-----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, DImvbSBbr62jTq2UixS1KC1hjIAGNhOrPjkKEi3hyy7veEW6OqcuZXnfe1taf91Q bN8R4+yo3rOgYRtOT0Qspg== 0000950135-98-003408.txt : 19980518 0000950135-98-003408.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950135-98-003408 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLC SYSTEMS INC CENTRAL INDEX KEY: 0000879682 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 043153858 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11388 FILM NUMBER: 98625837 BUSINESS ADDRESS: STREET 1: 10 FORGE PK CITY: FRANKLIN STATE: MA ZIP: 02038 BUSINESS PHONE: 5084785991 10-Q 1 FORM 10-Q 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarter ended March 31, 1998. Commission file number 1-11388 PLC SYSTEMS INC. (Exact name of registrant as specified in its charter) BRITISH COLUMBIA, CANADA 04-3153858 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10 FORGE PARK, FRANKLIN, MASSACHUSETTS 02038 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 541-8800 -------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO . APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practical date. CLASS OUTSTANDING AT MAY 14, 1998 Common Stock, no par value 18,985,081 2 - -------------------------------------------------------------------------------- PLC SYSTEMS INC. INDEX Part I. Financial Information: Item 1. Condensed Consolidated Balance Sheets...............................3 Condensed Consolidated Statements of Operations.....................4 Condensed Consolidated Statements of Cash Flows.....................5 Notes to Condensed Consolidated Financial Statements................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............9-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk......13 Part II. Other Information: Item 1. Legal Proceedings.............................................14 Item 2. Changes in Securities.........................................14 Item 3. Not Applicable................................................14 Item 4. Not Applicable................................................14 Item 5. Not Applicable................................................14 Item 6. Exhibits and Reports on Form 8-K..............................14 -2- 3 Item 1. Financial Statements - -------------------------------------------------------------------------------- PLC SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 1998 1997 --------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents.......................................... $ 9,952 $ 3,484 Marketable securities.............................................. 3,005 12,845 Accounts receivable, net........................................... 704 1,337 Inventories ....................................................... 3,032 2,512 Prepaid expenses and other current assets.......................... 433 502 -------- -------- Total current assets........................................... 17,126 20,680 Equipment, furniture and leasehold improvements, net ................. 5,931 5,636 Other assets........................................................... 702 701 -------- -------- Total assets.................................................... $ 23,759 $ 27,017 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 1,385 $ 917 Accrued clinical costs............................................. 1,461 1,292 Accrued compensation............................................... 667 570 Accrued expenses................................................... 857 923 Deferred revenue................................................... 52 70 5% Convertible Debentures......................................... - 3,819 Other accrued liabilities.......................................... 118 296 -------- -------- Total current liabilities....................................... 4,540 7,887 Capital lease obligations.............................................. 103 121 Commitments and contingencies Stockholders' equity: Common stock, no par value, 25,000 shares authorized, 18,976 and 16,419 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively and 18,368 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively................................. 75,235 71,115 Accumulated deficit.................................................... (55,469) (51,533) Foreign currency translation........................................... (650) (573) --------- --------- 19,116 19,009 --------- --------- Total liabilities and stockholders' equity............................. $ 23,759 $ 27,017 ======= =======
-3- 4 PLC SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended MARCH 31, ------------------ 1998 1997 ---- ---- Revenues: Product sales.............................. $ 365 $ 771 Placement and service fees................. 580 817 -------- -------- Total revenues ......................... 945 1,588 Cost of revenues: Product sales ............................ 152 336 Placement and service fees.................. 536 494 -------- -------- Total cost of revenues................... 688 830 -------- -------- Gross profit.................................. 257 758 Operating expenses: Selling, general and administrative ........ 3,053 2,817 Research and development.................... 1,291 1,071 -------- -------- Total operating expenses................ 4,344 3,888 -------- -------- Loss from operations.......................... (4,087) (3,130) Other income: Interest income, net........................ 150 91 Gain from foreign currency, net............. 1 17 -------- -------- 151 108 -------- -------- Provision for income taxes.................... $ (3,936) $ (3,022) --------- --------- Net loss...................................... $ (3,936) $(3,022) ========= ========= Basic and diluted loss per share.............. $ (.21) $ (.18) Shares used to compute basic and diluted loss per share.............................. 18,759 16,547 The accompanying notes are an integral part of the condensed consolidated financial statements. -4- 5 PLC SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended MARCH 31, ------------------ 1998 1997 ---- ---- Operating activities: Net loss..................................... $(3,936) $(3,022) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization.............. 606 421 Change in assets and liabilities: Accounts receivable................... 752 1,182 Inventory ........................... (502) (806) Prepaid expenses and other assets..... 52 154 Accounts payable...................... 464 (355) Deferred revenue...................... (253) (75) Accrued liabilities................... 344 219 ------- -------- Net cash used for operating activities......... (2,473) (2,282) Investing activities: Purchase of marketable securities.......... (999) - Maturities of marketable securities........ 10,839 4,494 Purchase of fixed assets................... (872) (857) ------- -------- Net cash provided by investing activities...... 8,968 3,637 Financing activities: Net proceeds from sales of common shares... 196 517 Principal payments on capital lease obligations................................ (16) (3) ------- -------- Net cash provided by financing activities...... 180 514 Effect of exchange rate changes on cash and cash equivalents........................... (207) (186) ------- -------- Net increase in cash and cash equivalents...... 6,468 1,683 Cash and cash equivalents at beginning of period...................................... 3,484 3,039 -------- -------- Cash and cash equivalents at end of period..... $ 9,952 $ 4,722 ======= ======= NON-CASH FINANCING ACTIVITIES: Conversion of Convertible Debentures and accrued interest into Common Stock.......... $ 3,828 $ - The accompanying notes are an integral part of the condensed consolidated financial statements. -5- 6 PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31,1998 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. 2. NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("Statement 128") which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All loss per share amounts for all periods have been presented, and have been restated, to conform to Statement 128. 3. COMPREHENSIVE INCOME As of January 1,1998 the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components:however the adoption of this Statement had no impact on the Company's net loss or shareholders equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. During the first quarter of 1998 and 1997,total comprehensive loss amounted to $4,013,00 and $3,169,00. 4. INVENTORY Inventories consist of the following (in thousands): March 31, December 31, 1998 1997 --------- ------------ Raw materials . . . . . . $1,450 $1,141 Work in process . . . . . 300 10 Finished goods . . . . . . 1,282 1,361 ----- ----- $3,032 $2,512 ====== ====== 5. ISSUANCE OF CONVERTIBLE DEBENTURES a. Convertible Debentures due July 17, 2002 and August 14, 2002. -6- 7 PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) In July 1997, the Company entered into a $20 million financing commitment. Under the terms of the financing, the Company received $10,075,000 in July 1997 and $10,075,000 in August 1997 from the issuance of five-year convertible debentures to accredited investors through Salomon Smith Barney Inc. as placement agent. The convertible debentures accrue interest at 5% per annum, payable in cash or common stock at the Company's option, at the time of conversion. The debentures are convertible into common shares under a predetermined formula. The first tranche of the debentures are convertible into common shares at the lesser of (a) $25.98, or (b) the market price of the Company's Common Stock at the time of conversion, with no more than 1,007,500 shares of Common Stock issuable in full payment of all accrued interest and principal. In September 1997, the entire first tranche of convertible debentures of $10,075,000 and related accrued interest converted into 890,394 shares of common stock. The second tranche of the debentures are convertible into common shares at the lesser of (a) $14.60, or (b) the market price of the Company's Common Stock at the time of conversion, with no more than 1,507,500 shares of Common Stock issuable in full payment of all accrued interest and principal. In September 1997, $5,825,000 of the second tranche of convertible debentures and related accrued interest converted into 512,572 shares of common stock. In January and February 1998, the remaining $4,250,000 of the second tranche of convertible debt and related accrued interest converted into 576,606 shares of common stock. In connection with the issuance of the first tranche of convertible debentures, the Company issued 69,875 redeemable warrants to purchase shares of its Common Stock at $27.81 per share. In connection with the issuance of the second tranche of convertible debentures, the Company issued 80,125 redeemable warrants to purchase shares of its Common Stock at $15.78 per share. If the average closing sale price of its Common Stock for any consecutive 30 trading day period commencing January 17, 1999 exceeds the exercise price by more than 50%, the Company has the right, exercisable at any time upon 30 days notice to the holder to redeem the warrant at a price of $.10 per warrant share. The warrants issued in connection with the first tranche expire on July 17, 2002. The warrants issued in connection with the second tranche expire on August 14, 2002. b. Convertible Debentures due April 23, 2003 In April 1998, the Company entered into a $10 million financing commitment. Under the terms of the financing, the Company received $5 million in April 1998 from the issuance of non-interest bearing five-year convertible debentures (the first tranche) to accredited investors through Salomon Smith Barney Inc. as placement agent. The debentures are convertible into common shares under a predetermined formula. The first tranche of the debentures are convertible into common shares at the lesser of (a) $19.53, or (b) commencing July 22, 1998, the average of the five lowest consecutive closing bid price during a look-back period consisting of thirty consecutive trading days prior to conversion. In connection with the first tranche, the maximum number of the Company's Common Stock issuable related to the debt conversion is 640,000. In conjunction with the second tranche,the maximum number of the Company's Common stock issuable related to the debt would be 671,422.The Company will -7- 8 PLC SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) have the right to force conversion, in whole or in part, so long as the Company's closing bid prices of its Common Stock has traded at or above $23.44 for a period of thirty day consecutive trading days, with thirty days prior notice to the holder for cash or stock, at the option of the Company. In connection with the first tranche, the Company issued 4,864 redeemable warrants to purchase shares of its Common Stock at $19.53 per share. If the average closing sale price of its Common Stock for any consecutive 30 trading day period commencing April 23, 1999 exceeds the exercise price by more than 50%, the Company has the right, exercisable at any time upon 30 days notice to the holder to redeem the warrant at a price of $.10 per warrant share. The warrants expire on April 23, 2003. 6. LEGAL PROCEEDINGS In September 1996, CardioGenesis Corporation, ("CardioGenesis") filed a civil lawsuit in the United States District Court for the Northern District of California seeking to have the Company's synchronization patent declared invalid, or, alternatively, asking the court to determine whether CardioGenesis infringes on this patent. In October 1996, the Company filed an answer and counterclaim alleging that CardioGenesis infringes on this patent. The counterclaim seeks both injunctive relief and monetary damages against CardioGenesis. In October 1997, CardioGenesis filed an amended complaint seeking to have the Company's synchronization patent declared unenforceable. CardioGenesis is not seeking monetary damages from the Company. In January 1997, CardioGenesis Corporation, filed a challenge to the Company's European synchronization patent in the European Patent Office and in March 1997 the Company filed its response. In addition, in April 1997, the Company filed an infringement lawsuit against CardioGenesis in the Munich District Courts alleging infringement of its synchronization patent. An oral hearing has been scheduled in the Munich District Court on October 1, 1998. The Company and certain of its officers have been named as defendants in 21 purported class action lawsuits filed between August 1997 and November 1997 in the United States District Court for the District of Massachusetts. The suits allege violations of the federal securities laws. The plaintiffs are seeking damages in connection with such alleged violations. Nineteen of these complaints have been consolidated by the court into a single action for pretrial purposes and the remaining two suits have been consolidated into the one suit for pretrial purposes . These matters are in the earliest stages of litigation and the Company has filed motions to dismiss all of these claims. There can be no assurance that the motions to dismiss these claims will be successful. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of these pending litigation matters. It is possible that the Company's result of operations or cash flows in a particular quarter or annual period or its financial position could be materially affected by an ultimate unfavorable outcome of this pending litigation. The Company believes that it has valid defenses to these class action litigation matters and intends to vigorously defend itself in these matters. -8- 9 Item 2. - -------------------------------------------------------------------------------- PLC SYSTEMS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company has both a placement strategy and a direct/distributor sales strategy for Heart Laser System purchases. The placement program allows the Company to receive recurring revenues based on the usage of the Heart Laser System rather than one-time revenues for the sale of each Heart Laser System. Under the placement model, an installation fee is paid when the Heart Laser System is installed and the Company then receives a fee per use. Sterile handpieces and other disposables are included in the per procedure fee. Revenues from these contracts are classified as placement fees. The cost of the Heart Laser System is depreciated over the term of the contract. In the near term, it is expected that placement revenues will continue to be negatively impacted until the U.S. Food and Drug Administration ("FDA") approval is granted and medicare reimbursement is granted by the Health Care Financing Administration (HCFA). In certain foreign countries where credit risk is high or where health care is not reimbursed by the government or insurance, the Heart Laser System is sold as capital equipment and the related sterile handpieces and other disposables are sold separately for each procedure. The Company sells Heart Laser Systems directly and through distributors. These sales are classified as product sales. RESULTS OF OPERATIONS Total revenues for the quarter ended March 31, 1998 were $945,000, a decrease of 40% when compared to $1,588,000 for the quarter ended March 31, 1997. Product sales for the quarter ended March 31, 1998 were $365,000, a decrease of 53% when compared to $771,000 for the quarter ended March 31, 1997. In 1998, the Company shipped four Heart Laser Systems under the placement strategy while in 1997, the Company shipped six Heart Laser Systems, of which one was a sale and five where under the placement strategy. Included in the 1998 sales amount is recognition of deferred revenue from a 1996 sale accounting for approximately 63% of product sales for the quarter ended March 31,1998. Placement and service fees for the three months ended March 31, 1998 were $580,000, a decrease of 29% when compared with $817,000 for the same period in fiscal 1997. Although the Company has increased its placement contract base, revenue dollars have decreased. The Company generates a revenue stream over the life of the placement contract. Typically, the revenue generated in the initial periods of the contract are less than in later periods when PreMarket Approval ("PMA") is anticipated and minimum contractual billings are increased. In May 1997, the Health Care Financing Administration (HCFA) instituted a non-coverage policy for TMR procedures performed on Medicare patients in the United States. The HCFA announcement coupled with the July 28, 1997 FDA Advisory Panel recommendation of non-approval caused the Company to reexamine its requirement of contractual minimum billings prior to FDA approval. As a result, the Company permitted a slowdown in the contractual minimum billings to an actual usage billing. On April 24, 1998, an FDA Advisory Panel unanimously recommended that the Heart Laser System for TMR be approved for marketing for patients who suffer severe, stable angina. The FDA Panel's decision is not binding. The Company awaits the FDA's final action on the application. Until PMA approval and reimbursement, of which no assurance can be given, the Company expects that future billings -9- 10 under placement contracts will be impacted similarly and the effect on future revenue on existing contracts cannot be predicted. Total gross profit for the three month period ended March 31, 1998 approximated 27% down from 48% for the comparable period in fiscal 1997. This decrease resulted from two factors. First, the total gross margin declined due to unfavorable capacity and manufacturing variances. The Company anticipates that after PMA approval, of which no assurance can be given, production will increase to levels which will absorb manufacturing overhead and mitigate these variances. Secondly, the Company's existing placement contracts are in the pre-PMA contractual minimum billings period, which are typically lower than minimums required after PMA approval, of which no assurance can be given, at which time annual minimums increase. The cost of the laser is charged on a straight-line basis over the life of the placement contract. The overall depreciation on Heart Laser Systems under existing placement contracts is increasing at a faster rate than the corresponding revenue generated due to the lower pre-PMA minimum billings. This has resulted in a lower gross margin in 1998 as compared to 1997. Until such time that the Company sees an increase to its minimum billings on existing and future placement contracts, the gross margin is expected to be negatively impacted. Selling, general and administrative expenditures of $3,053,000 for the three period ending March 31, 1998 increased 8% when compared to fiscal 1997 expenditures of $2,817,000. The increase in the quarter ended March 31, 1998 over the 1997 period primarily relates to additional sales and marketing personnel in anticipation of a possible FDA approval. Research and development expenditures for the three months ended March 31, 1998 was $1,291,000 an increase of 21% when compared to spending of $1,071,000 for the comparable period in fiscal 1997. This increase is related to increased staffing requirements associated with growing demands for clinical study compilation and data preparation and the development of new products. Other income of $151,000 for the period ended March 31, 1998 increased $43,000 or 40% when compared to $108,000 for the comparable period in 1997. Included in other income is interest income, interest expense and other expense. Interest income for the three months ended March 31, 1998 was $192,000 when compared to $92,000 for the comparable period in fiscal 1997. The Company's average cash balances were higher in the 1998 period. Interest expense for the three months ended March 31, 1998 was $42,000 when compared to $1,000 for the comparable period in 1997. In 1998 the Company recorded interest expense on the outstanding debentures. In the comparable period in 1997, there was no outstanding debentures. The Company records transactions in several foreign currencies, which resulted in currency fluctuation income of $1,000 for the three months ended March 31, 1998 as compared to income of $17,000 for the three months ended March 31, 1997. The Company incurred a net loss of $3,936,000 for the quarter ended March 31, 1998 when -10- 11 compared to the net loss of $3,022,000 for the quarter ended March 31, 1997. As previously discussed in more detail, the following resulted in a higher loss for the three month period in 1998; lower overall revenues, unfavorable capacity and manufacturing variances, and higher overall expenses. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had cash and cash equivalents of $9,952,000 and marketable securities of $3,005,000. In April 1998, the Company entered into a $10 million financing commitment. Under the terms of the financing, the Company received approximately $5 million in net proceeds through the issuance of convertible debentures due April 23, 2003. See Note 5 in the accompanying condensed consolidated financial statements. For the three months ended March 31, 1998, the Company incurred a loss of $3,936,000 which resulted in the use of approximately $2,500,000 to support operations. Cash provided by investing activities was approximately $9,000,000 related to the net maturities of approximately $10,000,000 of marketable securities, offset by an investment of approximately $900,000 in fixed assets primarily related to its placement contract activity. Cash provided by financing activities was approximately $200,000 from the exercise of stock options. In February 1997, the Company's PMA was filed by the FDA. In anticipation of a possible FDA approval, the Company had been increasing its overall operating expenses to be positioned to increase its production capacities. In order to be adequately positioned to meet these demands, the Company secured financing in July 1997. On July 28, 1997, an FDA Advisory Panel recommended a non-approval pending further patient data. In December 1997, the Company submitted all of the requested data on the Heart Laser System. Given this delay, the Company has monitored its operating expenses closely and minimized increases to expenses and overhead during this period. On April 24, 1998, an FDA Advisory Panel unanimously recommended that the Heart Laser System for TMR be approved for marketing for patients who suffer from severe, stable angina and are not amenable to conventional coronary revascularization techniques (e.g., bypass surgery and angioplasty). As part of its recommendation, the Panel described certain labeling conditions and post-market surveillance obligations for FDA's consideration. The FDA Panel's decision is not binding. The Company awaits the FDA's final action on the application. The Company secured a financing commitment up to $10 million from two institutional investors. On April 23, 1998, the Company received $5 million from the issuance of convertible debentures due April 23, 2003, with a commitment to receive up to an additional $5 million at the Company's option. The Company has secured this additional capital to support a successful market launch of the Heart Laser System to open-heart centers in the U.S. full FDA clearance of which no assurance can be given. In addition, this new funding will allow the Company to conduct further research in the TMR arena, such as an ongoing study evaluating TMR as an adjunct to bypass surgery, as well as to develop new products. With the $13 million in cash and marketable securities at March 31, 1998, along with the $10 million financing commitment of April 23, 1998, the Company believes that it has sufficient resources to meet its working capital demands for at least the next twelve months. -11- 12 The Company and certain of its officers have been named as defendants in 21 purported class action lawsuits filed between August 1997 and November 1997. See Note 6 in the accompanying condensed consolidated financial statements for further discussion. The Company has insurance coverage for such legal action . The maximum deductable under such coverage has been incurred. The Year 2000 Issue refers to potential problems with computer systems or any equipment with computer chips or software that uses dates where the date has been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any clock or date recording mechanism incorporating date sensitive software which uses only two digits to represent the year may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. The Company is presently evaluating the impact of the Year 2000 Issue as it affects business operations, interfaces with customers and vendors, and contingencies related to products that have been sold that may need to be modified. To date, the Company is unaware of any situations of noncompliance that would materially adversely effect its operations or financial condition. There can be no assurance, however, that instances of noncompliance which could have a material adverse effect on the Company's operations or financial condition will not be identified, that the systems of other companies with which the Company transacts business will be corrected on a timely basis; or that failure by such entities to correct a Year 2000 problem or a correction which is incompatible with the Company's information systems would not have a material adverse effect on the Company's operations and financial condition. Unanticipated decreases in operating revenues, increases in expenses, or a further delay in the expected FDA approval, may adversely impact the Company's cash position. The Company may seek additional financing through the issuance and sale of debt or equity securities, bank financing, joint ventures or by other means. The availability of such financing and the reasonableness of any related terms in comparison to market conditions cannot be assured. The Company believes that operating losses are likely until after such time, if ever , as the Company receives its PMA from the FDA for the Heart Laser System. Although the Heart Laser System has been granted "expedited review" status by the FDA, the Company cannot project when, if at all, such approval will be granted or that any approval will include desirable claims. Any failure or delay in receiving any such approval would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company must also convince health care professionals, third party payors and the general public of the medical and economic benefits of the Heart Laser System. No assurance can be given that the Company will be successful in marketing the Heart Laser System or that the Company will be able to operate profitably on a consistent basis. This report contains forward-looking statements regarding anticipated increases in revenues, marketing of products and proposed products and other matters. These statements, in addition to statements made in conjunction with the words "anticipate," "expect," "intend," "believe," "seek," "estimate" and similar expressions are forward-looking statements that involve a number of risks and uncertainties. The following is a list of factors, among others, that would cause actual results to differ materially from the forward-looking statements: approval by the U.S. Food and Drug -12- 13 Administration, business conditions and growth in certain market segments and general economy, an increase in competition or other competitive developments, increased or continued market acceptance of the Company's products and proposed products by health care professionals and third party payors, and other risks and uncertainties indicated from time to time in the Company's annual report, SEC Form 10k for fiscal year ended December 31,1997 and the Company's other filings with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. -13- 14 PLC SYSTEMS INC. Part II Other Information ITEM 1. LEGAL PROCEEDINGS. See Note 6 to Notes to Consolidated Financial Statements filed with this Form 10-Q. ITEM 2. CHANGES IN SECURITIES. See Note 5 to Notes to Consolidated Financial Statements filed with this Form 10-Q. ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a.) EXHIBITS (I) The following exhibits are filed herewith: Exhibit NO. TITLE 10a Convertible Debenture Purchase Agreement. 10b Form of Convertible Debenture. 10c Form of Redeemable Warrant 10d Registration Rights Agreement. 27 Financial Data Schedule. b.) REPORTS ON FORM 8-K None -14- 15 PLC SYSTEMS INC. Part II Other Information (Continued) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLC SYSTEMS INC. Registrant Date: MAY 15, 1998 By:/s/ PATRICIA L. MURPHY ---------------------- ------------------------- Patricia L. Murphy (Chief Financial Officer) -15- EX-10.A 2 CONVERTIBLE DEBENTURE PURCHASE AGREEMENT 1 Exhibit 10.a CONVERTIBLE DEBENTURE PURCHASE AGREEMENT PLC SYSTEMS INC. ------------------------------ April 23, 1998 ------------------------------ 2 CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of April 23, 1998 (this "AGREEMENT"), among PLC Systems Inc., a corporation organized and existing under the laws of British Columbia, Canada (the "COMPANY"), Southbrook International Investments, Ltd., a British Virgin Islands corporation ("SOUTHBROOK"), Brown Simpson Strategic Growth Fund, L.P., a New York limited partnership ("BROWN SIMPSON L.P."), and Brown Simpson Strategic Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON LIMITED"). Southbrook, Brown Simpson Limited and Brown Simpson LP are each sometimes referred to herein as a "PURCHASER" and collectively as the "PURCHASERS." WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchasers and the Purchasers desire, severally and not jointly, to purchase up to an aggregate principal amount of $10,000,000 of the Company's to be created Convertible Debentures, due April 23, 2003 (the "CONVERTIBLE DEBENTURES"), which are convertible into shares of the Company's common stock, no par value (the "COMMON STOCK"). IN CONSIDERATION of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE I PURCHASE AND SALE OF CONVERTIBLE DEBENTURES 1.1 PURCHASE AND SALE, Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Purchasers and the Purchasers shall, severally and not jointly, purchase an aggregate principal amount of up to $10,000,000 of Convertible Debentures, at the closings described below. All references herein to "dollars" or "$" shall be to U.S. dollars (U.S.$) unless otherwise specified. 1.2 THE CLOSINGS (a) THE TRANCHE CLOSINGS. (i) Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchasers and the Purchasers shall, severally and not jointly, purchase an aggregate principal amount of $5,000,000 of Convertible Debentures (the"TRANCHE 1 DEBENTURES") for an aggregate purchase price of $5,000,000, each Purchaser being obligated to pay a purchase price equal to the principal amount of Tranche 1 Debentures to be issued and sold to it at the Tranche 1 Closing (as defined below). The closing of the purchase and sale of the Tranche 1 Debentures (the "TRANCHE 1 CLOSING") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("ROBINSON SILVERMAN"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof or such later date as the parties shall agree. The date of the Tranche 1 Closing 3 is hereinafter referred to as the "TRANCHE 1 CLOSING DATE." (ii) At the Tranche 1 Closing, (a) the Company shall deliver (A) to Southbrook (1) $4,000,000 aggregate principal amount of Tranche 1 Debentures and the Southbrook Tranche 1 Warrant (as defined in Section 3.17), each registered in the name of Southbrook, (2) the legal opinions of Mintz, Levin, Cohen, Ferris, Glovsky and Popeo, P.C. and DuMoulin, Black, substantially in the forms attached hereto as EXHIBIT E-1 and EXHIBIT E-2, respectively (the "TRANCHE 1 OPINIONS"), and (3) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 1 Closing by the Company to Southbrook pursuant to this Agreement; (B) to Brown Simpson Limited (1) $750,000 aggregate principal amount of Tranche 1 Debentures and the Tranche 1 Brown Simpson Limited Warrant, each registered in the name of Brown Simpson Limited, (2) a Tranche 1 Opinion, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 1 Closing by the Company to Brown Simpson Limited pursuant to this Agreement; and (C) to Brown Simpson L.P. (1) $250,000 aggregate principal amount of Tranche 1 Debentures and the Tranche 1 Brown Simpson L.P. Warrant, each registered in the name of Brown Simpson L.P., (2) a Tranche 2 Opinion, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 1 Closing by the Company to Brown Simpson L.P. pursuant to this Agreement; and (b) each Purchaser shall deliver to the Company (1) the purchase price for the Tranche 1 Debentures being purchased by it at the Tranche 1 Closing, determined in accordance with Section 1.2(a)(i), in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Tranche 1 Closing Date, and (2) all documents, instruments and writings required to have been delivered at or prior to the Tranche 1 Closing by such Purchaser pursuant to this Agreement. (b) THE TRANCHE 2 CLOSING. (i) Subject to the terms and conditions set forth in this Agreement, the Company shall have the right by delivery of written notice to the Purchasers (a "SUBSEQUENT TRANCHE NOTICE") to require the Purchasers, severally and not jointly, to purchase Convertible Debentures in such aggregate principal amount not to exceed $5,000,000 (subject to reduction as hereinafter provided) as the Company may designate in such notice (the "TRANCHE 2 DEBENTURES"), each Purchaser being obligated (subject to the terms and conditions hereof) to purchase such portion of the aggregate principal amount of such Convertible Debentures as equals such Purchaser's pro rata portion of the aggregate principal amount of Tranche 1 Debentures issued and sold at the Tranche 1 Closing. The Company may deliver a Subsequent Tranche Notice no earlier than the expiration of the 30th Trading Day after the date that a registration statement (an "UNDERLYING SECURITIES REGISTRATION STATEMENT") contemplated by the Registration Rights Agreement, dated the date hereof, among the Purchasers and the Company substantially in the form of EXHIBIT B attached hereto (the "REGISTRATION RIGHTS AGREEMENT") covering, among other things, the shares of Common Stock issuable upon conversion of the Tranche 1 Debentures and the shares of Common Stock issuable upon exercise of the Tranche 1 Warrants has been declared effective by the Securities and Exchange -2- 4 Commission (the "COMMISSION") (provided, that Trading Days during which any Purchaser (or its successors, permitted assigns or other successors in interest) is unable to resell securities under such Underlying Securities Registration Statement shall be added to such 30 Trading Day period), and no later than December 31, 1998 (the "TRANCHE 2 CLOSING EXPIRATION DATE"). The closing of the purchase and sale of the Tranche 2 Debentures (the "TRANCHE 2 CLOSING") shall take place at the offices of Robinson Silverman on such date (which may not be prior to the fifteenth Trading Day after receipt by the Purchasers of the Subsequent Tranche Notice); PROVIDED that in no case shall the Tranche 2 Closing take place unless and until the conditions listed in Section 4.1 have been satisfied or waived by the appropriate party. The date of the Tranche 2 Closing is hereinafter referred to as the "TRANCHE 2 CLOSING DATE." Notwithstanding anything to the contrary contained herein, the Company may, by written notice to each Purchaser provided prior to the Tranche 2 Closing Date, revoke such Subsequent Tranche Notice in the event that the closing sale price of the Common Stock, as reported by the American Stock Exchange or any other exchange or market on which the Common Stock is then traded, decreases by more than 20% from the date of the delivery of the Subsequent Tranche Notice and prior to the Tranche 2 Closing Date. (ii) At the Tranche 2 Closing, (a) the Company shall deliver (A) to each Purchaser (1) a pro rata portion of the principal amount (determined by reference to the principal amount of Tranche 1 Debentures issued and sold at the Tranche 1 Closing) of the Tranche 2 Debentures to be issued and sold thereat (or such other principal amount upon which the parties may agree) and the applicable Tranche 2 Warrant, each registered in the name of the appropriate Purchaser, (2) the legal opinions referenced in Section 4.1(k), substantially in the forms attached hereto as EXHIBIT E-1 and EXHIBIT E-2, respectively, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 2 Closing by the Company to the Purchasers pursuant to this Agreement; and (b) each Purchaser shall, severally and not jointly, deliver to the Company (1) the purchase price for the Tranche 2 Debentures being purchased by it at the Tranche 2 Closing, determined in accordance with Section 1.2(a)(i), in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Tranche 2 Closing Date and (2) all documents, instruments and writings required to have been delivered at or prior to the Tranche 2 Closing by such Purchaser pursuant to this Agreement. In the event that a Purchaser ("DEFAULTING PURCHASER") fails to purchase Tranche 2 Debentures in accordance with this Section 1.2(b)(ii) despite the performance by the Company of its obligations under this Section and the satisfaction by the Company of the conditions set forth in Section 4.1, the Company shall notify the non-Defaulting Purchaser or Purchasers of such failure whereby the non-Defaulting Purchaser or Purchasers shall have the option to purchase all or any portion of the remaining Tranche 2 Debentures within 5 Business Days from the later of the date it receives notice of such option and the Tranche 2 Closing Date. If no non-Defaulting Purchaser elects to purchase the remaining Tranche 2 Debentures, the Company may then assign the Defaulting Purchaser's rights hereunder to a third party, which party shall be reasonably acceptable to the non-Defaulting Purchaser or Purchasers, without further obligation to the Defaulting Purchaser to -3- 5 purchase the Tranche 2 Debentures. Failure by any Purchaser to buy Tranche 2 Debentures shall not affect the Company's obligations with respect to the Tranche 1 Debentures acquired by such Purchaser, which shall remain unaffected thereby. 1.3 FORM OF DEBENTURES. The Tranche 1 Debentures shall be in the form of EXHIBIT A attached hereto. The Tranche 2 Debentures shall be identical to the Tranche 1 Debentures, mutatis mutandis, except that the Conversion Price (as defined below) for the Tranche 2 Debentures shall be reset as of the Original Issue Date (as defined below) for the Tranche 2 Debentures. For purposes of this Agreement, "CONVERSION PRICE," "ORIGINAL ISSUE DATE," "TRADING DAY" and "PER SHARE MARKET VALUE" shall have the meanings set forth in EXHIBIT A. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company hereby makes the following representations and warranties to the Purchasers: (a) ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of British Columbia, Canada, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in SCHEDULE 2.1(A) (collectively, the "SUBSIDIARIES"). Each of the Subsidiaries is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the full corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate reasonably be expected to (x) adversely affect the legality, validity or enforceability of this Agreement, the Convertible Debentures, the Warrants (as defined in Section 3.17), or the Registration Rights Agreement (collectively, the "TRANSACTION DOCUMENTS"), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or financial condition of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents (any of the foregoing, a "MATERIAL ADVERSE EFFECT"). (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by the -4- 6 Transaction Documents and otherwise to carry out its obligations thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company. Each of the Transaction Documents has been duly executed by the Company and when delivered in accordance with the terms hereof shall constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate of incorporation, articles, by-laws or other charter documents (or their foreign equivalents). (c) CAPITALIZATION. The authorized, issued and outstanding capital stock of the Company is set forth in SCHEDULE 2.1(C). No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the Common Stock entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as disclosed in SCHEDULE 2.1(C), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Convertible Debentures and Warrants hereunder, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. To the knowledge of the Company, except as specifically disclosed in the SEC Documents (as defined below) or SCHEDULE 2.1(C), no Person (as defined below) beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) or has the right to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of 5% of the Common Stock. A "Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. (d) ISSUANCE OF CONVERTIBLE DEBENTURES AND WARRANTS. The Convertible Debentures and the Warrants are duly authorized, and, when issued and paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable. The Company, as at the Tranche 1 Closing Date and Tranche 2 Closing Date, as the case may be (each, a "CLOSING DATE" and, collectively, the "CLOSING DATES"), has and at all times while the Convertible Debentures and the Warrants are outstanding will maintain an adequate reserve of duly authorized shares of Common Stock to enable it to perform its conversion, exercise and other obligations under this Agreement, the Warrants and the Convertible Debentures, and in no -5- 7 circumstances shall such reserved and available shares of Common Stock be less than the sum of (i) 1,311,422 shares of Common Stock for issuance upon conversion of the Tranche 1 Debentures and Tranche 2 Debentures and (ii) the number of shares of Common Stock which would be issuable upon exercise in full of the Tranche 1 Warrants and Tranche 2 Warrants. The Company and the Purchasers agree that all liquidated damages and early redemption or repayment amounts payable pursuant to any Transaction Documents shall be paid in cash unless otherwise consented to by the Purchasers. The shares of Common Stock issuable upon conversion of Convertible Debentures and upon exercise of the Warrants are collectively referred to herein as the "Underlying Shares." When issued in accordance with the terms of the Convertible Debentures and the Warrants, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable. The Convertible Debentures, Warrants and Underlying Shares are collectively referred to herein as the "SECURITIES." (e) NO CONFLICTS. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its Certificate of Incorporation or Articles (each as amended through the date hereof) or (ii) subject to obtaining the Required Approvals (as defined below), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) to the knowledge of the Company, result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal, state and foreign securities laws and regulations), or by which any material property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as could not, individually or in the aggregate, have or result in a Material Adverse Effect. Neither the business of the Company nor any Subsidiary is being conducted in violation of any applicable law, ordinance or regulation of any governmental authority which could, individually or in the aggregate, have a Material Adverse Effect. (f) CONSENTS AND APPROVALS. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other Federal, state, local, foreign or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents other than (i) the filing of the Underlying Securities Registration Statements with the Commission, which shall be filed in the time periods set forth in the Registration Rights Agreement, (ii) the applications for the listing of the Underlying Shares with the American Stock Exchange (and with any other national securities exchange or market on which the Common Stock is then listed), and (iii) other than, in all other cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, could not reasonably be expected to have or result in, individually or in the aggregate, a Material -6- 8 Adverse Effect and to deliver to the Purchasers the Convertible Debentures or the Warrant (and, upon conversion or exercise thereof, the Underlying Shares) in the manner contemplated hereby and by the Registration Rights Agreement free and clear of all liens and encumbrances of any nature whatsoever (the "REQUIRED APPROVALS"). (g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in the Disclosure Materials (as defined below), there is no action, suit, notice of violation, proceeding or investigation pending or, to the best knowledge of the Company, threatened against, or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, local or foreign) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, individually or in the aggregate, have or result in a Material Adverse Effect. (h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, (ii) is in violation of any order of any court, arbitrator or governmental body (Federal, state, local or foreign), or (iii) is in violation of any statute, rule or regulation of any governmental authority, except in each case as could not reasonably be expected to individually or in the aggregate have or result in, individually or in the aggregate, a Material Adverse Effect. (i) PRIVATE OFFERING. Neither the Company nor any Person acting on its behalf has taken or will take any action which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"). (j) SEC DOCUMENTS. The Company has filed all reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC DOCUMENTS" and, together with the Schedules to this Agreement and any other information furnished by or on behalf of the Company in connection with the offer and sale of the Securities to the Purchasers, the "DISCLOSURE MATERIALS") on a timely basis, or has received a valid extension of such time of filing. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules -7- 9 and regulations of the Commission with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and the Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods shown, subject, in the case of unaudited statements, to normal year-end audit adjustments. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, there has been no event, occurrence or development that has had or that could have or result in a Material Adverse Effect which has not been specifically disclosed in writing to the Purchasers by the Company. The Company last filed audited financial statements with the Commission on March 31, 1998 and has not received any comments from the Commission in respect thereof. (k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (l) CERTAIN FEES. Other than fees due and payable to Smith Barney, Inc. as set forth in the engagement letter previously furnished to the Purchasers, no fees or commissions will be payable by the Company to any broker, financial or investment advisor, placement agent finder, investment banker, bank or any other Person acting in a similar capacity with respect to the transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless each of the Purchasers, their respective employees, officers, directors, agents, and partners, and their respective Affiliates (as such term is defined under Rule 405 promulgated under the Securities Act), from and against all claims, losses, damages, costs (including the costs of preparation and reasonable attorney's fees) and expenses suffered in respect of any such claimed or existing fees. (m) SOLICITATION MATERIALS. The Company has not (i) distributed any offering materials in connection with the offering and sale of the Securities other than the Disclosure Materials or (ii) solicited any offer to buy or sell the Securities by means of any form of general solicitation or advertising. (n) FORM S-3 ELIGIBILITY. The Company is, and at each Closing Date will be, eligible to register securities for resale with the Commission under Form S-3 promulgated under the Securities Act. (o) EXCLUSIVITY. The Company shall not issue and sell the Convertible Debentures to any Person other than the Purchasers and their respective Affiliates and managed funds, if any, other than with the specific prior written consent of the Purchasers. -8- 10 (p) LISTING MAINTENANCE REQUIREMENTS COMPLIANCE. The Company has not in the two years preceding the date hereof received written notice from any stock exchange or market on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange or market. 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of the Purchasers, severally and not jointly, hereby represents and warrants to the Company as follows: (a) ORGANIZATON; AUTHORITY. Such Purchaser is a corporation duly incorporated or a limited partnership duly formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with the requisite power and authority to enter into and to consummate the transactions contemplated hereby and by the Registration Rights Agreement and otherwise to carry out its obligations hereunder and thereunder. The purchase by such Purchaser of the Securities to be purchased by it hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, enforceable against such Purchaser, in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. (b) INVESTMENT INTENT. Such Purchaser is acquiring the Securities to be purchased by it hereunder for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof or interest therein, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. (c) PURCHASER STATUS. At the time such Purchaser was offered the Convertible Debentures and the Tranche 1 Warrant to be purchased by it hereunder, it was, and at the date hereof, it is, and at each Closing Date (and on the Tranche 2 Closing Expiration Date, if applicable), it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) EXPERIENCE OF PURCHASER. Such Purchaser either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. (e) ABILITY OF PURCHASER TO BEAR RISK OF INVESTMENT. Such Purchaser is able to -9- 11 bear the economic risk of an investment in the Securities, and, at the present time, is able to afford a complete loss of such investment. (f) ACCESS TO INFORMATION. Each Purchaser acknowledges receipt of the Disclosure Materials and further acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities, and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that such Purchaser believes is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. (g) RELIANCE. Each Purchaser understands and acknowledges that (i) the Convertible Debentures and the Warrants to be sold to it hereunder are being offered and sold to it in a private placement that is exempt from the registration requirements of the Securities Act and (ii) the availability of such exemption depends in part on and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchasers make no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 2.2. ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 TRANSFER RESTRICTIONS. (a) If any Purchaser should decide to dispose of any portion of the Securities held by it, each such Purchaser understands and agrees that it may do so only pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to, the registration requirements thereof. In connection with any transfer of any portion of the Securities other than pursuant to an effective registration statement or to the Company, the transferor shall provide notice thereof to the Company who may require the transferor thereof to provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. -10- 12 (b) Each Purchaser agrees to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Securities: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE AND/OR EXERCISABLE HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. [FOR CONVERTIBLE DEBENTURES ONLY] THIS CONVERTIBLE DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF APRIL 23, 1998, EXECUTED BY THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF PLC SYSTEMS INC. The Underlying Shares shall not contain the legend set forth above (or any other legend) if the conversion of Convertible Debentures or exercise of Warrants, as the case may be, pursuant to which such Underlying Shares are to be issued occurs at any time while the Underlying Securities Registration Statement is effective under the Securities Act or in the event there is not an effective Underlying Securities Registration Statement at such time, if in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the Commission). The Company agrees that it will provide the Purchaser, upon request, with a certificate or certificates representing Underlying Shares, free from any legend at such time as such legends are no longer required pursuant to this Section. 3.2 STOP TRANSFER INSTRUCTION. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in Section 3.1. 3.3 FURNISHING OF INFORMATION. As long as any Purchaser owns Underlying Shares, the Company covenants to timely file (or obtain extensions in respect thereof) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to the Purchasers and make publicly available in accordance -11- 13 with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. 3.4 COPIES AND USE OF DISCLOSURE MATERIALS. The Company consents to the use of the Disclosure Materials, and any amendments and supplements thereto, by the Purchasers in connection with resales of Securities other than pursuant to an effective Underlying Securities Registration Statement. 3.5 BLUE SKY LAWS. In accordance with the Registration Rights Agreement, the Company shall qualify the Underlying Shares under the securities or Blue Sky laws of such jurisdictions as any Purchaser may reasonably request and shall continue such qualification at all times through the third anniversary of the last Closing Date; PROVIDED, HOWEVER, that neither the Company nor its Subsidiaries shall be required in connection therewith to qualify as a foreign corporation where they are not now so qualified or to take any action that would subject the Company to general service of process in any such jurisdiction where it is not then so subject. 3.6 INTEGRATION. The Company shall not and shall use its best efforts to ensure that no Affiliate of the Company shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the issue or sale of any of the Securities to any Purchaser. 3.7 PURCHASER OWNERSHIP OF COMMON STOCK. Each of the Purchasers agrees not to use its ability to convert Debentures and exercise Warrants to the extent such conversion or exercise would result in it beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of the Debentures and exercise of the Warrants held by it after application of this Section. To the extent that the limitation contained in this Section applies, the determination of whether Debentures are convertible by a Purchaser (in relation to other securities owned by it) and of what portion thereof are convertible shall be in the sole discretion of such Purchaser, and the submission of Debentures for conversion shall be deemed to be such Purchaser's determination of whether such Debentures are convertible (in relation to other securities owned by it) and of which portion of its Debentures are convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of a Purchaser to convert Debentures at such time as such conversion will not violate the provisions of this Section. The provisions of this Section may be waived by a Purchaser (but only as to itself) upon not less than -12- 14 75 days prior notice to the Company, and the provisions of this Section shall continue to apply until such 75th day (or later, if stated in the notice of waiver). 3.8 LISTING AND RESERVATION OF UNDERLYING SHARES. The Company shall (a) not later than the fifth Business Day following the Tranche 1 Closing Date prepare and file with the American Stock Exchange (as well as any other national securities exchange or market on which the Common Stock is then listed or traded) an additional shares listing application covering all of the Underlying Shares that are issuable in respect of conversions of Debentures, and exercise of Warrants which number shall initially not be less than the sum of 640,000 Underlying Shares reserved for issuance upon conversion of Tranche 1 Debentures and 4,864 shares reserved for issuance upon exercise of Tranche 1 Warrants and Tranche 2 Warrants); (b) take all steps necessary to cause such shares to be approved for listing in the American Stock Exchange (as well as on any other national securities exchange or market on which the Common Stock is then listed) as soon as possible thereafter; and (c) provide to the Purchasers evidence of such listing, and the Company shall maintain the listing of its Common Stock on such exchange. If the Tranche 2 Warrants are issued and delivered on or after the Tranche 2 Closing Expiration Date, the Company shall (not later than five Business Days thereafter) prepare and file with the American Stock Exchange (as well as any other national securities exchange or market on which the Common Stock is then listed or traded) an additional shares listing application covering the number of Underlying Shares issuable upon exercise in full of the Tranche 2 Warrants, and take all steps necessary to cause such shares to be approved for listing thereon as soon as possible thereafter. (b) The Company shall reserve for issuance upon conversion of the Convertible Debentures and upon exercise of the Warrants in accordance with their terms the number of shares to be listed on the American Stock Exchange (and such other national securities exchange or market on which the Common Stock is then listed or traded) as set forth in Section 3.8(a). Shares of Common Stock reserved for issuance upon the conversion of the Convertible Debentures as set forth in Section 3.8(a)(i)(1) and Section 3.8(a)(ii)(1), as the case may be, shall be allocated pro rata to each of the Purchasers in accordance with the principal amount of Convertible Debentures issued and delivered to such Purchaser at the Tranche 1 Closing or the Trance 2 Closing, as applicable. 3.9 CONVERSION PROCEEDURES. EXHIBIT D attached hereto sets forth the procedures with respect to the conversion of the Convertible Debentures, including the forms of conversion notice to be provided upon conversion, instructions as to the procedures for conversion, the form of legal opinion, if necessary, that shall be rendered by or on behalf of the Company to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchasers to exercise their right of conversion smoothly and expeditiously. 3.10 PURCHASERS' RIGHTS IF TRADING IN COMMON STOCK IS SUSPENDED OR DELISTED. If at -13- 15 any time while any Purchaser (or any assignee thereof) owns any Securities trading in the shares of the Common Stock is suspended on or delisted from the American Stock Exchange or any other principal market or exchange for such shares (other than as a result of the suspension of trading in securities on such market or exchange generally or temporary suspensions pending the release of material information) for more than three Trading Days, at the option of any Purchaser exercisable by written notice to the Company delivered within 60 days of notice of such suspension or delisting, the Company shall repay in cash the entire principal amount of then outstanding Convertible Debentures held by such Purchaser and redeem all then outstanding Underlying Shares then held by such Purchaser in cash, at an aggregate purchase price equal to the sum of (I) the aggregate outstanding principal amount of Convertible Debentures then held by such Purchaser multiplied by (1) the average Per Share Market Value for the five (5) Trading Days immediately preceding (a) the day of such notice or (b) the date of payment in full of the repurchase price calculated under this Section, whichever is greater, divided by (2) the Conversion Price on the date of the repurchase notice, (II) the aggregate of all non-principal amounts then payable in respect of all Convertible Debentures to be repaid, (III) the number of Underlying Shares then held by such Purchaser multiplied by the average Per Share Market Value for the five (5) Trading Days immediately preceding (A) the date of the notice or (B) the date of payment in full by the Company of the repurchase price calculated under this Section, whichever is greater, and (IV) interest on the amounts set forth in I - III above accruing from the 5th day after such notice until the repurchase price under this Section is paid in full at the rate of 15% per annum. The Company shall provide written notice of any prepayment demand made pursuant to this Section to each other holder of Securities within 24 hours of its receipt thereof. 3.11 NO VIOLATION OF APPLICABLE LAW. Notwithstanding any provision of this Agreement to the contrary, if the repurchase of Convertible Debentures and/or redemption of Underlying Shares otherwise required under this Agreement would be prohibited by applicable law, such repurchase shall be effected as soon as it is permitted under such law; PROVIDED, HOWEVER, that interest payable by the Company with respect to any such repurchase and/or redemption shall continue to accrue in accordance with Section 3.10. 3.12 USE OF PROCEEDS. The Company shall use all of the net proceeds from the placement of the Securities for working capital purposes, which may include the acquisition of complementary businesses or products, and not for the satisfaction of any portion of Company or Subsidiary debt, or to redeem Company equity or equity-equivalent securities in excess of, in the aggregate (for all such satisfactions and redemptions) $1,000,000. Pending application of the proceeds of this placement in the manner permitted hereby the Company will invest such proceeds in interest bearing accounts and short-term, investment grade interest bearing securities. 3.13 NOTICE OF BREACHES. (a) Each of the Company and each Purchaser shall give prompt written notice to the other of any breach of any representation, warranty or other agreement contained in this Agreement or in the Registration Rights Agreement, as well as any events or occurrences arising after the date hereof and prior to, with respect to the Tranche 1 -14- 16 Closing, the Tranche 1 Closing Date, with respect to the Tranche 2 Closing, the Tranche 2 Closing Date which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained herein to be incorrect or breached as of such Closing Date. The Company shall give such notice to each Purchaser. However, no disclosure by either party pursuant to this Section shall be deemed to cure any breach of any representation, warranty or other agreement contained herein or in the Registration Rights Agreement, and no such disclosure by any Purchaser shall affect the rights of and obligations owing to the nondisclosing Purchasers under the Transaction Documents. (b) Notwithstanding the generality of Section 3.14(a), the Company shall promptly notify each Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contemplated hereby and by the Registration Rights Agreement violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Convertible Debentures a copy of any written statement in support of or relating to such claim or notice. (c) The default by any Purchaser of any of its obligations, representations or warranties under any Transaction Document shall not be imputed to, and shall have no effect upon, any other Purchaser or affect the Company's obligations under the Transaction Documents to any non-defaulting Purchaser. 3.14 CONVERSION OBLIGATIONS OF THE COMPANY. The Company covenants to honor conversions of Convertible Debentures and exercise of Warrants and to deliver Underlying Shares in accordance with the terms and conditions and time period set forth in the respective Convertible Debentures and Warrants. 3.15 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS; CERTAIN COMPANY ACTIONS. (a) The Company shall not, directly or indirectly, without the prior written consent of Southbrook and, on behalf of Brown Simpson Limited and Brown Simpson LP, Brown Simpson Asset Management, LLC ("BROWN SIMPSON MANAGEMENT"), offer, sell, grant any option to purchase, or otherwise dispose (or announce any offer, sale, grant or any option to purchase or other disposition) of any of its or its Affiliates equity or equity-equivalent securities at a price which is on the face thereof or implied therein, less than either the market price or fair market value for such securities (a "SUBSEQUENT FINANCING") for a period of 100 days after the last to occur of the Tranche 1 Closing Date or the Tranche 2 Closing Date (or, if later, the Tranche 2 Closing Expiration Date), except (i) the granting of options to employees, officers and directors, and the issuance of shares upon exercise of options granted, under any stock option plan heretofore or hereinafter duly adopted by the Company, (ii) shares issued upon exercise of any currently outstanding options and to the extent disclosed in SCHEDULE 2.1(A), (iii) shares of Common Stock issued upon conversion of Convertible Debentures and exercise of Warrants, (iv) shares issued or issuable in connection with any registered primary public offering of the Company's securities or -15- 17 in any private financing under which gross proceeds to the Company is at least $25,000,000 (provided, that Southbrook and Brown Simpson Management shall have the option to purchase up to 33% of any such private financing), (v) any securities issued or issuable to any entity (or its stockholders) acquired by the Company in a merger, stock or asset acquisition or similar transaction, or (vi) any securities issued by the Company in connection with any technology transfer or license agreement or marketing or similar joint venture agreement, unless (A) the Company delivers to each of Southbrook and Brown Simpson Management a written notice (the "SUBSEQUENT FINANCING NOTICE") of its intention to effect such Subsequent Financing, which Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Financing shall be affected, and a term sheet or similar document relating thereto (which shall be attached to such Subsequent Financing Notice) and (B) neither Southbrook nor Brown Simpson Management shall have notified the Company by 5:00 p.m. (Eastern Time) on the fifth Business Day after its receipt of the Subsequent Financing Notice of its willingness to provide (or to cause its sole designee to provide) such Subsequent Financing, subject to completion and negotiation of definitive documentation therefor, on substantially the terms set forth in the Subsequent Financing Notice. If neither Southbrook nor Brown Simpson Management notifies the Company of its intention to provide such Subsequent Financing within such time period, the Company may effect the Subsequent Financing substantially upon the terms and to the Persons (or Affiliates of such Persons) set forth in the Subsequent Financing Notice; PROVIDED, that the Company shall provide each of Southbrook and Brown Simpson Management with a second Subsequent Financing Notice, and each of Southbrook and Brown Simpson Management shall again have the right of first refusal set forth above in this Section 3.15(a), if the Subsequent Financing subject to the initial Subsequent Financing Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Financing Notice within 60 Business Days after the date of the initial Subsequent Financing Notice with the Person (or an Affiliate of such Person) identified in the Subsequent Financing Notice. If Southbrook and Brown Simpson Management indicate a willingness to provide Subsequent Financing in an amount that, in the aggregate, exceeds the amount indicated in the Subsequent Financing Notice, then Southbrook (or its designee) shall have the right to provide up to 80% and Brown Simpson (or its designee) shall have the right to provide up to 20% of such Subsequent Financing. (b) Other than Underlying Shares and other "Registrable Securities" (as defined in the Registration Rights Agreement) to be registered in accordance with the Registration Rights Agreement, the Company shall, for a period of not less than 90 Trading Days after the date that the Underlying Shares Registration Statement relating to the securities issued at the last to occur of the Tranche 1 Closing Date or Tranche 2 Closing Date (or, if later, the Tranche 2 Closing Expiration Date) is declared effective by the Commission, not, without the prior written consent of Purchasers, (i) issue or sell any of its or any of its Affiliates' equity or equity-equivalent securities pursuant to Regulation S promulgated under the Securities Act, or (ii) register for resale any securities of the Company. Any days that any Purchaser is unable to -16- 18 sell Underlying Shares under an Underlying Securities Registration Statement shall be added to such 90 Trading Day period for the purposes of (i) and (ii) above. (c) As long as there are Convertible Debentures outstanding, the Company shall not and shall cause the Subsidiaries not to, without the consent of Purchasers, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Purchasers; (ii) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock (except Underlying Shares and shares repurchased from employees of the Company upon their termination of employment with the Company not in excess of $1,000,000 in aggregate); or (iii) enter into any agreement with respect to any of the foregoing. Any repurchase of Convertible Debentures or Underlying Shares must be offered pro rata among the Purchasers in accordance with their then held respective principal amount of Convertible Debentures. 3.16 THE WARRANTS. (a) At the Tranche 1 Closing the Company shall issue and deliver (i) to Southbrook, a Common Stock purchase warrant (the "TRANCHE 1 SOUTHBROOK WARRANT") entitling Southbrook to purchase, on the terms and conditions set forth therein, 3,891 shares of Common Stock at a price per share equal to the Tranche 1 Warrant Exercise Price (as defined below); (ii) to Brown Simpson LP, a Common Stock purchase warrant (the "TRANCHE 1 BROWN SIMPSON LP WARRANT") entitling Brown Simpson LP to purchase, on the terms and conditions set forth therein, 243 shares of Common Stock at a price per share equal to the Tranche 1 Warrant Exercise Price; and (iii) to Brown Simpson Limited, a Common Stock purchase warrant (the "TRANCHE 1 BROWN SIMPSON LIMITED WARRANT," and together with the Southbrook Tranche 1 Warrant and the Brown Simpson LP Tranche 1 Warrant, the "TRANCHE 1 Warrants") entitling Brown Simpson Limited to purchase, on the terms and conditions set forth therein, 730 shares of Common Stock at an exercise price per share equal to the Tranche 1 Warrant Exercise Price. The "TRANCHE 1 WARRANT EXERCISE PRICE" shall be equal to 125% of the average Per Share Market Value for the five (5) Trading Days immediately preceding the Tranche 1 Closing Date. (b) At the earlier to occur of the Tranche 2 Closing Date or the Tranche 2 Closing Expiration Date, the Company shall issue and deliver (i) to Southbrook, a Common Stock purchase warrant entitling Southbrook to purchase, on the terms and conditions set forth therein, a number of shares of Common Stock equal to (A) if the Tranche 2 Warrants are issued on the Tranche 2 Closing Date, 1% of the purchase price to be paid by Southbrook for the Tranche 2 Debentures to be issued and sold to it at the Tranche 2 Closing or (B) if the Tranche 2 Warrants are to be issued and delivered on the Tranche 2 Closing Expiration Date, the number of shares to which the Tranche 1 Southbrook Warrant entitled Southbrook to purchase, at a price per share equal to the Tranche 2 Warrant Exercise Price (as defined below); (ii) to Brown Simpson LP, a Common Stock purchase warrant entitling Brown Simpson LP to purchase, on the terms and conditions set forth therein, a number of shares of Common Stock equal to (A) if the Tranche 2 Warrants are issued and delivered on the Tranche 2 Closing Date, 1% of the purchase price to be paid by Brown Simpson LP for the Tranche 2 Debentures to be issued and sold to it at -17- 19 the Tranche 2 Closing or (B) if the Tranche 2 Warrants are to be issued and delivered on the Tranche 2 Closing Expiration Date, the number of Shares to which the Tranche 1 Brown Simpson LP Warrant entitled Brown Simpson LP to purchase, at a price per share equal to the Tranche 2 Warrant Exercise Price; and (iii) to Brown Simpson Limited, a Common Stock purchase warrant entitling Brown Simpson Limited to purchase, on the terms and conditions set forth therein, a number of shares of Common Stock equal to (A) if the Tranche 2 Warrants are issued on the Tranche 2 Closing Date, 1% of the purchase price to be paid by Brown Simpson Limited for the Tranche 2 Debentures to be issued and sold to it at the Tranche 2 Closing or (B) if the Tranche 2 Warrants are to be issued and delivered on the Tranche 2 Closing Expiration Date, the number to which the Tranche 1 Brown Simpson Limited Warrant entitled Brown Simpson Limited to purchase, at a price per share equal to the Tranche 2 Warrant Exercise Price. The "TRANCHE 2 WARRANT EXERCISE PRICE" shall equal (a) if the Tranche 2 Warrants are issued and delivered on the Tranche 2 Closing Date, 125% of the average Per Share Market Value for the five (5) Trading Days immediately preceding such date or (b) if the Tranche 2 Warrants are to be issued and delivered on the Tranche 2 Closing Expiration Date, 125% of the average Per Share Market Value for the five (5) Trading Days immediately preceding such date. The Common stock purchase Warrants described in this paragraph are collectively referred to herein as the "TRANCHE 2 WARRANTS, and the Tranche 1 Warrants and the Tranche 2 Warrants are collectively referred to herein as the "WARRANTS." In each case of determining the number of shares issuable on exercise of the Tranche 2 Warrants if such warrants are issued on the Tranche 2 Closing Date, such number shall be determined by Smith Barney, Inc. using the Black-Scholes pricing model. (c) The Warrants shall be substantially in the form of EXHIBIT C. The failure of a Tranche 2 Closing with respect to any Purchaser due to a failure by the Company to timely deliver a Subsequent Tranche Notice or to satisfy all of the conditions set forth in section 4.1 shall not affect the Company's obligation to issue and deliver Tranche 2 Warrants on the Tranche 2 Closing Expiration Date. 3.17 TRANSACTIONS IN THE COMMON STOCK. The Purchasers will not establish a short position in the Common Stock during the fifteen (15) Trading Days after receipt of a Subsequent Funding Notice and prior to the Tranche 2 Closing Date. Any existing short position may be maintained. 3.18 LIMITING AGREEMENTS. So long as Convertible Debentures are outstanding, the Company will not enter into a contract, agreement or understanding that would restrict the Company's ability to pay principal, liquidated damages or penalty interest pursuant to any Transaction Documents. 3.19 LIMITATION ON AMOUNT OF TRANCHE 2 FINANCING. Notwithstanding anything to the contrary contained herein, if the Company shall not have previously obtained Stockholder Approval as contemplated under Section 4(a)(ii) of EXHIBIT A, then the Company may not require the Purchasers to acquire, and the amount of financing indicated on any Subsequent Tranche -18- 20 Notice shall be reduced as necessary so that the Purchasers shall be required to acquire a principal amount of Tranche 2 Debentures equal to no more than the Maximum Amount. The Maximum Amount shall be a principal amount of Tranche 2 Debentures that, if converted in full in accordance with their terms as at the Tranche 2 Closing Date, would result in the issuance to the Purchasers of a number of Underlying Shares equal to one half of the amount by which (i) the Issuable Maximum (as defined in Section 4(a)(ii) of EXHIBIT A), exceeds (ii) the sum of (A) any Underlying Shares theretofore issued on conversion of the Tranche 1 Debentures, plus (B) 200% of the number of Underlying Shares as would be issuable upon conversion in full of any principal amount of Tranche 1 Debentures then outstanding (assuming such conversions occurred in full on the Tranche 2 Closing Date), plus (C) 1,979,572 shares of Common Stock. ARTICLE IV CONDITIONS 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE TRANCHE 2 DEBENTURES. The obligation of each Purchaser hereunder to acquire and pay for Tranche 2 Debentures is subject to the satisfaction or waiver by such Purchaser at or before the Tranche 2 Closing of each of the following conditions: (a) TRANCHE 1 CLOSING. The Tranche 1 Closing shall have occurred; (b) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date when made and as of the Tranche 2 Closing Date as though made on and as of such date; (c) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Tranche 2 Closing Date; (d) UNDERLYING SECURITIES REGISTRATION STATEMENTS. The Underlying Securities Registration Statement with respect to the Underlying Shares issuable on conversion and exercise of all outstanding Tranche 1 Debentures and Tranche 1 Warrants shall have been declared effective under the Securities Act by the Commission and such Underlying Registration Statement shall have remained effective and shall not be subject to any stop order and no stop order shall be pending or threatened as at the Tranche 2 Closing Date; (e) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority which prohibits the consummation of any of the transactions -19- 21 contemplated by this Agreement or the Registration Rights Agreement relating to the issuance or conversion of any of the Securities; (f) MANAGEMENT. Neither Dr. Robert I. Rudko nor William C. Dow shall have left the Company or suffered a voluntary or involuntary material lessening of responsibility as Chairman or Chief Executive Officer (as the case may be) and, if the Company shall deliver a Subsequent Tranche Notice after October 23, 1998, the Company shall have previously hired a Chief Financial Officer; (g) NO SUSPENSIONS OF TRADING IN COMMON STOCK. The trading in the Common Stock shall not have been suspended by the Commission or on the American Stock Exchange (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company and except if, at the time there is any suspension on the American Stock Exchange, the Common Stock is then listed and approved for trading on the New York Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market within one (1) Trading Day thereof); (h) LISTING OF COMMON STOCK. The Common Stock shall have been at all times between the Tranche 1 Closing Date and the Tranche 2 Closing Date, and on the Tranche 2 Closing Date shall be, listed for trading on the American Stock Exchange, New York Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market; (i) CHANGE OF CONTROL. No Change of Control in the Company shall have occurred since the Tranche 1 Closing Date. "Change of Control" means the occurrence of any of (i) an acquisition after the date hereof by an individual, group (as defined in Rule 13d-1 promulgated under the Exchange Act), or legal entity of in excess of 30% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii); (j) LEGAL OPINIONS. The Company shall have delivered to such Purchaser opinions of outside legal counsel to the Company in substantially the forms attached hereto as EXHIBIT E-1 and EXHIBIT E-2, and dated the Tranche 2 Closing Date; (k) REQUIRED APPROVALS. All Required Approvals shall have been obtained; (l) SHARES OF COMMON STOCK. On the Tranche 2 Closing Date the Company shall have reserved for issuance to the Purchasers the number of shares of Common -20- 22 Stock specified in Section 3.8(a)(ii); (m) DELIVERY OF SECURITIES. The Company shall have delivered to Robinson Silverman (or such other Person acceptable to such Purchaser and the Company) in escrow pending the Tranche 2 Closing the Tranche 2 Convertible Debentures and Tranche 2 Warrants being purchased at the Tranche 2 Closing by such Purchaser, registered in the name of such Purchaser, each in form satisfactory to Robinson Silverman (or such other Person); (n) PERFORMANCE OF CONVERSION/EXERCISE OBLIGATIONS. The Company shall have (a) delivered Underlying Shares upon conversion of Tranche 1 Convertible Debentures and exercise of Tranche 1 Warrants and otherwise performed its obligations in accordance with the terms, conditions and timing requirements of the Tranche 1 Convertible Debentures and Tranche 1 Warrants; and (o) MARKET PRICE OF COMMON STOCK. The closing sale price of the Common Stock as reported by the American Stock Exchange or any other exchange or market on which the Common Stock is then listed shall be the greater of at least $8.00 per share for each of the fifteen (15) Trading Days immediately preceding each of the date of Subsequent Tranche Notice and the Tranche 2 Closing Date, provided that, in either case, all material information regarding the Company has been publicly disseminated on a timely basis, whether or not the Company has a duty under federal securities laws to disclose such information. ARTICLE V MISCELLANEOUS 5.1 FEES AND EXPENSES. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except as set forth in the Registration Rights Agreement PROVIDED, that the Company shall pay the fees due and payable to Brown Simpson as set forth in the engagement letter previously furnished to Purchasers. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares pursuant hereto. 5.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Exhibits and Schedules hereto, the Registration Rights Agreement, the Convertible Debentures and the Warrants contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 5.3 NOTICES. Any and all notices or other communications or deliveries required or -21- 23 permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 8:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: PLC Systems Inc. 10 Forge Park Franklin, MA 02038 Attn: William C. Dow, Chief Executive Officer Facsimile No.: (508) 541-7990 With copies to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 Attn: Neil H. Aronson Facsimile No.: (617) 542-2241 If to Southbrook: Southbrook International Investments, Ltd c/o Trippoak Advisors, Inc. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Facsimile No.: (212) 32-3256 Attn: Robert L. Miller If to Brown Simpson LP: Brown Simpson Strategic Growth Fund, L.P. 152 West 57th Street, 40th Floor New York, New York 10019 Facsimile No.: (212) 247-1329 Attn: Mitchell Kaye If to Brown Simpson Limited: Brown Simpson Strategic Growth Fund, Ltd. 152 West 57th Street, 40th Floor New York, New York 10019 Facsimile No.: (212) 247-1329 Attn: Mitchell Kaye -22- 24 With copies in the case of any Purchasers to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson or such other address as may be designated in writing hereafter, in the same manner, by such person. 5.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and each of the Purchasers; or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 5.5 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 5.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each of the Purchasers. No Purchaser may assign this Agreement or any rights or obligations hereunder without the prior written consent of the Company, except that any Purchaser may assign its rights hereunder and under the Transaction Documents without the consent of the Company as long as such assignee demonstrates to the reasonable satisfaction of the Company its satisfaction of the representations and warranties set forth in Section 2.2. This provision shall not limit a Purchaser's right to transfer securities or transfer or assign rights hereunder or under the Registration Rights Agreement. 5.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and, other than with respect to Section 3.15, which is intended in part for the benefit of and which may be enforced by Brown Simpson Management, and with respect to permitted assignees under Section 5.6, is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 5.8 GOVERNING. This Agreement shall be governed by and construed and -23- 25 enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. 5.9 SURVIVAL. The agreements and covenants contained in ARTICLE III, IV and this ARTICLE V shall survive the delivery and conversion of the Convertible Debentures pursuant to this Agreement and the representations and warranties of the Company and the Purchasers contained in ARTICLE II shall survive until a date that is three years after the last Closing Date. 5.10 EXECUTION. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 5.11 PUBLICITY. The Company shall consult with each Purchaser and each Purchaser shall consult with the Company prior to issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and the Company shall not issue any such press release or otherwise make any such public statement without the prior written consent of each Purchaser and the Purchasers shall not issue any such press release or otherwise make any public statement without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing parties shall provide the other parties with prior notice of such public statement. 5.12 SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 5.13 REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchasers will be entitled to specific performance of the obligations of the Company under the Transaction Documents. Each of the Company and the Purchasers (severally and not jointly) agree that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. -24- 26 IN WITNESS WHEREOF, the parties hereto have caused this Convertible Debenture Purchase Agreement to be duly executed as of the date first indicated above. Company: PLC SYSTEMS INC. By:/s/ Patricia L. Murphy ---------------------- Patricia L. Murphy Chief Financial Officer Purchasers: SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. By:/s/ Kenneth L. Henderson ------------------------ Kenneth L. Henderson Attorney-in-Fact BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. By:/s/ Mitchell Kaye ----------------- Mitchell Kaye Principal BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. By:/s/ Mitchell Kaye ----------------- Mitchell Kaye Principal -25- 27 SCHEDULE 2.1(A) SUBSIDIARIES
- ---------------------------------------------------- ------------------------------ ================================ NAME Jurisdiction Percentage of of Equity ORGANIZATION Securities Owned BY THE COMPANY - ---------------------------------------------------- ------------------------------ ================================ PLC Medical Systems, Inc. Delaware 100% - ---------------------------------------------------- ------------------------------ ================================ PLC Sistemas Medicos Internacionais, Lda Portugal 100% - ---------------------------------------------------- ------------------------------ ================================ PLC Sistemas Medicos GmbH Germany 100% - ---------------------------------------------------- ------------------------------ ================================ PLC Medical Systems AG Switzerland 100% - ---------------------------------------------------- ------------------------------ ================================ PLC Medical Systems Asia/Pacific Pte Ltd. Singapore 100% - ---------------------------------------------------- ------------------------------ ================================ PLC Medical Systems France France 100% - ---------------------------------------------------- ------------------------------ ================================ PLC Medical Systems Australia Pty. Ltd. Australia 100% - ---------------------------------------------------- ------------------------------ ================================
-26- 28 EXHIBIT 2.1(c) PLC SYSTEMS CAPITALIZATION TABLE Shares Authorized 25,000,000 Shares O/S @ 04/22/98 (18,980,081) Shares reserved for options outstanding (2,804,983) Shares reserved for warrants outstanding (150,000) ------------ Balance Remaining 3,064,936 EX-10.B 3 CONVERTIBLE DEBENTURE DUE APRIL 23, 2003 1 EXHIBIT 10.b NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF APRIL 23, 1998, EXECUTED BY THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF PLC SYSTEMS INC. No. [ ] U.S. $500,000 PLC SYSTEMS INC. CONVERTIBLE DEBENTURE DUE APRIL 23, 2003 THIS DEBENTURE is one of a duly authorized issue of debentures of PLC Systems Inc. a corporation organized and existing under the laws of British Columbia, Canada, having a principal place of business at 10 Forge Park, Franklin, MA 02038 (the "Company"), designated as its Convertible Debentures, due April 22, 2003, in an aggregate principal amount of up to $10,000,000 (the "Debentures"). FOR VALUE RECEIVED, the Company promises to pay to [ ], or registered assigns (the "Holder"), the principal sum of Five Hundred Thousand dollars ($500,000), on or prior to April 23, 2003 or such earlier date as the Debentures are required to be repaid as provided hereunder (the "Maturity Date"). The principal of this Debenture is payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address of the Holder last appearing on the records of the Company regarding registration and transfer of Debentures (the "Debenture Register"), except that principal paid on April 23, 2003 may, at the Company's option, be paid in shares of the Common Stock (as defined in Section 6) calculated based upon the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date or Maturity 2 Date, as provided below, as the case may be. All amounts due hereunder shall be paid in cash or in Common Stock as provided herein. A transfer of the right to receive principal under this Debenture shall be transferable only through an appropriate entry in the Debenture Register as provided herein. This Debenture is subject to the following additional provisions: Section 1. The Debentures are issuable in denominations of Two Hundred Fifty Thousand Dollars ($250,000) and integral multiples of Fifty Thousand Dollars ($50,000) in excess thereof. No service charge will be made for such registration of transfer or exchange. Section 2. This Debenture has been issued subject to certain investment representations of the original Holders set forth in the Convertible Debenture Purchase Agreement, dated as of April 23, 1998, as amended from time to time (the "Purchase Agreement"), and may be transferred or exchanged only in compliance with the Purchase Agreement. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any Federal, state, local or foreign administrative or governmental body): (a) any default in the payment of the principal of, or liquidated damages in respect of, this Debenture, free of any claim of subordination, as and when the same shall become due and payable on the Conversion Date or the Maturity Date or by acceleration or otherwise; (b) the Company shall fail to observe or perform any warranty contained in, or any representation of the Company shall prove to have been incorrect when given under, or the Company shall fail to observe or perform in any material respect any covenant or agreement under, or otherwise commit any breach of, this Debenture, the Purchase Agreement, any Warrant (as defined in the Purchase Agreement) or the Registration Rights Agreement (as defined in Section 6), and such failure or breach shall not have been remedied within 30 days after the date on which notice of such failure or breach shall have been given; (c) the Company or any of its subsidiaries shall commence, or there shall be commenced against the Company or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or 3 the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or the Company or any subsidiary thereof shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of the foregoing; (d) the Company shall default in any of its obligations under any mortgage, credit agreement or other facility, indenture agreement or other instrument under which there is indebtedness of the Company exceeding Four Hundred Thousand dollars ($400,000) secured by assets of the Company (or any Subsidiary thereon), whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable; (e) the Common Stock shall be delisted from the American Stock Exchange or any other national securities exchange or market on which such Common Stock is listed for trading or suspended from trading thereon without being relisted or having such suspension lifted, as the case may be, within three Trading Days; (f) the Company shall be a party to any merger or consolidation pursuant to which the Company shall not be the surviving entity or shall dispose of all or substantially all of its assets in one or more transactions, or shall redeem more than a de minimis number of shares of Common Stock (other than an aggregate of $1,000,000 of shares of Common Stock which may be repurchased from employees upon their termination of employment with the Company, calculated by reference to the market price of the Common Stock at such time, and other than redemptions of Underlying Shares (as defined in Section 6)); or (g) the Company shall fail to deliver certificates to holders prior to the 15th day after a Conversion Date pursuant to Section 4(b). -3- 4 If during the time that any portion of this Debenture remains outstanding, any Event of Default occurs and is continuing, and in every such case, then the Holders may, by notice to the Company, declare the full principal amount of this Debenture, together with all other amounts owing hereunder, to the date of acceleration, to be, plus the "Adjustment Amount" (as defined in Section 6) whereupon the same shall become, immediately due and payable in cash (notwithstanding anything herein contained to the contrary) without presentment, demand, protest or other notice of any kind, all of which are waived by the Company, notwithstanding anything herein contained to the contrary, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. Section 4. Conversion. (a) (i) This Debenture shall be convertible into shares of the Common Stock (subject to reduction pursuant to Section 4(a)(ii) below and Section 3.7 of the Purchase Agreement) at the option of the Holder in whole or in part at any time and from time to time after the ninetieth (90th) day following the Original Issue Date and prior to the close of business on the Maturity Date unless such conversion occurs at the Initial Conversion Price (as defined below), in which event this Debenture shall be convertible at the option of the Holder immediately after the Original Issue Date. The Holder shall effect conversions by surrendering the Debentures (or such portions thereof) to be converted, together with the form of conversion notice attached hereto as Exhibit A (the "Conversion Notice") to the Company. Each Conversion Notice shall specify the principal amount of Debentures to be converted (which may not be less than $100,000 or such less principal amount of Debentures than held by such Holder) and the date on which such conversion is to be effected, which date may not be prior to the date such Conversion Notice is deemed to have been delivered pursuant to Section 4(h) (the "Conversion Date"). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that the Conversion Notice is deemed delivered pursuant to Section 4(h). Subject to Sections 4(a)(ii) and 4(b) hereof and Section 3.7 of the Purchase Agreement, each Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to such Holder (in the manner and within the time set forth in Section 5(b)) a new Debenture for such principal amount as has not been converted. (ii) Certain Regulatory Approval. If on the Conversion Date applicable to any conversion, (A) the Common Stock is then listed for trading on the American Stock Exchange , (B) the Conversion Price then in effect is such that the aggregate number of shares of the Common Stock that would then be issuable upon conversion of the entire outstanding principal amount of Debentures, together with any shares of the Common Stock previously issued upon conversion of Debentures would equal or exceed 20% of the number of shares of the -4- 5 Common Stock outstanding on the Original Issue Date (the "Issuable Maximum"), and (C) the Company has not previously obtained the Stockholder Approval (as defined below), then the Company shall issue to the Holder requesting such conversion the Issuable Maximum and, with respect to any shares of the Common Stock that otherwise would have been issuable to such holder in respect of the Conversion Notice at issue or in respect of payment of interest hereunder in excess of the Issuable Maximum, the Holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than 90 days after such Conversion Date, convene a meeting of the holders of the Common Stock and use its reasonable efforts to obtain the Stockholder Approval or (2) prepay, from funds legally available therefor at the time of such prepayment, the balance of the principal amount of the Debentures subject to such Conversion Notice and the remaining aggregate principal amount of Debentures then outstanding and held by such Holder at a price equal to the sum of (A) the principal amount of Debentures then outstanding and held by such Holder multiplied by the product of (i) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such prepayment price, whichever is greater, divided by (ii) the Conversion Price calculated on the Conversion Date plus (B) all other amounts then due in respect of such Debentures; provided, however, that if the Holder has requested that the Company obtain Stockholder Approval under paragraph (1) above and the Company fails for any reason to obtain such Stockholder Approval within the time period set forth in (1) above, the Company shall be obligated to prepay Debentures in accordance with the provisions of paragraph (2) above, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue from the Conversion Date. If the Holder has requested that the Company prepay Debentures pursuant to this Section and the Company fails for any reason to pay the prepayment price under (2) above within seven days after the Conversion Date, the Company will pay interest on such prepayment price at a rate of 15% per annum to the converting Holder, accruing from the Conversion Date until the prepayment price plus any accrued interest thereon is paid in full. The entire prepayment price, including interest thereon, shall be paid in cash. "Stockholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the stockholders of the Company held in accordance with the Company's Certificate of Incorporation and by-laws, of the issuance by the Company of shares of the Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Debentures into the Common Stock at a price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 713 of the American Stock Exchange (or any successor or replacement provision thereof). (iii) Maximum Conversion Shares. Notwithstanding anything to the contrary set forth herein, the Company shall not be obligated to issue in excess of 816,326 shares of Common Stock upon conversion of Debentures, which shares shall constitute payment in full of the principal hereunder on April 23, 2003, which number shall be subject to adjustment pursuant to Section 4 (other than the first sentence of Section 4(c)(i). In accordance with the Purchase Agreement such number of shares shall be available on a pro rata basis based upon the pro rata purchase price for the Debentures paid by the original Holders of Debentures. Shares of Common Stock issued in respect of penalties and liquidated damages hereunder shall not count -5- 6 towards the 816,326 share limit referenced in this paragraph and shall be paid in cash unless otherwise agreed to by the Holders. (b) Not later than three Trading Days after the Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1 of the Purchase Agreement) representing the number of shares of the Common Stock being acquired upon the conversion of Debentures (subject to reduction pursuant to Section 4(a)(ii) hereof and Section 3.7 of the Purchase Agreement) and (ii) Debentures in a principal amount equal to the principal amount of Debentures not converted; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of the Common Stock issuable upon conversion of the principal amount of Debentures until Debentures are either delivered for conversion to the Company or any transfer agent for the Debentures or the Common Stock, or the Holder notifies the Company that such Debenture has been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith (in which case the Company shall issue a replacement Debenture in like principal amount). The Company shall, upon request of the Holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of the Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, are not delivered to or as directed by the applicable Holder by the third Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the Debentures tendered for conversion. If the Company fails to deliver to the Holder such certificate or certificates pursuant to this Section, including for purposes hereof, any shares of the Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, prior to the fifth Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $1,500 for each day after such fifth Trading Day until such certificates are delivered. (c) (i) The conversion price (the "Conversion Price") in effect on any Conversion Date shall be the lesser of (a) 125% of the average Per Share Market Value of the Common Stock for the five (5) Trading Days immediately preceding the Original Issue Date (the "Initial Conversion Price") and (b) the average of the five (5) consecutive lowest Per Share Market Values for the thirty (30) Trading Days immediately preceding the Conversion Date (which Per Share Market Value will not include days on which the converting Holder established a short position in the Common Stock; provided that, if the average Per Share Market Value for five (5) consecutive Trading Days is equal to or greater than the Initial Conversion Price, then the Conversion Price may not, subject to the operation of the immediately succeeding sentence, be less than 85% of the average Per Share Market Value of the Common Stock for the five (5) Trading Days immediately preceding the Original Issue Date. If a registration statement -6- 7 registering the resale of the shares of Common Stock issuable upon conversion of the Debentures and naming the Holder as a Selling Stockholder thereunder (the "Underlying Shares Registration Statement") is not filed on or prior to the 30th day after the Original Issue Date, or (b) the Company fails to file with the Securities and Exchange Commission (the "Commission") a request for acceleration in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Shares Registration Statement will not be "reviewed" or is not subject to further review or comment by the Commission, or (c) the Underlying Shares Registration Statement is not declared effective by the Commission on or prior to the 90th day after the Original Issue Date, or (d) such Underlying Shares Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as such term is defined in the Registration Rights Agreement) at any time prior to the expiration of the "Effectiveness Period" (as such term as defined in the Registration Rights Agreement), without being succeeded by a subsequent Underlying Shares Registration Statement filed with and declared effective by the Commission within 10 Business Days (as defined in Section 6), or (e) trading in the Common Stock shall be suspended for any reason for more than three Trading Days, or (f) if the conversion rights of the Holders of Debentures hereunder are suspended for any reason (any such failure being referred to as an "Event," and for purposes of clauses (a), (c) and (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) days period is exceeded, or for purposes of clause (d) the date which such 10 Business Day-period is exceeded, or for purposes of clause (e) the date on which such three Trading Day period is exceeded, being referred to as "Event Date"), the Conversion Price shall be decreased by 2.5% on the Event Date and each monthly anniversary thereof until the earlier to occur of the second month anniversary after the Event Date and such time as the applicable Event is cured (i.e., the Conversion Price would decrease by 2.5% as of the Event Date and an additional 2.5% as of the one month anniversary of such Event Date). Commencing the second month anniversary after the Event Date, at the option of each Holder for each applicable monthly period either (a) the Company shall pay to the Holders 2.5% of the product of the principal amount of outstanding Debentures (each Holder being entitled to receive such portion of such amount as equals its pro rata portion of Debentures then outstanding), in cash or (b) the Conversion Price shall be decreased by 2.5% for each additional such month (to be effective in full on the monthly applicable Event Date) as liquidated damages, and not as a penalty on the first day of each monthly anniversary of the Event Date in either case until such time as the applicable Event is cured. Any decrease in the Conversion Price pursuant to this Section shall not be subject to a Conversion Price floor and shall remain in effect notwithstanding the fact that the Event causing such decrease has been subsequently cured and further monthly decreases have ceased. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. (ii) If the Company, at any time while any Debentures are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of the Common Stock, (b) subdivide outstanding shares of the Common Stock into a larger number of -7- 8 shares, (c) combine outstanding shares of the Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of the Common Stock outstanding after such event. Any adjustment made pursuant to this Section 4(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any Debentures are outstanding, shall issue rights or warrants to all holders of the Common Stock (and not to Holders of Debentures) entitling them to subscribe for or purchase shares of the Common Stock at a price per share less than the Per Share Market Value of the Common Stock at the record date mentioned below, the Initial Conversion Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of the Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase shares of the Common Stock the issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section 4(c)(iii), if any such right or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section 4 after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while Debentures are outstanding, shall distribute to all holders of the Common Stock (and not to Holders of Debentures) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 4(c)(ii) and (iii) above), then in each such case the Initial Conversion Price at which Debentures shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of the Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value -8- 9 of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith; provided, however, that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the holders of a majority in interest of Debentures then outstanding; and provided, further, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the holders of Debentures of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of the Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vi Whenever the Initial Conversion Price is adjusted pursuant to Section 4(c)(ii),(iii) or (iv), the Company shall promptly mail to each Holder of Debentures in accordance with Section 5(h), a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holder of this Debenture shall have the right thereafter to, at its option, (A) convert the then outstanding principal amount, together with any other amounts then owing hereunder in respect of this Debenture only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount, together with any other amounts then owing hereunder in respect of this Debenture could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay, from funds legally available therefor at the time of such prepayment, all of its Debentures at a price equal to the sum of (i) the aggregate of the principal amount of Debentures then held by the Holder multiplied by (a) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the effective date of the reclassification or share exchange triggering such prepayment right or (2) the date of payment in full by the Company of the prepayment price hereunder, whichever is greater, divided by (b) the Conversion Price calculated on such effective date, plus (ii) the aggregate of all other amounts then payable in respect of all Debentures to be repaid hereunder. The entire redemption price -9- 10 shall be paid in cash, and the terms of payment of such redemption price shall be subject to the provisions set forth in Section 5(b). The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities, cash or property set forth in this Section 4(c)(vii) upon any conversion following such event. This provision shall similarly apply to successive reclassifications or share exchanges. (viii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption (other than redemptions of the stock of employees upon their termination of employment with the Company in an aggregate amount not to exceed $1,000,000, calculated by reference to the market price of the Common Stock at such time) of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders of Debentures at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as -10- 11 of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 30-day period commencing the date of such notice to the effective date of the event triggering such notice. (d) If at any time conditions shall arise by reason of action taken by the Company which in the opinion of the Board of Directors are not adequately covered by the other provisions hereof and which might materially and adversely affect the rights of the Holders (different than or distinguished from the effect generally on rights of holders of any class of the Company's capital stock) or if at any time any such conditions are expected to arise by reason of any action contemplated by the Company, the Company shall mail a written notice briefly describing the action contemplated and the material adverse effects of such action on the rights of the Holders at least 30 calendar days prior to the effective date of such action, and an Appraiser mutually acceptable to the Holders of majority in interest of the Debentures and the Company shall give its opinion as to the adjustment, if any (not inconsistent with the standards established in this Section 4), of the Conversion Price (including, if necessary, any adjustment as to the securities into which Debentures may thereafter be convertible) and any distribution which is or would be required to preserve without diluting the rights of the Holders. The determination of the Appraiser shall be final. (e) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of the Common Stock solely for the purpose of issuance upon conversion of the Debentures, as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, the sum of 1,311,422 shares of Common Stock for issuance (on a pro rata basis as described in Section 4(a)(iii) upon conversion of Debentures (taking into account the adjustments and restrictions of Section 4(c)). The Company covenants that all shares of the Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Underlying Shares Registration Statement has been declared effective under the Securities Act, freely tradeable. (f) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (g) The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, -11- 12 provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (h) Any and all notices or other communications or deliveries to be provided by the Holders of the Debentures hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 10 Forge Park, Franklin, MA 02038 (facsimile number (508) 581-7990, attention Chief Executive Officer with copy to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., attention Neil H. Aronson (facsimile number (617) 542-2241), or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder of the Debentures at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 8:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days after deposit in the United States mails, (iv) the Business Day following the date of mailing, if send by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. Section 5. Company Conversion: Company Prepayment. (a) Provided that the average Per Share Market Value for any consecutive 30 Trading Day period commencing on the Original Issue Date exceeds the Initial Conversion Price by more than 50%, this Debenture shall be convertible in whole or in part into a number of shares of Common Stock at the Conversion Price at the option of the Company; provided, however, that the Company is not permitted to deliver a Company Conversion Notice (as defined below) within 10 days after issuing any press release or other public statement relating to such conversion or at any time when the Underlying Securities Registration Statement is not then effective or shares of Common Stock are not listed for trading. In addition, provided there is an effective Underlying Securities Registration Statement at such time or the Holders are eligible to resell Common Stock without volume restrictions, pursuant to Rule 144(k) promulgated under the Securities Act, the Company shall have the right to convert any outstanding principal amount -12- 13 of Debentures on April 23, 2003. The Company shall effect any such conversion by delivering to the Holder a written notice in the form attached hereto as Exhibit B (the "Company Conversion Notice"), which Company Conversion Notice, once given, shall be irrevocable. Each Company Conversion Notice shall specify the principal amount of Debentures to be converted. The Company shall deliver such Company Conversion Notice at least two (2) Trading Days before the Maturity Date or the date of conversion (such date is hereinafter referred to as the "Company Conversion Date"). Upon its receipt of a Company Conversion Notice, the Holder shall surrender the principal amount of Debentures subject to such notice at the office of the Company or of any transfer agent for the Debentures or Common Stock. If the Company is converting less than the aggregate principal amount of all Debentures, the Company shall, upon conversion of the principal amount of Debentures subject to such Company Conversion Notice and receipt of the Debentures surrendered for conversion, deliver to the Holder, a replacement Debenture for such principal amount of Debentures as have not been converted. Each of a Holder Conversion Notice and a Company Conversion Notice is sometimes referred to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a "Company Conversion Date" is sometimes referred to herein as a "Conversion Date." (b)(i) Provided that the average Per Share Market Value for any consecutive 30 Trading Day period exceeds the Initial Conversion Price by more than 50%, the Company shall have the right, exercisable at any time upon 30 Trading Days notice (an "Optional Prepayment Notice") to the Holders to prepay all or any portion of the principal amount of Debentures then outstanding, at a price equal to the Optional Prepayment Price (as defined below). The entire Optional Prepayment Price shall be paid in cash. Holders of Debentures may convert (and the Company shall honor such conversions in accordance with the terms hereof) of Debentures, including the portion thereof subject to an Optional Prepayment Notice, during the period from the date thereof through the 29th Trading Day after the receipt of an Optional Prepayment Notice. (ii) If any portion of the Optional Prepayment Price shall not be paid by the Company by the 30th Trading Day after the delivery of an Optional Prepayment Notice, interest shall accrue thereon at the rate of 15% per annum until the Optional Prepayment Price plus all such interest is paid in full (any such amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of the Optional Prepayment Price remains unpaid for more than seven (7) calendar days after the date due, the Holder of Debentures subject to such prepayment may elect, by written notice to the Company given at any time thereafter, to either (a) demand conversion in accordance with the formula and the time frame therefor set forth herein of all or any portion of the principal amount of Debentures for which such Optional Prepayment Price, plus accrued liquidated damages thereof, has not been paid in full (the "Unpaid Prepayment Amount"), in which event the Per Share Market Value for such Unpaid Prepayment Amounts shall be the lower of the Per Share Market Value calculated on the date the Optional Prepayment Price was originally due and the Per Share Market Value as of the Holder's written demand for conversion, or (b) invalidate ab initio such prepayment, notwithstanding anything herein contained to the contrary. If the Holder elects option (a) above, the Company shall within three (3) Trading Days of its receipt of such election deliver to the Holder the shares -13- 14 of Common Stock issuable upon conversion of the Unpaid Prepayment Amount subject to such Holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (b) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of Holder's notice of such election, return to the Holder all of the Unpaid Prepayment Amount. (iii) The "Optional Prepayment Price" shall equal the full principal amount of the Debenture, together with all other amounts owing thereunder, plus the Adjustment Amount (as defined in Section 6). Section 6. Definitions. For the purposes hereof, the following terms shall have the following meanings: "Adjustment Amount" is equal to (i) the aggregate principal amount of Debentures then outstanding multiplied by (A) the average Per Share Market Value for the five Trading Days immediately preceding (1) the applicable Trigger Date or (2) the date of payment of all amounts due as a result of such Event of Default, whichever is greater, divided by (B) the Conversion Price with respect to the aggregate principal amount of Debentures then outstanding calculated on the applicable Trigger Date, minus (ii) the aggregate principal amount of Debentures then outstanding, plus all other amounts due, except for those referred to in (i) above pursuant to the terms hereof. "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in New York City or in the Province of British Columbia, Canada are authorized or required by law or other government action to close. "Common Stock" means the Company's common stock, without par value, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "Original Issue Date" shall mean the date of the first issuance of any Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. "Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the American Stock Exchange or other stock exchange or quotation system on which the Common Stock is then listed or if there is no such price on such date, then the closing bid price on such exchange or quotation system on the date nearest preceding such date, or (b) if the Common Stock is not listed then on the American Stock Exchange or any stock exchange or quotation system, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar organization or -14- 15 agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an appraiser selected in good faith by the Holders of a majority in interest of the Debentures; provided, however, that the Company, after receipt of the determination by such appraiser, shall have the right to select an additional appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such appraiser. "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Registration Rights Agreement" means the Registration Rights Agreement, dated April 23, 1998, among the Company and the original holders of Debentures. "Trading Day" means (a) a day on which the Common Stock is traded on the American Stock Exchange or other stock exchange or market on which the Common Stock has been listed, or (b) if the Common Stock is not listed on the Nasdaq SmallCap Market or any stock exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Trigger Date" shall mean, (i) with respect to an Event of Default caused by an event described in Section 3(a), the date the payment of principal at issue was due, (ii) with respect to an Event of Default caused by an event described in Section 3(b), the date specified in any other provision of this Debenture, the Purchase Agreement or the Registration Rights Agreement that require prepayment of the outstanding principal amount of this Debenture as a result of an event so contemplated, if not, the date such event becomes an Event of Default pursuant to Section 3(b), and (iii) with respect to an Event of Default caused by an event described in Section 3(c), (d), (e) and (f), the date such event becomes an Event of Default pursuant to such Sections. "Underlying Shares" means the number of shares of Common Stock into which the Debentures are convertible in accordance with the terms hereof and the Purchase Agreement. Section 7. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. -15- 16 Section 8. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. Section 9. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. Section 10. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflicts of laws thereof. Section 11. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. Section 12. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Section 13. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next calendar month, the preceding Business Day in the appropriate calendar month). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE TO FOLLOW] -16- 17 IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to be duly executed by an officer thereunto duly authorized as of the date first above indicated. PLC SYSTEMS INC. By:/s/ Patricia L. Murphy ------------------------- Name: Patricia L. Murphy Title: Chief Financial Officer Attest: By:/s/ Robert J. Rudko ---------------------- Name: Robert J. Rudko Title: Chairman 18 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert Debenture No. [ ] into shares of Common Stock, no par value per share (the "Common Stock"), of PLC Systems Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: Date to Effect Conversion Principal Amount of Debentures to be Converted Number of shares of Common Stock to be Issued Applicable Conversion Price Signature Name Address The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock outstanding on such date and the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion notice were effected in full, whereupon, if the Company determines that such conversion would result in it owning in excess of 4.999% of the outstanding shares of Common Stock on such date, the Company shall convert up to an amount equal to 4.999% of the outstanding shares of Common Stock and issue to the holder one or more certificates representing Debentures which have not been converted as a result of this provision. 19 EXHIBIT B PLC SYSTEMS INC. NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of PLC SYSTEMS INC. (the "Company") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to convert the above Debenture No. [ ] into shares of Common Stock, no par value per share (the ACommon Stock@), of the Company according to the conditions hereof, as of the date written below. No fee will be charged to the Holder for any conversion hereunder, except for such transfer taxes, if any, which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: Date to Effect Conversion Principal Amount of Debentures to be Converted Number of shares of Common Stock to be Issued Applicable Conversion Price Signature Name: Address: EX-10.C 4 REDEEMABLE WARRANT 1 EXHIBIT 10.c NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. PLC SYSTEMS INC. REDEEMABLE WARRANT Warrant No. [ ]Dated April 23, 1998 PLC Systems Inc., a corporation organized and existing under the laws of British Columbia, Canada (the "Company"), hereby certifies that, for value received, [ ], or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of [ ] shares of Common Stock, no par value (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $19.53 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including April 23, 2003 or earlier as provided herein (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), 2 evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration, Exercise of Warrants and Redemption. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., New York time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., New York time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(b), 6 and 10, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its office at 10 Forge Park, Franklin, MA 02038, Attention: Chief Financial Officer, or at such other address as the Company may specify in writing to the then registered Holder, and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in lawful money of the United States of America, in cash or by certified or official bank check or checks, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends other than as required by the Purchase Agreement of even date herewith between the Holder and the Company. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall 2 3 issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) If the average closing sale price of the Common Stock for any consecutive 30 Trading Day period commencing April 23, 1999 exceeds the Exercise Price by more than 50%, the Company shall have the right, exercisable at any time upon 30 days notice to the Holder given at any time after April 23, 1999, to redeem this Warrant at a price of $.10 per Warrant Share. Any portion of this Warrant not exercised by 5:00 p.m. (New York time) on the 30th day following such notice (the "Redemption Date") shall be returned to the Company and the Company shall issue therefor in full and complete satisfaction of its obligations under such remaining portion to the Holder an amount equal to the number of shares of Common Stock then issuable hereunder multiplied by $.10 per share (the "Redemption Price"). The Redemption Price shall be payable to the Holder and shall be mailed to such persons at their address of record, and the Warrant shall be cancelled. The Holder may exercise this Warrant during the period from the date of such call notice through the 29th day thereafter. 4. Payment of Exercise Price. The Holder may pay the Exercise Price in cash or, in the event that a registration statement covering the resale of the Warrant Shares and naming the holder thereof as a selling stockholder thereunder is not effective for the resale of the Warrant Shares at any time during the term of this Warrant, pursuant to a cashless exercise, as follows: (a) Cash Exercise. The Holder shall deliver immediately available funds; (b) Cashless Exercise. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the closing sale prices of the Common Stock for the Trading Day immediately prior to the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 3 4 5. Piggyback Registration Rights. During the term of this Warrant the Company may not file any registration statement with the Securities and Exchange Commission (other than registration statements of the Company filed on Form S-8 or Form S-4 including supplements thereto) at any time when there is not an effective registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder, but not additionally filed registration statements in respect of such securities), each as promulgated under the Securities Act of 1933, as amended, pursuant to which the Company is registering securities pursuant to a Company employee benefit plan or pursuant to a merger, acquisition or similar transaction) unless the Company provides the Holder with not less than 20 days notice to each of the Holder and Robinson Silverman Pearce Aronsohn & Berman LLP, attention Kenneth L. Henderson, notice of its intention to file such registration statement and provides the Holder the option to include any or all of the applicable Warrant Shares therein. The piggyback registration rights granted to the Holder pursuant to this Section shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the expiration of this Warrant. The Company will pay all registration expenses in connection therewith. 6. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder, and the Company shall not be required to issue or cause to be issued or deliver or cause to be delivered the certificates for Warrant Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company may in its discretion issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 8. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in 4 5 accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock (as defined below) or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company in which the consideration therefor is equity or equity equivalent securities or any compulsory share exchange pursuant to which the Common Stock is converted into other securities or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security 5 6 (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") mutually selected in good faith by the holders of a majority in interest of the Warrants then outstanding and the Company. Any determination made by the Appraiser shall be final. (d) If, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock to all holders of Common Stock for a consideration per share less than the Exercise Price then in effect, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Exercise Price, and (B) the consideration, if any, received or receivable by the Company upon such issue or sale by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale. (e) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) If: 6 7 (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption (other than redemptions of the stock of employees upon their termination of employment with the Company in an aggregate amount not to exceed $1,000,000, calculated by reference to the market price of the Common Stock at such time) of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 7 8 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (ii) round the number of Warrant Shares issuable, up to the next whole number. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (Eastern Standard Time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 8:00 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (1) if to the Company, to PLC Systems Inc., 10 Forge Park, Franklin, MA 02038, Attention: Chief Financial Officer, or to facsimile no. (508) 541-7990 with a copy to Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., One Financial Center, Boston, MA 02111, Attention: Neil H. Aronson or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. (a) The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. (b) Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder. 8 9 (b) Subject to Section 12(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. 9 10 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. PLC SYSTEMS INC. By:/s/ Patricia L. Murphy ---------------------- Patricia L. Murphy Chief Financial Officer 10 11 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To PLC Systems Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of Common Stock ("Common Stock"), no par value, of PLC Systems Inc. and encloses herewith $________ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: (Please print name and address) Dated: Name of Holder: ________________________, _____ (Print) (By:) (Name:) (Title:) ------------------------------------------------ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) 11 12 [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of PLC Systems Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of PLC Systems Inc. with full power of substitution in the premises. Dated: - ---------------, ---- --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- 12 EX-10.D 5 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.d REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of April 23, 1998, among PLC Systems Inc., a corporation organized and existing under the laws of British Columbia, Canada (the "COMPANY"), Southbrook International Investments, Ltd., a British Virgin Islands corporation ("SOUTHBROOK"), Brown Simpson Strategic Growth Fund, L.P., a New York limited partnership ("BROWN SIMPSON LP"), and Brown Simpson Strategic Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON LIMITED"). Southbrook, Brown Simpson LP and Brown Simpson Limited are each referred to herein as a "PURCHASER" and collectively as the "PURCHASERS." This Agreement is made pursuant to the Convertible Debenture Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "PURCHASE AGREEMENT"). The Company and the Purchasers hereby agree as follows: 1. DEFINITIONS Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "ADVICE" shall have meaning set forth in Section 3(o). "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "CONTROL," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close. "CLOSING DATE" shall have the meaning set forth in the Purchase Agreement. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's Common Stock, without par value. 2 "DEBENTURES" means Tranche 1 and Tranche 2 Convertible Debentures of the Company issued to the Purchasers pursuant to the Purchase Agreement. "EFFECTIVENESS DATE" means (i) with respect to the Registration Statement to be filed with respect to the Tranche 1 Debentures, the 90th day following the Tranche 1 Closing Date and (ii) with respect to the Registration Statement to be filed with respect to the Tranche 2 Debentures, the 90th day following the Tranche 2 Closing Date. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILING DATE" means (i) with respect to the shares of Common Stock issuable upon conversion of the Tranche 1 Debentures and exercise of the Tranche 1 Warrants, the 30th day following the Tranche 1 Closing Date and (ii) with respect to the shares of Common Stock issuable upon conversion of the Tranche 2 Debentures and exercise of the Tranche 2 Warrants, the 30th day following the Tranche 2 Closing Date. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c). "LOSSES" shall have the meaning set forth in Section 5(a). "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. 2 3 "REGISTRABLE SECURITIES" means (a) with respect to the Registration Statement to be filed after the Tranche 1 Closing, the shares of Common Stock issuable upon (i) conversion of the Tranche 1 Debentures and (ii) exercise of the Tranche 1 Warrants issued by the Company to the Purchasers, (b) with respect to the Registration Statement to be filed after the Tranche 2 Closing, the shares of Common Stock issuable upon (i) conversion of the Tranche 2 Debentures and (ii) exercise of the Tranche 2 Warrants issued by the Company to the Purchasers; PROVIDED, HOWEVER that in order to account for the fact that the number of shares of Common Stock that are issuable upon conversion of Debentures is determined in part upon the market price of the Common Stock at the time of conversion, in the case of each of (a) and (b), Registrable Securities shall include (but not be limited to) a number of shares of Common Stock equal to no less than the sum of (1) two times the number of shares of Common Stock into which the applicable tranche of Debentures are convertible, assuming such conversion occurred on the particular Closing Date for such tranches of Debentures and (2) the number of shares of Common Stock issuable upon exercise in full of the Warrants issued at the applicable Closing Date described herein, or such other number of shares of Common Stock as agreed to by the parties to the Purchase Agreement; PROVIDED, FURTHER that the Company shall not be obligated to register, (A) in respect of the Tranche 1 Closing, in excess of the sum of (i) 640,000 shares of Common Stock issuable upon conversion of Tranche 1 Debentures and (ii) 4,864 shares of Common Stock issuable upon exercise of Tranche 1 Warrants and (B) in respect of the Tranche 2 Closing, in excess of the sum of (i) 200% of the number of shares of Common Stock issuable upon conversion in full of the Tranche 2 Debentures and (ii) a number of shares of Common Stock sufficient to permit exercise in full of the Tranche 2 Warrants (whether such Warrants are issued on the Tranche 2 Closing Date or the Tranche 2 Closing Expiration Date). "REGISTRATION STATEMENT" means the registration statements contemplated by Section 2(a) (and any additional Registration Statements contemplated in the definition of Registrable Securities), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended. 3 4 "SPECIAL COUNSEL" means any special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section 4. "UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. 2. SHELF REGISTRATION (a) On or prior to each applicable Filing Date the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if otherwise directed by the Holders of a majority in interest of the applicable Registrable Securities in accordance herewith or if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall (i) not permit any securities other than the Registrable Securities to be included in the Registration Statement and (ii) use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until the date which is two years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent to such effect (the "EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER, that the Company shall not be deemed to have used its best efforts to keep the Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders not being able to sell the Registrable Securities covered by such Registration Statement during the Effectiveness Period, unless such action is required under applicable law or the Company has filed a post-effective amendment to the Registration Statement and the Commission has not declared it effective. (b) If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pursuant to the Registration Statement may be effected on one occasions in the form of an Underwritten Offering. In such event, and if the managing underwriters advise the Company and such Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such Underwritten Offering exceeds the amount of Registrable Securities which can be sold in such Underwritten Offering, there shall be included in such Underwritten Offering the amount of such Registrable Securities which in the opinion of such managing underwriters can be sold, and such amount shall be allocated PRO RATA among the Holders proposing to sell Registrable Securities in such Underwritten Offering. (c) If any of the Registrable Securities are to be sold in an Underwritten Offering, the investment banker in interest that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering upon 4 5 consultation with the Company. No Holder may participate in any Underwritten Offering hereunder unless such Person (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. 3. REGISTRATION PROCEDURES In connection with the Company's registration obligations hereunder, the Company shall: (a) Prepare and file with the Commission on or prior to each applicable Filing Date, a Registration Statement on Form S-3 (or such other form if directed by the Holders in connection with an Underwritten Offering hereunder or if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) in accordance with the method or methods of distribution thereof as specified by the Holders (except if otherwise directed by the Holders), and cause the Registration Statement to become effective and remain effective as provided herein; PROVIDED, HOWEVER, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall (i) furnish to the Holders, their Special Counsel and any managing underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such managing underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities, their Special Counsel, or any managing underwriters, shall reasonably object in writing within three (3) Business Days of their receipt thereof. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as practicable to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and promptly provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply with the provisions of the Securities Act and the Exchange Act with respect to the 5 6 disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold, their Special Counsel and any managing underwriters immediately (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) If requested by any managing underwriter or the Holders of a majority in interest of the Registrable Securities to be sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as such managing underwriters and such Holders reasonably agree should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, HOWEVER, that the Company shall not be required to take any action pursuant to this Section 3(e) that would, in the opinion of counsel for the Company, violate applicable law or be materially detrimental to the business prospects of the Company. 6 7 (f) Furnish to each Holder, their Special Counsel and any managing underwriters, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (g) Promptly deliver to each Holder, their Special Counsel, and any underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any underwriters in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any underwriters and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or underwriter requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (i) Cooperate with the Holders and any managing underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such managing underwriters or Holders may request at least two Business Days prior to any sale of Registrable Securities. (j) Upon the occurrence of any event contemplated by Section 3(c)(vi), as promptly as practicable, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7 8 (k) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the American Stock Exchange and any other securities exchange, quotation system, market or over-the-counter bulletin board, if any, on which similar securities issued by the Company are then listed as and when required pursuant to the Purchase Agreement. (l) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including those reasonably requested by any managing underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such underwriters as are customarily made by issuers to underwriters in underwritten public offerings, and confirm the same if and when requested; (ii) in the case of an Underwritten Offering obtain and deliver copies thereof to the managing underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each such underwriter, in form, scope and substance reasonably satisfactory to any such managing underwriters covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such underwriters; (iii) immediately prior to the effectiveness of the Registration Statement, and, in the case of an Underwritten Offering, at the time of delivery of any Registrable Securities sold pursuant thereto, obtain and deliver copies to the Holders and the managing underwriters, if any, of "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling Holder and each of the underwriters, if any, in form and substance as are customary in connection with Underwritten Offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the underwriters, if any, than those set forth in Section 6 (or such other provisions and procedures acceptable to the managing underwriters, if any, and holders of a majority of Registrable Securities participating in such Underwritten Offering; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any managing underwriters to evidence the continued validity of the representations and warranties made pursuant to clause 3(l)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (m) Make available for inspection by the selling Holders, a representative of such Holders, an underwriter participating in any disposition of Registrable Securities, and an attorney or accountant retained by such selling Holders or underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in 8 9 each case reasonably requested by any such Holder, representative, underwriter, attorney or accountant in connection with the Registration Statement; PROVIDED, HOWEVER, that any information that is determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not known by such Person to be bound by a confidentiality agreement with the Company. (n) Comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts Underwritten Offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall cover said 12-month period, or end shorter periods as is consistent with the requirements of Rule 158. (o) The Company may require each selling Holder to furnish to the Company such information regarding the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force) the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. The Purchaser covenants and agrees that (i) it will not sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and (ii) the Purchaser and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in 9 10 Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by SECTION 3(j), or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. If (a) there is material non-public information regarding the Company which the Board reasonably determines not to be in the Company's best interest to disclose and which the Company is not otherwise required to disclose, or (b) there is a significant business opportunity (including but not limited to the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction) available to the Company which the Board reasonably determines not to be in the Company's best interest to disclose, then the Company may postpone or suspend filing or effectiveness of a registration statement for a period not to exceed 20 consecutive days, provided that the Company may not postpone or suspend its obligation under this Section for more than 60 days in the aggregate during any 12 month period; PROVIDED, HOWEVER, that no such postponement of suspension shall be permitted for consecutive 20 day periods, arising out of the same set as of facts, circumstances or transactions. 4. REGISTRATION EXPENSES (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall, except as and to the extent specified in Section 4(b), be borne by the Company whether or not pursuant to an Underwritten Offering and whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with The American Stock Exchange and each other securities exchange or market on which Registrable Securities are required hereunder to be listed and (B) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or the Holders of a majority of Registrable Securities may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders, in the case of the Special Counsel, to a maximum amount of $5,000, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company 10 11 shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. (b) If the Holders require an Underwritten Offering pursuant to the terms hereof, the Company shall be responsible for all costs, fees and expenses in connection therewith, except for the fees and disbursements of the underwriters (including any underwriting commissions and discounts and other expenses charged by the underwriters) and their legal counsel and accountants (which shall be borne by the Holders). Therefore, in such circumstances the Holder shall bear the expenses of the fees and disbursements of any legal counsel or accounting firm retained by the underwriters in connection with such Underwritten Offering and the costs of any determination (but not filing) by the underwriters of the eligibility of the Registrable Securities for investment under the applicable state securities laws. By way of illustration which is not intended to diminish from the provisions of Section 4(a), the Holders shall not be responsible for, and the Company shall be required to pay the fees or disbursements incurred by the Company (including by its legal counsel and accountants) in connection with, the preparation and filing of a Registration Statement and related Prospectus for such offering, the maintenance of such Registration Statement in accordance with the terms hereof, the listing of the Registrable Securities in accordance with the requirements hereof, and printing expenses incurred to comply with the requirements hereof. 5. INDEMNIFICATION (a) INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents (including any underwriters retained by such Holder in connection with the offer and sale of Registrable Securities), brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by or on behalf of such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of 11 12 distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, the directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a 12 13 conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 10 Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; PROVIDED, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) CONTRIBUTION. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by PRO RATA allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), the 13 14 Purchaser shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by the Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that the Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. RULE 144 The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, they will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales of its securities pursuant to Rule 144. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144; PROVIDED, HOWEVER, that the Company shall not be obligated to provide an opinion to any Holder regarding the sale of Registrable Securities pursuant to exemptions provided by Rule 144. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. 7. MISCELLANEOUS (a) REMEDIES. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the 14 15 Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. (c) NO PIGGYBACK ON REGISTRATIONS. Neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not enter into any agreement providing any such right to any of its securityholders. (d) PIGGY-BACK REGISTRATIONS. If at any time when there is not an effective Registration Statement the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each holder of Registrable Securities written notice of such determination and, if within twenty (20) days after receipt of such notice, any such holder shall so request in writing, the Company shall include in such registration statement all or any part of the Registrable Securities such holder requests to be registered. No right to registration of Registrable Securities under this Section shall be construed to limit any registration otherwise required hereunder. (e) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least a majority of the then outstanding Registrable Securities; PROVIDED, HOWEVER, that, for the purposes of this sentence, Registrable Securities that are owned, directly or indirectly, by the Company, or an Affiliate of the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (f) NOTICES. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 8:00 p.m. (New York City 15 16 time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. If to the Company: PLC Systems Inc. 10 Forge Park Franklin, MA 02038 Attn: Chief Executive Officer Facsimile No.: (508) 541-7990 With copies to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 Attn: Neil H. Aronson Facsimile No.: (617) 542-2241 If to the Southbrook: Southbrook International Investments, Ltd. c/o Trippoak Advisors, Inc. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Attn: Robert L. Miller Facsimile No.: (212) 332-3256 If to Brown Simpson LPP Brown Simpson Strategic Growth Fund, L.P. 152 West 57th Street, 40th Floor New York, NY 10019 Attn: Mitchell Kaye Facsimile No.: (212) 247-1329 If to Brown Simpson LP: Brown Simpson Strategic Growth Fund, Ltd. 152 West 57th Street, 40th Floor New York, NY 10019 Facsimile No.: (212) 247-1329 of any Purchaser) to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Kenneth L. Henderson Fax: (212) 541-4630 If to any other Person who is then the registered Holder: 16 17 To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. The Purchaser may assign its rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (h) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of the Purchaser hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by the Purchasers to any assignee or transferee of all or a portion of the Debentures, the Warrants or the Registrable Securities if: (i) the Purchaser agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignees restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, and (v) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement. The rights to assignment shall apply to the Purchaser's (and to subsequent) successors and assigns. (i) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. (k) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto 17 18 shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (n) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than the Purchaser or transferees or successors or assigns thereof if such Persons are deemed to be Affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE TO FOLLOW] 18 19 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. PLC SYSTEMS INC. By:/s/ Patricia L. Murphy ---------------------- Patricia L. Murphy Title:Chief Financial Officer Purchasers: SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. By:/s/ Kenneth L. Henderson ------------------------ Kenneth L. Henderson Attorney-in-Fact BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. By:/s/ Mitchell Kaye ----------------- Mitchell Kaye Principal BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. By:/s/ Mitchell Kaye ----------------- Mitchell Kaye Principal 19 EX-27 6 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 MAR-31-1998 9,952,000 3,005 944,000 (240,000) 3,032,000 17,126,000 10,766 (4,835) 23,759,000 4,540,000 0 0 0 75,235,000 (56,119,000) 23,759 365 945 688,000 4,344,000 (1,000) 0 (150,000) (3,936,000) 0 (3,396,000) 0 0 0 (3,936,000) (.21) (.21)
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