Exhibit 10.21


 


SECURITIES PURCHASE AGREEMENT


 


This SECURITIES PURCHASE AGREEMENT (the “Agreement”),
dated as of March 31, 2006, is entered into by and between Aksys, Ltd., a
Delaware corporation, with headquarters located at Two Marriott Drive,
Lincolnshire, Illinois 60069 (the “Company”), and Durus Life Sciences Master
Fund Ltd., a Cayman Islands company (“Durus” or the “Investor,” and,
collectively with other investors listed on the Schedule of Investors attached
hereto as Exhibit A, as amended (the “Schedule of Investors”), the “Investors”).


 


RECITALS


 


A.            The Company desires to issue a
series of convertible preferred stock of the Company designated as Series B
Convertible Preferred Stock (the “Preferred Shares”), the terms of which are
set forth in the certificate of designation for such series of preferred stock
in the form attached hereto as Exhibit B (the “Certificate of Designation”). The
Preferred Shares shall be convertible into shares of the Company’s common
stock, par value $0.01 per share (the “Common Stock”), pursuant to the terms of
the Certificate of Designation (such shares of Common Stock into which the
Preferred Shares may be converted hereinafter referred to as the “Conversion
Shares”) and otherwise in accordance with the terms of the Certificate of
Designation.


 


B.            The Company also desires to issue
warrants (the “Warrants”) pursuant to a Warrant Agreement, substantially in the
form attached hereto as Exhibit C (the “Warrant Agreement”), by and between the
Company and the Warrant Agent (as defined in the Warrant Agreement), which
Warrants may be exercised for a period of five (5) years from their original
date of issue to acquire shares of Common Stock (the “Warrant Shares”) at an
initial exercise price of $1.10 per share and otherwise in accordance with the
terms of the Warrant Agreement. The Warrants and the Preferred Shares will be
issued in detachable Units (“Units”), each Unit consisting of (i) one (1)
Preferred Share (which initially may be converted into 1000 Conversion Shares
pursuant to the terms of the Certificate of Designation) and (ii) Warrants to
purchase 1000 Warrant Shares at an initial exercise price of $1.10 per share.


 


C.            The Investor wishes to purchase, and
the Company wishes to sell to the Investor, upon the terms and conditions set
forth in this Agreement, Units consisting of (i) that aggregate number of
Preferred Shares set forth opposite the Investor’s name on the Schedule of
Investors and (ii) Warrants to purchase that number of Warrant Shares equal to
the number of Conversion Shares underlying the Preferred Shares being purchased
and set forth opposite the Investor’s name on the Schedule of Investors.


 


D.            In connection with this Agreement,
the Company and the Investor are entering into a number of other agreements
including: (i) a bridge loan agreement and a loan agreement, substantially in
the forms attached hereto as Exhibits D and E, respectively (the “Bridge Loan”
and the “Loan Agreement”, respectively, and hereinafter sometimes referred to
collectively as the “Loan Agreements”), pursuant to which the Company will be
issuing certain notes (the “New Notes”) evidencing amounts owed by the Company
under the Loan Agreements, and which Loan Agreements and the obligations
thereunder will be secured and guaranteed as contemplated


 


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therein; and (ii) an Investor Rights
Agreement, substantially in the form attached hereto as Exhibit F (the “Investor
Rights Agreement”).


 


E.             The Company has outstanding certain
subordinated notes (the “Outstanding Notes”) issued pursuant to that certain
Note Purchase Agreement, dated as of February 23, 2004, by and among the
Company, Durus and Artal Long Biotech Portfolio LLC (“Artal”) and is willing to
accept the surrender of a portion of the Outstanding Notes in exchange for the
Preferred Shares and the Warrants.


 


F.             The Units, the Preferred Shares,
the Warrants, the New Notes, the Conversion Shares and the Warrant Shares are
sometimes hereinafter referred to collectively as the “Securities”.


 


In consideration
of the premises, the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Investor hereby agree as follows:


 


1.               PURCHASE
AND SALE OF PREFERRED SHARES AND WARRANTS


 


1.1.                                                      Purchase
and Sale of Preferred Shares and Warrants.


 


1.1.1.            On or prior to the Initial Closing, as hereinafter defined, the
Company shall adopt and file the Certificate of Designation with the Secretary
of State of the State of Delaware and authorize, execute and deliver the
Warrant Agreement.


 


1.1.2.            On or prior to the Initial Closing, the Company shall have
authorized (i) the sale and issuance of the Preferred Shares; (ii) the
issuance of the Conversion Shares; (iii) the sale and issuance of the Warrants;
and (iv) the issuance of the Warrant Shares.


 


1.1.3.            The Preferred Shares shall be issued, and purchased by the
Investors, from time to time in accordance with the terms of this Agreement in
sub series, with the Preferred Shares issued at the Initial Closing, as
hereinafter defined, being designated as the “Series B-1 Preferred Shares” and
the Preferred Shares issued at the first Subsequent Closing, as hereinafter
defined, being designated as the “Series B-2 Preferred Shares” and so on for
each Subsequent Closing as contemplated in Section 1.3. As provided in and
subject to the Certificate of Designation, all Preferred Shares across all sub
series shall have the same rights, preferences, privileges and restrictions,
except as to voting rights as described in the Certificate of Designation. As
used herein, the term “Preferred Share” and “Preferred Shares” refers to a
Preferred Share of any sub series and all Preferred Shares across all sub
series, respectively


 


1.1.4.            Subject to the terms and conditions of this Agreement, at the
Initial Closing, the Company shall issue to the Investor Units consisting of
(i) the number of Series B-1 Preferred Shares as is set forth opposite the
Investor’s name on the Schedule of Investors and (ii) Warrants to acquire that
number of Warrant Shares equal to the number of Conversion Shares underlying
such Preferred Shares and set forth opposite the Investor’s name on the
Schedule of Investors.


 


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1.1.5.            The Investors shall have the option, as contemplated in Section
1.3 and subject to the terms and conditions of this Agreement, to purchase at
one or more Subsequent Closings, as hereinafter defined, and the Company agrees
to sell and issue to the Investors upon the exercise of such option, Units
consisting of (i) the number of Preferred Shares as is set forth opposite each
Investor’s name on the Notice of Additional Investment as provided in Section
1.3 and (ii) Warrants to acquire that number of Warrant Shares equal to the
number of Conversion Shares underlying the Preferred Shares being purchased and
set forth opposite the Investor’s name on the Notice of Additional Investment. At
each Subsequent Closing, the Company shall issue and the Investors shall
purchase Preferred Shares in consecutive sub series as described in Section
1.1.3


 


1.2.                         Issuance
of Securities. In consideration of the payment of the purchase price in the
amount and manner contemplated in Section 1.5, the Company shall deliver to an Investor
the Preferred Shares and the Warrants being purchased, each duly executed on
behalf of the Company and registered in the name of the Investor or its
designees.


 


1.3.                         Additional
Investment.


 


1.3.1.            Following the Initial Closing, the Investor shall have the
option, in its sole discretion, to purchase from the Company, Units at a
purchase price of $1,000 per Unit, each Unit consisting of additional Preferred
Shares and Warrants, for an aggregate purchase price of up to $15,000,000. The
Investor may from time to time, in its sole discretion, assign this right, in
whole or in part, to one or more additional investors to be designated by the
Investor. Any such designated investor shall execute and deliver a counterpart
signature page to this Agreement and each of the other Transaction Documents
applicable to a purchaser of Units of Preferred Shares and Warrants under this
Agreement and thereby, without any further action by the Company or any
Investor, become a party to and be deemed to be an Investor under this
Agreement, the Investor Rights Agreement and each of the other Transaction
Documents applicable to a purchaser of Units of Preferred Shares and Warrants
under this Agreement, and all schedules and exhibits hereto and thereto shall
automatically be updated to reflect such Investor as a party hereto and
thereto.


 


1.3.2.            The Investors may exercise the option to make an additional
investment by duly executing and delivering to the Company a notice of
additional investment in the form attached hereto as Exhibit G (the “Notice of
Additional Investment”) setting forth: (i) the names of the Investors; (ii) a
declaration by the Investors desiring to exercise the option to purchase
additional Units of Preferred Shares and Warrants as contemplated in this Section
1.3; (iii) the number of Units of Preferred Shares and Warrants that each
Investor desires to purchase at the Subsequent Closing; and (iv) the Subsequent
Closing Date. This option to purchase additional Units of Preferred Shares and
Warrants shall expire on the one (1) year anniversary of the date that the
Company receives shareholder approval for the issuance of the Conversion Shares
and the Warrant Shares as contemplated in Section 4.13, and thereafter shall be
of no force and effect.


 


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1.4.                         Closings.


 


1.4.1.            The initial closing of the sale and purchase of Units of Series
B-1 Preferred Shares and Warrants under this Agreement (the “Initial Closing”)
shall take place at 10:00 a.m., San Francisco time, on the fifth Business Day
after the satisfaction or waiver of the conditions to the Initial Closing set
forth in Sections 5 and 6.1, or on such other date or time as shall be mutually
agreed to by the Company and the Investor (the “Initial Closing Date”). The
Initial Closing shall occur at the offices of Morrison & Foerster, 425
Market Street, San Francisco, CA 94105.


 


1.4.2.            Following the Initial Closing, there may occur one or more
subsequent closings (each a “Subsequent Closing”) in connection with additional
purchases of Units of Preferred Shares and Warrants as contemplated in Section
1.3. A Subsequent Closing shall take place at the offices of Morrison &
Foerster at such time and on such date as shall be set forth in the Notice of
Additional Investment or such other time and date as may be mutually agreed to
by the Company and the participating Investors (each a “Subsequent Closing Date”).
The Initial Closing and a Subsequent Closing are sometimes hereinafter referred
to without distinction as a “Closing”.


 


1.5.                         Purchase
Price; Manner of Payment.


 


1.5.1.            At the
Initial Closing, the Investor shall exchange five million dollars ($5,000,000)
in principal amount of Outstanding Notes for five thousand (5,000) Units, each
Unit consisting of (i) one (1) Series B-1 Preferred Share (which initially may
be converted into 1000 Conversion Shares pursuant to the terms of the
Certificate of Designation) and (ii) Warrants with a term of five (5) years
from the date of issuance to purchase 1000 Warrant Shares at an initial
exercise price of $1.10 per share.


 


1.5.2.            At one
or more Subsequent Closings, Investors shall have the option to purchase up to
an aggregate of fifteen thousand (15,000) additional Units at a price of one
thousand dollars ($1,000) per Unit, which purchase price shall be paid via wire
transfer of immediately available funds in accordance with wire instructions
provided by the Company. The number of Units to be purchased by each Investor
at a Subsequent Closing shall be as set forth opposite the Investor’s name on
the Notice of Additional Investment.


 


2.               REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.


 


The Company represents and warrants to each Investor that:


 


2.1.                                        Organization
and Qualification. The Company and its Subsidiaries are duly organized, validly
existing and in good standing under the laws of the jurisdictions in


 


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which they are formed and have the requisite
power and authority to own their properties and to carry on their businesses as
now being conducted. The Company and its Subsidiaries are duly qualified as
foreign entities to do business and are in good standing in every jurisdiction
in which the ownership of property or the nature of their businesses conducted
by them makes such qualification necessary and where the failure to qualify
would reasonably be expected to have a Material Adverse Effect. “Subsidiary”
means any corporation, association, partnership, limited liability company,
joint venture or other entity of which more than 50% of the voting stock or
other equity interest is owned directly or indirectly by any Person or one or
more of the other Subsidiaries of such Person or a combination thereof. “Material
Adverse Effect” means any event, matter, condition or circumstance (including
any such event, matter, condition or circumstance which would occur upon notice
or lapse of time or both) which (i) has or would reasonably be expected to have
a material adverse effect on (A) the business, prospects, properties,
assets, operations, results of operations or condition (financial or otherwise)
of the Company and its Subsidiaries, taken as a whole, (B) the
intellectual property of the Company and its Subsidiaries, taken as a whole,
(C) the transactions contemplated in this Agreement or the other
Transaction Documents, as hereinafter defined, or by the agreements and
instruments to be entered into in connection herewith or therewith, or
(D) the authority or ability of the Company to perform its obligations
under this Agreement or the other Transaction Documents, or
(ii) materially adversely affects the legality, validity, binding effect
or enforceability of any of this Agreement or the other Transaction Documents,
the rights and remedies of the Investors hereunder and thereunder, or the validity,
perfection or priority of any lien granted to the Investors under any of the
Transaction Documents.


 


2.2.                                        Authorization;
Enforcement; Validity. The Company has the requisite power and authority to
enter into and perform its obligations under this Agreement, the Securities,
the Certificate of Designation, the Warrants, the New Notes, the Loan
Agreements, the other Loan Documents (as defined in each of the Bridge Loan and
the Loan Agreement), the Investor Rights Agreement and each of the other
agreements and documents entered into by the parties hereto in connection with
the transactions contemplated by this Agreement (this Agreement, the
Securities, the Certificate of Designation, the Warrants, the New Notes, the
Loan Agreements, the other Loan Documents, the Investor Rights Agreement and
such other agreements and documents being hereinafter referred to collectively
as the “Transaction Documents”) and to issue the Securities in accordance with
the terms hereof and thereof. Except as set forth on Schedule 2.2, the
execution and delivery of this Agreement and the other Transaction Documents by
the Company and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Preferred Shares, the reservation for issuance and the issuance of the
Conversion Shares, the issuance of the Warrants, the reservation for issuance
and issuance of the Warrant Shares and the issuance of the New Notes have been
duly authorized by the Company’s board of directors and no further consent or
authorization is required by the Company, its board of directors or its
shareholders. This Agreement and the other Transaction Documents have been, or
when delivered hereunder and thereunder will have been, duly executed and
delivered by the Company and constitute, or when so delivered will constitute,
the legal, valid and


 


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binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies and except as rights to indemnification and to
contribution may be limited by federal or state securities law.


 


2.3.                                        Issuance
of Securities. The issuance of the Securities is duly authorized, and the
Securities, upon issuance, shall be validly issued, fully paid and
non-assessable and free from all preemptive or similar rights, taxes, liens and
charges with respect to the issue thereof, and, subject to the filing of the
Certificate of Designation, the Preferred Shares shall be entitled to the
rights and preferences set forth in the Certificate of Designation. As of the
Initial Closing, the Company shall have reserved from its duly authorized
capital stock for the purpose of issuance not less than the sum of
(i) 120% of the maximum number of Conversion Shares issuable upon
conversion of the Preferred Shares (assuming for purposes hereof, that the
Preferred Shares are convertible at the initial conversion price and without
taking into account any limitations on the conversion of the Preferred Shares
that may be set forth in the Certificate of Designation) issued at the Initial
Closing and (ii) 120% of the maximum number of Warrant Shares issuable upon
exercise of the Warrants (without taking into account any limitations on the
exercise of the Warrants set forth in the Warrants) issuable at the Initial
Closing. Upon issuance or conversion in accordance with the Certificate of
Designation or exercise in accordance with the Warrants, as the case may be,
the Conversion Shares and the Warrant Shares, respectively, will be validly
issued, fully paid and non-assessable and free from all preemptive or similar
rights, taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. Subject
to the representations and warranties of the Investors in this Agreement, the
offer and issuance by the Company of the Securities are exempt from
registration under the Securities Act of 1933, as amended (the “Securities Act”).


 


2.4.                                        No
Conflicts. Except as set forth on Schedule 2.4, subject to the filing of
the Certificate of Designation, the execution, delivery and performance of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
will not (i) conflict with or result in a violation of the Company’s
Certificate of Incorporation, any capital stock of the Company, the Company’s
Bylaws or the Certificate of Designation or (ii) violate, conflict with, result
in a breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture, patent, license or other instrument to which the Company or any of
its Subsidiaries is a party or by which any property or asset of the Company or
any of its Subsidiaries is bound or affected or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree or the like
(including federal and state securities laws and regulations and the rules and
regulations of any self-regulatory organizations to which the Company or its
securities are subject) applicable to the Company or any of its Subsidiaries or
by


 


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which any property or asset of the Company or
any of its Subsidiaries is bound or affected, or (iv) except as
contemplated by the Transaction Documents, result in, or require, the creation,
or imposition of any lien upon or with respect to any of the properties or
assets of the Company or any of its Subsidiaries.


 


2.5.                                        Consents.
Except as set forth on Schedule 2.5, the Company is not required to obtain any
approval, consent, license, exemption, authorization or order of, or make any
filing or registration with, any court, governmental agency or authority or any
regulatory or self-regulatory agency or any other Person in connection with the
execution, delivery or performance of its obligations under or contemplated by
this Agreement and the other Transaction Documents. Except as set forth on
Schedule 2.5, all approvals, consents, licenses, exemptions, authorizations,
orders, filings and registrations which the Company is required to make or
obtain pursuant to the preceding sentence will be made, obtained or effected on
or prior to the Initial Closing Date, and the Company and its Subsidiaries are
unaware of any facts or circumstances which might prevent the Company from
making, obtaining or effecting any of the registrations, applications or
filings pursuant to the preceding sentence. Except as set forth on Schedule
2.5, the Company is not in violation of the requirements of the NASDAQ Capital
Market and has no knowledge of any facts which would reasonably be expected to
lead to delisting or suspension of the Common Stock in the foreseeable future.


 


2.6.                                        No
General Solicitation; Placement Agent’s Fees. Neither the Company, nor any
of its Subsidiaries or Affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
in connection with the offer or sale of the Securities. The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or brokers’ commissions (other than for Persons engaged by the Investors)
relating to or arising out of the transactions contemplated hereby or by the
other Transaction Documents. The Company shall pay, and hold the Investors
harmless against, any liability, loss or expense (including, without
limitation, attorney’s fees and out-of-pocket expenses) arising in connection
with any such claim. “Affiliate” means any Person which, directly or
indirectly, controls, is controlled by or is under common control with another
Person. For purposes of the foregoing, “control,” “controlled by” and “under
common control with” with respect to any Person shall mean the possession,
directly or indirectly, of the power (i) to vote ten percent (10%) or more
of the securities having ordinary voting power of the election of directors of
such Person, or (ii) to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities
or by contract or otherwise.


 


2.7.                                        No
Integrated Offering. Except as set forth on Schedule 2.7, none of the
Company, its Subsidiaries, any of their Affiliates, nor any Person acting on
its or their behalf has, directly or indirectly, made any offers or sales of
any security or solicited any offers to buy any security, under circumstances
that would require registration of any of the Securities under the Securities
Act or cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of the Securities Act or any applicable
shareholder approval provisions, including, without limitation, under the rules


 


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and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated.


 


2.8.                                        Application
of Takeover Protections; Termination of Rights Agreement and Standstill
Restrictions.


 


2.8.1.  The Company and its board of
directors have taken any and all actions necessary in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under the Certificate of Incorporation or the
laws of the jurisdiction of its incorporation which is or could become
applicable to the Investors as a result of the transactions contemplated by
this Agreement and the other Transaction Documents, including, without
limitation, the Company’s issuance of the Securities and the Investors’
ownership of the Securities.


 


2.8.2.  The Company and its board of
directors have taken any and all actions necessary in order to render the
Rights Agreement, as hereinafter defined, inapplicable to the Investors as a
result of the transactions contemplated by this Agreement and the other
Transaction Documents, including, without limitation, the Company’s issuance of
the Securities and the Investors’ ownership of the Securities, and in
furtherance of the foregoing, the Company and its board of directors have duly
authorized, executed and delivered an amendment to its Rights Agreement, dated
as of October 28, 1996 and amended as of February 23, 2004 (the “Rights
Agreement”), between the Company and Computershare Investor Services Inc.
(formerly EquiServe Trust Company, N.A.), as successor Rights Agent to First
Chicago Trust Company of New York, substantially in the form attached hereto as
Exhibit H, effective immediately prior to the execution and delivery of this
Agreement. In furtherance of the foregoing, the Company and its board of
directors have also taken any and all actions necessary under the Rights Agreement
to redeem all outstanding Rights under the Rights Agreement so as terminate the
right of the holders thereof to exercise such Rights, with their only remaining
right being the right to receive the Redemption Price, as provided in the
Rights Agreement, and to render the Rights Agreement of no further force and
effect, to be effective immediately prior to the execution and delivery of this
Agreement. Simultaneously with the execution and delivery of this Agreement,
the Company has delivered to the Investor a certificate, executed by the
Secretary of the Company and dated as of the date hereof, certifying as to the
adoption of resolutions of the Company’s board of directors consistent with the
foregoing, which resolutions are in a form acceptable to the Investor, and as
to the incumbency, authority and signature(s) of the officer(s) of the Company
authorized to execute and deliver the amendment to the Rights Agreement.


 


2.8.3.  The Company has duly authorized,
executed and delivered an amendment to the Settlement Agreement and Mutual
Release, dated as of February 23, 2004, among the Company, Durus, Artal and
other parties thereto, substantially in the form attached hereto as Exhibit I
and dated as of the date hereof, pursuant to which amendment the Company has
terminated and rendered inapplicable as of the date


 


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hereof all standstill, control and other
restrictions on Durus and Artal that may be implicated by the transactions
contemplated by this Agreement and the other Transaction Documents, including,
without limitation, the Company’s issuance of the Securities and the Investor’s
ownership of the Securities. Simultaneously with the execution and delivery of
this Agreement, the Company has delivered to the Investors a certificate,
executed by the Secretary of the Company and dated as of the date hereof,
certifying as to the adoption of resolutions of the Company’s board of
directors consistent with the foregoing, which resolutions are in a form
acceptable to the Investors, and as to the incumbency, authority and
signature(s) of the officer(s) of the Company authorized to execute and deliver
the amendment to the Settlement Agreement and Mutual Release.


 


2.9.                                        SEC
Documents; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it
with the Securities and Exchange Commission (the “SEC”) pursuant to the
reporting requirements of the Securities Exchange Act of 1934 (the “Exchange
Act”) (all of the foregoing filed prior to the date hereof and all exhibits
included therein and financial statements, notes and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as
the “SEC Documents”). The Company has delivered to the Investors or their
representatives true, correct and complete copies of each of the SEC Documents
not available on the EDGAR system. As of their respective dates, the SEC
Documents complied with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents
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 the light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
SEC Documents complied as to form with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto as in
effect as of the time of filing. Such financial statements have been prepared
in accordance with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim financial statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present the
financial position of the Company and its Subsidiaries as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). The Company’s budget for fiscal year 2006 attached hereto as
Exhibit J (the “Budget”) is a true and correct copy of the most recent
operating budget for the Company and its Subsidiaries approved by the Company’s
board of directors. All financial projections and forecasts delivered to the
Investors, including the Budget, represent the Company’s best estimates and
assumptions as to future performance, which the Company believes to be fair and
reasonable in light of current and reasonably foreseeable business conditions. No
information provided by or on behalf of the Company to the Investors contains
any untrue statement of a material fact or omits to


 


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state any material fact necessary in order to
make the statements therein not misleading, in light of the circumstance under
which they are or were made.


 


2.10.                                  Absence
of Certain Changes. Except as set forth on Schedule 2.10, since the Company’s
most recently filed audited financial statements contained in a Form 10-K,
there has been no material adverse change and no material adverse development
in the business, assets, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company and its
Subsidiaries. Except as set forth on Schedule 2.10, since the Company’s most
recently filed audited financials statements contained in a Form 10-K, neither
the Company nor any of its Subsidiaries has (i) declared or paid any
dividends or made any distributions on its outstanding capital stock (except
dividends paid directly to the Company by its Subsidiaries), (ii) issued any
shares of capital stock; (iii) sold any assets outside of the ordinary
course of business; (iv) had capital expenditures, individually or in the
aggregate, in excess of $50,000; (v) incurred any Indebtedness individually or
in the aggregate in excess of $25,000; (vi) conducted its business and
operations other than in the ordinary course of business and consistent with
past practices or (vii) increased the compensation of any existing employee,
officer, director or consultant, or paid or awarded any bonus, incentive
compensation, service award or other like benefit to any employee, officer,
director or consultant, or made any severance or termination payments, or
entered into or amended any severance agreement or the like with, any employee,
officer or director, or entered into any new employment, consulting, retention,
incentive compensation, non-competition, retirement, parachute or
indemnification agreement with any officer, director, employee or agent, or
modify any such existing agreement. Except as set forth on Schedule 2.10,
neither the Company nor any of its Subsidiaries has taken any steps to seek
protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend, or may have a
reasonable basis upon which, to initiate involuntary bankruptcy proceedings. Except
as set forth on Schedule 2.10, the Company and its Subsidiaries, individually
and on a consolidated basis, after giving effect to the transactions
contemplated by this Agreement and the other Transaction Documents to occur at
the Initial Closing, will not be, Insolvent (as hereinafter defined). For
purposes hereof, “Insolvent” means, with respect to any Person (i) the
present fair saleable value of such Person’s assets is less than the amount
required to pay such Person’s total Indebtedness (as defined in
Section 2.16), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to
incur or believes that it will incur debts that would be beyond its ability to
pay as such debts mature or (iv) such Person has unreasonably small
capital with which to conduct the business in which it is engaged as such
business is now conducted and is proposed to be conducted.


 


2.11.                                  Conduct
of Business; Regulatory Permits. Neither the Company nor any of its Subsidiaries
is in violation of any term of or in default under the Certificate of
Incorporation, the Certificate of Designation, any other certificate of
designation, the preferences or rights of any other outstanding series of
preferred stock of the Company, the Bylaws or any Subsidiaries’ organizational
charter or articles of incorporation or


 


10

















 


bylaws (or equivalent organizational
documents). Except as set forth on Schedule 2.11, neither the Company nor any
of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation applicable to the Company or its
Subsidiaries or by which it or its properties may be bound, and neither the
Company nor any of its Subsidiaries will conduct its business in violation of
any of the foregoing. Without limiting the generality of the foregoing, except
as set forth on Schedule 2.11, the Company is not in violation of any of the
rules, regulations or requirements of the NASDAQ Capital Market and has no
knowledge of any facts or circumstances that would reasonably be expected to
lead to delisting or suspension of the Common Stock by the NASDAQ Capital
Market in the foreseeable future. Except as set forth on Schedule 2.11, during
the two years prior to the date hereof, (i) the Common Stock has been
designated for quotation on the NASDAQ National Market or the NASDAQ Capital
Market, (ii) trading in the Common Stock has not been suspended by the
SEC, the NASDAQ National Market or the NASDAQ Capital Market and (iii) the
Company has received no communication, written or oral, from the SEC, the
NASDAQ National Market or the NASDAQ Capital Market regarding the suspension or
delisting of the Common Stock. Except as set forth on Schedule 2.11, the
Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate regulatory authorities necessary to conduct
their respective businesses, and neither the Company nor any such Subsidiary
has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.


 


2.12.                                  Corrupt
Practices. Neither the Company nor any of its Subsidiaries nor any
director, officer, agent, employee or other Person acting on behalf of the
Company or any of its Subsidiaries has, in the course of its, his or her
actions for, or on behalf of, the Company or any of its Subsidiaries
(i) used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity;
(ii) made any direct or indirect unlawful payment to any foreign or
domestic government official or employee using corporate funds;
(iii) violated or is in violation of any provision of the U.S. Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee.


 


2.13.                                  Sarbanes-Oxley
Act. The Company is in compliance with any and all applicable requirements
of the Sarbanes-Oxley Act of 2002 and any and all applicable rules and
regulations promulgated by the SEC thereunder.


 


2.14.                                  Transactions
with Affiliates. Except as set forth on Schedule 2.14, none of the
officers, directors or employees of the Company or any of its Subsidiaries is
presently a party to any transaction with the Company or any of its
Subsidiaries (other than for ordinary course services as employees, officers or
directors), including, but not limited to, any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any such officer, director or employee or Subsidiaries or any corporation,
partnership, trust or other entity in which any such officer, director, or
employee has a substantial interest or is an officer, director, trustee or
partner.


 


11

















 


2.15.                                  Equity
Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock, par value $0.01 per share, of which as of the date hereof,
32,177,574 shares of Common Stock are issued and outstanding, 4,442,286 shares
of Common Stock are reserved for issuance pursuant to securities (other than
the Preferred Shares and the Warrants) exercisable or exchangeable for, or
convertible into, shares of Common Stock, and no shares of preferred stock
(other than the Preferred Shares) are issued and outstanding or reserved for
issuance. All of such outstanding or reserved shares have been, or upon
issuance will be, validly issued, fully paid and non-assessable. Except as set
forth on Schedule 2.15, (i) none of the Company’s share capital is subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company and (ii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities. Except as set forth on Schedule
2.15, (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
share capital of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional share capital of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
share capital of the Company or any of its Subsidiaries; (ii) there are no
agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to register the sale of any of their securities under the
Securities Act; (iii) there are no outstanding securities or instruments
of the Company or any of its Subsidiaries which contain any redemption or
similar provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries;
(iv) the Company does not have any stock appreciation rights or “phantom
stock” plans or agreements or any similar plans or agreements; and (v) the
Company and its Subsidiaries have no liabilities or obligations required to be
disclosed in the SEC Documents and not disclosed in the SEC Documents. The
Company has furnished to the Investors true, correct and complete copies of the
Company’s Amended and Restated Certificate of Incorporation (the “Certificate
of Incorporation”), and the Company’s Bylaws (the “Bylaws”), and the terms of
all securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.


 


The name, capital structure and ownership of each Subsidiary of the
Company on the date of this Agreement are as set forth in Schedule 2.15. All of
the outstanding capital stock of, or other interest in, each such Subsidiary has
been validly issued, and is fully paid and nonassessable. Except for the
Subsidiaries set forth on Schedule 2.15, on the date of this Agreement, the
Company has no equity interest in any Person.


 


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2.16.                                  Indebtedness
and Other Contracts. Schedule 2.16 contains a complete and accurate list of
all contracts, agreements, indentures, licenses or instruments material to the
conduct of the Company’s business as currently conducted or as presently
contemplated to be conducted or involving a monetary amount in excess of
$25,000. Except as set forth on Schedule 2.16, neither the Company nor any of
its Subsidiaries (i) has outstanding any debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing Indebtedness (as defined below) of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may
become bound; (ii) is a party to any financing statements securing obligations
in any amounts filed in connection with the Company or any of its Subsidiaries;
(iii) is a party to any contract, agreement, indenture, license or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement, indenture, license or instrument could
reasonably be expected to result in a Material Adverse Effect; (iv) is in
default (and no event has occurred which with notice or lapse of time or both
could place the Company in default) under any contract, agreement, indenture,
license or other instrument (including any such contract, agreement, indenture,
license or other instrument relating to Indebtedness) to which the Company or
any of its Subsidiaries is a party or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected; (v) is a party to
any contract, agreement, indenture, license or instrument, the performance of
which has or may reasonably be expected to have a Material Adverse Effect or
(vi) has any other material liabilities, fixed or contingent, that are not
reflected in the financial statements referred to in Section 2.9 or in the
notes thereto. For purposes of this Agreement: (x) ”Indebtedness” of any
Person means, without duplication (A) all indebtedness for borrowed money,
(B) all obligations issued, undertaken or assumed as the deferred purchase
price of property or services, (C) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in
the event of default are limited to repossession or sale of such property),
(F) all monetary obligations under any leasing or similar arrangement
which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses
(A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; and (y) ”Contingent
Obligations” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness,
lease, dividend or other obligation of another Person if the


 


13

















 


primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.


 


2.17.                                  Absence
of Litigation. Except as set forth in Schedule 2.17, there is no action,
suit, notice of violation, claim, proceeding, inquiry or, to the Company’s
knowledge, any investigation before or by any court, public board, government
agency or authority, arbitrator, self-regulatory organization or body pending
or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries, any of their respective properties, the Common
Stock or any outstanding stock of the Company’s Subsidiaries, or any of the
Company’s or its Subsidiaries’ officers or directors.


 


2.18.                                  Insurance.
The properties of the Company and its Subsidiaries are insured, with
financially sound and reputable insurance companies (not Affiliates of the
Company), in such amounts, with such deductibles and covering such risks as is
customarily carried in accordance with sound business practice by companies
engaged in similar businesses and owning similar properties in the localities
where the Company or such Subsidiaries operate. Neither the Company nor any
such Subsidiary has been refused any insurance coverage sought or applied for,
and neither the Company nor any such Subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost comparable to the current cost for
such coverage.


 


2.19.                                  Employee
Relations. Except as set forth on Schedule 2.19, neither the Company nor
any of its Subsidiaries is a party to any collective bargaining agreement or
employs any member of a union. The Company and its Subsidiaries believe that
their relations with their employees are good. No employee of the Company or
any of its Subsidiaries is, or is expected to be, in violation of any material
term of any employment contract, confidentiality, disclosure or proprietary
information agreement, non-competition agreement, or any other contract or
agreement or any restrictive covenant, and the continued employment of each
such employee does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters. Except as set forth on
Schedule 2.19, the Company and its Subsidiaries are in compliance in all
material respects with all federal, state, local and foreign laws and
regulations respecting labor, employment and employment practices and benefits,
terms and conditions of employment and wages and hours. There are no strikes,
lockouts or other labor disputes against the Company or any of its
Subsidiaries, or, to the best of the Company’s knowledge, threatened against or
affecting the Company or any of its Subsidiaries.


 


2.20.                                  Title.
Except as set forth in Schedule 2.20, the Company and its Subsidiaries have
good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to
the business of the Company


 


14

















 


and its Subsidiaries, in each case free and
clear of all liens, encumbrances and defects except such as do not materially
affect the value of such property and do not interfere with the use made and proposed
to be made of such property by the Company and any of its Subsidiaries. Any
real property and facilities held under lease by the Company or any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.


 


2.21.                                  Intellectual
Property Rights. Except as set forth in Schedule 2.21, the Company and its
Subsidiaries own or possess all rights or licenses to use all trademarks, trade
names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”), free from burdensome restrictions, necessary to conduct
their respective businesses as presently conducted and as presently
contemplated to be conducted in the future. Except as set forth in Schedule
2.21, none of the Company’s or its Subsidiaries’ Intellectual Property Rights
have expired, terminated or been abandoned, or are expected to expire,
terminate or be abandoned. Neither the Company nor any Subsidiary has any
knowledge of any infringement by the Company or any of its Subsidiaries of the
Intellectual Property Rights of others. There is no claim, action or proceeding
being made or brought, or to the best knowledge of the Company, being
threatened, against the Company or any of its Subsidiaries regarding
Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might reasonably be expected to give rise to any of the
foregoing infringements or claims, actions or proceedings. No third party
possesses rights to the Intellectual Property Rights of the Company or any of
its Subsidiaries which, if exercised, could enable such third party to develop
products competitive to those of the Company or any of its Subsidiaries or
could have an adverse effect on the ability of the Company or any of its
Subsidiaries to conduct its business as presently conducted or as presently
contemplated to be conducted. The Company and its Subsidiaries have taken all
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.


 


2.22.                                  Environmental
Laws. Each of the Company and its Subsidiaries is in compliance in all
material respects with all Environmental Laws, and there are no actions, suits,
claims, notices of violation, hearings, investigations or proceedings pending
or, to the best of the Company’s knowledge, threatened against or affecting the
Company or any of its Subsidiaries, or with respect to the ownership, use,
maintenance and operation of the Company’s and its Subsidiaries’ properties,
relating to any Environmental Laws. The term “Environmental Laws” means all
federal, state or local laws, statutes, common law duties, rules, regulations,
ordinances and codes, together with all administrative orders, directives, requests,
licenses, authorizations and permits of, and agreements with (including consent
decrees), any governmental agencies or authorities, in each case relating to or
imposing liability or standards of conduct concerning public health, safety and
environmental protection matters.


 


15

















 


2.23.                                       Subsidiary
Rights. The Company and each of its Subsidiaries has the unrestricted right
to vote, and (subject to limitations imposed by applicable law) to receive
dividends and distributions on, all capital securities of its Subsidiaries as
owned by the Company or such Subsidiary.


 


2.24.                                       Tax
Status. Except set forth on Schedule 2.24, the Company and each of its
Subsidiaries (i) has made or filed all foreign, federal and state income
and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject, (ii) has paid all taxes and other
governmental assessments and charges shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and (iii) has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes claimed to be
due by the taxing authority of any jurisdiction, and, to the Company’s
knowledge, there is no basis for any such claim.


 


2.25.                                       Internal
Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset and liability accountability,
(iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets and liabilities is compared with the
existing assets and liabilities at reasonable intervals and appropriate action
is taken with respect to any difference. The Company is not an “accelerated
filer” as defined in Rule 12b-2 under the Exchange Act for its fiscal year
ending December 31, 2005 and, accordingly, has not complied with
Section 404 of the Sarbanes-Oxley Act of 2002. The Company maintains
disclosure controls and procedures that are effective in ensuring that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC,
including, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure. During the twelve (12) months
immediately preceding the date hereof neither the Company nor any of its
Subsidiaries have received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of its Subsidiaries.


 


2.26.                                       Investment
Company Status. The Company is not, and upon consummation of the sale of
the Securities will not be, an “investment company,” a company controlled by an
“investment company” or an “affiliated person” of, or “promoter” or “principal


 


16

















 


underwriter” for, an “investment company” as
such terms are defined in the Investment Company Act of 1940, as amended.


 


2.27.                                       Transfer
Taxes. On the applicable Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in
connection with the sale and transfer of the Securities to be sold to the
Investors hereunder will be, or will have been, fully paid or provided for by
the Company, and all laws imposing such taxes will be or will have been
complied with.


 


2.28.                                       Disclosure.
All reports, financial and other statements, certificates and other information
and disclosure provided to the Investors regarding the Company and its
Subsidiaries, their businesses and the transactions contemplated hereby and by
the other Transaction Documents, including the Schedules to this Agreement or
any other Transaction Document, furnished by or on behalf of the Company are
true and correct and do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Each press release issued by the Company or its Subsidiaries during
the twenty four (24) months preceding the date of this Agreement did not
at the time of release contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
are made, not misleading. Except as set forth on Schedule 2.28, no event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their businesses, properties, prospects, operations
or financial conditions, which, under applicable law, rule or regulation,
requires public disclosure or announcement by the Company but which has not
been publicly announced or disclosed.


 


2.29.                                       ERISA.
Schedule 2.29 contains a complete and accurate list of all Plans maintained or
sponsored by the Company or any ERISA Affiliate or to which the Company or any
ERISA Affiliate contributes. The Company and its ERISA Affiliates are in
compliance in all material respects with all applicable provisions and
requirements of ERISA with respect to each Plan, and have performed all their
obligations under each Plan; and no ERISA Event has occurred or is reasonably
expected to occur.


 


2.30.                                       No
Stabilization. The Company has not taken, directly or indirectly, any action
designed to or that could cause or result in any stabilization or manipulation
of the price of the Common Stock.


 


2.31.                                       FDA
and Related Matters.


 


2.31.1.      Schedule 2.31 sets forth a
complete and accurate list, referencing relevant records and documents, for the
last five (5) years, of (i) all regulatory or warning letters, notices of
adverse findings and similar letters or notices issued to the Company or any
Subsidiary by the Food and Drug Administration (the “FDA”) or any other
governmental entity that is concerned with the safety, efficacy, reliability or
manufacturing of the medical devices developed, manufactured or sold by the
Company or any Subsidiary (hereinafter for purposes of this Section 2.31, “Medical


 


17

















 


Device Regulatory Agency”); (ii) all reports, filings or communications
made by the Company or any of its Subsidiaries to or with a Medical Device
Regulatory Agency regarding the medical devices developed, manufactured or sold
by the Company or any Subsidiary (but excluding any reports, filings or
communications in connection with applications seeking approval from any such
Medical Device Regulatory Agency for the marketing and sale of such medical
devices); (iii) all product recalls and safety alerts conducted by or issued to
the Company or any Subsidiary and any requests from the FDA or any Medical
Device Regulatory Agency requesting the Company or any Subsidiary to cease to
investigate, test, manufacture, market or sell any product; (iv) any civil
penalty actions begun by the FDA or any Medical Device Regulatory Agency
against the Company or any Subsidiary and all consent decrees issued with
respect to the Company or any Subsidiary; and (v) any other communications
between the Company or any Subsidiary on the one hand and the FDA or any
Medical Device Regulatory Agency on the other hand. The Company has delivered
to the Investors copies of all documents referred to in Schedule 2.31.


 


2.31.2.      The Company and its
Subsidiaries have obtained all consents, approvals, certifications,
authorizations and permits of, and have made all filings with, or notifications
to, all Medical Device Regulatory Agencies pursuant to applicable requirements
of all federal laws, rules and regulations, and all corresponding state and
foreign laws, rules and regulations applicable to the Company or any Subsidiary
and relating to its business. The Company and its Subsidiaries are in
compliance with all applicable federal laws, rules and regulations and all
corresponding applicable state and foreign laws, rules and regulations relating
to medical device manufacturers. The Company has no reason to believe that any
of the consents, approvals, authorizations, registrations, certifications,
permits, filings or notifications that it or any of its Subsidiaries has
received or made to operate their respective businesses have been or are being
questioned, challenged or revoked. There are no investigations or inquiries by
the FDA or any Medical Device Regulatory Agency pending or threatened relating
to the operation of the Company’s or the Company’s Subsidiaries’ businesses or
the Company’s or any Subsidiary’s compliance with applicable laws, rules or
regulations relating to medical device manufacturers.


 


2.32.                                  Ranking
of Preferred Shares. No issued or outstanding equity securities of the
Company or any Subsidiary will be senior to or pari passu with the Preferred
Shares, when issued, as to dividend rights or upon the liquidation, winding up
or dissolution of the Company.


 


2.33.                                  Bridge
Loan. The Company has duly authorized, executed and delivered the Bridge
Loan, dated as of the date hereof, and has performed, satisfied and complied in
all material respects with the covenants, agreements and conditions contained
therein to be performed, satisfied or complied with on and as of the date
hereof. Simultaneously with the execution and delivery of this Agreement, the
Company has delivered to the Investor a certificate, executed by the Secretary
of the Company and dated as of the date hereof, certifying as to the adoption
of resolutions of the Company’s board of directors consistent with the
foregoing, which resolutions are in a form acceptable to the Investor,


 


18

















 


and as to the incumbency, authority and
signature(s) of the officer(s) of the Company authorized to execute and deliver
the Bridge Loan.


 


2.34.                                       Chief
Executive Officer. The Company has received and accepted a letter from
William Dow, substantially in the form attached hereto as Exhibit K, in which
letter Mr. Dow acknowledges and agrees to having been removed from his position
as CEO of the Company and resigns as a member of the board of directors of the
Company effective on and as of the date hereof. Simultaneously with the
execution and delivery of this Agreement, the Company has delivered to the
Investor a certificate, executed by the Secretary of the Company and dated as
of the date hereof, certifying as to the adoption of resolutions of the Company’s
board of directors consistent with the foregoing, which resolutions are in a
form acceptable to the Investor.


 


2.35.                                       Appointment
of Acting CEO. The Company’s board of directors has appointed Laurence
Birch as acting CEO and as a member of the board of directors of the Company
effective on and as of the date hereof. Simultaneously with the execution and
delivery of this Agreement, the Company has delivered to the Investor a
certificate, executed by the Secretary of the Company and dated as of the date
hereof, certifying as to the adoption of resolutions of the Company’s board of
directors consistent with the foregoing, which resolutions are in a form
acceptable to the Investor.


 


2.36.                                       Appointment
of Durus Board Member. The Company and its board of directors have taken
any and all actions necessary under the Certificate of Incorporation and Bylaws
to appoint to the board of directors a member designated by Durus as a Class
III director. Simultaneously with the execution and delivery of this Agreement,
the Company has delivered to the Investor a certificate, executed by the
Secretary of the Company and dated as of the date hereof, certifying as to the
adoption of resolutions of the Company’s board of directors consistent with the
foregoing, which resolutions are in a form acceptable to the Investor.


 


2.37.                                       Indemnification
Agreements. The Company has, or prior to the Initial Closing will have,
executed and delivered an indemnification agreement, substantially in the form
attached hereto as Exhibit L (a “New Indemnification Agreement”), dated as of the
date hereof, with each member of the Company’s board of directors, including
the Durus designee to the board of directors as provided in Section 2.36. Simultaneously
with the execution and delivery of this Agreement, the Company has delivered to
the Investor a certificate, executed by the Secretary of the Company and dated
as of the date hereof, certifying as to the adoption of resolutions of the
Company’s board of directors consistent with the foregoing, which resolutions
are in a form acceptable to the Investor, and as to the incumbency, authority
and signature(s) of the officer(s) of the Company authorized to execute and
deliver the New Indemnification Agreements.


 


2.38.                                       D&O
Insurance. The Company has provided the Investor with evidence of and, as
of the date hereof, has in full force and effect Directors and Officers
liability insurance coverage for the benefit of each member of the Company’s
board of directors, including the Durus designee to the board of directors as
provided in Section 2.36, with


 


19

















 


such coverage, in such amount, of such
duration and with such insurance carriers as is set forth in Schedule 2.39.


 


3.               INVESTORS’
REPRESENTATIONS AND WARRANTIES.


 


Each Investor represents and warrants to the Company that:


 


3.1.                                             Organization;
Authority. The Investor is an entity duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization with
the requisite power and authority to enter into and to consummate the
transactions contemplated by this Agreement and the other Transaction Documents
to which it is a party and otherwise to carry out its obligations hereunder and
thereunder.


 


3.2.                                             Investment
Purpose. The Investor is purchasing the Securities for its own account and
not with a view to the distribution thereof, provided, however, that by making
the representation herein, the Investor reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption from registration under the Securities Act.


 


3.3.                                             Reliance
on Exemptions. The Investor understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and the Investor’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Investor set forth herein in order to determine the
availability of such exemptions and the eligibility of the Investor to acquire
the Securities.


 


3.4.                                             Information.
To the knowledge of the Investor, the Investor and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities. The Investor and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any other
due diligence investigations conducted by the Investor or its advisors, if any,
or its representatives shall modify, amend or affect the Investor’s right to
rely on the Company’s representations and warranties contained herein. The
Investor understands that its investment in the Securities involves a high
degree of risk.


 


3.5.                                             No
Governmental Review. The Investor understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities.


 


3.6.                                             Restrictions
on Transfer or Resale; Legends.


 


3.6.1.   Restrictions on
Transfer or Resale  The Investor
understands that, except as provided in the Investor Rights Agreement:
(i) the Securities have not been and are


 


20

















 


not being registered under the Securities Act
or any state securities laws, and may not be offered for sale, sold, assigned
or transferred unless (A) the resale of the Securities is registered
pursuant to an effective registration statement under the Securities Act,
(B) if requested by the Company, the Investor shall have delivered to the
Company an opinion of counsel (in form, substance and scope customary for
opinions of counsel in comparable transactions) to the effect that such
Securities to be sold, assigned or transferred may be sold or transferred
pursuant to an exemption from such registration, or (C) the Securities are
sold or transferred pursuant to Rule 144 promulgated under the Securities Act,
as amended, (or a successor rule thereto) (“Rule 144”); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the Person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the Securities Act) may require compliance with some other exemption
under the Securities Act or the rules and regulations of the SEC thereunder;
and (iii) except as set forth in the Investor Rights Agreement, neither
the Company nor any other Person is under any obligation to register the Securities
under the Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder.


 


3.6.2.  Legends. The Investor
understands that the certificates or other instruments representing the
Preferred Shares, the Warrants and the New Notes and, until such time as the
resale of the Conversion Shares, the Warrants and the Warrant Shares have been
registered under the Securities Act as contemplated by the Investor Rights
Agreement, the certificates representing the Conversion Shares, the Warrants
and the Warrant Shares, except as set forth below, shall bear any legend as
required by the “blue sky” laws of any state and a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):


 


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933, AS AMENDED AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.


 


3.7.                                        Authorization;
Enforcement. This Agreement, and the other Transaction Documents to which
the Investor is a party, have been duly and validly authorized, executed and
delivered on behalf of the Investor and shall constitute the legal, valid and
binding obligations of the Investor enforceable against the Investor in
accordance with their respective terms, except as such enforceability may be
limited by general principles


 


21

















 


of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws
relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.


 


3.8.                                        No
Conflicts; No Violation. The execution, delivery and performance by the
Investor of this Agreement and the other Transaction Documents to which the
Investor is a party, and the consummation by the Investor of the transactions
contemplated hereby and thereby, will not (i) result in a violation of the
organizational documents of the Investor or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Investor is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws) applicable to the Investor, except for, in
the case of clauses (ii) and (iii) above, such conflicts, defaults,
rights or violations which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the ability of the
Investor to perform its obligations hereunder.


 


3.9.                                        Residency.
The Investor is a resident of that jurisdiction specified below its address on
the Schedule of Investors.


 


4.          COVENANTS
OF THE PARTIES.


 


4.1.                                             Best
Efforts. Each party shall use its reasonable best efforts to satisfy each
of the conditions to be satisfied by it as provided in Sections 5 and 6 of this
Agreement.


 


4.2.                                             Reporting
Status. Until the date on which the Investors shall no longer hold any
Securities (the “Reporting Period”), the Company shall timely file all reports
required to be filed with the SEC pursuant to the Exchange Act, and the Company
shall not terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations thereunder
would no longer require or otherwise permit such termination, and the Company
shall use its best efforts to maintain its eligibility to register the
Conversion Shares and the Warrant Shares for resale by the Investors on Form
S-3.


 


4.3.                                             Use
of Proceeds. The Company will use the proceeds from the sale of the
Securities exclusively to fund business operating plans approved by the Company’s
board of directors, including the approval of the members of the Company’s
board of directors designated by the Investors.


 


4.4.                                             Financial
Information. Unless filed with the SEC through the EDGAR System and
available to the public through the EDGAR system, the Company agrees to send
the following to the Investors during the Reporting Period (i) within
one Business Day after the filing thereof with the SEC, a copy of its
annual reports and Quarterly Reports on Form 10-K and 10-Q, any regularly
prepared interim reports or any consolidated balance sheets, income statements,
shareholders’ equity statements and/or cash flow statements


 


22

















 


for any period, any current reports on Form
8-K and any registration statements (other than on Form S-8) or amendments
filed pursuant to the Securities Act, (ii) within one (1) Business
Day after release thereof, facsimile copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and
other information made available or given to the shareholders of the Company
generally, contemporaneously with the making available or giving thereof to the
shareholders. As used in this Agreement, “Business Day” means any day other
than Saturday, Sunday or other day on which commercial banks in The City of New
York are authorized or required by law to remain closed.


 


4.5.                                             Listing.
The Company will use its best efforts, so long as the Investors own any of the
Securities, to obtain and maintain the listing and trading of the Common Stock
(including the Conversion Shares and the Warrant Shares) on the NASDAQ Capital
Market or, in lieu thereof, the NASDAQ National Market, and the Company will
comply in all respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the NASDAQ Capital Market or the
NASDAQ National Market, as the case may be, and other exchanges or quotation
systems, as applicable. Neither the Company nor any of its Subsidiaries shall
take any action which would be reasonably expected to result in the delisting
or suspension of the Common Stock on the NASDAQ Capital Market.


 


4.6.                                             Placement
Agent, Advisory and Broker Fees and Expenses. The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (other than for Persons engaged by the Investors)
relating to or arising out of the transactions contemplated hereby or the other
Transaction Documents. The Company shall pay, and hold the Investors harmless
against, any liability, loss or expense (including, without limitation,
reasonable attorney’s fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment.


 


4.7.                                        Validity
and Reservation of Shares.


 


4.7.1.  Validity of Shares. The
Company shall take all actions necessary to ensure that, upon issuance or
conversion in accordance with the Certificate of Designation or exercise in
accordance with the Warrants, as the case may be, the Conversion Shares and the
Warrant Shares, respectively, will be validly issued, fully paid and
non-assessable and free from all preemptive or similar rights, taxes, liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock.


 


4.7.2.  Reservation of Shares. The
Company shall at all times have reserved from its duly authorized capital stock
for the purpose of issuance not less than the sum of (i) 120% of the
maximum number of Conversion Shares issuable upon conversion of the Preferred
Shares (without taking into account any limitations on the conversion of the
Preferred Shares that may be set forth in the Certificate of Designation) and
(ii) 120% of the maximum number of Warrant Shares issuable upon exercise of the
Warrants (without taking into account any limitations on the


 


23

















 


exercise of the Warrants set forth in the
Warrants), based upon the conversion price of the Preferred Shares and the
exercise price of the Warrants in effect from time to time. The Company shall
not reduce the number of shares of Common Stock reserved for issuance as
provided above without the consent of the Investors. If at any time the number
of shares of Common Stock authorized and reserved for issuance is below the
number of shares required in the first sentence of this Section 4.7.2, then the
Company will promptly take all corporate action necessary to authorize and
reserve a sufficient number of shares of Common Stock, including without
limitation calling a special meeting of shareholders to authorize additional
shares of Common Stock to meet the Company’s obligations under this Section
4.7.2, and using its best efforts to obtain shareholder approval of such
increase in shares. Within thirty (30) days after the Initial Closing, the
Company shall call a special meeting of shareholders to authorize additional
shares of Common Stock to meet the Company’s obligations under this Section
4.7.2 with respect to the Preferred Shares and Warrants that may be issued at
the Subsequent Closings, and use its best efforts to obtain shareholder approval
of such increase in shares within ninety (90) days after the Initial Closing.


 


4.8.                                        Conduct
of Business and Compliance with Law. Neither the Company nor any of its
Subsidiaries shall violate any term of or be in default under the Certificate
of Incorporation, the Certificate of Designation, any other certificate of
designation, the preferences or rights of any other outstanding series of
preferred stock of the Company, the Bylaws or any Subsidiaries’ organizational
charter or articles of incorporation or bylaws (or equivalent organizational
documents). The business of the Company and its Subsidiaries shall not be
conducted in violation of any applicable judgment, decree, order, statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries.


 


4.9.                                        Filings
and Consents. The Company and the Investors will cooperate with each other
with respect to obtaining, as promptly as practicable, all necessary consents,
approvals, authorizations and agreements of, and the giving of all notices and
making of all filings with, any third parties, including, without limitation,
governmental and regulatory authorities and the NASDAQ Capital Market,
necessary to authorize, approve or permit the consummation of the transactions
contemplated by this Agreement and the other Transaction Documents, including,
without limitation, requesting an exemption from NASDAQ on behalf of the
Company from any applicable NASDAQ Marketplace rules or other requirements
regarding the need for a vote of the Company’s shareholders in order to
consummate the transactions contemplated in this Agreement and the other
Transaction Documents. The Company shall pay any requisite fees arising from
actions taken in furtherance of this Section 4.9.


 


4.10.                                  Removal
of Legends. Unless otherwise required by applicable state securities laws,
if (i) Securities have been sold under an effective registration statement
filed under the Securities Act, (ii) a holder of Securities, if requested by
the Company, provides the Company with an opinion of counsel (in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that Securities to be sold,


 


24

















 


assigned or transferred may be sold or
transferred pursuant to an exemption from registration under the Securities Act
or (iii) Securities can be sold without restriction under Rule 144, then the
Company shall direct the transfer agent for the Securities in question to issue
one or more certificates for such Securities, free from any restrictive legend,
in such name and in such denominations as specified by the Securities holder.


 


4.11.                                  No
Integration. None of the Company, its Subsidiaries, any of their
Affiliates, nor any Person acting on their behalf will make any offers or sales
of any security or solicit any offers to buy any security, under circumstances
that would require registration of any of the Securities under the Securities
Act or cause the offering of the Securities hereunder to be integrated with
prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system
on which any of the securities of the Company are listed or designated.


 


4.12.                                  Other
Changes. Except as agreed to by the Investor, beginning the date hereof
until the Initial Closing Date, the Company shall not, and shall not suffer or
permit any of its Subsidiaries to (i) make any expenditures in respect of
(A) any lease or any sale and leaseback (real or personal property) other
than rental payments under real property and personal property leases set forth
in Schedule 2.16, (B) any purchase or other acquisition of any fixed or capital
assets or any other assets other than expenditures in the ordinary course of
business consistent with past practices not in excess of $50,000 individually
and $50,000 in the aggregate, or (C) any other expenditures except in the
ordinary course of business consistent with past practices, (ii) enter
into any new contract, agreement, indenture, license or instrument or enter
into any other transaction except on commercially reasonable terms and in the
ordinary course of business consistent with past practices, (iii) establish
any new Plan or change any Plan except as required by law, (iv) increase the
compensation of any existing employee, officer, director or consultant, or pay
or award any bonus, incentive compensation, service award or other like benefit
to any employee, officer, director or consultant, or make any severance or
termination payments, or enter into or amend any severance agreement with, any
employee, officer or director, or enter into any new employment, consulting,
non-competition, retirement, parachute or indemnification agreement with any
officer, director, employee or agent, or modify any such existing agreement; or
(v) take any action that, if taken prior to the date of this Agreement, would
have be disclosed on a disclosure schedule to any of the Company’s
representations and warranties contained herein.


 


4.13.                                  Shareholder Approval. In order to comply with the
Marketplace Rules of the NASDAQ Capital Market with respect to the issuance of
the Conversion Shares and the Warrant Shares, the Company shall promptly notice
and hold an annual or special meeting of its shareholders (which meeting shall
take place no later than June 30, 2006) in accordance with all applicable laws
and rules and regulations of the SEC and the NASDAQ Capital Market and the
Company’s Certificate of Incorporation and Bylaws, at which meeting the Company
shall seek shareholder approval of resolutions providing for the Company’s issuance of the maximum number of Conversion
Shares and Warrant


 


25

















 


Shares issuable upon the
conversion and exercise of the maximum number of Preferred Shares and Warrants
issuable under this Agreement and the other Transaction Documents (assuming
that such Preferred Shares are converted, and such Warrants are exercised, at
their initial conversion price and initial exercise price, respectively).


 


4.14.                                  Rights
Agreement. Beginning on and as of the date hereof, the Company shall take any and
all actions necessary or advisable to effectuate, as promptly as practicable
after the date hereof, the redemption of the outstanding Rights under the
Rights Agreement as provided in Section 2.8.2 and as contemplated by Section 23
of the Rights Agreement. Without limiting the generality of the foregoing, the
Company shall cause the Rights Agent to take all actions necessary or advisable in
connection with the foregoing. The Company shall keep Durus informed of its
actions with respect to the foregoing, and shall take all steps in connection
therewith reasonably requested by Durus. All actions in connection with the
Rights Agreement shall be subject to the prior consent of the Durus, such
consent not to be unreasonably withheld.


 


4.15.                                  Further
Assurances. The Company shall undertake such actions and execute and
deliver such additional instruments and documents as may be reasonably
requested by the Investors, before or after any Closing, in order to consummate
the transactions contemplated by, and to confirm and carry out and to
effectuate fully the intent and purposes of, this Agreement and the other
Transaction Documents.


 


5.               CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.


 


The obligation of the Company hereunder to issue and sell the Units of
Preferred Shares and Warrants to an Investor at the Initial Closing and a
Subsequent Closing, as the case may be, is subject to the satisfaction by the
Investor, on or before the Initial Closing Date, and by the Investor on or
before the Subsequent Closing Date, as the case may be, of each of the
following conditions (any of which may be waived by the Company in whole or in
part):


 


5.1.                                        The
Investor shall have executed and delivered this Agreement, the Loan Agreement,
the Investor Rights Agreement and any other of the Transaction Documents
required to be executed and delivered by the Investor at the applicable
Closing.


 


5.2.                                        The
Investor shall have delivered at the Closing the purchase price for the
Preferred Shares and the Warrants being purchased at such Closing, in the
amount and manner provided for by this Agreement.


 


5.3.                                        The
representations and warranties of the Investor shall be true and correct in all
material respects as of the date when made and as of the Initial Closing Date
or the Subsequent Closing Date, as the case may be, as though made at that
time, and the Investor shall have performed, satisfied and complied with in all
material respects the covenants, agreements and conditions required by this
Agreement and any of the other Transaction Documents to be performed, satisfied
or complied with by the Investor at or prior to the Initial Closing Date or the
Subsequent Closing Date, as the case may be.


 


26

















 


5.4.                                   No
statute, rule, regulation, executive order, decree, ruling or injunction will
have been enacted, entered, promulgated or endorsed by or in any court or
governmental or regulatory authority of competent jurisdiction or any self
regulatory organization having authority over the matters contemplated hereby
which prohibits the consummation by the Investor and the Company of the
purchase and sale of the Units to be acquired by such Investor at the
applicable Closing.


 


6.                    CONDITIONS TO INVESTOR’S OBLIGATION TO PURCHASE.


 


6.1.                                   Initial
Closing. The obligation of an Investor hereunder to purchase the Units of Series B-1
Preferred Shares and Warrants at the Initial Closing is subject to the
satisfaction, on or before the Initial Closing Date, of each of the following
conditions (any of which may be waived by the Investor in whole or in
part):


 


6.1.1.                               Execution
and Delivery of Documents and Issuance of Securities. The Company shall
have duly executed and delivered this Agreement, the Loan Agreement, the Investor
Rights Agreement, the Warrant Agreement, the Certificate of Designation and any
other of the Transaction Documents required to be executed and delivered by the
Company at the Initial Closing. The Company shall have also delivered to the
Investor duly executed certificates, against payment therefor, representing the
Series B-1 Preferred Shares and the Warrants.


 


6.1.2.                               Due
Diligence and Other Documents. The Investor shall have completed its due
diligence review of the Company to its satisfaction, as determined by the
Investor in its sole discretion. The Investor shall have received such other
approval, opinions, documents or materials as the Investor may reasonably
request.


 


6.1.3.                               Representations
and Warranties; Performance of Obligations. The representations and
warranties of the Company (before and after giving effect to the consummation
of the transactions contemplated by this Agreement and the other Transaction
Documents) shall be true and correct in all material respects as of the date
when made and as of the Initial Closing Date as though made at that time, and
the Company shall have performed, satisfied and complied in all respects with
the covenants, agreements and conditions required by the this Agreement, the
Loan Agreement, the Investor Rights Agreement, the Warrant Agreement and the
other Transaction Documents to be performed, satisfied or complied with by the
Company. The Investor shall have received a certificate, executed by the Chief
Executive Officer or Chief Financial Officer of the Company, dated as of the
Initial Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by the Investor.


 


6.1.4.                               No
Restraints; Approvals.


 


6.1.4.1.            No
statute, rule, regulation, executive order, decree, ruling or injunction will
have been enacted, entered, promulgated or endorsed by or in any court or
governmental or regulatory authority of competent jurisdiction, or any self 


 


27

















 


regulatory organization having authority over
the matters contemplated hereby, which would prohibit the consummation of any
of, or materially adversely affect, the transactions contemplated by this
Agreement or the other Transaction Documents. No action, suit or proceeding
shall have been instituted and remain pending, or have been threatened, before
a court or other governmental or regulatory body of competent jurisdiction to
restrain, prohibit or otherwise challenge any of the transactions contemplated
by this Agreement or the other Transaction Documents (or seeking damages from
the Investor, any of its Affiliates or the Company as a result thereof).


 


6.1.4.2.            Except
as contemplated by Section 4.13, the Company shall have obtained all
governmental, regulatory or third party consents and approvals necessary for
the consummation of the transactions contemplated by this Agreement and the
other Transaction Documents, including, without limitation, the Company shall
have obtained an exemption or other form of relief or clarification (in form and
substance acceptable to the Investor) from NASDAQ to the effect that any of the
NASDAQ’s rules regarding the need for a vote of the Company’s shareholders
are inapplicable to the transactions contemplated in this Agreement and the
other Transaction Documents.


 


6.1.4.3.            The
Investor shall have received a certificate, executed by the Chief Executive
Officer or Chief Financial Officer of the Company, dated as of the Initial
Closing Date, certifying that all (i) authorizations, consents or
approvals of, notices to or filings with any governmental or regulatory
authority and (ii) approvals and consents of any other Person, required in
connection with the consummation of the transactions contemplated by this
Agreement and the other Transaction Documents, shall have been obtained or made
and that all applicable waiting periods have expired without notice of any
action which seeks to restrain, enjoin or otherwise prohibit or materially
delay the transactions contemplated by this Agreement and the other Transaction
Documents and as to such other matters as may be reasonably requested by
the Investor.


 


6.1.5.                               Opinion
of Company Counsel. The Investor shall have received the opinion of the
Company’s outside counsel, dated as of the Initial Closing Date, in substantially
the form of Exhibit M attached hereto.


 


6.1.6.                               Organizational
Documents; Good Standing. The Company shall have delivered to the Investor (i) a
certificate evidencing the formation and good standing of the Company and each
of its material Subsidiaries in each such entity’s jurisdiction of formation
issued by the Secretary of State (or equivalent) of such jurisdiction of
formation as of a date within five (5) days of the Initial Closing Date, (ii) a
certificate evidencing the Company’s qualification as a foreign corporation and
good standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company conducts business and is required to so
qualify, as of a date within five (5) days of the Initial Closing Date, (iii) a
certified copy of 


 


28

















 


the Certificate of Incorporation as certified
by the Secretary of State of the State of Delaware within five (5) days of
the Initial Closing Date and (iv) a certified copy of the Certificate of
Designation as certified by the Secretary of State of the State of Delaware
within five (5) days of the Initial Closing Date.


 


6.1.7.                               Resolutions;
Incumbency. The Company shall have delivered to the Investor (i) a
certificate, executed by the Secretary of the Company and dated as of the
Initial Closing Date, as to (A) the resolutions adopted unanimously by the
Company’s board of directors with respect to the transactions contemplated by
this Agreement and the other Transaction Documents, in a form acceptable
to the Investor, (B) the Certificate of Incorporation, (C) the
Bylaws, each as in effect at the Initial Closing, and (D) the incumbency,
authority and signatures of each officer of the Company authorized to execute
and deliver this Agreement and the other Transaction Documents to be executed
and delivered at the Initial Closing and act with respect thereto and (ii) a
letter from the Company’s transfer agent certifying the number of shares of
Common Stock outstanding as of a date within five (5) days of the Initial
Closing Date.


 


6.1.8.                               Continued
Listing. The Common Stock shall be listed on the NASDAQ Capital Market and
shall not have been suspended, as of the Initial Closing Date, by the SEC or
the NASDAQ Capital Market from trading on the NASDAQ Capital Market nor shall
proceedings regarding such suspension by the SEC or the NASDAQ Capital Market
have been threatened, as of the Initial Closing Date, either by the SEC or the
NASDAQ Capital Market nor shall the Company be out of compliance with any of
the minimum maintenance requirements of the NASDAQ Capital Market.


 


6.1.9.                               Board
and Employee Matters.


 


6.1.9.1.            The
Company’s Bylaws shall provide that its Board of Directors shall consist of
seven (7) members as of the Initial Closing Date and the Investor shall
have designated at least four (4) of the Company’s seven (7) board
members, and such designees, on and as of the Initial Closing Date, shall have
been appointed to the Company’s board of directors in accordance with the
Certificate of Incorporation and Bylaws such that one (1) designee is a Class I
director, one (1) designee is a Class II director and two (2) designees
are Class III directors, and any necessary consents, approvals,
authorizations and agreements of, and the giving of all notices and making of
all filings with, any third parties in connection with the appointment of such
designees to the Company’s board of directors shall have been received or made,
as the case may be, including, without limitation, the provision of any
information to the Company’s shareholders in accordance with Rule 14f-1 of
the Exchange Act regarding the right of the Investor to designate a majority of
the members of the Company’s board of directors.


 


29

















 


6.1.9.2.            The
Company shall have executed and delivered a New Indemnification Agreement for
each of the Investor’s designees to the Company’s board of directors.


 


6.1.9.3.            The
Company shall have provided the Investor with evidence of Directors and
Officers liability insurance coverage for the benefit of the Investor’s
designees to the Company’s board of directors, with coverage of the type,
amount, duration and with such insurance carriers acceptable to the Investor.


 


6.1.9.4.            The
Company shall have duly authorized, executed and delivered agreements, in
substantially the form attached hereto as Exhibit N, with members of
the Company’s existing board of directors to be designated by the Investor,
pursuant to which agreements such designated members of the board shall have
resigned from the board of directors of the Company on and as of the Initial
Closing Date in order to create four vacancies therein that will have then been
filled by appointment of the Investor’s designees as provided in this
Agreement.


 


6.1.9.5.            Any
disclosures to be made by the Company in connection with changes in the
management and members of the board of directors of the Company shall be
satisfactory to the Investor in its sole discretion.


 


6.1.9.6.       The Company shall have
entered into a consulting agreement with William Dow substantially in the form attached
hereto as Exhibit O, pursuant to which agreement Mr. Dow shall have
resigned as an employee of the Company on and as of the Initial Closing Date
and agreed to provide certain consulting services to the Company in exchange
for certain consideration as provided therein.


 


6.1.10.                         Rights
Agreement. The Company shall have effectuated and consummated the
redemption of the outstanding Rights under the Rights Agreement, as provided in
Sections 2.8.2 and 4.14, in accordance with Section 23 of the Rights
Agreement.


 


6.1.11.                         Mutual
Release. The Company shall have duly authorized, executed and delivered a
Mutual Release among the Company, Durus and Artal, substantially in the form attached
hereto as Exhibit P and effective on and as of the Initial Closing Date.


 


6.1.12.                         Other
Matters.


 


6.1.12.1.        The Company
shall have delivered to the Investor such other documents relating to the
transactions contemplated by this Agreement and the other Transaction Documents
as the Investor or its counsel may reasonably request.


 


30

















 


6.1.12.2.        No event or
events shall have occurred since the date hereof that, taken individually or in
the aggregate, would reasonably be expected to have a Material Adverse Effect.


 


6.1.12.3.        The Company
shall have paid, via wire transfer of immediately available funds or other
acceptable payment mechanism, the fees and expenses incurred by the Investor as
provided in Section 10.3.


 


6.1.12.4.        The Company
shall have entered into an amendment to its Research, Development, and License
Agreement with DEKA Research and Development Corporation, in form and
substance mutually agreed to by the Company and the Investor.


 


6.2.                                   Subsequent
Closings. In connection with any Subsequent Closing, an Investor electing
to purchase additional Units of Preferred Shares and Warrants at a Subsequent
Closing shall be entitled to receive evidence of the satisfaction, on or before
the Subsequent Closing Date, of each of the following conditions (any of which may be
waived by the Investor in whole or in part):


 


6.2.1.                               Issuance
of Securities. The Company shall have delivered to the Investor duly
executed certificates, against payment therefor, representing the Preferred
Shares and the Warrants.


 


6.2.2.                               Representations
and Warranties; Performance of Obligations. The representations and
warranties of the Company (before and after giving effect to the consummation
of the transactions contemplated by the Transaction Documents) shall be true
and correct in all material respects as of the date when made and as of the
Subsequent Closing Date as though made at that time (except to the extent, and
only to the extent, that the Company’s representations and warranties may change
as a result of the consummation of the transactions contemplated by this
Agreement and the other Transaction Documents on the Initial Closing Date) and
the Company shall have performed, satisfied and complied in all respects with
the covenants, agreements and conditions required by this Agreement and the
other Transaction Documents to be performed, satisfied or complied with by the
Company. The Investor shall have received a certificate, executed by the Chief
Executive Officer or Chief Financial Officer of the Company, dated as of the
Subsequent Closing Date, to the foregoing effect and as to such other matters
as may be reasonably requested by the Investor(s).


 


6.2.3.                               No
Restraints.


 


6.2.3.1.         No statute,
rule, regulation, executive order, decree, ruling or injunction will have been
enacted, entered, promulgated or endorsed by or in any court or governmental or
regulatory authority of competent jurisdiction, or any self regulatory
organization having authority over the matters contemplated hereby, which would
prohibit the consummation of any of, or materially adversely 


 


31

















 


affect, the transactions contemplated by this
Agreement or the other Transaction Documents. No action, suit or proceeding
shall have been instituted and remain pending, or have been threatened, before
a court or other governmental or regulatory body of competent jurisdiction to
restrain, prohibit or otherwise challenge any of the transactions contemplated
by this Agreement or the other Transaction Documents (or seeking damages from
the Investor, any of its Affiliates or the Company as a result thereof).


 


6.2.3.2.         Except as
contemplated by Section 4.13, the Company shall have obtained all
governmental, regulatory or third party consents and approvals necessary for
the consummation of the transactions contemplated by this Agreement and the
other Transaction Documents, including, without limitation, the Company shall
have obtained an exemption or other form of relief or clarification (in form and
substance acceptable to the Investor) from NASDAQ to the effect that any of the
NASDAQ’s rules regarding the need for a vote of the Company’s shareholders
are inapplicable to the transactions contemplated in this Agreement and the
other Transaction Documents.


 


6.2.3.3.         The Investor
shall have received a certificate, executed by the Chief Executive Officer or
Chief Financial Officer of the Company, dated as of the Subsequent Closing
Date, certifying that all (i) authorizations, consents or approvals of,
notices to or filings with any governmental or regulatory authority and (ii) approvals
and consents of any other Person, required in connection with the consummation
of the transactions contemplated by this Agreement and the other Transaction
Documents, shall have been obtained or made and that all applicable waiting
periods have expired without notice of any action which seeks to restrain,
enjoin or otherwise prohibit or materially delay the transactions contemplated
by this Agreement and the other Transaction Documents and as to such other
matters as may be reasonably requested by the Investors.


 


6.2.4.                               Opinion
of Company Counsel. The Investor shall have received the opinion of the
Company’s outside counsel, dated as of the Subsequent Closing Date, in
substantially the form of Exhibit Q attached hereto.


 


6.2.5.                               Organizational
Documents; Good Standing. The Company shall have delivered to the Investor (i) a
certificate evidencing the formation and good standing of the Company and each
of its material Subsidiaries in each such entity’s jurisdiction of formation
issued by the Secretary of State (or equivalent) of such jurisdiction of
formation as of a date within five (5) days of the Subsequent Closing
Date, (ii) a certificate evidencing the Company’s qualification as a
foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company conducts business
and is required to so qualify, as of a date within five (5) days of the
Subsequent Closing Date and (iii) a certified copy of the Certificate of
Incorporation as certified by the Secretary of State of the State of Delaware
within five (5) days of the Subsequent Closing Date.


 


32

















 


6.2.6.                               Resolutions;
Incumbency. The Company shall have delivered to the Investor (i) a
certificate, executed by the Secretary of the Company and dated as of the
Subsequent Closing Date, as to (A) the resolutions adopted by the Company’s
board of directors with respect to the transactions contemplated by this
Agreement and the other Transaction Documents, in a form acceptable to the
Investor, (B) the Certificate of Incorporation, (C) the Bylaws, each
as in effect at the Subsequent Closing, and (D) the incumbency, authority
and signatures of each officer of the Company authorized to execute and deliver
this Agreement and the other Transaction Documents to be executed and delivered
at the Subsequent Closing and act with respect thereto and (ii) a letter
from the Company’s transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five (5) days of the Subsequent
Closing Date.


 


6.2.7.                               Continued
Listing. The Common Stock shall be listed on the NASDAQ Capital Market and
shall not have been suspended, as of the Subsequent Closing Date, by the SEC or
the NASDAQ Capital Market from trading on the NASDAQ Capital Market nor shall
proceedings regarding such suspension by the SEC or the NASDAQ Capital Market
have been threatened, as of the Subsequent Closing Date, either by the SEC or
the NASDAQ Capital Market or by falling below the minimum maintenance
requirements of the NASDAQ Capital Market.


 


6.2.8.                               Other
Matters.


 


6.2.8.1.         The Company
shall have delivered to the Investor(s) such other documents relating to the
transactions contemplated by this Agreement and the other Transaction Documents
as the Investor or its counsel may reasonably request.


 


6.2.8.2.         No event or
events shall have occurred since the date hereof that, taken individually or in
the aggregate, would reasonably be expected to have a Material Adverse Effect.


 


6.2.8.3.         The Company
shall have paid, via wire transfer of immediately available funds or other
acceptable payment mechanism, the fees and expenses incurred by the Investor(s)
as provided in Section 10.3.


 


7.                    INDEMNIFICATION


 


In consideration of an Investor’s execution
and delivery of this Agreement and the other Transaction Documents and the
acquisition of the Securities, and in addition to all of the Company’s other
obligations under this Agreement, the Loan Agreements, the Investor Rights
Agreement, the Preferred Shares, the Warrants, the New Notes and the other
Transaction Documents, the Company hereby acknowledges and agrees that it shall
defend, protect, indemnify and hold harmless the Investor and each other holder
of the Securities and each and all of their respective shareholders, partners,
members, officers, directors, employees, managers and direct and indirect
investors and any of the foregoing Persons’


 


33

















 


agents or other representatives (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement and the other Transaction Documents)
(collectively the “Indemnitees”) from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages and expenses as incurred in connection therewith (regardless of whether
any such Indemnitee is a party to the action for which indemnification is
sought), and including reasonable attorney’s fees and disbursements (the “Indemnified
Liabilities”), incurred by an Indemnitee as a result of, or arising out of, or
relating to (a) any misrepresentation by the Company or any breach of any
representation or warranty made by the Company herein or in any other
Transaction Document or in any certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation
of the Company contained herein or in any other Transaction Document or in any
certificate, instrument or document contemplated hereby or thereby or (c) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or breach by the Company, or the enforcement by the
Investor, of this Agreement or any other Transaction Document or any certificate,
instrument or document contemplated hereby or thereby  or (ii) the
status of such Indemnitee as an investor in the Company. To the extent that the
foregoing indemnification obligations on the part of the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities that is
permissible under applicable law.


 


The indemnification obligations on the part of
the Company contained in this Section 7 do not apply to amounts paid in
settlement of Indemnified Liabilities if such settlement is made without the
prior written consent of the Company, which consent shall not be unreasonably
withheld. The Company may participate in, and assume and control, the
defense of any claim with counsel mutually satisfactory to the Company and the
Indemnitee. If, in the reasonable opinion of counsel mutually satisfactory to
the Company and the Indemnitee, the representation by such counsel of the
Company and the Indemnitee is inappropriate due to actual or potential
conflicts of interests between the Indemnitee and any other party represented
by such counsel in such proceeding or the actual or potential defendants in, or
targets of, any such action including the Indemnitee, and any such Indemnitee
reasonably determines that there may be legal defenses available to such
Indemnitee that are different from or in addition to those available to the
Company, then the Indemnitee is entitled to assume such defense and may retain
its own counsel, with fees and expenses to be paid by the Company.


 


8.                    DEFINITIONS


 


“Affiliate” has the meaning set forth in Section 2.6.


 


“Agreement” means this Securities Purchase Agreement dated as of March 31,
2006 entered into by and between the Company and the Investor.


 


“Artal” has the meaning set forth in Recital E.


 


34

















 


“Bridge Loan” has the meaning set forth in Recital D.


 


“Business Day” has the meaning set forth in Section 4.4.


 


“Bylaws” has the meanings set forth in Section 2.15.


 


“Certificate of Designation” has the meaning set forth in Recital A.


 


“Certificate of Incorporation” has the meaning set forth in Section 2.15.


 


“Closing” has the meaning set forth in Section 1.4.


 


“Common Stock” means the Company’s common stock, par value $0.01 per
share


 


“Company” means Aksys, Ltd.


 


“Conversion Shares” has the meaning set forth in Recital A.


 


“Environmental Laws” has the meaning set forth in Section 2.22.


 


“ERISA” means the Employee Retirement Income Security Act of 1974,
including (unless the context otherwise requires) any rules or regulations
promulgated thereunder.


 


“ERISA Affiliate” means each business or entity which is, or within the
last six years was, a member of a “controlled group of corporations”, under “common
control” or an “affiliated service group” with the Company within the meaning
of Section 414(b), (c) or (m) of the Internal Revenue Code, required
to be aggregated with the Company under Section 414(o) of the Internal
Revenue Code, or is, or within the last six years was, under “common control”
with the Company, within the meaning of Section 4001(a)(14) of ERISA.


 


“ERISA Event” means (i) a reportable event as defined in Section 4043
of ERISA with respect to a Pension Plan, excluding, however, such events as to
which the PBGC by regulation has waived the requirement of Section 4043(a) of
ERISA that it be notified within 30 days of the occurrence of such event; (ii) the
applicability of the requirements of Section 4043(b) of ERISA with
respect to a contributing sponsor, as defined in Section 4001(a)(13) of
ERISA, to any Pension Plan where an event described in paragraph (9), (10),
(11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected
to occur with respect to such plan within the following 30 days; (iii) a
withdrawal by the Company or any ERISA Affiliate thereof from a Pension Plan or
the termination of any Pension Plan resulting in liability under
Sections 4063 or 4064 of ERISA; (iv) the withdrawal of the Company or
any ERISA Affiliate thereof in a complete or partial withdrawal (within the
meaning of Section 4203 and 4205 of ERISA) from any Multiemployer Plan if
there is any potential liability therefore, or the receipt by the Company or
any ERISA Affiliate thereof of notice from any Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of
ERISA;  (v) the filing of a notice
of intent to terminate, the treatment of a plan amendment as a termination
under Section 4041 or 4041A of ERISA, or the


 


35

















 


commencement of proceedings by the PBGC to terminate a Pension Plan or
Multiemployer Plan; (vi) the imposition of liability on the Company or any
ERISA Affiliate thereof pursuant to Sections 4062(e) or 4069 of ERISA or
by reason of the application of Section 4212(c) of ERISA; (vii) the
failure by the Company or any ERISA Affiliate thereof to make any required
contribution to a Plan, or the failure to meet the minimum funding standard of Section 412
of the Internal Revenue Code with respect to any Pension Plan (whether or not
waived in accordance with Section 412(d) of the Internal Revenue
Code) or the failure to make by its due date a required installment under Section 412(m)
of the Internal Revenue Code with respect to any Pension Plan or the failure to
make any required contribution to a Multiemployer Plan; (viii) an event or
condition which might reasonably be expected to constitute grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Pension Plan or Multiemployer Plan; (ix) the imposition of any
liability under Title I or Title IV of ERISA, other than PBGC premiums due
but not delinquent under Section 4007 of ERISA, upon the Company, or any
ERISA Affiliate thereof; (x) an application for a funding waiver under Section 303
of ERISA or an extension of any amortization period pursuant to Section 412
of the Internal Revenue Code with respect to any Pension Plan; (xi) the
occurrence of a non-exempt prohibited transaction under Sections 406 or 407 of
ERISA for which the Company or any Subsidiary thereof may be directly or
indirectly liable; (xii) a violation of the applicable requirements of Section 404
or 405 of ERISA or the exclusive benefit rule under Section 401(a) of
the Internal Revenue Code by any fiduciary or disqualified person for which the
Company or any ERISA Affiliate thereof may be directly or indirectly
liable; (xii) the occurrence of an act or omission which could give rise to the
imposition on the Company or any ERISA Affiliate thereof of fines, penalties,
taxes or related charges under Chapter 43 of the Internal Revenue Code or under
Sections 409, 502(c), (i) or (1) or 4071 of ERISA; (xiii) the
assertion of a material claim (other than routine claims for benefits) against
any Plan or the assets thereof, or against the Company, or any Subsidiary
thereof in connection with any such plan; (xiv) receipt from the IRS of notice
of the failure of any Qualified Plan to qualify under Section 401(a) of
the Internal Revenue Code, or the failure of any trust forming part of any
Qualified Plan to fail to qualify for exemption from taxation under Section 501(a) of
the Internal Revenue Code; (xv) the imposition of any lien on any of the
rights, properties or assets of the Company or any ERISA Affiliate thereof, in
either case pursuant to Title I or IV of ERISA or to Section 401(a)(29)
or 412 of the Internal Revenue Code; or (xvi) the establishment or amendment by
the Company or any Subsidiary thereof of any “welfare plan”, as such term is
defined in Section 3(1) of ERISA, that provides post-employment
welfare benefits in a manner that would increase the liability of the Company.


 


“Exercise Price” has the meaning set forth in the Warrant Agreement.


 


“Indebtedness” has the meaning set forth in Section 2.16.


 


“Initial Closing” has the meaning set forth in Section 1.4.1.


 


“Initial Closing Date” has the meaning set forth in Section 1.4.1.


 


“Insolvent” has the meaning set forth in 2.10.


 


36

















 


“Investor” and the “Investors” have the meaning set forth in the first
paragraph of this Agreement.


 


“Investor Rights Agreement” has the meaning set forth in Recital D.


 


“Loan Agreement” has the meaning set forth in Recital D.


 


“Loan Agreements” has the meaning set forth in Recital D.


 


“Material Adverse Effect” has the meaning set forth in Section 2.1.


 


“Multiemployer Plan” means a “multiemployer plan” (within the meaning
of Section 3(37) of ERISA) to which the Company or any ERISA Affiliate thereof
makes, is making, or is obligated or has ever been obligated to make,
contributions.


 


“New Notes” has the meaning set forth in Recital D.


 


“Notice of Additional Investment” has the meaning set forth in Section 1.3.2.


 


“Outstanding Notes” has the meaning set forth in Recital E.


 


“PBGC” means the Pension Benefit Guaranty Corporation or any successor
thereto.


 


“Pension Plan” means an employee benefit plan (as defined in Section 3(3) of
ERISA) other than a Multiemployer Plan (i) that is or was at any time
maintained or sponsored by the Company or any ERISA Affiliate thereof or to
which the Company, or any ERISA Affiliate thereof has ever made, or was
obligated to make, contributions, and (ii) that is or was subject to Section 412
of the Internal Revenue Code, Section 302 of ERISA or Title IV of ERISA.


 


“Person” means an individual,
corporation, partnership, limited liability company, joint venture, trust,
unincorporated organization or any other entity of whatever nature or any
governmental agency or authority.


 


“Plan” means (i) an employee benefit plan (as defined in Section 3(3) of
ERISA) other than a Multiemployer Plan which is or was at any time maintained
or sponsored by the Company or any Subsidiary thereof or to which the Company
or any Subsidiary thereof has ever made, or was obligated to make,
contributions, (ii) a Pension Plan, or (iii) a Qualified Plan.


 


“Preferred Shares” has the meaning set forth in Recital A.


 


“Qualified Plan” means an employee benefit plan (as defined in Section 3(3) of
ERISA) other than a Multiemployer Plan (i) that is or was at any time
maintained or sponsored by the Company or any ERISA Affiliate thereof or to
which the Company or any ERISA Affiliate thereof has ever made, or was ever
obligated to make, contributions, and (ii) that is intended to be tax-qualified
under Section 401(a) of the Internal Revenue Code.


 


37

















 


“Redemption Price” has the meaning set forth in the Rights Agreement.


 


“Rights Agreement” has the meaning set forth in Section 2.8.2.


 


“Schedule of Investors” has the meaning set forth in the first
paragraph of this Agreement.


 


“SEC” has the meaning set forth in Section 2.9.


 


“SEC Documents” has the meaning set forth in Section 2.9.


 


“Securities” has the meaning set forth in Recital F.


 


“Securities Act” has the meaning set forth in Section 2.3.


 


“Subsequent Closing” has the meaning set forth in Section 1.4.2.


 


“Subsequent Closing Date” has the meaning set forth in 1.4.2.


 


“Subsidiary” has the meaning set forth in Section 2.1.


 


“Transaction Documents” has the meaning set forth in Section 2.2.


 


“Units” has the meaning set forth in Recital B.


 


“Warrant Agent” has the meaning given to such term set forth in the
Warrant Agreement.


 


“Warrants” has the meaning set forth in Recital B.


 


“Warrant Agreement” has the meaning set forth in Recital B.


 


“Warrant Shares” has the meaning set forth in Recital B.


 


9.                   TERMINATION. In
the event that the Initial Closing shall not have occurred on or before the
date that is sixty (60) days following the date hereof due to the Company’s
failure to satisfy the conditions set forth in Sections 6 (and Durus does not
waive such unsatisfied condition(s)), Durus may, in its sole discretion,
terminate this Agreement at any time after such date without any liability
whatsoever to the Company; provided, however, if this Agreement is terminated
pursuant to this Section 9, the Company shall remain obligated to the
Investors under Section 10.3.


 


10.            MISCELLANEOUS


 


10.1.                                           Press
Releases and Announcements. All press releases and announcements concerning
the transactions contemplated by this Agreement and the other Transaction
Documents shall be mutually agreed to by the Company and the Investors, except
for any such disclosure required by law which, in the case of such disclosure
by the


 


38

















 


Company, shall, to the extent practicable
under the circumstances, be first discussed with the Investors and, in the case
of such disclosure by the Investors, shall, to the extent practicable under the
circumstances, be first discussed with the Company.


 


10.2.                                           Interpretation.


 


10.2.1.                           The
various section headings are inserted for purposes of reference only and
shall not affect the meaning or interpretation of this Agreement or any
provision hereof.


 


10.2.2.                           Each
party hereto acknowledges that it has been represented by competent counsel and
participated in the drafting of this Agreement and the other Transaction
Documents and agrees that any applicable rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in connection with the construction or interpretation of this
Agreement and the other Transaction Documents.


 


10.3.                                           Fees
and Expenses. The Company shall reimburse the Investor(s) for reasonable
attorney’s fees and related costs and expenses incurred in connection with the
transactions contemplated by this Agreement and the other Transaction Documents
and due diligence in connection therewith, including fees and related costs and
expenses incurred in connection with any Additional Investment by the
Investor(s) as contemplated by Section 1.3, which amount(s) shall be paid
to the Investors or its counsel whether or not the transactions contemplated by
this Agreement and the other Transaction Documents are consummated, including,
without limitation, in the event this Agreement is terminated as contemplated
in Section 9. Except as expressly set forth above, each party hereto shall
be solely responsible for the payment of 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 and the other Transaction Documents. Without
limiting the generality of the foregoing, the Company shall pay all stamp and
other taxes, if any, which may be payable in respect of the issuance, sale
and delivery to the Investor(s) or any designees of the Preferred Shares, the
Warrants, the New Notes, the Conversion Shares or the Warrant Shares, and shall
save the Investor harmless against any loss or liability resulting from
nonpayment or delay in the payment of any such taxes.


 


10.4.                                                Governing
Law; Jurisdiction and Venue; Waiver of Jury Trial.


 


10.4.1.                           This
Agreement is to be construed in accordance with and governed by the internal
laws of the State of New York (as permitted by Section 5-1401 of the New
York General Obligations Law (or any similar successor provision)) without
giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the internal laws of the State of
New York to the rights and duties of the parties.


 


39

















 


10.4.2.                           For
purposes of any suit, action or other legal proceeding relating to this
Agreement or the enforcement of any provision of this Agreement, each party
hereto hereby expressly and irrevocably submits and consents to the exclusive
jurisdiction of the courts of the State of New York sitting in the borough of
Manhattan and the United States District Court for the Southern District of New
York for the purposes of any such suit, action or legal proceeding, including
to enforce any settlement, order or award; and agrees that such state and
federal courts shall be deemed to be a convenient forum; and waives and agrees
not to assert (by way of motion, as a defense or otherwise), in any such legal
proceeding commenced in such court any claim that such party is not subject
personally to the jurisdiction of such court, that such legal proceeding has
been brought in an inconvenient forum, that the venue of such proceeding is
improper or that this Agreement or the subject matter of this Agreement may not
be enforced in or by such court.


 


10.4.3.                           Each
party hereto agrees to the entry of an order to enforce any resolution,
settlement, order or award made pursuant to this Section by the courts of
the State of New York sitting in the borough of Manhattan and the United States
District Court for the Southern District of New York and in connection
therewith hereby waives, and agrees not to assert by way of motion, as a defense,
or otherwise, any claim that such resolution, settlement, order or award is
inconsistent with or violative of the laws or public policy of the laws of the
State of New York or any other jurisdiction.


 


10.4.4.                           Each
party hereto hereby knowingly, voluntarily, and intentionally waives the right
to a trial by jury in respect of any litigation arising out of, under or in
connection with this Agreement, this waiver being a material inducement for
each such party to enter into this Agreement.


 


10.5.                                           Specific
Performance. The parties hereto agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific intent or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to
prevent or cure breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof without the necessity of
demonstration actual damages and without having to post a bond or other form of
security as a condition to such relief, this being in addition to any other
remedy to which they may be entitled by law or equity.


 


10.6.                                           Survival.
Unless this Agreement is terminated under Section 9, the representations
and warranties of the parties hereunder shall survive each Closing.


 


10.7.                                           Third
Party Beneficiaries. Except as set forth in Section 7 of this
Agreement, this Agreement is intended for the benefit of the parties hereto and
their respective permitted successors (including subsequent Securities holders)
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other Person or entity.


 


10.8.                                           Entire
Agreement. This Agreement, the other Transaction Documents and the other
documents contemplated hereby and thereby (including all schedules and exhibits


 


40

















 


thereto) constitute the full and entire
understanding and agreement among the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other in any
manner by any representations, warranties, covenants and agreements except as
specifically set forth herein and therein. This Agreement supersedes all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof.


 


10.9.                                           Severability.
The provisions of this Agreement shall be severable, and any invalidity,
unenforceability or illegality of any provision or provisions of this Agreement
shall not affect any other provision or provisions of this Agreement, and each
term and provision of this Agreement shall be construed to be valid and
enforceable to the full extent permitted by law.


 


10.10.                                     Amendment
and Waiver. This Agreement may be amended or modified only upon the
mutual written consent of the Company and the Investors. No failure to exercise
and no delay in exercising any right, power or privilege granted under this
Agreement shall operate as a waiver of such right, power or privilege. No
single or partial exercise of any right, power or privilege granted under this
Agreement shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies provided in
this Agreement are cumulative and are not exclusive of any rights or remedies
provided by law.


 


10.11.                                     Relationship
of the Parties. For all purposes of this Agreement and the other
Transaction Documents, each of the parties hereto and their respective
Affiliates shall be deemed to be independent entities and, anything in this
Agreement or the other Transaction Documents to the contrary notwithstanding,
nothing herein shall be deemed to constitute the parties hereto or any of their
respective Affiliates as partners, joint venturers, co-owners, an association
or any entity separate and apart from each party itself, nor shall this
Agreement or any other Transaction Documents make any party hereto an employee
or agent, legal or otherwise, of the other parties for any purposes whatsoever.
None of the parties hereto is authorized to make any statements or
representations on behalf of any other party or in any way to obligate any
other party, except as expressly authorized in writing by the other parties. Except
as expressly provided in this Agreement or any other Transaction Documents, no
party hereto or thereto shall assume nor shall be liable for any liabilities or
obligations of the other parties, whether past, present or future.


 


10.12.                                     Notices.


 


All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified; (ii) when sent by confirmed
telex or facsimile if sent during normal business hours of the recipient, if
not, then on the next business day; (iii) five (5) days after having
been sent by registered or certified mail, return receipt requested, postage
prepaid; or (iv) two (2) days after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent to the parties hereto
at the


 


41

















 


respective addresses set forth below, or as
notified by such party from time to time at least ten (10) days prior to
the effectiveness of such notice:


 


	
  if to the Investors:

  	
  Durus Life Sciences Master Fund Ltd.

  
	
   

  	
  c/o International Fund Services (Ireland)
  Ltd.

  
	
   

  	
  3rd Floor, Bishops Square

  
	
   

  	
  Redmonds Hill

  
	
   

  	
  Dublin 2, Ireland

  
	
   

  	
  Attention: Susan Byrne

  
	
   

  	
  Tel: (011) 35-31-707-5113

  
	
   

  	
  Fax: (011) 35-31-707-5013

  
	
  with a copy to:

  	
  Gavin Grover, Esq.

  
	
   

  	
  Morrison & Foerster LLP

  
	
   

  	
  425 Market Street

  
	
   

  	
  San Francisco,
  California 94105

  
	
   

  	
  Tel:
  415-268-7000

  
	
   

  	
  Fax:
  415-269-7522

  
	
  and a copy to:

  	
  Paul N. Roth, Esq.

  
	
   

  	
  Schulte, Roth & Zabel

  
	
   

  	
  919 Third Avenue

  
	
   

  	
  New York, New York 10022

  
	
   

  	
  Tel: 212-756-2000

  
	
   

  	
  Fax: 212-593-5955

  
	
   

  	
   

  
	
  if to the Company:

  	
  Aksys, Ltd.

  
	
   

  	
  Two Marriott Drive

  
	
   

  	
  Lincolnshire, Illinois 60069

  
	
   

  	
  Tel: 847-229-2020

  
	
   

  	
  Fax: 847-229-2080

  
	
   

  	
   

  
	
  with a copy to:

  	
  Keith S. Crow P.C.

  
	
   

  	
  Kirkland & Ellis LLP

  
	
   

  	
  200 East Randolph Drive

  
	
   

  	
  Chicago, Illinois 60601

  
	
   

  	
  Tel: 312-861-2000

  
	
   

  	
  Fax: 312-861-2200

  



 


10.13.                                     Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.


 


10.14.                                          Attorney’s
Fees. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorney’s fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.


 


42

















 


In Witness Whereof, the parties hereto have
executed this Agreement as of the date set forth in the first paragraph hereof.


 


	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  AKSYS, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Laurence
  P. Birch

  	
   

  
	
   

  	
   

  	
  Name: Laurence
  P. Birch

  
	
   

  	
   

  	
  Title: CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INVESTOR:

  
	
   

  	
   

  
	
   

  	
  DURUS LIFE SCIENCES MASTER FUND LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Leslie Lake

  	
   

  
	
   

  	
   

  	
  Name: Leslie
  Lake

  
	
   

  	
   

  	
  Title: Director

  



 


 


[Signature page to Securities
Purchase Agreement]


 

















 


Exhibit A


 


SCHEDULE
OF INVESTORS


 


 


	
  Investor

  	
   

  	
  Investor’s Address
  and Facsimile Number

  	
   

  	
  Securities Purchased

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Durus Life Sciences Master
  Fund Ltd.

  	
   

  	
  c/o International Fund
  Services

  (Ireland) Ltd.

  3rd Floor, Bishops Square
Redmonds Hill
Dublin 2, Ireland
Attention: Susan Byrne
Tel: (011) 35-31-707-5113

  Fax: (011) 35-31-707-5013

  	
   

  	
  5000 Units, with each Unit

  consisting of the following:

  

  One (1) share of Series B-1

  Preferred Stock and

  
Warrants to purchase 1,000 Warrant
  Shares