Document:

Exhibit 10.4

 

FIRST
AMENDMENT TO CREDIT AND SECURITY AGREEMENT

 

This
Amendment, dated as of April  29 , 2005, is made by and between WATERS
INSTRUMENTS, INC. a Minnesota corporation (the “Borrower”), and WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”).

 

Recitals

 

The Borrower
and the Lender are parties to a Credit and Security Agreement dated as of September 7,
2004 the “Credit Agreement”). 
Capitalized terms used in these recitals have the meanings given to them
in the Credit Agreement unless otherwise specified.

 

The Borrower
has requested that certain amendments be made to the Credit Agreement, which
the Lender is willing to make pursuant to the terms and conditions set forth
herein.

 

NOW,
THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:

 

1.                                       Defined
Terms.  Capitalized terms used in
this Amendment that are defined in the Credit Agreement shall have the same
meanings as defined therein, unless otherwise defined herein.  In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case maybe, the following
definitions:

 

(a)                                  The
term “Borrowing Base” as defined in Section 1.1 of the Credit Agreement is
hereby amended by replacing the date “April 30, 2005” where it appears in
subparagraph (b)(iii) of such definition with the date “October 31,
2005”.

 

(b)                                 The
term “Swingline Advance” is hereby added to Section 1.1 of the Credit
Agreement, in the appropriate alphabetical order, to provide as follows:

 

“Swingline Advance” means, at any time, that part of the aggregate
Revolving Advances then outstanding that would exceed the Borrowing Base at
such time except for the effect of subparagraph (b) (iii) of the
definition of the term “Borrowing Base”.

 

2.                                       Margins.  The first paragraph of Section 2.9(b) of
the Credit Agreement preceding the table set forth in such Section is
hereby amended in its entirety to. 
provide as follows:

 

“(b)                           Margins. 
The Margins through and including the first adjustment occurring as
specified below shall be one-half of one percent (.50%) for Term Advances that
are Floating Rate

 

 

Advances and
one-half of one percent (.50%) for Revolving Advances that are Floating Rate
Advances.  Beginning with respect to the fiscal
quarter of the Borrower ending December 31, 2005, the Margins shall be
adjusted with respect to the fiscal quarters of the Borrower ending June 30
and December 31 on the basis of the Debt Service Coverage Ratio of the
Borrower with respect to the two (2) consecutive fiscal quarters ending as
of the end of such fiscal quarter, in accordance with the following table:”

 

3.                                       Swingline
Advance Fees.  Section 2.10(h) of
the Credit Agreement is hereby amended in its entirety to provide as follows:

 

“(h)                           Swingline Advance Fees; Overadvance Fees.  The Borrower shall pay a fee in the minimum
amount of $500.00 with respect to any fiscal month of the Borrower occurring on
or after May 1, 2005, during which a Swingline Advance is outstanding,
regardless of whether a Swingline Advance is outstanding for a single day or
every day during such fiscal month, such fee to be due and payable in arrears
on the first day of the month following the accrual of any such fee and on the
Termination Date, if applicable.

 

The Borrower
shall pay a fee for each Overadvance in the minimum amount of $1,000.00 for
each day or portion thereof that Revolving Advances exceed the Borrowing Base,
regardless of how the Overadvance arises or whether or not the Overadvance has
been agreed to in advance by Lender; provided, however, that payment of such
Overadvance fee shall not be deemed to constitute either consent to the
Overadvance or the waiver of any Event of Default arising as the result of an
Overadvance not otherwise consented to in advance by Lender.

 

4.                                       No
Other Changes.  Except as explicitly
amended by this Amendment, all of the terms and conditions of the Credit
Agreement shall remain in full force and effect and shall apply to any advance
or letter of credit thereunder.

 

5.                                       Conditions
Precedent.  This Amendment, shall be
effective when the Lender shall have received an executed original hereof,
together with each of the following, each in substance and form acceptable to
the Lender in its sole discretion:

 

(a)                                  A
Certificate of the Secretary of the Borrower certifying as to (i) the
resolutions of the board of directors of the Borrower approving the execution
and delivery of this Amendment, (ii) the fact that the articles of
incorporation and bylaws of the Borrower, which were certified and delivered to
the Lender pursuant to the Certificate of Authority of the Borrower’s secretary
or assistant secretary dated as of August 25, 2004 continue in full force
and effect and have not been amended or otherwise modified except as set forth
in the Certificate to be delivered, and (iii) certifying that the officers
and agents of the Borrower who have been certified to the Lender, pursuant to
the Certificate of Authority of the Borrower’s secretary or assistant secretary
dated as of August 25, 2004 as being authorized to sign and to act on
behalf of the Borrower

 

2

 

continue to be
so authorized or setting forth the sample signatures of each of the officers
and agents of the Borrower authorized to execute and deliver this Amendment and
all other documents, agreements and certificates on behalf of the Borrower.

 

(b)                                 Such
other matters as the Lender may require.

 

6.                                       Representations
and Warranties.  The Borrower hereby
represents and warrants to the Lender as follows:

 

(a)                                  The
Borrower has all requisite power and authority to execute this Amendment and to
perform all of its obligations hereunder, and this Amendment has been duly
executed and delivered by the Borrower and constitutes the legal, valid and
binding obligation of the Borrower, enforceable in accordance with its terms.

 

(b)                                 The
execution, delivery and performance by the Borrower of this Amendment have been
duly authorized by all necessary corporate action and do not (i) require
any authorization, consent or approval by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate
any provision of any law, rule or regulation or of any order, writ,
injunction or decree presently in effect, having applicability to the Borrower,
or the articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which the Borrower is
a party or by which it or its properties may be bound or affected.

 

(c)                                  All
of the representations and warranties contained in Article V of the Credit
Agreement are correct on and as of the date hereof as though made on and as of
such date, except to the extent that such representations and warranties relate
solely to an earlier date.

 

7.                                       References.  All references in the Credit Agreement to “this
Agreement” shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.

 

8.                                       No
Waiver.  The execution of this
Amendment and acceptance of any documents related hereto shall not be deemed to
be a waiver of any Default or Event of Default under the Credit Agreement or
breach, default or event of default under any Security Document or other
document held by the Lender, whether or not known to the Lender and whether or
not existing on the date of this Amendment.

 

9.                                       Release.  The Borrower hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon contract
or tort or under any state or federal

 

3

 

law or otherwise, that the
Borrower has had, now has or has made claim to have against any such person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this Amendment, whether
such claims, demands and causes of action are matured or unmatured or known or
unknown.

 

10.                                 Costs
and Expenses.  The Borrower hereby
reaffirms its agreement under the Credit Agreement to pay or reimburse the
Lender on demand for all costs and expenses incurred by the Lender in
connection with the Loan Documents, including without limitation all reasonable
fees and disbursements of legal counsel. 
Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation
of this Amendment and the documents and instruments incidental hereto.  The Borrower hereby agrees that the Lender
may, at any time or from time to time in its sole discretion and without
further authorization by the Borrower, make a loan to the Borrower under the
Credit Agreement, or apply the proceeds of any loan, for the purpose of paying
any such fees, disbursements, costs and expenses.

 

11.                                 Miscellaneous.  This Amendment may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed
an original and all of which counterparts, taken together, shall constitute one
and the same instrument.

 

IN WITNESS
WHEREOF, the parties hereto have caused this Amendment to be duly executed as
of the date first written above.

 

 

	
   

  	
  WATERS
  INSTRUMENTS, INC.,

  
	
   

  	
  a Minnesota
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Gregg Anshus

  	
   

  
	
   

  	
  Its:

  	
  CFO

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  WELLS FARGO
  BUSINESS CREDIT, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Brian J. Waldinger

  	
   

  
	
   

  	
   

  	
  Its Vice
  President

  	
   

  
					

 

4Exhibit 4.1

 

THE SECURITIES REPRESENTED HEREBY MAY NOT BE
TRANSFERRED UNLESS (I) SUCH SECURITIES HAVE BEEN REGISTERED FOR SALE PURSUANT
TO THE SECURITIES ACT OF 1933, AS AMENDED, (II) SUCH SECURITIES MAY BE SOLD
PURSUANT TO RULE 144(K), OR (III) THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER MAY LAWFULLY BE MADE
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR QUALIFICATION UNDER
APPLICABLE STATE SECURITIES LAWS.

 

SUBJECT TO THE PROVISIONS OF SECTION 10
HEREOF, THIS WARRANT SHALL BE VOID AFTER 5:00 P.M. EASTERN TIME ON [FIFTH
ANNIVERSARY OF THE CLOSING DATE] (the “EXPIRATION DATE”).

 

No. A-                    

 

CELLEGY PHARMACEUTICALS, INC.

 

SERIES A WARRANT TO PURCHASE               
SHARES OF

COMMON STOCK, PAR VALUE $0.0001 PER SHARE

 

For VALUE RECEIVED,                                         
(“Warrantholder”), is entitled to purchase, subject to the provisions of this
Warrant, from Cellegy Pharmaceuticals, Inc., a Delaware corporation (“Company”),
at any time not later than 5:00 P.M., Eastern time, on the Expiration Date (as
defined above), at an exercise price per share equal to $2.25 (the exercise
price in effect being herein called the “Warrant Price”),             
shares (“Warrant Shares”) of the Company’s Common Stock, par value $0.0001 per
share (“Common Stock”).  The number of
Warrant Shares purchasable upon exercise of this Warrant and the Warrant Price
shall be subject to adjustment from time to time as described herein.

 

Section 1.                                            Registration.  The Company shall maintain books for the
transfer and registration of the Warrant. 
Upon the initial issuance of this Warrant, the Company shall issue and
register the Warrant in the name of the Warrantholder.

 

Section 2.                                            Transfers.  As provided herein, this Warrant may be
transferred only pursuant to a registration statement filed under the
Securities Act of 1933, as amended (the “Securities Act”), or an exemption from
such registration.  Subject to such
restrictions, the Company shall transfer this Warrant from time to time upon
the books to be maintained by the Company for that purpose, upon surrender
thereof for transfer properly endorsed or accompanied by appropriate
instructions for transfer and such other documents as may be reasonably required
by the Company, including, if required by the Company, an opinion of its
counsel to the effect that such transfer is exempt from the registration
requirements of the Securities Act, to establish that such transfer is being
made in accordance with the terms hereof, and a new Warrant shall be issued to
the transferee and the surrendered Warrant shall be canceled by the Company.

 

 

Section 3.                                            Exercise
of Warrant.  Subject to the
provisions hereof, the Warrantholder may exercise this Warrant in whole or in part
at any time prior to its expiration upon surrender of the Warrant, together
with delivery of the duly executed Warrant exercise form attached hereto as
Appendix A (the “Exercise Agreement”) and payment by cash, certified check or
wire transfer of funds (or, in certain
circumstances, by cashless exercise as provided below) for the aggregate
Warrant Price for that number of Warrant Shares then being purchased, to
the Company during normal business hours on any business day at the Company’s
principal executive offices (or such other office or agency of the Company as
it may designate by notice to the Warrantholder).  The Warrant Shares so purchased shall be
deemed to be issued to the Warrantholder or the Warrantholder’s designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered (or evidence of loss, theft or
destruction thereof and security or indemnity satisfactory to the Company), the
Warrant Price shall have been paid and the completed Exercise Agreement shall
have been delivered.  Certificates for
the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the Warrantholder
within a reasonable time, not exceeding three (3) business days, after this
Warrant shall have been so exercised. 
The certificates so delivered shall be in such denominations as may be
requested by the Warrantholder and shall be registered in the name of the
Warrantholder or such other name as shall be designated by the
Warrantholder.  If this Warrant shall
have been exercised only in part, then, unless this Warrant has expired, the
Company shall, at its expense, at the time of delivery of such certificates,
deliver to the Warrantholder a new Warrant representing the number of shares
with respect to which this Warrant shall not then have been exercised.  As used herein, “business day” means a day,
other than a Saturday or Sunday, on which banks in New York City are open for
the general transaction of business. 
Each exercise hereof shall constitute the re-affirmation by the
Warrantholder that the representations and warranties contained in Section 5
of the Purchase Agreement (as defined below) are true and correct in all
material respects with respect to the Warrantholder as of the time of such
exercise.

 

Section 4.                                            Compliance
with the Securities Act of 1933. Except as provided in the Purchase
Agreement (as defined below), the Company may cause the legend set forth on the
first page of this Warrant to be set forth on each Warrant or similar legend on
any security issued or issuable upon exercise of this Warrant, unless counsel
for the Company is of the opinion as to any such security that such legend is
unnecessary.

 

Section 5.                                            Payment
of Taxes.  The Company will pay any
documentary stamp taxes attributable to the initial issuance of Warrant Shares
issuable upon the exercise of the Warrant; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect
of any transfer involved in the issuance or delivery of any certificates for
Warrant Shares in a name other than that of the Warrantholder in respect of
which such shares are issued, and in such case, the Company shall not be
required to issue or deliver any certificate for Warrant Shares or any Warrant
until the person requesting the same has paid to the Company the amount of such
tax or has established to the Company’s reasonable satisfaction that such tax
has been paid.  The Warrantholder shall
be responsible for income taxes due under federal, state or other law, if any
such tax is due.

 

2

 

Section 6.                                            Mutilated
or Missing Warrants.  In case this
Warrant shall be mutilated, lost, stolen, or destroyed, the Company shall issue
in exchange and substitution of and upon cancellation of the mutilated Warrant,
or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and for the purchase of a like number of Warrant Shares,
but only upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction of the Warrant, and with respect to a lost,
stolen or destroyed Warrant, reasonable indemnity or bond with respect thereto,
if requested by the Company.

 

Section 7.                                            Reservation
of Common Stock.  The Company hereby
represents and warrants that there have been reserved, and the Company shall at
all applicable times keep reserved until issued (if necessary) as contemplated
by this Section 7, out of the authorized and unissued shares of Common
Stock, sufficient shares to provide for the exercise of the rights of purchase
represented by this Warrant.  The Company
agrees that all Warrant Shares issued upon due exercise of the Warrant shall be,
at the time of delivery of the certificates for such Warrant Shares, duly
authorized, validly issued, fully paid and non-assessable shares of Common
Stock of the Company.

 

Section 8.                                            Adjustments.  Subject and pursuant to the provisions of
this Section 8, the Warrant Price and number of Warrant Shares subject to
this Warrant shall be subject to adjustment from time to time as set forth
hereinafter.

 

(a)                                  If the Company shall,
at any time or from time to time while this Warrant is outstanding, pay a
dividend or make a distribution on its Common Stock in shares of Common Stock,
subdivide its outstanding shares of Common Stock into a greater number of
shares or combine its outstanding shares of Common Stock into a smaller number
of shares or issue by reclassification of its outstanding shares of Common
Stock any shares of its capital stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the
continuing corporation), then the number of Warrant Shares purchasable upon
exercise of the Warrant and the Warrant Price in effect immediately prior to
the date upon which such change shall become effective, shall be adjusted by
the Company so that the Warrantholder thereafter exercising the Warrant shall
be entitled to receive the number of shares of Common Stock or other capital
stock which the Warrantholder would have received if the Warrant had been
exercised immediately prior to such event upon payment of a Warrant Price that
has been adjusted to reflect a fair allocation of the economics of such event
to the Warrantholder.  Such adjustments
shall be made successively whenever any event listed above shall occur.

 

(b)                                 If any capital
reorganization, reclassification of the capital stock of the Company,
consolidation or merger of the Company with another corporation in which the
Company is not the survivor, or sale, transfer or other disposition of all or
substantially all of the Company’s assets to another corporation shall be
effected, then, as a condition of such reorganization, reclassification,
consolidation, merger, sale, transfer or other disposition, lawful and adequate
provision shall be made whereby each Warrantholder shall thereafter have the
right to purchase and receive upon the basis and upon the terms and conditions
herein specified and in lieu of the Warrant Shares immediately theretofore
issuable upon exercise of the Warrant, such shares of stock, securities or
assets as would have been issuable or payable with respect to or in exchange
for a number of Warrant Shares equal to the number of Warrant Shares
immediately 

 

3

 

theretofore issuable upon exercise of the
Warrant, had such reorganization, reclassification, consolidation, merger,
sale, transfer or other disposition not taken place, and in any such case
appropriate provision shall be made with respect to the rights and interests of
each Warrantholder to the end that the provisions hereof (including, without
limitation, provision for adjustment of the Warrant Price) shall thereafter be
applicable, as nearly equivalent as may be practicable in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof.  The Company shall not effect any
such consolidation, merger, sale, transfer or other disposition unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger, or the
corporation purchasing or otherwise acquiring such assets or other appropriate
corporation or entity shall assume the obligation to deliver to the
Warrantholder, at the last address of the Warrantholder appearing on the books
of the Company, such shares of stock, securities or assets as, in accordance
with the foregoing provisions, the Warrantholder may be entitled to purchase,
and the other obligations under this Warrant. 
The provisions of this paragraph (b) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales, transfers
or other dispositions.

 

(c)                                  In case the Company
shall fix a payment date for the making of a distribution to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing corporation) of
evidences of indebtedness or assets (other than cash dividends or cash
distributions payable out of consolidated earnings or earned surplus or
dividends or distributions referred to in Section 8(a)), or subscription
rights or warrants, the Warrant Price to be in effect after such payment date
shall be determined by multiplying the Warrant Price in effect immediately
prior to such payment date by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied by the Market
Price (as defined below) per share of Common Stock immediately prior to such
payment date, less the fair market value (as determined by the Company’s Board
of Directors in good faith) of said assets or evidences of indebtedness so
distributed, or of such subscription rights or warrants, and the denominator of
which shall be the total number of shares of Common Stock outstanding
multiplied by such Market Price per share of Common Stock immediately prior to
such payment date.  “Market Price” as of
a particular date (the “Valuation Date”) shall mean the following: (a) if the
Common Stock is then listed on a national stock exchange, the closing sale
price of one share of Common Stock on such exchange on the last trading day
prior to the Valuation Date; (b) if the Common Stock is then quoted on The
Nasdaq Stock Market, Inc. (“Nasdaq”), the National Association of Securities
Dealers, Inc. OTC Bulletin Board (the “Bulletin Board”) or such similar
exchange or association, the closing sale price of one share of Common Stock on
Nasdaq, the Bulletin Board or such other exchange or association on the last
trading day prior to the Valuation Date or, if no such closing sale price is
available, the average of the high bid and the low asked price quoted thereon
on the last trading day prior to the Valuation Date; or (c) if the Common Stock
is not then listed on a national stock exchange or quoted on Nasdaq, the
Bulletin Board or such other exchange or association, the fair market value of
one share of Common Stock as of the Valuation Date, shall be determined in good
faith by the Board of Directors of the Company and the Warrantholder.  If the Common Stock is not then listed on a
national securities exchange, the Bulletin Board or such other exchange or
association, the Board of Directors of the Company shall respond promptly, in
writing, to an inquiry by the Warrantholder prior to the exercise hereunder as
to the 

 

4

 

fair market value of a share of Common Stock
as determined by the Board of Directors of the Company.  In the event that the Board of Directors of
the Company and the Warrantholder are unable to agree upon the fair market
value in respect of subpart (c) hereof, the Company and the Warrantholder shall
jointly select an appraiser, who is experienced in such matters.  The decision of such appraiser shall be final
and conclusive, and the cost of such appraiser shall be borne equally by the Company
and the Warrantholder.  Such adjustment
shall be made successively whenever such a payment date is fixed.

 

(d)                                 An adjustment to the
Warrant Price shall become effective immediately after the payment date in the
case of each dividend or distribution and immediately after the effective date
of each other event which requires an adjustment.

 

(e)                                  In the event that, as
a result of an adjustment made pursuant to this Section 8, the
Warrantholder shall become entitled to receive any shares of capital stock of
the Company other than shares of Common Stock, the number of such other shares
so receivable upon exercise of this Warrant shall be subject thereafter to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares contained in
this Warrant.

 

(f)                                    Except as provided
in subsection (g) hereof, if and whenever the Company shall issue or sell,
or is, in accordance with any of subsections (f)(l) through (f)(7) hereof,
deemed to have issued or sold, any shares of Common Stock for no consideration
or for a consideration per share less than the Warrant Price in effect
immediately prior to the time of such issue or sale, then and in each such case
(a “Trigger Issuance”) the then-existing Warrant Price, shall be
reduced, as of the close of business on the effective date of the Trigger
Issuance, to a price determined as follows:

 

Adjusted Warrant Price = (A x B) + D

A+C

 

where

 

“A” equals the number of shares of Common
Stock outstanding, including Additional Shares of Common Stock (as defined
below) deemed to be issued hereunder, immediately preceding such Trigger
Issuance;

 

“B” equals the Warrant Price in effect
immediately preceding such Trigger Issuance;

 

“C” equals the number of Additional Shares of
Common Stock issued or deemed issued hereunder as a result of the Trigger
Issuance; and

 

“D” equals the aggregate consideration, if
any, received or deemed to be received by the Company upon such Trigger
Issuance;

 

5

 

provided, however, that in no event shall the
Warrant Price after giving effect to such Trigger Issuance be greater than the
Warrant Price in effect prior to such Trigger Issuance.

 

For purposes of this subsection (f), “Additional
Shares of Common Stock” shall mean all shares of Common Stock issued by the
Company or deemed to be issued pursuant to this subsection (f), other than
Excluded Issuances (as defined in subsection (g) hereof).

 

For purposes of this subsection (f), the
following subsections (f)(l) to (f)(8) shall also be applicable:

 

(f)(1)  Issuance of Rights or Options.  In case at any time the Company shall in any
manner grant (directly and not by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any options for
the purchase of, Common Stock or any stock or security convertible into or
exchangeable for Common Stock (such warrants, rights or options being called “Options”
and such convertible or exchangeable stock or securities being called “Convertible
Securities”) whether or not such Options or the right to convert or exchange
any such Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such Options or
upon the conversion or exchange of such Convertible Securities (determined by
dividing (i) the sum (which sum shall constitute the applicable consideration)
of (x) the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus (y) the aggregate amount
of additional consideration payable to the Company upon the exercise of all
such Options, plus (z), in the case of such Options which relate to Convertible
Securities, the aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the conversion
or exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such Options)
shall be less than the Warrant Price in effect immediately prior to the time of
the granting of such Options, then the total number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of
the total amount of such Convertible Securities issuable upon the exercise of
such Options shall be deemed to have been issued for such price per share as of
the date of granting of such Options or the issuance of such Convertible
Securities and thereafter shall be deemed to be outstanding for purposes of
adjusting the Warrant Price.  Except as
otherwise provided in subsection 8(f)(3), no adjustment of the Warrant
Price shall be made upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such Options or upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible
Securities.

 

(f)(2)  Issuance of Convertible Securities.  In case the Company shall in any manner issue
(directly and not by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert any 

 

6

 

such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the sum (which sum
shall constitute the applicable consideration) of (x) the total amount received
or receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus (y) the aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the Warrant Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding for
purposes of adjusting the Warrant Price, provided that (a) except as otherwise
provided in subsection 8(f)(3), no adjustment of the Warrant Price shall
be made upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) no further adjustment of the
Warrant Price shall be made by reason of the issue or sale of Convertible
Securities upon exercise of any Options to purchase any such Convertible
Securities for which adjustments of the Warrant Price have been made pursuant
to the other provisions of subsection 8(f).

 

(f)(3) Change
in Option Price or Conversion Rate.  Upon
the happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subsection 8(f)(l) hereof, the
additional consideration, if any, payable upon the conversion or exchange of
any Convertible Securities referred to in subsections 8(f)(l) or 8(f)(2), or
the rate at which Convertible Securities referred to in subsections 8(f)(l) or
8(f)(2) are convertible into or exchangeable for Common Stock shall change at
any time (including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Warrant Price in effect
at the time of such event shall forthwith be readjusted to the Warrant Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold.  On
the termination of any Option for which any adjustment was made pursuant to
this subsection 8(f) or any right to convert or exchange Convertible
Securities for which any adjustment was made pursuant to this subsection 8(f)
(including without limitation upon the redemption or purchase for consideration
of such Convertible Securities by the Company), the Warrant Price then in
effect hereunder shall forthwith be changed to the Warrant Price which would
have been in effect at the time of such termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
termination, never been issued.

 

(f)(4) Stock
Dividends.  Subject to the provisions of
this Section 8(f), in case the Company shall declare a dividend or make
any other distribution upon any stock of the Company (other than the Common
Stock) payable in Common 

 

7

 

Stock, Options or Convertible Securities,
then any Common Stock, Options or Convertible Securities, as the case may be,
issuable in payment of such dividend or distribution shall be deemed to have
been issued or sold without consideration.

 

(f)(5)
Consideration for Stock.  In case any
shares of Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to be the
net amount received by the Company therefor, after deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. 
In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to be the
fair value of such consideration as determined in good faith by the Board of
Directors of the Company, after deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Company in
connection therewith.  In case any
Options shall be issued in connection with the issue and sale of other
securities of the Company, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of the
Company.  If Common Stock, Options or
Convertible Securities shall be issued or sold by the Company and, in
connection therewith, other Options or Convertible Securities (the “Additional
Rights”) are issued, then the consideration received or deemed to be received
by the Company shall be reduced by the fair market value of the Additional
Rights (as determined using the Black-Scholes option pricing model or another
method mutually agreed to by the Company and the Warrantholder).  The Board of Directors of the Company shall
respond promptly, in writing, to an inquiry by the Warrantholder as to the fair
market value of the Additional Rights. 
In the event that the Board of Directors of the Company and the
Warrantholder are unable to agree upon the fair market value of the Additional
Rights, the Company and the Warrantholder shall jointly select an appraiser,
who is experienced in such matters.  The
decision of such appraiser shall be final and conclusive, and the cost of such
appraiser shall be borne evenly by the Company and the Warrantholder.

 

(f)(6) Record
Date.  In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them (i)
to receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

 

(f)(7)
Treasury Shares.  The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the 

 

8

 

account of the Company or any of its
wholly-owned subsidiaries, and the disposition of any such shares (other than
the cancellation or retirement thereof) shall be considered an issue or sale of
Common Stock for the purpose of this subsection (f).

 

(f)(8) Nasdaq
Limitation.  Notwithstanding any other
provision in Section 8(f) to the contrary, if a reduction in the Warrant
Price pursuant to Section 8(f) (other than as set forth in this clause
(f)(8)) would require the Company to obtain stockholder approval of the
transactions contemplated by the Purchase Agreement pursuant to Nasdaq
Marketplace Rule 4350(i) and such stockholder approval has not been obtained,
(i) the Warrant Price shall be reduced to the maximum extent that would not
require stockholder approval under such Rule, and (ii) the Company shall use
its commercially reasonable efforts to obtain such stockholder approval in
accordance with the requirements of Nasdaq and the Company’s certificate of
incorporation and by-laws as soon as reasonably practicable, including by
calling a special meeting of stockholders entitled to vote on such Warrant
Price adjustment.  This provision shall
not restrict the number of shares of Common Stock which a Warrantholder may
receive or beneficially own in order to determine the amount of securities or other
consideration that such Holder may receive in the event of a transaction
contemplated by Section 8 of this Warrant.

 

(g)                                 Anything herein to the contrary
notwithstanding, the Company shall not be required to make any adjustment of
the Warrant Price in the case of the issuance of (A) capital stock, Options or
Convertible Securities issued to directors, officers, employees or consultants
of the Company in connection with their service as directors of the Company,
their employment by the Company or their retention as consultants by the
Company pursuant to an equity compensation program approved by the Board of
Directors of the Company or the compensation committee of the Board of
Directors of the Company, (B) shares of Common Stock issued upon the conversion
or exercise of Options or Convertible Securities issued prior to the date
hereof, provided such securities are not amended after the date hereof to
increase the number of shares of Common Stock issuable thereunder or to lower
the exercise or conversion price thereof, (C) securities issued pursuant to
that certain Purchase Agreement dated May     , 2005, among
the Company and the Investors named therein (the “Purchase Agreement”) and
securities issued upon the exercise or conversion of those securities, and (D)
shares of Common Stock issued or issuable by reason of a dividend, stock split
or other distribution on shares of Common Stock (but only to the extent that
such a dividend, split or distribution results in an adjustment in the Warrant
Price pursuant to the other provisions of this Warrant) (collectively, “Excluded
Issuances”).

 

(h)                                 Upon any adjustment to
the Warrant Price pursuant to Section 8(f) above, the number of Warrant
Shares purchasable hereunder shall be adjusted by multiplying such number by a
fraction, the numerator of which shall be the Warrant Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price in effect immediately thereafter.

 

9

 

Section 9.                                            Fractional
Interest.  The Company shall not be
required to issue fractions of Warrant Shares upon the exercise of this
Warrant.  If any fractional share of
Common Stock would, except for the provisions of the first sentence of this Section 9,
be deliverable upon such exercise, the Company, in lieu of delivering such
fractional share, shall pay to the exercising Warrantholder an amount in cash
equal to the Market Price of such fractional share of Common Stock on the date
of exercise.

 

Section 10.                                      Extension
of Expiration Date.  If the Company
fails to cause any Registration Statement covering Registrable Securities
(unless otherwise defined herein, capitalized terms are as defined in the
Registration Rights Agreement relating to the Warrant Shares (the “Registration
Rights Agreement”)) to be declared effective prior to the applicable dates set
forth therein, or if any of the events specified in Section 2(c)(ii) of
the Registration Rights Agreement occurs, and the Blackout Period (whether
alone, or in combination with any other Blackout Period) continues for more
than 60 days in any 12 month period, or for more than a total of 90 days, then
the Expiration Date of this Warrant shall be extended one day for each day
beyond the 60-day or 90-day limits, as the case may be, that the Blackout
Period continues.

 

Section 11.                                      Benefits.  Nothing in this Warrant shall be construed to
give any person, firm or corporation (other than the Company and the
Warrantholder) any legal or equitable right, remedy or claim, it being agreed
that this Warrant shall be for the sole and exclusive benefit of the Company
and the Warrantholder.

 

Section 12.                                      Notices
to Warrantholder.  Upon the happening
of any event requiring an adjustment of the Warrant Price, the Company shall
promptly give written notice thereof to the Warrantholder at the address
appearing in the records of the Company, stating the adjusted Warrant Price and
the adjusted number of Warrant Shares resulting from such event and setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.  Failure to
give such notice to the Warrantholder or any defect therein shall not affect
the legality or validity of the subject adjustment.

 

Section 13.                                      Identity
of Transfer Agent.  The Transfer
Agent for the Common Stock is                                       .  Upon the appointment of any subsequent
transfer agent for the Common Stock or other shares of the Company’s capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrant, the Company will mail to the Warrantholder a statement setting forth
the name and address of such transfer agent.

 

Section 14.                                      Notices.  Unless otherwise provided, any notice
required or permitted under this Warrant shall be given in writing and shall be
deemed effectively given as hereinafter described (i) if given by personal
delivery, then such notice shall be deemed given upon such delivery, (ii) if
given by telex or facsimile, then such notice shall be deemed given upon receipt
of confirmation of complete transmittal, (iii) if given by mail, then such
notice shall be deemed given upon the earlier of (A) receipt of such notice by
the recipient or (B) three days after such notice is deposited in first class
mail, postage prepaid, and (iv) if given by an internationally recognized
overnight air courier, then such notice shall be deemed given one business day
after delivery to such carrier.  All
notices shall be addressed as follows: if to the Warrantholder, at its address
as set forth in the Company’s books and records and, if to the Company, at the
address as 

 

10

 

follows, or at such other address as the
Warrantholder or the Company may designate by ten days’ advance written notice to
the other:

 

If to the Company:

 

Cellegy Pharmaceuticals, Inc.

1000 Marina Boulevard, Suite 300

Brisbane, California 94005

Attention: 
Chief Financial Officer

Fax: 
(650) 616-2222

 

With a copy to:

 

Weintraub, Genshlea, Chediak, Sproul

400 Capitol Mall, 11th Floor

Sacramento, CA 95814

Attention: 
Kevin Kelso, Esq.

Fax: (916) 446-1611

 

Section 15.                                      Registration
Rights.  The initial Warrantholder is
entitled to the benefit of certain registration rights with respect to the
shares of Common Stock issuable upon the exercise of this Warrant as provided
in the Registration Rights Agreement, and any subsequent Warrantholder may be
entitled to such rights.

 

Section 16.                                      Successors.  All the covenants and provisions hereof by or
for the benefit of the Warrantholder shall bind and inure to the benefit of its
respective successors and assigns hereunder.

 

Section 17.                                      Governing
Law; Consent to Jurisdiction; Waiver of Jury Trial.  This Warrant shall be governed by, and
construed in accordance with, the internal laws of the State of New York,
without reference to the choice of law provisions thereof.  The Company and, by accepting this Warrant,
the Warrantholder, each irrevocably submits to the exclusive jurisdiction of
the courts of the State of New York located in New York County and the United
States District Court for the Southern District of New York for the purpose of
any suit, action, proceeding or judgment relating to or arising out of this
Warrant and the transactions contemplated hereby.  Service of process in connection with any
such suit, action or proceeding may be served on each party hereto anywhere in
the world by the same methods as are specified for the giving of notices under
this Warrant.  The Company and, by
accepting this Warrant, the Warrantholder, each irrevocably consents to the
jurisdiction of any such court in any such suit, action or proceeding and to
the laying of venue in such court.  The
Company and, by accepting this Warrant, the Warrantholder, each irrevocably
waives any objection to the laying of venue of any such suit, action or
proceeding brought in such courts and irrevocably waives any claim that any
such suit, action or proceeding brought in any such court has been brought in
an inconvenient forum.  EACH OF THE COMPANY AND, BY ITS ACCEPTANCE
HEREOF, THE WARRANTHOLDER HEREBY WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN
ANY LITIGATION WITH RESPECT TO THIS WARRANT 

 

11

 

AND REPRESENTS THAT COUNSEL HAS BEEN
CONSULTED SPECIFICALLY AS TO THIS WAIVER.

 

Section 18.                                      Call
Provision.  Notwithstanding any other
provision contained herein to the contrary, in the event that the closing bid
price of a share of Common Stock as traded on the Nasdaq (or such other
exchange or stock market on which the Common Stock may then be listed or
quoted) equals or exceeds $5.00 (appropriately adjusted for any stock split,
reverse stock split, stock dividend or other reclassification or combination of
the Common Stock occurring after the date hereof) for any twenty (20) consecutive
trading days commencing after the Registration Statement (as defined in the
Registration Rights Agreement) has been declared effective, the Company, upon
thirty (30) days prior written notice (the “Notice Period”) given to the
Warrantholder within one business day immediately following the end of such
twenty (20) trading day period, may call this Warrant, in whole but not in
part, at a redemption price equal to $0.01 per share of Common Stock then
purchasable pursuant to this Warrant; provided that (i) the Company
simultaneously calls all Company Warrants (as defined below) on the same terms
and (ii) all of the shares of Common Stock issuable hereunder either (A) are
registered pursuant to an effective Registration Statement (as defined in the
Registration Rights Agreement) which is not suspended and for which no stop
order is in effect, and pursuant to which the Warrantholder is able to sell
such shares of Common Stock at all times during the Notice Period or (B) no
longer constitute Registrable Securities (as defined in the Registration Rights
Agreement).  Notwithstanding any such
notice by the Company, the Warrantholder shall have the right to exercise this
Warrant prior to the end of the Notice Period.

 

Section 19                                         Cashless
Exercise.  Notwithstanding any other
provision contained herein to the contrary, from and after the first
anniversary of the Closing Date (as defined in the Purchase Agreement) and so
long as the Company is required under the Registration Rights Agreement to have
effected the registration of the Warrant Shares for sale to the public pursuant
to a Registration Statement (as such term is defined in the Registration Rights
Agreement), if the Warrant Shares may not be freely sold to the public for any
reason (including, but not limited to, the failure of the Company to have
effected the registration of the Warrant Shares or to have a current prospectus
available for delivery or otherwise, but excluding the period of any Allowed
Delay (as defined in the Registration Rights Agreement), the Warrantholder may
elect to receive, without the payment by the Warrantholder of the aggregate
Warrant Price in respect of the shares of Common Stock to be acquired, shares
of Common Stock equal to the value of this Warrant or any portion hereof by the
surrender of this Warrant (or such portion of this Warrant being so exercised)
together with the Net Issue Election Notice annexed hereto as Appendix B duly
executed, at the office of the Company. 
Thereupon, the Company shall issue to the Warrantholder such number of
fully paid, validly issued and nonassessable shares of Common Stock as is
computed using the following formula:

 

X = Y (A - B)

      
A

 

where

 

12

 

X =                             the number of shares of
Common Stock which the Warrantholder has then requested be issued to the
Warrantholder;

 

Y =                              the total number of
shares of Common Stock covered by this Warrant which the Warrantholder has
surrendered at such time for cash-less exercise (including both shares to be
issued to the Warrantholder and shares to be canceled as payment therefor);

 

A =                            the “Market Price” of one
share of Common Stock as at the time the net issue election is made; and

 

B =                              the Warrant Price in
effect under this Warrant at the time the net issue election is made.

 

Section 20                                         Limitations
on Exercise.  Notwithstanding
anything to the contrary contained herein, the number of Warrant Shares that
may be acquired by the Warrantholder upon any exercise of this Warrant (or
otherwise in respect hereof) shall be limited to the extent necessary to insure
that, following such exercise (or other issuance), the total number of shares
of Common Stock then beneficially owned by such Warrantholder and its
Affiliates and any other Persons whose beneficial ownership of Common Stock
would be aggregated with the Warrantholder’s for purposes of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), does
not exceed 9.999% of the total number of issued and outstanding shares of
Common Stock (including for such purpose the shares of Common Stock issuable
upon such exercise). For such purposes, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder. This provision shall not restrict
the number of shares of Common Stock which a Holder may receive or beneficially
own in order to determine the amount of securities or other consideration that
such Holder may receive in the event of a transaction contemplated by Section 8
of this Warrant.  This restriction may
not be waived.(1)

 

Section 21.                                      No
Rights as Stockholder.  Prior to the
exercise of this Warrant, the Warrantholder shall not have or exercise any
rights as a stockholder of the Company by virtue of its ownership of this
Warrant.

 

Section 22.                                      Amendment;
Waiver.  This Warrant is one of a
series of Warrants of like tenor issued by the Company pursuant to the Purchase
Agreement and initially covering an aggregate of up to 727,272 shares of Common
Stock (collectively, the “Company Warrants”).  Any term of this Warrant may be amended or
waived (including the adjustment provisions included in Section 8 of this
Warrant) upon the written consent of the Company and the holders of Company
Warrants representing at least 50% of the number of shares of Common Stock then
subject to all outstanding Company Warrants (the “Majority Holders”); provided,
that (x) any such amendment or waiver must apply to all Company Warrants; and
(y) the number of Warrant Shares subject to this Warrant, the Warrant Price and
the Expiration Date may not be amended, and the right to exercise this Warrant
may not be altered or waived, without the written consent of the Warrantholder.

 

(1) To be included only at the specific
request of an Investor.

 

13

 

Section 23.                                      Section Headings.  The section headings in this Warrant are
for the convenience of the Company and the Warrantholder and in no way alter,
modify, amend, limit or restrict the provisions hereof.

 

14

 

IN WITNESS WHEREOF, the Company has caused
this Warrant to be duly executed, as of the             
day of May, 2005.

 

	
   

  	
  CELLEGY PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

APPENDIX A

CELLEGY PHARMACEUTICALS, INC.

WARRANT EXERCISE FORM

 

To Cellegy Pharmaceuticals, Inc.:

 

The undersigned hereby irrevocably elects to
exercise the right of purchase represented by the within Warrant (“Warrant”)
for, and to purchase thereunder by the payment of the Warrant Price and
surrender of the Warrant,                               
shares of Common Stock (“Warrant Shares”) provided for therein, and requests
that certificates for the Warrant Shares be issued as follows:

 

	
   

  	
   

  	
   

  
	
   

  	
  Name

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Federal Tax ID or Social Security No.

  	
   

  

 

and delivered by (certified mail to the above
address), or (electronically (provide DWAC Instructions:                                      ),
or (other (specify):                                                     ).

 

and, if the number of Warrant Shares shall
not be all the Warrant Shares purchasable upon exercise of the Warrant, that a
new Warrant for the balance of the Warrant Shares purchasable upon exercise of
this Warrant be registered in the name of the undersigned Warrantholder or the
undersigned’s Assignee as below indicated and delivered to the address stated
below.

 

Dated:                                       ,
        

 

	
  Signature:

  	
   

  	
   

  	
   

  	
   

  
	
  Note: The signature must correspond with
  the name of the Warrantholder as written on the first page of the Warrant in
  every particular, without alteration or enlargement or any change whatever,
  unless the Warrant has been assigned.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name (please print)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Federal Identification or

  	
   

  
	
   

  	
   

  	
  Social Security No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Assignee:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

APPENDIX B

CELLEGY PHARMACEUTICALS, INC.

NET ISSUE ELECTION NOTICE

 

To: Cellegy Pharmaceuticals, Inc.

 

Date:[                                                  ]

 

The undersigned hereby elects under Section 19
of this Warrant to surrender the right to purchase [                        ]
shares of Common Stock pursuant to this Warrant and hereby requests the
issuance of [                          ]
shares of Common Stock.  The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.

 

 

	
   

  	
   

  
	
  Signature

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Name for Registration

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Mailing Address

  	
   

  

 

17

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