiveness of such offering, in which event the person(s) entitled to receive Common Stock issuable upon such conversion of the Series D-1 Preferred Stock shall not be deemed to have converted such Series D-1 Preferred Stock until immediately prior to the effectiveness of such offering and the Corporation shall deliver to such holders tendering Series D-1 Preferred Stock for conversion written notice of the anticipated date of such effectiveness no less than ten (10) calendar days prior thereto.

(c) Adjustments of Conversion Price. So long as any shares of Series D-1 Preferred Stock are outstanding, the Conversion Price of the Series D-1 Preferred Stock shall be subject to adjustment from time to time as follows:

(i) (A) Upon issuance (or deemed issuance pursuant to the provisions hereof) by the Corporation of any Additional Stock (as defined below) after the date of the filing of this Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock, without consideration or for an Effective Price per share, or, in the case of Convertible Securities, a conversion price per share, less than the Conversion Price for the Series D-1 Preferred Stock in effect immediately prior to the issuance (or deemed issuance) of such Additional Stock, then the Conversion Price for the Series D-1 Preferred Stock in effect immediately prior to each (such issuance or deemed issuance) shall be adjusted to a price determined by the following formula: (A + B) / (C + D), where “A” equals the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the then applicable Conversion Price, where “B” equals the consideration, if any, received by the Corporation upon such issuance or sale, where “C” equals the total number of shares of Common Stock outstanding prior to issuance of the additional shares and where “D” equals any Additional Stock or any conversion shares, or any other shares reserved for issuance which are associated with such financing, immediately after such issuance or sale. See Exhibit A hereto for an example of the formula set forth herein.

(B) No adjustment of the Conversion Price for Series D-1 Preferred Stock shall be made in an amount less than one-half of One Cent ($0.005) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be taken into account in any subsequent adjustment to the Conversion Price. No adjustment of the Conversion Price for the Series D-1 Preferred Stock pursuant to this Paragraph A.5.(c)(i) shall have the effect of increasing such Conversion Price for the Series D-1 Preferred Stock above the Conversion Price in effect immediately prior to such adjustment.

(C) In the case of the issuance of securities of the Corporation for cash, the amount of consideration received by the Corporation for such securities shall be deemed to be the amount of cash paid therefor before deducting any discounts, commissions or other

expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof.

(D) In the case of the issuance of securities of the Corporation for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to have a dollar value equal to the fair market value of such non-cash consideration, irrespective of any accounting treatment thereof, as determined by a vote of the majority of the Board of Directors including the affirmative vote of the Series D-1 Preferred Director.

(E) In the case of the issuance (whether before, on or after the date of issuance of Series D-1 Preferred Stock) of Options or Convertible Securities, the following provisions shall apply for all purposes of this Paragraph A.5.(c)(i) and Paragraph A.5.(c)(ii) hereof:

(1) With respect to Options to purchase Common Stock, the aggregate maximum number of shares of Common Stock deliverable upon exercise of such Options shall be deemed to have been issued at the time such Options were issued and for a consideration equal to the consideration (determined in the manner provided in Subparagraph A.5.(c)(i)(C) and Subparagraph A.5.(c)(i)(D) hereof), if any, received by the Corporation for such Options plus the minimum exercise price provided in such Options for Common Stock issuable thereunder.

(2) With respect to Convertible Securities and Options to purchase Convertible Securities, the aggregate maximum number of shares of Common Stock deliverable upon the conversion or exchange of any such Convertible Securities and the aggregate maximum number of shares of Common Stock issuable upon the exercise of such Options to purchase Convertible Securities and the subsequent conversion or exchange of such Convertible Securities shall be deemed to have been issued at the time such Convertible Securities or such Options were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such Convertible Securities and Options, plus the minimum additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such Convertible Securities or the exercise of such Options and the conversion or exchange of the Convertible Securities issuable upon exercise of such Options (the consideration in each case to be determined in the manner provided in Subparagraphs A.5.(c)(i)(C) and A.5.(c)(i)(D) hereof).

(3) In the event of any change in the number of shares of Common Stock deliverable, or in the consideration payable to the Corporation, upon exercise of such Options or upon conversion or exchange of such Convertible Securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series D-1 Preferred Stock, to the extent in any way affected by or computed using such Options or Convertible Securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such Options or the conversion or exchange of such Convertible Securities.

(4) Upon the expiration or termination of any such Options or any such rights to convert or exchange Convertible Securities, the

Conversion Price of the Series D-1 Preferred Stock, to the extent in any way affected by or computed using such Options or Convertible Securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and Options and Convertible Securities which remain in effect) that were actually issued upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities.

(5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Subparagraphs A.5.(c)(i)(E)(1) and (2) hereof shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Subparagraph A.5.(c)(i)(E)(3) or (4) hereof.

(ii) “Additional Stock” shall mean any shares of Common Stock or shares of Common Stock issuable pursuant to Convertible Securities issued or Options (or deemed to have been issued pursuant to Paragraph A.5.(c)(i)(E) hereof) by the Corporation after the date of issuance of Series D-1 Preferred Stock, except:

(A) Common Stock issued pursuant to a transaction described in Paragraph A.5.(c)(iii) hereof;

(B) Common Stock or options to purchase such Common Stock issued to officers, employees or directors of, or consultants to, the Corporation, pursuant to any agreement, plan or arrangement approved by the Board of Directors of the Corporation; provided, however, that the maximum number of shares of Common Stock heretofore or hereafter issued or issuable pursuant to all such agreements, plans and arrangements shall not exceed an aggregate of Three Million One Hundred Seventeen Thousand Four Hundred Thirty Nine (3,117,439) shares of Common Stock (“Permitted Options”); and provided, further, that any option grant subsequent to the date of this Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock of CollaGenex Pharmaceuticals, Inc., which otherwise requires the approval of the board of directors, shall require, prior to the time of such grant, the approval of the Series D-1 Preferred Stock Director (as defined in Section 8(c) hereof); and

(C) Common Stock issued or issuable upon conversion of shares of Series D-1 Preferred Stock.

(iii) In the event the Corporation at any time or from time to time after the date of issuance of Series D-1 Preferred Stock fixes a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of shares of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series D-1 Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series D-1 Preferred Stock shall be increased in proportion to such increase in the aggregate number of shares issuable with respect to Common Stock Equivalents, with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Subparagraph A.5.(c)(i)(E) hereof.

(iv) If the number of shares of Common Stock outstanding at any time after the date of issuance of Series D-1 Preferred Stock is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series D-1 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series D-1 Preferred Stock shall be decreased in proportion to such decrease in the outstanding shares of Common Stock.

(d) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Paragraph A.5.(c)(iii) hereof, then, in each such case for the purpose of this Paragraph A.5.(d), the holders of shares of Series D-1 Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were holders of the number of shares of Common Stock into which their shares of Series D-1 Preferred Stock are convertible as of the record date fixed for the determination of the holders of shares of Common Stock entitled to receive such distribution.

(e) Recapitalization. If at any time or from time to time there shall be a recapitalization or reclassification of Common Stock (other than a subdivision, combination or consolidation, merger or sale of assets or stock transaction provided for in Paragraph A.6. hereof), provision shall be made so that each holder of shares of Series D-1 Preferred Stock shall thereafter be entitled to receive, upon conversion of the Series D-1 Preferred Stock, the number of shares of stock or other securities or property of the Corporation or otherwise, receivable upon such recapitalization or reclassification by a holder of the number of shares of Common Stock into which such shares of Series D-1 Preferred Stock could have been converted immediately prior to such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Paragraph A.5. with respect to the rights of the holders of shares of Series D-1 Preferred Stock after the recapitalization or reclassification to the end that the provisions of this Paragraph A.5. (including adjustments of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series D-1 Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

(f) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization or any other voluntary action, avoid or seek 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 the carrying out of all the provisions of this Paragraph A.5. and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of shares of Series D-1 Preferred Stock against impairment.

(g) No Fractional Shares. No fractional shares shall be issued upon conversion of the Series D-1 Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded upward to the nearest whole share, and there shall be no payment to a holder of shares of Series D-1 Preferred Stock for any such rounded fractional share. Whether or not fractional shares result from such conversion shall be determined on the basis of the total number of shares of Series D-1 Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion.

(h) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price of the Series D-1 Preferred Stock pursuant to this Paragraph A.5., the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of shares of Series D-1 Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, certified by the Corporation’s President or Chief Financial Officer. The Corporation shall, upon the written request at any time of any holder of shares of Series D-1 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such

adjustment and readjustment, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series D-1 Preferred Stock.

(i) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of shares of Series D-1 Preferred Stock, at least twenty (20) calendar days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

(j) Reservation of Stock Issuable Upon Conversion, Dividends. The Corporation shall at all times take appropriate steps to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series D-1 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series D-1 Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series D-1 Preferred Stock, then in addition to such other remedies as shall be available to the holder of such shares of Series D-1 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.

(k) Notices. Any notice required by the provisions of this Paragraph A.5. to be given to the holders of shares of Series D-1 Preferred Stock shall be deemed given when received if delivered via courier or sent by facsimile, by telex, or by United States mail, postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation.

(l) Mandatory Conversion.

(i) All or a portion of the shares of Series D-1 Preferred Stock shall, at the option of the Corporation (as determined by the Board of Directors), automatically be converted into fully paid, registered and non-assessable shares of Common Stock in accordance with Paragraph A.5.(a) above, if at any time after the date the first share of Series D-1 Preferred Stock is issued, the following two conditions are met:

(A) the Closing Common Stock Market Price (as defined in Paragraph B.(d) hereof) for thirty (30) consecutive trading days is at least two hundred percent (200%) of the Conversion Price then in effect; and

(B) an effective shelf registration (in accordance with Section 5(b) of the Stockholders and Registration Rights Agreement) is in effect for the shares of Common Stock to be issued upon conversion of the shares of Series D-1 Preferred Stock.

(ii) If the Corporation has elected to convert Series D-1 Preferred Stock into Common Stock pursuant to Paragraph A.5.(l)(i) above, the Corporation will provide written notice of mandatory conversion of shares of Series D-1 Preferred Stock to each holder of record of Series D-1 Preferred Stock no less than thirty (30) nor more than sixty (60) calendar days prior to the date fixed for conversion by first class mail, postage prepaid, to each holder at such holder’s address as it appears on the stock register of the Corporation. The Corporation’s obligation to deliver shares of Common Stock shall be deemed fulfilled if, on the mandatory conversion date, the Corporation shall deposit with a bank or trust company in New York, New York having capital of at least One Hundred Million Dollars

($100,000,000), such number of shares of Common Stock as are required to be delivered by the Corporation upon the conversion of the shares of Series D-1 Preferred Stock so called for conversion. Provided the Corporation has fulfilled its obligation to deposit shares as provided in the foregoing sentence, effective on the mandatory conversion date fixed by the Corporation and notified to the holders of Series D-1 Preferred Stock, each outstanding share of Series D-1 Preferred Stock shall be converted into a fully paid, registered, and non-assessable share of Common Stock at the Conversion Price then in effect, automatically and without any action on the part of any holder of shares of Series D-1 Preferred Stock, and each such share of Common Stock shall be deemed outstanding from and after the mandatory conversion date.

(m) Overall Cap on Common Stock Issuable. Notwithstanding anything contained in this Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock to the contrary, the number of shares of Common Stock issuable by the Corporation upon conversion of the Series D-1 Preferred Stock and acquirable by the holders of the Series D-1 Preferred Stock in such capacity, shall not exceed 19.99% of the number of shares of Common Stock outstanding on December 15, 2005, subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations affecting the Common Stock (the “Maximum Common Stock Issuance”), unless the issuance of shares of Common Stock hereunder in excess of the Maximum Common Stock Issuance shall first be approved by the Corporation’s stockholders in accordance with applicable law and the By-laws and Certificate of Incorporation of the Corporation. If at any point in time and from time to time the Corporation proposes to issue any Additional Stock for an Effective Price per share, or, in the case of Convertible Securities, a conversion price per share, less than the Conversion Price for the Series D-1 Preferred Stock (a “Triggering Transaction”), and the number of shares of Common Stock previously issued upon conversion of the Series D-1 Preferred Stock together with the number of shares of Common Stock that would then be issuable in the event of conversion of all shares of Series D-1 Preferred Stock then outstanding, would exceed the Maximum Common Stock Issuance as a result of such Triggering Transaction, as a condition to consummation of such Triggering Transaction, the Corporation shall promptly call a stockholder meeting to request stockholder approval for the issuance of Common Stock hereunder in excess of the Maximum Common Stock Issuance (the “Additional Issuance”). Following any approval by the stockholders of such Additional Issuance, each share of Series D-1 Preferred Stock then outstanding shall be convertible into the number of shares of Common Stock determined pursuant to this Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock without regard to the limitations provided in this Section A.5(m).

6. Optional Redemption.

(a) If at any time after the date of original issuance of the shares of Series D-1 Preferred Stock less than five percent (5%) of the shares of Series D-1 Preferred Stock originally issued are outstanding, the Corporation shall be entitled, at the Corporation’s option, to redeem the shares of Series D-1 Preferred Stock then outstanding for an amount equal to one hundred percent (100%) of the original issue price per share plus an amount equal in full to cumulative accrued dividends and Default Dividends (whether or not earned or declared) accrued and unpaid thereon.

(b) If at any time after the date of the original issuance of the Series D-1 Preferred Stock a Change in Control occurs, the Corporation shall be entitled, at its option, to redeem all of the shares of Series D-1 Preferred Stock then outstanding for an amount equal to one hundred percent (100%) per share of the liquidation preference plus an amount equal in full to cumulative dividends and Default Dividends (whether or not earned or declared) accrued and unpaid thereon from the date of original issuance of the Series D-1 Preferred Stock until the date of redemption.

(c) If the Corporation elects to redeem Series D-1 Preferred Stock pursuant to this Paragraph 6(a) or (b), the Corporation will provide written notice of such optional redemption of shares of Series D-1 Preferred Stock to each holder of record of Series D-1 Preferred Stock not less than thirty (30)

calendar days prior to the date fixed for redemption by first class mail, postage prepaid, to each holder and such holder’s address as it appears on the stock register of the Corporation.

7. Status of Converted Stock. In the event any shares of Series D-1 Preferred Stock are converted to Common Stock pursuant to Paragraph A.5. hereof, or are redeemed by the Corporation pursuant to Paragraph A.6. hereof, the shares so converted or so redeemed shall be canceled, retired and eliminated and shall not be reissued by the Corporation. The Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation’s authorized capital stock.

8. Voting Rights.

(a) General. Subject to the provisions of this Section A.8(a), the holders of Series D-1 Preferred Stock shall be entitled to vote together with the holders of Common Stock on all matters to be voted on by the Corporation on an as-converted basis. To the extent permitted under the applicable rules of NASDAQ, each holder of shares of Series D-1 Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series D-1 Preferred Stock could be converted on the record date for the taking of a vote, provided that for purposes of determining the number of votes to which a holder of Series D-1 Preferred Stock is entitled, such determination shall be made as if the conversion price for such shares of Series D-1 Preferred Stock on the record date were equal to $11.16, as adjusted pursuant to Sections A.5(c)(iii) and A.5(c)(iv), but without any other adjustments thereto. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Series D-1 Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward).

(b) Class Voting Rights.

(i) Except as otherwise provided below, a vote of at least a majority of the shares of the Series D-1 Preferred Stock then outstanding shall be sufficient to take any action requiring the vote of the Series D-1 Preferred Stock as a separate class. At any meeting where the Series D-1 Preferred Stock shall have the right to vote as a separate class, the presence, in person or by proxy, of a majority of the then outstanding shares of Series D-1 Preferred Stock shall constitute a quorum of such class.

(ii) So long as any Series D-1 Preferred Stock is outstanding, the Corporation shall not, without the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of all outstanding shares of Series D-1 Preferred Stock voting separately as a class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for this purpose (A) amend, alter or repeal any provision of the Certificate of Incorporation or By-laws of the Corporation, each as amended, so as to affect, in any manner adverse to the holders of Series D-1 Preferred Stock, the relative rights, preferences, qualifications, limitations or restrictions of the Series D-1 Preferred Stock; (B) create, authorize, designate or reclassify any authorized stock of the Corporation into, or increase the authorized amount of, or issue any capital stock that ranks senior to or pari passu with the Series D-1 Preferred Stock, or any Junior Securities, whether voluntary or involuntary, or any security convertible into such a class or series, which are required to be redeemed by the Corporation at any time that any shares of Series D-1 Preferred Stock are outstanding; or (C) take any other action on which the holders of Series D-1 Preferred Stock shall be entitled by law to vote separately as a class.

(iii) The Corporation shall not, without the express written approval of the holders of record of a majority of the shares of Series D-1 Preferred Stock then outstanding take any of the following actions:

(A) Dividends. The Corporation shall not declare or pay any dividend or distribution on any shares of capital stock of the Corporation other than dividends on Series D-1 Preferred Stock.

(B) Indebtedness. The Corporation and its subsidiary shall not (x) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Corporation, guarantee any debt securities of another person, enter into any “keep well” or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, except that the Corporation may incur such indebtedness in any amount not to exceed Ten Million Dollars ($10,000,000) in the aggregate outstanding at any time only for the Corporation’s working capital requirements in the ordinary course of business (“Working Capital Loans”); or (y) make any loans, advances of capital contributions to, or investments in, any other person, other than to the Corporation or its subsidiaries.

(C) Dispositions. The Corporation shall not enter into or effect a recapitalization, corporate reorganization (including, without limitation, any distribution of assets to a subsidiary of the Corporation) or liquidation, sell, assign, lease or otherwise dispose (including by way of mortgage, license, encumbrance or any lien) of any assets or securities, except for (i) transactions in the ordinary course of business or (ii) any pledge, assignment, encumbrance, lien or other disposition of working capital assets (accounts receivable and inventory) directly related to the Working Capital Loan (as defined in Section A.8(b)(iii)(B)), or effectuate any split, subdivision or combination of any Equity Securities, or enter into a material contract or release or relinquish any material contract rights not in the ordinary course of business, or make any amendments, or modifications thereto. Notwithstanding the foregoing, the Corporation shall not, at any time, sell, assign, lease or otherwise dispose (including by way of pledge, mortgage, license, encumbrance or any lien) of any license, patent or Intellectual Property of the Corporation, except in the ordinary course of business, without the express written approval of the holders of a majority of the shares of Series D-1 Preferred Stock then outstanding. For purposes of the foregoing sentence, ordinary course of business shall include, without limitation, (a) licenses for purposes of research, development, manufacturing, marketing and/or distribution and (b) the abandonment of any Intellectual Property which the Corporation determines is of insignificant benefit to the Corporation and which could not, individually or in the aggregate, have a Material Adverse Effect on the Corporation.

(D) Acquisitions. The Corporation shall not merge or consolidate with, purchase, lease or otherwise make any acquisition of all or substantially all of the assets, properties or securities of, any person or entity in a transaction or series of related transactions with any calendar year period in excess of Ten Million Dollars ($10,000,000).

(E) Protective Agreements. The Corporation shall not: (i) enter into any non-disclosure agreement, that is not substantially in the form utilized by the Corporation as of the effective date of this Certificate of Designation, Preferences and Rights of the Series D-1 Cumulative Convertible Preferred Stock, with each new employee hired after such date; and (ii) enter into any non-competition agreement, that is not substantially in the form utilized by the Corporation, with each new officer hired after such date. The Corporation shall not terminate, amend or modify in any material respect any agreement relating to matters of non-disclosure or non-competition.

(F) Benefit Plans. The Corporation shall not adopt or amend in any material respect any collective bargaining agreement or any employee benefit plan of the Corporation which, individually or in the aggregate, could reasonably by expected to have a Material Adverse Effect.

(c) Board of Directors. The Board of Directors of the Corporation shall consist of not less than five (5) and not more than nine (9) directors. At each annual meeting of the stockholders of

the Corporation, and at each special meeting of the stockholders of the Corporation called for the purpose of electing directors of the Corporation, and at any time at which stockholders of the Corporation shall have the right to, or shall, vote for or consent in writing to the election of directors of the Corporation, then, and in each such event, until the occurrence of an Event of Default, (i) the holders of record of shares of Series D-1 Preferred Stock voting together as a separate class shall be entitled, but not obligated, to elect one (1) director, who shall be nominated by the holders of record of a majority of the shares of Series D-1 Preferred Stock then outstanding (the “Series D-1 Preferred Stock Director”), and (ii) the holders of record of shares of Common Stock shall elect the remaining directors, up to a maximum of eight (8), all of whom shall be nominated by the Board of Directors of the Corporation (collectively, the “Common Directors”). At any such meeting called for the purpose of electing directors, the presence in person or by proxy of (i) the holders of record of a majority of the shares of Series D-1 Preferred Stock then outstanding, in the case of the election of the Series D-1 Preferred Stock Director and (ii) the holders of record of a majority of the shares of each of the Common Stock, in the case of the election of a Common Director, shall constitute a quorum for the election of directors to be elected by such holders. A vacancy in any directorship entitled to be elected by the holders of record of shares of Series D-1 Preferred Stock (including without limitation, a vacancy resulting from the decision during an earlier election by the holders of the Series D-1 Preferred Stock not to fill the directorship to be held by the Series D-1 Preferred Stock Director) shall be filled only by vote or written consent of the holders of record of shares of Series D-1 Preferred Stock, in the manner set forth herein. A vacancy in any directorship elected by the holders of record of Common Stock may be filled by the vote or written consent of a majority of the directors elected by the holders of record of Common Stock then in office, and such appointed director shall serve until the next annual meeting of stockholders of the Corporation, unless earlier removed or such director resigns. Each Common Director who shall have been elected as provided in this Paragraph A.8.(c) may be removed during his or her term of office, whether with or without cause, only by the holders of record of a majority of the shares of Common Stock then outstanding, and each Series D-1 Preferred Stock Director who shall have been elected as provided in this Paragraph A.8.(c) may be removed during his or her term of office, whether with or without cause, by the holders of record of a majority of the shares of Series D-1 Preferred Stock then outstanding. Each Common Director and the Series D-1 Preferred Stock Director shall be entitled to one (1) vote on all matters which directors are entitled to vote on. The holders of record of a majority of the shares of Series D-1 Preferred Stock then outstanding shall have the right to call meetings of the Board of Directors and management of the Corporation, upon no less than five (5) calendar days’ prior written notice; provided, that such meetings are called no more frequently than once per fiscal quarter; and, provided, further, so long as no Event of Default has occurred or is continuing, a meeting may be called only if the Board of Directors has not held a board meeting or scheduled a board meeting for the calendar quarter in which such holders of Series D-1 Preferred Stock seek to call a meeting. During such time as holders of record of a majority of the Series D-1 Preferred Stock then outstanding are entitled to elect the Series D-1 Preferred Stock Director to the Board of Directors, such holders shall also be entitled to have such Series D-1 Preferred Stock Director serve on the compensation committee of the Board of Directors and any special committee created by the Board of Directors not in the ordinary course of business and the Corporation shall cause such Series D-1 Preferred Stock Director to be so appointed; provided, however, that if such Series D-1 Preferred Stock Director would not be considered “independent” or “disinterested” (i) for purposes of any applicable rule of NASDAQ or (ii) for purposes of any special committee formed in connection with any transaction or potential transaction involving the Corporation and Investor or any Purchaser, then such Series D-1 Preferred Stock Director shall not be eligible to be appointed to such committee.

9. Lack of Public Market. If the Common Stock of the Corporation ceases to be listed or authorized to be quoted on any national securities exchange or the public market for the Common Stock of the Corporation otherwise ceases to exist, the Corporation shall engage an investment bank, reasonably acceptable to the Corporation and the holders of record of a majority of the shares of the Series D-1 Preferred Stock, to determine the fair market value price of the Common Stock, from time to time, in connection with Paragraphs A.3., A.5. and A.6.

B. Definitions. As used herein, the following terms shall have the following definitions:

(a) “Accumulated Dividends” means with respect to any share of Series D-1 Preferred Stock, the dividends that have accrued on such shares as of such specified date for Dividend Periods ending on or prior to such date and that have not previously been paid in cash, including Additional Dividends and Default Dividends.

(b) “Additional Dividends” has the meaning given to such term in Paragraph A.3.(d).

(c) “Additional Stock” has the meaning set forth in Paragraph A.5.(c)(ii).

(d) “Closing Common Stock Market Price” for any day means the last sale price regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported on American Stock Exchange, NASDAQ, NYSE or any other national securities market.

(e) “Common Stock Equivalents” has the meaning set forth in Paragraph A.5.(c)(iii) hereof.

(f) “Conversion Price” has the meaning set forth in Paragraph A.5.(a) hereof.

(g) “Convertible Securities” means any indebtedness or shares of stock convertible into or exchangeable for Common Stock.

(h) “Dividend Declaration Date” means the last trading day on NASDAQ immediately prior to June 30 and December 31 of each year in which any shares of the Series D-1 Preferred Stock are outstanding.

(i) “Dividend Payment Dates” means July 31 and January 31 of each year (or, if such day is not a business day, the next succeeding day that is a business day.

(j) “Dividend Period” means each Semi-Annual Dividend Period.

(k) “Effective Price” of shares of Additional Stock means the quotient determined by dividing (i) the total number of such shares of Additional Stock issued or sold, or deemed to have been issued or sold, by the Corporation under Paragraph A.5.(c) hereof, into (ii) the consideration received by the Corporation under Paragraph A.5.(c) hereof for the issuance of such shares of Additional Stock.

(l) “Exchange Agreement” means the Restructuring and Exchange Agreement dated as of December 15, 2005, between the Corporation, Investor and the Purchasers.

(m) “Investor” means OCM Principal Opportunities Fund, L.P.

(n) “Intellectual Property” has the meaning set forth in the Stock Purchase Agreement.

(o) “Junior Payment Date” has the meaning set forth in Paragraph A.3.(h) hereof.

(p) “Junior Securities” has the meaning set forth in Paragraph A.2. hereof.

(q) “Material Adverse Effect” shall mean (i) any adverse change in the condition (financial or otherwise), assets (including, without limitation, patents and licenses to patents), liabilities, business, results of operations or prospects of the Company or its Subsidiary, which change individually or in the aggregate, is material to the Company or its Subsidiary, or (ii) any event, matter, condition or

effect which impairs the ability of the Company or its Subsidiary to perform on a timely basis its obligations hereunder. Materiality under clauses (i) or (ii) hereof shall be determined in good faith by the holders of record of a majority of the shares of Series D-1 Preferred Stock.

(r) “NASDAQ” shall mean the Nasdaq National Market.

(s) “NYSE” shall mean the New York Stock Exchange.

(t) “Option” means rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(u) “Purchaser” and “Purchasers” shall mean those persons, individually and collectively, who are parties to the Stock Purchase Agreement, as identified on Exhibit C to the Stock Purchase Agreement.

(v) “Permitted Options” has the meaning set forth in Paragraph A.5.(c)(ii)(B) hereof.

(w) “Semi-Annual Dividend Periods” means the semi-annual periods (1) commencing on each January 1 and ending on each June 30 and (2) commencing on July 1 and ending on each December 31.

(x) “Stockholders and Registration Rights Agreement” means the Stockholders and Registration Rights Agreement dated as of March 19, 1999, between the Corporation, the Investor and the Purchasers named therein, the Schedules and Exhibits thereto, and any certificate or other document required thereby, as the same may be amended from time to time.

(y) “Stock Purchase Agreement” means the Stock Purchase Agreement dated as of March 19, 1999, between the Corporation, Investor and the Purchasers named therein, the Schedules and Exhibits thereto, and any certificate or other document required thereby, as the same may be amended from time to time.

*****

IN WITNESS WHEREOF, the undersigned has caused this Certificate of Designation, Preferences and Rights of Series D-1 Cumulative Convertible Preferred Stock to be signed on the 19th day of December, 2005.

	/s/ Colin W. Stewart
	Colin W. Stewart
	President and Chief Executive Officer

EXHIBIT A

Example of Application of Formula for Adjustment of Conversion Price.

If, after the original issuance of the Series D-1 Preferred Stock, 9,000,000 shares of Common Stock were then outstanding and the Company were to issue 100,000 shares of Common Stock (the Additional Stock) for $7.50 per share (and thus, less than the $8.50 Conversion Price for Series D-1 Preferred Stock then in effect), the Conversion Price would be adjusted as follows:

[(A+B)]	/	[(C+D)]

[(9,000,000 x $8.50) + (100,000 x $7.50)]	/	[(9,000,000) + (100,000)]

[(76,500,000) + ($750,000)]	/	[(9,100,000)]

[(77,250,000)]	/	[(9,100,000)]

	=	$8.48

-----END PRIVACY-ENHANCED MESSAGE-----

INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT

TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO

RULE 13d-2(a)

Under the Securities Exchange Act of 1934 (Amendment No. 6 )*

SIGNATURE

10:00 A.M., New York City time, on December 21, 2005 (unless another time shall be agreed to by the Series D Holders and the Company).

10.5 Investment. Each Series D Holder is acquiring the Series D-1 Preferred and the Conversion Shares for his, her or its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same.

10.6 Accredited Investor. Such Series D Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act.

10.7 Legends. It is understood that the certificates evidencing the Series D-1 Preferred issued hereunder shall bear a legend substantially in the following form and such other legends that may be required under the laws of any applicable jurisdiction:

10.8 Acknowledgements.

11.1 Conditions to each Series D Holder’s Obligations at the Closing. Each Series D Holder’s obligations to surrender shares of Series D Preferred to be exchanged for shares of Series D-1 Preferred are subject to the satisfaction, at or prior to the Closing, of the following conditions:

(a) Representations and Warranties. The representations and warranties made by the Company in Section 9 hereof shall be true and correct in all material respects as of the date of Closing.

(a) Representations and Warranties. The representations and warranties made by each Series D Holder in Section 10 hereof shall be true and correct in all material respects as of the date of the Closing.

12.2 Successors and Assigns; Assignment. Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the

parties hereto. None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned by a Series D Holder without the prior consent in writing of the Company.

12.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.

2. Rank. With respect to dividend rights and rights on liquidation, winding up and dissolution of the Corporation, Series D-1 Preferred Stock shall rank senior to:

(i) the Common Stock, par value $0.01 per share (“Common Stock”), of the Corporation; and

3. Dividend Provisions.

(a) Each holder of Series D-1 Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cash dividends on each

share of Series D-1 Preferred Stock at a rate equal to nine percent (9%) per share per annum, subject to increase as set forth in Section A.3.(b) and Section A.3.(g).

(c) Dividends shall cease to accrue in respect of any shares of Series D-1 Preferred Stock on the date such shares are (i) converted into shares of Common Stock in accordance with Paragraph A.5. hereof, or (ii) are redeemed in accordance with Paragraph A.6. hereof.

(e) All dividends paid with respect to shares of Series D-1 Preferred Stock pursuant to Paragraph A.3.(a) shall be paid pro rata to the holders of Series D-1 Preferred Stock of record entitled thereto.

(iv) in the event of the acceleration of any indebtedness of the Corporation with a principal amount in excess of One Million Dollars ($1,000,000); or

(v) in the event of the receipt of a final non-appealable judgment against the Corporation in an amount that is uninsured in excess of One Million Dollars ($1,000,000); or

(viii) if at any time after the date the first share of Series D-1 Preferred Stock is issued, shares of Common Stock are not actively publicly traded on the American Stock Exchange, NASDAQ or NYSE; or

(i) Dividends payable on Series D-1 Preferred Stock for any period less than one (1) year shall be computed on the basis of a 360-day year consisting of twelve 30-day months plus the actual number of calendar days elapsed in the month for which such dividends are payable.

5. Conversion.

(c) Adjustments of Conversion Price. So long as any shares of Series D-1 Preferred Stock are outstanding, the Conversion Price of the Series D-1 Preferred Stock shall be subject to adjustment from time to time as follows:

(C) In the case of the issuance of securities of the Corporation for cash, the amount of consideration received by the Corporation for such securities shall be deemed to be the amount of cash paid therefor before deducting any discounts, commissions or other

expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof.

(E) In the case of the issuance (whether before, on or after the date of issuance of Series D-1 Preferred Stock) of Options or Convertible Securities, the following provisions shall apply for all purposes of this Paragraph A.5.(c)(i) and Paragraph A.5.(c)(ii) hereof:

(A) Common Stock issued pursuant to a transaction described in Paragraph A.5.(c)(iii) hereof;

(C) Common Stock issued or issuable upon conversion of shares of Series D-1 Preferred Stock.

adjustment and readjustment, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series D-1 Preferred Stock.

Under the Securities Exchange Act of 1934
(Amendment No. 6 )*