Document:

Exhibit 4.1

 

 

 

TAPESTRY PHARMACEUTICALS, INC.

 

and

 

AMERICAN
STOCK TRANSFER & TRUST COMPANY,

as Rights
Agent

 

RIGHTS
AGREEMENT

 

 

Dated as
of December 12, 2006

 

 

 

 

 

RIGHTS AGREEMENT

THIS RIGHTS AGREEMENT (“Agreement”), dated as of December 12,
2006, between TAPESTRY
PHARMACEUTICALS, INC., a Delaware corporation (the “Company”), and AMERICAN STOCK TRANSFER & TRUST COMPANY (“Rights Agent”).

The Board of Directors of the Company has authorized
and declared a dividend of one preferred share purchase right (a “Right”) for each Common Share (as
such term is hereinafter defined) outstanding at the close of business on
December 29, 2006 (the “Record Date”),
each Right representing the right to purchase one one-thousandth of a Preferred
Share (as such term is hereinafter defined), upon the terms and subject to the
conditions herein set forth, and has further authorized and directed the
issuance of one Right with respect to each Common Share that shall become
outstanding between the Record Date and the earliest to occur of the
Distribution Date, the Redemption Date and the Final Expiration Date (as such
terms are hereinafter defined); provided, however,
that Rights may be issued with respect to Common Shares that shall become
outstanding after the Distribution Date and prior to the earlier of the
Redemption Date and the Final Expiration Date in accordance with the provisions
of Section 22 hereof.

Accordingly, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:

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SECTION 1.             CERTAIN DEFINITIONS.  For purposes of this Agreement, the following
terms have the meanings indicated:

(a)           “Acquiring Person”
shall mean any Person (as such term is hereinafter defined) who or which,
together with all Affiliates and Associates (as such terms are hereinafter
defined) of such Person, shall be the Beneficial Owner (as such term is
hereinafter defined) of 15% or more of the Common Shares then outstanding.  Notwithstanding the foregoing, (A) the term
Acquiring Person shall not include (i) the Company, (ii) any Subsidiary (as
such term is hereinafter defined) of the Company, (iii) any employee benefit or
compensation plan of the Company or any Subsidiary of the Company, (iv) any
entity holding Common Shares for or pursuant to the terms of any such employee
benefit or compensation plan of the Company or any Subsidiary of the Company,
(v) any Person, together with all Affiliates and Associates of such Person, who
is the Beneficial Owner of 15% or more of the Common Shares outstanding as of
the date of this Agreement until such time after the date of this Agreement
that such Person, together with all Affiliates and Associates of such Person,
shall become the Beneficial Owner of any additional Common Shares (other than
by means of a dividend made by the Company on the Common Shares outstanding or
pursuant to a split, subdivision or other reclassification of the Common Shares
undertaken by the Company) and shall then beneficially own more than 15% of the
Common Shares outstanding, or (vi) an Excluded Stockholder (as such term is
hereinafter defined) and (B) no Person shall become an “Acquiring Person”
either (x) as the result of an acquisition of Common Shares by the Company
which, by reducing the number of shares outstanding, increases the proportionate
number of shares beneficially owned by such Person to 15% or more of the Common
Shares then outstanding; provided, however,
that if a Person shall become the Beneficial Owner of 15% or more of the Common
Shares then outstanding by reason of share purchases by the Company and shall,
following written notice from, or public disclosure by the Company of such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares without the prior consent of the Company and shall then
Beneficially Own more than 15% of the Common Shares then outstanding, then such
Person shall be deemed to be an “Acquiring Person,” or (y) if the Board of
Directors determines in good faith that a Person who would otherwise be an “Acquiring
Person,” as defined pursuant to the foregoing provisions of this paragraph (a),
has become such inadvertently, and such Person divests, as promptly as
practicable (as determined in good faith by the Board of Directors), following
receipt of written notice from the Company of such event, of Beneficial
Ownership of a sufficient number of Common Shares so that such Person would no
longer be an Acquiring Person, as defined pursuant to the foregoing provisions
of this paragraph (a), then such Person shall not be deemed to be an “Acquiring
Person” for any purposes of this Agreement; provided, however,
that if such Person shall again become the Beneficial Owner of 15% or more of
the Common Shares then outstanding, such Person shall be deemed an “Acquiring
Person,” subject to the exceptions set forth in this Section 1(a).

(b)           “Affiliate”
and “Associate”
shall have the respective meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as in effect
on the date of this Agreement.

(c)           A Person shall be
deemed the “Beneficial Owner”
of and shall be deemed to “beneficially own”
any securities:

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(i)            which such Person
or any of such Person’s Affiliates or Associates is deemed to beneficially own,
within the meaning of Rule 13d-3 of the General Rules and Regulations under the
Exchange Act as in effect on the date of this Rights Agreement;

(ii)           which such Person
or any of such Person’s Affiliates or Associates has (A) the right to acquire
(whether such right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other than these
Rights), warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to beneficially
own, securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person’s Affiliates or Associates until
such tendered securities are accepted for purchase or exchange; or (B) the
right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security if the agreement,
arrangement or understanding to vote such security (1) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations promulgated under the Exchange Act and (2) is not also then
reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or

(iii)         which are
beneficially owned, directly or indirectly, by any other Person with which such
Person or any of such Person’s Affiliates or Associates has any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities) for the purpose of acquiring, holding, voting (except
to the extent contemplated by the proviso to Section 1(c)(ii)(B) hereof)
or disposing of any securities of the Company.

Notwithstanding anything in this definition of
Beneficial Ownership to the contrary, (i) the phrase, “then outstanding,” when
used with reference to a Person’s Beneficial Ownership of securities of the
Company, shall mean the number of such securities then issued and outstanding
together with the number of such securities not then actually issued and
outstanding which such Person would be deemed to own beneficially hereunder,
and (ii) nothing in this
paragraph (c) shall cause a person engaged in business as an underwriter of
securities to be the “Beneficial Owner” of, or to “beneficially own,” any
securities acquired through such person’s participation in good faith in a firm
commitment underwriting until the expiration of forty (40) days after the date
of such acquisition.

(d)           “Business Day”
shall mean any day other than a Saturday, a Sunday, or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.

(e)           “Close of Business”
on any given date shall mean 5:00 p.m., Eastern Time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 p.m., Eastern Time, on the next succeeding Business Day.

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(f)            “Common Shares”
shall mean the shares of common stock, par value $0.0075 per share, of the
Company; provided, however, that, “Common Shares,”
when used in this Agreement in connection with a specific reference to any
Person other than the Company, shall mean the capital stock (or equity
interest) with the greatest voting power of such other Person or, if such other
Person is a Subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person.

(g)           “Distribution Date”
shall have the meaning set forth in Section 3 hereof.

(h)           “Excluded Stockholder”
shall mean any of the following Persons: 
Special Situations Fund III QP, L.P., Special Situations Fund III, L.P.,
Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund,
L.P., Special Situations Life Sciences Fund, L.P., 14159, L.P., Baker Biotech
Fund II (Z), L.P., Baker Biotech Fund III, L.P., Baker Biotech Fund III (Z),
L.P., Baker Bros. Investments II, L.P., Biotechnology Value Fund, L.P.,
Biotechnology Value Fund II, L.P., BVF Investments, L.L.C., Investment 10,
L.L.C., Fort Mason Master, L.P., Fort Mason Partners, L.P., Tang Capital
Partners, LP, Kevin C. Tang as Custodian for Julian Kong Tang Under the CA
Transfer to Minors Act, Kevin C. Tang as Custodian for Justin Lee Tang Under
the CA Transfer to Minors Act, Kevin C. Tang as Custodian for Noa Young Tang
Under the CA Transfer to Minors Act, Kevin Tang and Haeyoung Tang Trustees The
Tang Family Trust Dated 8-27-02 and IRA FBO Kevin Tang DB Securities Inc.
Custodian Rollover Account; provided that
any such Person shall not be an Excluded Stockholder in the event that such
Person, together with all Affiliates and Associates of such Person, acquires in
the aggregate (together with all other acquisitions of Common Shares by such
Person and all Affiliates and Associates of such Person pursuant to this
proviso, but excluding any Common Shares acquired pursuant to the terms of that
certain Purchase Agreement, dated as of February 2, 2006, by and among the
Company and the other parties thereto or any warrants issued under such
Purchase Agreement) more than 1.0% of the then issued and outstanding Common
Shares after April 4, 2006.

(i)            “Final Expiration Date”
shall have the meaning set forth in Section 7 hereof.

(j)            “Interested Stockholder”
shall mean any Acquiring Person or any Affiliate or Associate of an Acquiring
Person or any other Person in which any such Acquiring Person, Affiliate or
Associate has an interest, or any other Person acting directly or indirectly on
behalf of or in concert with any such Acquiring Person, Affiliate or Associate.

(k)           “Person”
shall mean any individual, firm, corporation or other entity, and shall include
any successor (by merger or otherwise) of such entity.

(l)            “Preferred Shares”
shall mean shares of Series C Junior Participating Preferred Stock, par value
$0.001 per share, of the Company having the designations and the powers,
preferences and rights, and the qualifications, limitations and restrictions set
forth in the Form of Certificate of Designation attached to this Agreement as
Exhibit A.

(m)          “Purchase Price”
shall have the meaning set forth in Section 7 hereof.

(n)           “Redemption Date”
shall have the meaning set forth in Section 7 hereof.

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(o)           “Shares Acquisition Date”
shall mean the first date of public announcement by the Company or an Acquiring
Person that an Acquiring Person has become such provided, however that, if such
Person is determined not to have become an Acquiring Person pursuant to clause (y)
of Subsection 1(a)(B) hereof, then no Shares Acquisition Date shall be deemed
to have occurred.

(p)           “Subsidiary”
of any Person shall mean any corporation or other entity of which a majority of
the voting power of the voting equity securities or equity interest is owned,
directly or indirectly, by such Person.

(q)           “Transaction”
shall mean any merger, consolidation or sale of assets described in
Section 13(a) hereof or any acquisition of Common Shares which would
result in a Person becoming an Acquiring Person or a Principal Party (as such
term is hereinafter defined).

(r)           “Transaction Person”
with respect to a Transaction shall mean (i) any Person who (x) is or will
become an Acquiring Person or a Principal Party (as such term is hereinafter
defined) if the Transaction were to be consummated and (y) directly or
indirectly proposed or nominated a director of the Company which director is in
office at the time of consideration of the Transaction, or (ii) an Affiliate or
Associate of such a Person.

SECTION 2.             APPOINTMENT OF RIGHTS AGENT.  The Company hereby appoints the Rights Agent
to act as agent for the Company in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment.  The Company may from time to time appoint
such co-Rights Agents as it may deem necessary or desirable.

SECTION 3.             ISSUE OF RIGHT CERTIFICATES.

(a)           Until the earlier
of the Close of Business on (i) the Shares Acquisition Date or (ii) the tenth
Business Day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement (determined in accordance with Rule 14d-2 under
the Exchange Act) by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) of, or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding Common Shares for or pursuant to the terms of any such plan) to
commence, a tender or exchange offer (which intention to commence remains in
effect for five Business Days after such announcement), the consummation of
which would result in any Person becoming an Acquiring Person (including any
such date which is after the date of this Agreement and prior to the issuance
of the Rights, the earlier of such dates being herein referred to as the “Distribution Date”), (x) the Rights
will be evidenced by the certificates for Common Shares registered in the names
of the holders thereof (which certificates shall also be deemed to be Right
Certificates) and not by separate Right Certificates, and (y) the Rights (and
the right to receive Right Certificates therefor) will be transferable only in
connection with the transfer of Common Shares. 
As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign, and the Company will
send or cause to be sent (and the Rights Agent will, if requested, send) by 

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first-class, insured, postage-prepaid mail, to each
record holder of Common Shares as of the Close of Business on the Distribution
Date, at the address of such holder shown on the records of the Company, a
Right Certificate, in substantially the form of Exhibit B hereto (a “Right Certificate”), evidencing one
Right for each Common Share so held, subject to the adjustment provisions of
Section 11 of this Rights Agreement. 
As of the Distribution Date, the Rights will be evidenced solely by such
Right Certificates; provided, however,
that in the event that a holder (other than an Acquiring Person) of any
security of the Company convertible into or otherwise exercisable for Common
Shares (a “Convertible Security”)
converts or otherwise exercises such Convertible Security into or for Common
Shares after the Distribution Date (but prior to the earlier of the Redemption
Date and the Final Expiration Date), the Company will send or cause to be sent
(and the Rights Agent will, if requested, send) by first-class, insured,
postage-prepaid mail, to such holder, at the address of such holder shown on
the records of the Company, a Right Certificate evidencing one Right for each
Common Share so held, subject to the adjustment provisions of Section 11
of this Rights Agreement.

(b)           On the Record Date,
or as soon as practicable thereafter, the Company will send (directly or
through the Rights Agent or its transfer agent) a copy of a Summary of Rights
to Purchase Preferred Shares, in substantially the form of Exhibit C
hereto (the “Summary of Rights”), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the Close of Business on the Record Date, at the address of such holder shown
on the records of the Company.  With
respect to certificates for Common Shares outstanding as of the Record Date,
until the Distribution Date, the Rights will be evidenced by such certificates
registered in the names of the holders thereof. 
Until the Distribution Date (or the earlier of the Redemption Date and
the Final Expiration Date), the surrender for transfer of any certificate for
Common Shares outstanding on the Record Date shall also constitute the transfer
of the Rights associated with the Common Shares represented thereby.

(c)           Certificates for
Common Shares which become outstanding (including, without limitation,
reacquired Common Shares referred to in the penultimate sentence of this
paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:

This certificate also evidences and entitles the
holder hereof to certain rights as set forth in a Rights Agreement between
Tapestry Pharmaceuticals, Inc. (the “Company”)
and American Stock Transfer & Trust Company, as Rights Agent (the “Rights Agent”), dated as of December
12, 2006, as amended from time to time (the “Rights
Agreement”), the terms of which are hereby incorporated herein
by reference and a copy of which is on file at the principal executive offices
of the Company.  Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate.  The Company will mail to
the holder of this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. 
As described in the Rights Agreement, Rights issued to any Person who
becomes an Acquiring Person or an Affiliate or Associate thereof (as defined in
the Rights Agreement) and certain related 

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persons, whether currently held by or on behalf of
such Person or by any subsequent holder, shall become null and void.

With respect to such certificates containing the
foregoing legend, until the Distribution Date (or, if earlier, the earlier of
the Redemption Date or the Final Expiration Date), the Rights associated with
the Common Shares represented by such certificates shall be evidenced by such
certificates alone, and the surrender for transfer of any such certificate
shall also constitute the transfer of the Rights associated with the Common
Shares represented thereby.  In the event
that the Company purchases or acquires any Common Shares after the Record Date
but prior to the Distribution Date, any Rights associated with such Common Shares
shall be deemed canceled and retired so that the Company shall not be entitled
to exercise any Rights associated with the Common Shares which are no longer
outstanding.  Notwithstanding this
Section 3(c), the omission of a legend shall not affect the enforceability
of any part of this Rights Agreement or the rights of any holder of the Rights.

SECTION 4.             FORM OF RIGHT CERTIFICATES.

(a)           The Right
Certificates (and the form of election to purchase Preferred Shares, the form
of assignment and the form of certification to be printed on the reverse
thereof) shall be substantially the same as Exhibit B hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or quotation
system on which the Rights may from time to time be listed, or to conform to
usage.  Subject to the provisions of
Sections 7, 11 and 22 hereof, the Right Certificates shall entitle the holders
thereof to purchase such number of one one-thousandths of a Preferred Share as
shall be set forth therein at the Purchase Price (as defined in Section 7(b)),
but the number of such one one-thousandths of a Preferred Share and the
Purchase Price shall be subject to adjustment as provided herein.

(b)           Any Right
Certificate issued pursuant to Section 3(a) or Section 22 hereof that
represents Rights which are null and void pursuant to the second paragraph of
Section 11(a)(ii) hereof and any Right Certificate issued pursuant to
Section 6 or Section 11 hereof upon transfer, exchange, replacement
or adjustment of any other Right Certificate referred to in this sentence,
shall contain (to the extent feasible) the following legend:

The Rights represented by this Right Certificate are
or were beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement).  Accordingly, this
Right Certificate and the Rights represented hereby are null and void.

The provisions of Section 11(a)(ii) hereof shall
be operative whether or not the foregoing legend is contained on any such Right
Certificate.

SECTION 5.             COUNTERSIGNATURE AND REGISTRATION.  The Right Certificates shall be executed on
behalf of the Company by its Chairman of the Board, its Chief Executive
Officer, its President, its Vice Chairman of the Board, its Chief Financial
Officer, or any of its Vice 

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Presidents, either manually or by facsimile signature, shall have
affixed thereto the Company’s seal or a facsimile thereof, and shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature.  The
Right Certificates shall be manually countersigned by the Rights Agent and
shall not be valid for any purpose unless countersigned.  In case any officer of the Company who shall
have signed any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery
by the Company, such Right Certificates, nevertheless, may be countersigned by
the Rights Agent and issued and delivered by the Company with the same force
and effect as though the person who signed such Right Certificates had not
ceased to be such officer of the Company; and any Right Certificate may be
signed on behalf of the Company by any person who, at the actual date of the
execution of such Right Certificate, shall be a proper officer of the Company
to sign such Right Certificate, although at the date of the execution of this
Agreement any such person was not such an officer.

Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its office designated for such purpose, books for
registration and transfer of the Right Certificates issued hereunder.  Such books shall show the names and addresses
of the respective holders of the Right Certificates, the number of Rights
evidenced on its face by each of the Right Certificates and the date of each of
the Right Certificates.

SECTION 6.             TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF
RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.  Subject to the provisions of
Section 11(a)(ii), Section 14 and Section 24 hereof, at any time
after the Close of Business on the Distribution Date, and at or prior to the
Close of Business on the earlier of the Redemption Date or the Final Expiration
Date, any Right Certificate or Right Certificates may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one one-thousandths
of a Preferred Share as the Right Certificate or Right Certificates surrendered
then entitled such holder to purchase. 
Any registered holder desiring to transfer, split up, combine or
exchange any Right Certificate or Right Certificates shall make such request in
writing delivered to the Rights Agent, and shall surrender the Right
Certificate or Right Certificates to be transferred, split up, combined or
exchanged at the office of the Rights Agent designated for such purpose.  Neither the Rights Agent nor the Company
shall be obligated to take any action whatsoever with respect to the transfer
of any such surrendered Right Certificate until the registered holder shall
have completed and signed the certificate contained in the form of assignment
on the reverse side of such Right Certificate and shall have provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.  Thereupon the Rights
Agent shall, subject to Section 11(a)(ii), Section 14 and
Section 24 hereof, countersign and deliver to the person entitled thereto
a Right Certificate or Right Certificates, as the case may be, as so
requested.  The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.

Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Right Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and, at the 

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Company’s request, reimbursement to the Company and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate if
mutilated, the Company will issue, execute and deliver a new Right Certificate
of like tenor to the Rights Agent for countersignature and delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed
or mutilated.

Notwithstanding any other provisions hereof, the
Company and the Rights Agent may amend this Rights Agreement to provide for
uncertificated Rights in addition to or in place of Rights evidenced by Rights
Certificates.

SECTION 7.             EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION
DATE OF RIGHTS.

(a)           The registered
holder of any Right Certificate may exercise the Rights evidenced thereby
(except as otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase on the reverse side thereof duly executed, to the Rights
Agent at the office of the Rights Agent designated for such purpose, together
with payment of the Purchase Price for each one one-thousandth of a Preferred
Share (or such other number of shares or other securities) as to which the
Rights are exercised, at or prior to the earliest of (i) the Close of Business
on December 29, 2016 (the “Final Expiration Date”),
(ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the “Redemption Date”), or (iii)
the time at which such Rights are exchanged as provided in Section 24
hereof.

(b)           The purchase price
for each one one-thousandth of a Preferred Share pursuant to the exercise of a
Right shall initially be $16.00 (the “Purchase Price”)
and shall be subject to adjustment from time to time as provided in Sections 11
and 13 hereof and shall be payable in lawful money of the United States of
America in accordance with paragraph (c) below.

(c)           Upon receipt of a
Right Certificate representing exercisable Rights, with the form of election to
purchase duly executed, accompanied by payment of the Purchase Price for the
shares to be purchased and an amount equal to any applicable transfer tax
required to be paid by the holder of such Right Certificate in accordance with
Section 9 hereof by certified check, cashier’s check, bank draft or money
order payable to the order of the Company, the Rights Agent shall thereupon
promptly (i) (A) requisition from any transfer agent for the Preferred Shares
certificates for the number of Preferred Shares to be purchased and the Company
hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) if the Company, in its sole discretion, shall have elected to
deposit the Preferred Shares issuable upon exercise of the Rights hereunder
into a depository, requisition from the depositary agent depositary receipts
representing such number of one one-thousandths of a Preferred Share as are to
be purchased (in which case certificates for the Preferred Shares represented
by such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company hereby directs the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Company the amount of cash
to be paid in lieu of issuance of fractional shares in accordance with
Section 14 hereof, (iii) after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Right Certificate, registered in such name or names as may be
designated by such holder and (iv) when appropriate, after receipt, deliver
such cash to or upon the order of the registered holder of such Right
Certificate.  In the event that the 

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Company is obligated to issue securities of the
Company other than Preferred Shares (including Common Shares) of the Company
pursuant to Section 11(a) hereof, the Company will make all arrangements
necessary so that such other securities are available for distribution by the
Rights Agent, if and when appropriate.

In addition, in the case of an exercise of the Rights
by a holder pursuant to Section 11(a)(ii) hereof, the Rights Agent shall
return such Right Certificate to the registered holder thereof after
imprinting, stamping or otherwise indicating thereon that the rights represented
by such Right Certificate no longer include the rights provided by
Section 11(a)(ii) hereof, and, if fewer than all the Rights represented by
such Right Certificate were so exercised, the Rights Agent shall indicate on
the Right Certificate the number of Rights represented thereby which continue
to include the rights provided by Section 11(a)(ii) hereof.

(d)           In case the
registered holder of any Right Certificate shall exercise fewer than all the
Rights evidenced thereby (other than a partial exercise of rights pursuant to
Section 11(a)(ii) as described in Section 7(c) hereof), a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent to the registered holder of such Right Certificate
or to his duly authorized assigns, subject to the provisions of Section 14
hereof.

(e)           The Company
covenants and agrees that it will cause to be reserved and kept available out
of its authorized and unissued Preferred Shares or any Preferred Shares held in
its treasury, the number of Preferred Shares that will be sufficient to permit
the exercise in full of all outstanding Rights in accordance with this
Section 7.

(f)            Notwithstanding
anything in this Agreement to the contrary, neither the Rights Agent nor the Company
shall be obligated to undertake any action with respect to a registered holder
upon the occurrence of any purported exercise as set forth in this
Section 7 unless such registered holder shall have (i) completed and
signed the certification following the form of election to purchase set forth
on the reverse side of the Rights Certificate surrendered for such exercise,
(ii) tendered the Purchase Price (and an amount equal to any applicable
transfer tax required to be paid by the holder of such Right Certificate in
accordance with Section 9) to the Company in the manner set forth in Section
7(c), and (iii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.

SECTION 8.             CANCELLATION AND DESTRUCTION OF RIGHT
CERTIFICATES. 
All Right Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the
Company or to any of its agents, be delivered to the Rights Agent for
cancellation or in canceled form, or, if delivered or surrendered to the Rights
Agent, shall be canceled by it, and no Right Certificates shall be issued in
lieu thereof except as expressly permitted by any of the provisions of this
Agreement.  The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof.  The Rights Agent shall deliver all canceled
Right Certificates to the Company approximately one and one-half years after
the cancellation date, or shall, at the written request of the Company, destroy
such canceled Right Certificates, and in such case shall deliver a certificate
of destruction thereof to the Company.

 9
 

 

SECTION 9.             AVAILABILITY OF PREFERRED SHARES.  The Company covenants and agrees that so long
as the Preferred Shares (and, after the time a person becomes an Acquiring
Person, Common Shares or any other securities) issuable upon the exercise of
the Rights may be listed on any national securities exchange or quotation
system, the Company shall use its best efforts to cause, from and after such
time as the Rights become exercisable, all shares reserved for such issuance to
be listed on such exchange or quotation system upon official notice of issuance
upon such exercise.

The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all Preferred Shares (or Common
Shares and other securities, as the case may be) delivered upon exercise of
Rights shall, at the time of delivery of the certificates for such Preferred
Shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable shares or other
securities.

The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer taxes and
charges which may be payable in respect of the issuance or delivery of the
Right Certificates or of any Preferred Shares upon the exercise of Rights.  The Company shall not, however,
be required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to
deliver any certificates or depositary receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company’s reasonable satisfaction that
no such tax is due.

As soon as practicable after the Distribution Date,
the Company shall use its best efforts to:

(i)            prepare and file a
registration statement under the Securities Act of 1933, as amended (the “Act”), with respect to the
securities purchasable upon exercise of the Rights on an appropriate form, will
use its best efforts to cause such registration statement to become effective
as soon as practicable after such filing and will use its best efforts to cause
such registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Final Expiration Date; and

(ii)           use its best
efforts to qualify or register the Rights and the securities purchasable upon
exercise of the Rights under the blue sky laws of such jurisdictions as may be
necessary or appropriate.

SECTION 10.          PREFERRED SHARES RECORD DATE.  Each person in whose name any certificate for
Preferred Shares or other securities is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Preferred Shares or other securities represented thereby on, and such
certificate shall be dated, the date upon which the Right Certificate
evidencing such Rights was duly surrendered with the forms of election and
certification duly executed and payment of the Purchase Price (and any
applicable transfer taxes) was made; provided, however,
that if the date of such surrender and payment is a date upon 

 10
 

 

which the Preferred Shares or other securities transfer books of the
Company are closed, such person shall be deemed to have become the record
holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Shares or other securities
transfer books of the Company are open. 
Prior to the exercise of the Rights evidenced thereby, the holder of a
Right Certificate, as such, shall not be entitled to any rights of a holder of
Preferred Shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or
to exercise any preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided herein.

SECTION 11.          ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES
OR NUMBER OF RIGHTS. 
The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to
time as provided in this Section 11.

(a)

(i)            In the event the
Company shall at any time after the date of this Agreement (A) declare a
dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the
outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into
a smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of shares
of capital stock issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, such holder would
have owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; provided,
however, that in no event shall the consideration to be paid upon
the exercise of one Right be less than the aggregate par value of the shares of
capital stock of the Company issuable upon exercise of one Right.  If an event occurs which would require an
adjustment under both Section 11(a)(i) and Section 11(a)(ii) hereof,
the adjustment provided for in this Section 11(a)(i) shall be in addition
to, and shall be made prior to any adjustment required pursuant to
Section 11(a)(ii) hereof.

(ii)           Subject to
Section 24 hereof and the provisions of the next paragraph of this
Section 11(a)(ii), in the event any Person shall become an Acquiring
Person, each holder of a Right shall, for a period of 60 days after the later
of such time any Person becomes an Acquiring Person or the effective date of an
appropriate registration statement filed under the Act pursuant to
Section 9 hereof (provided, however that, if at any time prior to the
expiration or termination of the Rights there shall be a temporary restraining
order, a preliminary injunction, an injunction, or temporary suspension by the
Board of Directors, or similar obstacle to exercise of the Rights (the “Injunction”) which prevents exercise
of the Rights, a new 60-day period shall commence on the date the Injunction is
removed), have a right to receive, upon exercise thereof at a price 

 11
 

 

equal to the then current
Purchase Price multiplied by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares as
shall equal the result obtained by (A) multiplying the then current Purchase
Price by the number of one one-thousandths of a Preferred Share for which a
Right is then exercisable and dividing that product by (B) 50% of the then
current per share market price of the Common Shares (determined pursuant to
Section 11(d) hereof) on the date such Person became an Acquiring Person; provided, however, that if the transaction that would
otherwise give rise to the foregoing adjustment is also subject to the
provisions of Section 13 hereof, then only the provisions of
Section 13 hereof shall apply and no adjustment shall be made pursuant to
this Section 11(a)(ii).  In the
event that any Person shall become an Acquiring Person and the Rights shall
then be outstanding, the Company shall not take any action which would
eliminate or diminish the benefits intended to be afforded by the Rights.

Notwithstanding anything in this Agreement to the
contrary, from and after the time any Person becomes an Acquiring Person, any
Rights beneficially owned by (i) such Acquiring Person or an Associate or
Affiliate of such Acquiring Person, (ii) a transferee of such Acquiring Person
(or of any such Associate or Affiliate) who becomes a transferee after the
Acquiring Person became such, or (iii) a transferee of such Acquiring Person
(or of any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person’s becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 11(a)(ii), shall become null and void without any further action
and no holder of such Rights shall have any rights whatsoever with respect to
such Rights, whether under any provision of this Agreement or otherwise.  The Company shall use all reasonable efforts
to insure that the provisions of this Section 11(a)(ii) and
Section 4(b) hereof are complied with, but shall have no liability to any
holder of Right Certificates or other Person as a result of its failure to make
any determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder.  No
Right Certificate shall be issued at any time upon the transfer of any Rights
to an Acquiring Person whose Rights would be void pursuant to the preceding sentence
or any Associate or Affiliate thereof or to any nominee of such Acquiring
Person, Associate or Affiliate; and any Right Certificate delivered to the
Rights Agent for transfer to an Acquiring Person whose Rights would be void
pursuant to the preceding sentence shall be canceled.

(iii)         In lieu of issuing
Common Shares in accordance with Section 11(a)(ii) hereof, the Company
may, if a majority of the Board of Directors then in office determines that
such action is necessary or appropriate and not contrary to the interests of
holders of Rights, elect to (and, in the event that the Board of Directors has
not exercised the exchange right contained in Section 24(c) hereof and
there are not sufficient treasury shares and authorized but unissued Common
Shares to permit the exercise in full of the Rights in accordance with the
foregoing subparagraph (ii), the Company shall) take all such action as may be
necessary to authorize, issue or pay, upon the exercise of the Rights, cash
(including by way of a reduction of the Purchase Price), property, Common
Shares, other securities or any combination thereof having 

 12
 

 

an aggregate value equal
to the value of the Common Shares which otherwise would have been issuable
pursuant to Section 11(a)(ii) hereof, which aggregate value shall be
determined by a nationally recognized investment banking firm selected by a
majority of the Board of Directors then in office.  For purposes of the preceding sentence, the
value of the Common Shares shall be determined pursuant to Section 11(d)
hereof.  Any such election by the Board
of Directors must be made within 60 days following the date on which the event
described in Section 11(a)(ii) hereof shall have occurred.  Following the occurrence of the event
described in Section 11(a)(ii) hereof, a majority of the Board of
Directors then in office may suspend the exercisability of the Rights for a
period of up to 60 days following the date on which the event described in
Section 11(a)(ii) hereof shall have occurred to the extent that such directors
have not determined whether to exercise their rights of election under this
Section 11(a)(iii).  In the event of
any such suspension, the Company shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended.

(b)           In case the Company
shall fix a record date for the issuance of rights, options or warrants to all
holders of Preferred Shares entitling them (for a period expiring within 45
calendar days after such record date) to subscribe for or purchase Preferred
Shares (or shares having the same designations and the powers, preferences and
rights, and the qualifications, limitations and restrictions as the Preferred
Shares (“equivalent preferred shares”))
or securities convertible into Preferred Shares or equivalent preferred shares
at a price per Preferred Share or equivalent preferred share (or having a
conversion price per share, if a security convertible into Preferred Shares or
equivalent preferred shares) less than the then current per share market price
of the Preferred Shares (as such term is hereinafter defined) on such record
date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate par value
of the shares of capital stock of the Company issuable upon exercise of one
Right.  In case such subscription price
may be paid in a consideration part or all of which shall be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors, whose determination shall be described in a
statement filed with the Rights Agent.  Preferred
Shares owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation.  Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that such rights, options
or warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.

(c)           In case the Company
shall fix a record date for the making of a distribution to all holders of the
Preferred Shares (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation) of evidences of indebtedness or assets (other than a regular
quarterly cash dividend or a dividend 

 13
 

 

payable in Preferred Shares) or subscription rights or
warrants (excluding those referred to in Section 11(b) hereof), the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the then current per share
market price of the Preferred Shares (as such term is hereinafter defined) on
such record date, less the fair market value (as determined in good faith by
the Board of Directors, whose determination shall be described in a statement
filed with the Rights Agent) of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided,
however, that in no event shall the consideration to be paid upon
the exercise of one Right be less than the aggregate par value of the shares of
capital stock of the Company to be issued upon exercise of one Right.  Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such distribution
is not so made, the Purchase Price shall again be adjusted to be the Purchase
Price which would then be in effect if such record date had not been fixed.

(d)

(i)            For the purpose of
any computation hereunder, the “current per share market price” of any security
(a “Security” for the purpose of this Section 11(d)(i)) on any date shall
be deemed to be the average of the daily closing prices per share of such
Security for the 30 consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date; provided, however,
that in the event that the current per share market price of the Security is
determined during a period following the announcement by the issuer of such
Security of (A) a dividend or distribution on such Security payable in shares
of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security or securities
convertible into such shares, or (C) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30 Trading
Days after the ex-dividend date for such dividend or distribution, or the
record date for such subdivision, combination or reclassification, then, and in
each such case, the current per share market price shall be appropriately
adjusted to reflect the current market price per share equivalent of such
Security.  The closing price for each day
shall be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Security is not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System (“Nasdaq”) or such other system then
in use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Security selected by the Board
of Directors or, if on any such date no professional market maker is making a
market in the Security, the price as determined in good faith by the Board of
Directors.  The term “Trading Day” shall mean a day on
which the principal national securities exchange on which the Security 

 14
 

 

is listed or admitted to
trading is open for the transaction of business or, if the Security is not
listed or admitted to trading on any national securities exchange, a Business
Day.

(ii)           For the purpose of
any computation hereunder, the “current per share market price” of the
Preferred Shares shall be determined in accordance with the method set forth in
Section 11(d)(i) hereof.  If the
Preferred Shares are not publicly traded, the “current per share market price”
of the Preferred Shares shall be conclusively deemed to be the current per
share market price of the Common Shares as determined pursuant to
Section 11(d)(i) hereof (appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof)
multiplied by one thousand.  If neither
the Common Shares nor the Preferred Shares are publicly held or so listed or
traded, “current per share market price” shall mean the fair value per share as
determined in good faith by the Board of Directors, whose determination shall
be described in a statement filed with the Rights Agent.

(e)           No adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided,
however, that any adjustments which by reason of this
Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.  All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-thousandth of a
Preferred Share or one ten-thousandth of any other share or security as the
case may be.  Notwithstanding the first
sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three years from
the date of the transaction which requires such adjustment or (ii) the date of
the expiration of the right to exercise any Rights.

(f)            If as a result of
an adjustment made pursuant to Section 11(a) hereof, the holder of any
Right thereafter exercised shall become entitled to receive any shares of
capital stock of the Company other than Preferred Shares, thereafter the number
of such other shares so receivable upon exercise of any Right shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Preferred Shares contained
in Sections 11(a) through 11(c) hereof, inclusive, and the provisions of
Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Shares shall
apply on like terms to any such other shares.

(g)           All Rights
originally issued by the Company subsequent to any adjustment made to the
Purchase Price hereunder shall evidence the right to purchase, at the adjusted
Purchase Price, the number of one one-thousandths of a Preferred Share
purchasable from time to time hereunder upon exercise of the Rights, all
subject to further adjustment as provided herein.

(h)           Unless the Company
shall have exercised its election as provided in Section 11(i) hereof,
upon each adjustment of the Purchase Price as a result of the calculations made
in Section 11(b) and Section 11(c) hereof, each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence
the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths
of a Preferred Share (calculated to the nearest one one-millionth of a
Preferred Share) obtained by (i) multiplying (x) the number of one one-thousandths
of a Preferred Share covered by a Right immediately prior to this adjustment by
(y) the Purchase Price in effect immediately prior to such adjustment of the
Purchase Price and (ii) 

 15
 

 

dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.

(i)            The Company may
elect on or after the date of any adjustment of the Purchase Price to adjust
the number of Rights, in substitution for any adjustment in the number of one
one-thousandths of a Preferred Share purchasable upon the exercise of a
Right.  Each of the Rights outstanding
after such adjustment of the number of Rights shall be exercisable for the
number of one one-thousandths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment.  Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price.  The Company shall make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made.  This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, shall be at least 10 days
later than the date of the public announcement. 
If Right Certificates have been issued, upon each adjustment of the
number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Right
Certificates on such record date Right Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and replacement
for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment.  Right
Certificates so to be distributed shall be issued, executed and countersigned
in the manner provided for herein and shall be registered in the names of the
holders of record of Right Certificates on the record date specified in the
public announcement.

(j)            Irrespective of
any adjustment or change in the Purchase Price or the number of one one-thousandths
of a Preferred Share issuable upon the exercise of the Rights, the Right
Certificates theretofore and thereafter issued may continue to express the
Purchase Price and the number of one one-thousandths of a Preferred Share which
were expressed in the initial Right Certificates issued hereunder.

(k)           Before taking any
action that would cause an adjustment reducing the Purchase Price below one
one-thousandth of the then par value, if any, of the Preferred Shares issuable
upon exercise of the Rights, the Company shall take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Preferred Shares at such
adjusted Purchase Price.

(l)            In any case in
which this Section 11 shall require that an adjustment in the Purchase
Price be made effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event the issuing to the holder
of any Right exercised after such record date of the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such
holder a due bill or

 16

 

other appropriate instrument evidencing such holder’s
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.

(m)          The Company
covenants and agrees that, after the Distribution Date, it will not, except as
permitted by Section 23 or Section 27 hereof, take (or permit any
Subsidiary to take) any action the purpose of which is to, or if at the time
such action is taken it is reasonably foreseeable that the effect of such
action is to, materially diminish or eliminate the benefits intended to be
afforded by the Rights.  Any such action
taken by the Company during any period after any Person becomes an Acquiring
Person but prior to the Distribution Date shall be null and void unless such
action could be taken under this Section 11(m) from and after the
Distribution Date.

(n)           Anything in this
Section 11 to the contrary notwithstanding, the Company shall be entitled
to make such reductions in the Purchase Price, in addition to those adjustments
expressly required by this Section 11, as and to the extent that it in its
sole discretion shall determine to be advisable in order that any consolidation
or subdivision of the Preferred Shares, issuance wholly for cash of any
Preferred Shares at less than the current market price, issuance wholly for
cash of Preferred Shares or securities which by their terms are convertible
into or exchangeable for Preferred Shares, dividends on Preferred Shares
payable in Preferred Shares or issuance of rights, options or warrants referred
to hereinabove in Section 11(b), hereafter made by the Company to holders
of its Preferred Shares shall not be taxable to such stockholders.

(o)           In the event that
at any time after the date of this Agreement and prior to the Distribution
Date, the Company shall (i) declare or pay any dividend on the Common Shares
payable in Common Shares or (ii) effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares) into a greater or lesser number of
Common Shares, then in any such case (A) the number of one one-thousandths of a
Preferred Share purchasable after such event upon proper exercise of each Right
shall be determined by multiplying the number of one one-thousandths of a
Preferred Share so purchasable immediately prior to such event by a fraction,
the numerator of which is the number of Common Shares outstanding immediately
before such event and the denominator of which is the number of Common Shares
outstanding immediately after such event, and (B) each Common Share outstanding
immediately after such event shall have issued with respect to it that number
of Rights which each Common Share outstanding immediately prior to such event
had issued with respect to it.  The
adjustments provided for in this Section 11(o) shall be made successively
whenever such a dividend is declared or paid or such a subdivision, combination
or consolidation is effected.

(p)           The exercise of
Rights under Section 11(a)(ii) hereof shall only result in the loss of
rights under Section 11(a)(ii) hereof to the extent so exercised and shall
not otherwise affect the rights represented by the Rights under this Agreement,
including the rights represented by Section 13 hereof.

SECTION 12.       Certificate of Adjusted Purchase Price or
Number of Shares.  Whenever an
adjustment is made as provided in Sections 11 and 13 hereof, the Company shall
promptly (a) prepare a certificate setting forth such adjustment, and a brief
statement of the facts accounting for such adjustment, (b) file with the Rights
Agent and with each transfer agent for 

 17
 

 

the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary
thereof to each holder of a Right Certificate in accordance with
Section 25 hereof.  The Rights Agent
shall be fully protected in relying on any such certificate and on any
adjustment therein contained and shall not be deemed to have knowledge of any
adjustment unless and until it shall have received such certificate.

SECTION 13.       CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER.

(a)           In
the event that, following the Shares Acquisition Date or, if a Transaction is
proposed, the Distribution Date, directly or indirectly (x) the Company shall
consolidate with, or merge with and into, any Interested Stockholder, or if in
such merger or consolidation all holders of Common Shares are not treated
alike, any other Person, (y) any Interested Stockholder, or if in such merger
or consolidation all holders of Common Shares are not treated alike, any other
Person shall consolidate with the Company, or merge with and into the Company,
and the Company shall be the continuing or surviving corporation of such merger
(other than, in the case of either transaction described in (x) or (y), a merger
or consolidation which would result in all of the voting power represented by
the securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
securities of the surviving entity) all of the voting power represented by the
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation and the holders of such securities not
having changed as a result of such merger or consolidation), or (z) the Company
shall sell, mortgage or otherwise transfer (or one or more of its subsidiaries
shall sell, mortgage or otherwise transfer), in one or more transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its subsidiaries (taken as a whole) to any Interested
Stockholder or Stockholders, or if in such transaction all holders of Common Shares
are not treated alike, any other Person, (other than the Company or any
Subsidiary of the Company in one or more transactions each of which
individually and the aggregate does not violate Section 13(d) hereof)
then, and in each such case, proper provision shall be made so that (i) each
holder of a Right, subject to Section 11(a)(ii) hereof, shall have the
right to receive, upon the exercise thereof at a price equal to the then
current Purchase Price multiplied by the number of one one-thousandths of a
Preferred Share for which a Right is then exercisable in accordance with the
terms of this Agreement and in lieu of Preferred Shares, such number of freely
tradeable Common Shares of the Principal Party (as such term is hereinafter
defined), free and clear of liens, rights of call or first refusal,
encumbrances or other adverse claims, as shall be equal to the result obtained
by (A) multiplying the then current Purchase Price by the number of one one-thousandths
of a Preferred Share for which a Right is then exercisable (without taking into
account any adjustment previously made pursuant to Section 11(a)(ii)
hereof) and dividing that product by (B) 50% of the then current per share
market price of the Common Shares of such Principal Party (determined pursuant
to Section 11(d) hereof) on the date of consummation of such
consolidation, merger, sale or transfer; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such consolidation,
merger, sale or transfer, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term “Company” shall thereafter be deemed
to refer to such Principal Party, it being specifically intended that the
provisions of Section 11 hereof shall apply to such Principal Party; and
(iv) such Principal Party shall take such steps (including, but not limited to,
the reservation of a sufficient number of shares of its Common Shares in
accordance with 

 18
 

 

Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
Common Shares thereafter deliverable upon the exercise of the Rights.

(b)           “Principal Party” shall mean:

(i)            in the case of any
transaction described in clause (x) or (y) of Section 13(a) hereof, the
Person that is the issuer of any securities into which Common Shares are
converted in such merger or consolidation, and if no securities are so issued,
the Person that is the other party to the merger or consolidation (or, if
applicable, the Company, if it is the surviving corporation); and

(ii)           in the case of any
transaction described in clause (z) of Section 13(a) hereof, the Person
that is the party receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;

provided, however,
that in any case, (1) if the Common Shares of such Person are not at such time
and have not been continuously over the preceding 12-month period registered
under Section 12 of the Exchange Act, and such Person is a direct or
indirect Subsidiary or Affiliate of another Person the Common Shares of which
are and have been so registered, “Principal Party” shall refer to such other
Person; (2) if such Person is a Subsidiary, directly or indirectly, or
Affiliate of more than one Person, the Common Shares of two or more of which
are and have been so registered, “Principal Party” shall refer to whichever of
such Persons is the issuer of the Common Shares having the greatest aggregate
market value; and (3) if such Person is owned, directly or indirectly, by a
joint venture formed by two or more Persons that are not owned, directly or
indirectly, by the same Person, the rules set forth in (1) and (2) above shall
apply to each of the chains of ownership having an interest in such joint
venture as if such party were a “Subsidiary” of both or all of such joint
venturers and the Principal Parties in each such chain shall bear the
obligations set forth in this Section 13 in the same ratio as their direct
or indirect interests in such Person bear to the total of such interests.

(c)           The Company shall
not consummate any such consolidation, merger, sale or transfer unless the
Principal Party shall have a sufficient number of authorized Common Shares that
have not been issued or reserved for issuance to permit the exercise in full of
the Rights in accordance with this Section 13 and unless prior thereto the
Company and each Principal Party and each other Person who may become a
Principal Party as a result of such consolidation, merger, sale or transfer
shall have (i) executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and (ii) prepared, filed and had declared and remain effective
a registration statement under the Act on the appropriate form with respect to
the Rights and the securities exercisable upon exercise of the Rights and
further providing that, as soon as practicable after the date of any
consolidation, merger, sale or transfer of assets mentioned in paragraph (a) of
this Section 13, the Principal Party at its own expense will:

(i)            cause the
registration statement under the Act with respect to the Rights and the
securities purchasable upon exercise of the Rights on an appropriate form to
remain 

 19
 

 

effective (with a
prospectus at all times meeting the requirements of the Act) until the Final
Expiration Date;

(ii)           use its best
efforts to qualify or register the Rights and the securities purchasable upon
exercise of the Rights under the blue sky laws of such jurisdictions as may be
necessary or appropriate;

(iii)         list the Rights and
the securities purchasable upon exercise of the Rights on each national
securities exchange on which the Common Shares were listed prior to the
consummation of such consolidation, merger, sale or transfer of assets or, if the
Common Shares were not listed on a national securities exchange prior to the
consummation of such consolidation, merger, sale or transfer of assets, on a
national securities exchange; and

(iv)          deliver to holders
of the Rights historical financial statements for the Principal Party and each
of its Affiliates which comply in all material respects with the requirements
for registration on Form 10 under the Exchange Act.

The provisions of this Section 13 shall similarly
apply to successive mergers or consolidations or sales or other transfers.

(d)           After the
Distribution Date, the Company covenants and agrees that it shall not (i)
consolidate with, (ii) merge with or into, or (iii) sell or transfer to, in one
or more transactions, assets or earning power aggregating more than 50% of the
assets or earning power of the Company and its subsidiaries taken as a whole,
any other Person (other than a Subsidiary of the Company in a transaction which
does not violate Section 11(m) hereof), if (x) at the time of or after
such consolidation, merger or sale there are any charter or bylaw provisions or
any rights, warrants or other instruments or securities outstanding, agreements
in effect or any other action taken which would diminish or otherwise eliminate
the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger or sale,
the stockholders of the Person who constitutes, or would constitute, the “Principal
Party” for purposes of Section 13(a) hereof shall have received a
distribution of Rights previously owned by such Person or any of its Affiliates
and Associates.  The Company shall not
consummate any such consolidation, merger, sale or transfer unless prior
thereto the Company and such other Person shall have executed and delivered to
the Rights Agent a supplemental agreement evidencing compliance with this
Section 13(d).

SECTION 14.       FRACTIONAL RIGHTS AND FRACTIONAL SHARES.

(a)           The
Company shall not be required to issue fractions of Rights or to distribute
Right Certificates which evidence fractional Rights.  In lieu of such fractional Rights, there
shall be paid to the registered holders of the Right Certificates with regard
to which such fractional Rights would otherwise be issuable, an amount in cash
equal to the same fraction of the current market value of a whole Right.  For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable.  The closing price for any day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the 

 20
 

 

principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or,
if the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by Nasdaq
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors. 
If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith
by the Board of Directors shall be used.

(b)           The Company shall
not be required to issue fractions of Preferred Shares (other than fractions
which are integral multiples of one one-thousandth of a Preferred Share) upon
exercise of the Rights or to distribute certificates which evidence fractional
Preferred Shares (other than fractions which are integral multiples of one one-thousandth
of a Preferred Share).  Fractions of
Preferred Shares in integral multiples of one one-thousandth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts;
provided, however, that holders of such
depositary receipts shall have all of the designations and the powers,
preferences and rights, and the qualifications, limitations and restrictions to
which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. 
In lieu of fractional Preferred Shares that are not integral multiples
of one one-thousandth of a Preferred Share, the Company shall pay to the
registered holders of Right Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one Preferred Share.  For
the purposes of this Section 14(b), the current market value of a
Preferred Share shall be the current per share market price of the Preferred
Shares (as determined pursuant to the second sentence of Section 11(d)(i) hereof)
for the Trading Day immediately prior to the date of such exercise (or, if not
publicly traded, in accordance with Section 11(d)(ii) hereof).

(c)           Following the
occurrence of one of the transactions or events specified in Section 11
hereof giving rise to the right to receive Common Shares, capital stock
equivalents (other than Preferred Shares) or other securities upon the exercise
of a Right, the Company shall not be required to issue fractions of Common
Shares or units of such Common Shares, capital stock equivalents or other
securities upon exercise of the Rights or to distribute certificates which
evidence fractional Common Shares, capital stock equivalents or other
securities.  In lieu of fractional Common
Shares, capital stock equivalents or other securities, the Company shall pay to
the registered holders of Right Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of
the current market value of one Common Share or unit of such Common Shares,
capital stock equivalents or other securities. 
For purposes of this Section 14(c), the current market value shall
be the current per share market price (as determined pursuant to
Section 11(d)(i) hereof) for the Trading Day immediately prior to the date
of such exercise and, if such capital stock equivalent is not traded, each such
capital stock equivalent shall have the value of one one-thousandth of a
Preferred Share.

 21
 

 

(d)           The holder of a
Right by the acceptance of the Right expressly waives his right to receive any
fractional Rights or any fractional shares upon exercise of a Right (except as
provided above).

SECTION 15.       Rights of Action.  All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Right Certificates (and, prior to the Distribution Date, the registered
holders of the Common Shares) and any registered holder of any Right
Certificate (or, prior to the Distribution Date, of the Common Shares), without
the consent of the Rights Agent or of the holder of any other Right Certificate
(or, prior to the Distribution Date, of the Common Shares), may, in his own
behalf and for his own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, his right to exercise the Rights evidenced by such Right
Certificate in the manner provided in such Right Certificate and in this Agreement.  Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.  Holders of Rights shall be entitled to
recover the reasonable costs and expenses, including attorneys fees, incurred
by them in any action to enforce the provisions of this Agreement.

SECTION 16.       AGREEMENT OF RIGHT HOLDERS.  Every holder of a Right, by accepting the
same, consents and agrees with the Company and the Rights Agent and with every
other holder of a Right that:

(a)           prior to the
Distribution Date, the Rights will be transferable only in connection with the
transfer of the Common Shares;

(b)           after the
Distribution Date, the Right Certificates are transferable (subject to the
provisions of this Agreement) only on the registry books of the Rights Agent if
surrendered at the principal office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer; and

(c)           the Company and the
Rights Agent may deem and treat the person in whose name the Right Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right
Certificates or the associated Common Shares certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent shall be affected by any notice to the
contrary.

SECTION 17.       RIGHT CERTIFICATE HOLDER NOT DEEMED A
STOCKHOLDER.  No holder, as
such, of any Right Certificate shall be entitled to vote, receive dividends or
be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the 

 22
 

 

election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in Section 25
hereof), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by such Right Certificate shall have been
exercised in accordance with the provisions hereof.

SECTION 18.       CONCERNING THE RIGHTS AGENT.  The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from
time to time, on demand of the Rights Agent, its reasonable expenses and
counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder.  The Company also agrees to
indemnify the Rights Agent for, and to hold it harmless against, any loss,
liability, or expense, incurred without negligence, bad faith or willful
misconduct on the part of the Rights Agent, for anything done or omitted by the
Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.  The indemnity
provided herein shall survive the expiration of the Rights and the termination
of this Agreement.

The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon any
Right Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.  In no
case will the Rights Agent be liable for special, indirect, incidental or
consequential or consequential loss or damage at any kind whatsoever (including
but not limited to lost profits), even if the Rights Agent has been advised of
such loss or damage.

SECTION 19.       MERGER OR CONSOLIDATION OR CHANGE OF NAME OF
RIGHTS AGENT.  Any corporation
into which the Rights Agent or any successor Rights Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Rights Agent or any successor Rights Agent shall be
a party, or any corporation succeeding to the shareholder services or corporate
trust business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties
hereto, provided that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof.  In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement any of the Right
Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of the predecessor Rights
Agent and deliver such Right Certificates so countersigned; and in case at that
time any of the Right Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Right Certificates shall have the full force provided
in the Right Certificates and in this Agreement.

 23
 

 

In case at any time the name of the Rights Agent shall
be changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and
in this Agreement.

SECTION 20.       DUTIES OF RIGHTS AGENT. 
The Rights Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the Company
and the holders of Right Certificates, by their acceptance thereof, shall be
bound:

(a)           The Rights Agent
may consult with legal counsel of its choice (who may be legal counsel for the
Company), and the opinion of such counsel shall be full and complete
authorization and protection to the Rights Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.

(b)           Whenever in the
performance of its duties under this Agreement the Rights Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a certificate signed
by any one of the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer, any Vice President, the Treasurer or
the Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.

(c)           The Rights Agent
shall be liable hereunder to the Company and any other Person only for its own
negligence, bad faith or willful misconduct.

(d)           The Rights Agent
shall not be liable for or by reason of any of the statements of fact or
recitals contained in this Agreement or in the Right Certificates (except its
countersignature thereof) or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the
Company only.

(e)           The
Rights Agent shall not be under any responsibility in respect of the validity
of this Agreement or the execution and delivery hereof (except the due
execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including
the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Sections 3, 11, 13, 23 or 24 hereof, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after receipt of a certificate pursuant to Section 12 hereof
describing such change or adjustment); nor shall it by any act hereunder be
deemed to make any representation or warranty as to the authorization or 

 24
 

 

reservation of any Preferred Shares to be issued
pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares will, when issued, be validly authorized and issued, fully
paid and nonassessable.

(f)            The Company agrees
that it will perform, execute, acknowledge and deliver or cause to be
performed, executed, acknowledged and delivered all such further and other
acts, instruments and assurances as may reasonably be required by the Rights
Agent for the carrying out or performing by the Rights Agent of the provisions
of this Agreement.

(g)           The Rights Agent is
hereby authorized and directed to accept instructions with respect to the
performance of its duties hereunder from any one of the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Financial Officer, any
Vice President, the Secretary or the Treasurer of the Company, and to apply to
such officers for advice or instructions in connection with its duties, and it
shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions. 
Any application by the Rights Agent for written instructions from the
Company may, at the option of the Rights Agent, set forth in writing any action
proposed to be taken or omitted by the Rights Agent with respect to its duties
or obligations under this Agreement and the date on and/or after which such
action shall be taken or omitted and the Rights Agent shall not be liable for
any action taken or omitted in accordance with a proposal included in any such
application on or after the date specified therein (which date shall not be
less than three Business Days after the date indicated in such application
unless any such officer shall have consented in writing to an earlier date)
unless, prior to taking or omitting any such action, the Rights Agent has
received written instructions in response to such application specifying the
action to be taken or omitted.

(h)           The Rights Agent
and any stockholder, director, officer or employee of the Rights Agent may buy,
sell or deal in any of the Rights or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this Agreement.  Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.

(i)            The Rights Agent
may execute and exercise any of the rights or powers hereby vested in it or
perform any duty hereunder either itself or by or through its attorneys or
agents, and the Rights Agent shall not be answerable or accountable for any
act, default, neglect or misconduct of any such attorneys or agents or for any
loss to the Company resulting from any such act, default, neglect or misconduct,
provided reasonable care was exercised in the selection and continued
employment thereof.

(j)            No
provision of this Agreement shall require the Rights Agent to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder or in the exercise of its rights if there shall be
reasonable grounds for believing that repayment of such funds or adequate
indemnification against such risk or liability is not reasonably assured to it.

 25
 

 

(k)           If, with respect to
any Right Certificate surrendered to the Rights Agent for exercise or transfer,
the certificate attached to the form of assignment or form of election to
purchase, as the case may be, has not been executed, the Rights Agent shall not
take any further action with respect to such requested exercise of transfer
without first consulting with the Company.

SECTION 21.       CHANGE OF RIGHTS AGENT. 
The Rights Agent or any successor Rights Agent may resign and be
discharged from its duties under this Agreement upon 30 days’ notice in writing
mailed to the Company and to each transfer agent for the Common Shares or
Preferred Shares by registered or certified mail, and to the holders of the
Right Certificates by first-class mail. 
The Company may remove the Rights Agent or any successor Rights Agent
upon 30 days’ notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent for the Common Shares or
Preferred Shares by registered or certified mail, and to the holders of the
Right Certificates by first-class mail. 
If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.  If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who shall, with such notice, submit his Right Certificate for inspection by
the Company), then the registered holder of any Right Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights
Agent.  Any successor Rights Agent,
whether appointed by the Company or by such a court, shall be either (a) a
corporation, business trust or limited liability company organized and doing
business under the laws of the United States or of any other state of the
United States which is authorized under such laws to exercise corporate trust
or stock transfer powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $50 million or (b) a
direct or indirect wholly owned Subsidiary of such an entity or its
wholly-owning parent.  After appointment,
the successor Rights Agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and
transfer to the successor Rights Agent any property at the time held by it
hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose.  Not
later than the effective date of any such appointment the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent for the Common Shares or Preferred Shares, and mail a notice thereof in
writing to the registered holders of the Right Certificates.  Failure to give any notice provided for in
this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent,
as the case may be.

SECTION 22.       ISSUANCE OF NEW RIGHT CERTIFICATES.  Notwithstanding any of the provisions of this
Agreement or of the Rights to the contrary, the Company may, at its option,
issue new Right Certificates evidencing Rights in such form as may be approved
by its Board of Directors to reflect any adjustment or change in the Purchase
Price and the number or kind or class of shares or other securities or property
purchasable under the Right Certificates made in accordance with the provisions
of this Agreement.  In addition, in
connection with the issuance or sale of Common Shares following the
Distribution Date and prior to the earlier of the Redemption Date and the Final
Expiration Date, the Company (a) shall with respect to Common 

 26
 

 

Shares so issued or sold
pursuant to the exercise of stock options or under any employee plan or
arrangement in existence prior to the Distribution Date, or upon the exercise,
conversion or exchange of securities, notes or debentures issued by the Company
and in existence prior to the Distribution Date, and (b) may, in any other
case, if deemed necessary or appropriate by the Board of Directors, issue Right
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however,
that (i) the Company shall not be obligated to issue any such Right
Certificates if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Right Certificate
would be issued, and (ii) no Right Certificate shall be issued if, and to the
extent that, appropriate adjustment shall otherwise have been made in lieu of
the issuance thereof.

SECTION 23.       REDEMPTION.

(a)           The Rights may be
redeemed by action of the Board of Directors pursuant to Section 23(b)
hereof and shall not be redeemed in any other manner.

(b)

(i)            The Board of
Directors may, at its option, at any time prior to the earlier of (A) such time
as any Person becomes an Acquiring Person, or (B) the Final Expiration Date,
redeem all but not less than all of the then outstanding Rights at a redemption
price of $0.01 per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price being hereinafter referred to as the “Redemption
Price”), and the Company may, at its option, pay the Redemption
Price in Common Shares (based on the “current per-share market price,” as such
term is defined in Section 11(d) hereof, of the Common Shares at the time
of redemption), cash or any other form of consideration deemed appropriate by
the Board of Directors.  The redemption
of the Rights by the Board of Directors may be made effective at such time, on
such basis and subject to such conditions as the Board of Directors in its sole
discretion may establish. 
Notwithstanding anything contained in this Agreement to the contrary,
the Rights shall not be exercisable pursuant to Section 11(a)(ii) hereof
prior to the expiration or termination of the Company’s right of redemption
under this Section 23(b)(i).

(ii)           In addition, the
Board of Directors may, at its option, at any time after the time a Person
becomes an Acquiring Person and after the expiration of any period during which
the holder of Rights may exercise the rights under Section 11(a)(ii)
hereof but prior to any event described in clause (x), (y) or (z) of the first
sentence of Section 13 hereof, redeem all but not less than all of the
then outstanding Rights at the Redemption Price (x) in connection with any
merger, consolidation or sale or other transfer (in one transaction or in a
series of related transactions) of assets or earning power aggregating 50% or
more of the assets or earning power of the Company and its subsidiaries (taken
as a whole) in which all holders of Common Shares are treated alike and not
involving (other than as a holder of Common Shares being treated like all other
such holders) an Interested Stockholder or a Transaction Person or (y)(A) if
and for so long as the Acquiring Person is not thereafter the Beneficial Owner
of 15% or more of the then outstanding Common Shares, and (B) at the time of
redemption no other Persons are Acquiring Persons.

 27
 

 

(c)           Immediately upon
the action of the Board of Directors ordering the redemption of the Rights
pursuant to Section 23(b) hereof, and without any further action and
without any notice, the right to exercise the Rights will terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price.  The Company shall
promptly give public notice of any such redemption; provided,
however, that the failure to give, or any defect in, any such notice
shall not affect the validity of such redemption.  Within 10 days after such action of the Board
of Directors ordering the redemption of the Rights pursuant to
Section 23(b) hereof, the Company shall mail a notice of redemption to all
the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Shares, provided, however, that failure to give,
or any defect in, any such notice shall not affect the validity of such
redemption.  Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice.  Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.  Neither the Company nor
any of its Affiliates or Associates may redeem, acquire or purchase for value
any Rights at any time in any manner other than that specifically set forth in
this Section 23 or in Section 24 hereof, and other than in connection
with the purchase of Common Shares prior to the Distribution Date.

(d)           The Company may, at
its option, discharge all of its obligations with respect to any redemption of
the Rights by (i) issuing a press release announcing the manner of redemption
of the Rights and (ii) mailing payment of the Redemption Price to the
registered holders of the Rights at their last addresses as they appear on the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares, and upon such
action, all outstanding Right Certificates shall be null and void without any
further action by the Company.

SECTION 24.       EXCHANGE.

(a)           The Board of
Directors may, at its option, at any time after any Person becomes an Acquiring
Person, exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the
provisions of Section 11(a)(ii) hereof) for Common Shares at an exchange
ratio of one Common Share per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such exchange ratio being hereinafter referred to as the “Exchange Ratio”).  Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50%
or more of the Common Shares then outstanding.

(b)           Immediately
upon the action of the Board of Directors ordering the exchange of any Rights
pursuant to Section 24(a) hereof and without any further action and
without any notice, the right to exercise such Rights shall terminate and the
only right thereafter of a holder of such Rights shall be to receive that
number of Common Shares equal to the number of such Rights held by such holder
multiplied by the Exchange Ratio.  The
Company shall promptly give 

 28
 

 

public notice of any such exchange; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange.  The Company promptly shall mail a notice of
any such exchange to all of the holders of such Rights at their last addresses
as they appear upon the registry books of the Rights Agent; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange.  Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice.  Each such notice of exchange
will state the method by which the exchange of the Common Shares for Rights
will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged.  Any
partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions of
Section 11(a)(ii) hereof) held by each holder of Rights.

(c)           In lieu of issuing
Common Shares in accordance with Section 24(a) hereof, the Company may, if
a majority of the Board of Directors then in office determines that such action
is necessary or appropriate and not contrary to the interests of the holders of
Rights, elect to (and, in the event that there are not sufficient treasury
shares and authorized but unissued Common Shares to permit any exchange of the
Rights in accordance with Section 24(a) hereof, the Company shall) take
all such action as may be necessary to authorize, issue or pay, upon the
exchange of the Rights, cash, property, Common Shares, other securities or any
combination thereof having an aggregate value equal to the value of the Common
Shares which otherwise would have been issuable pursuant to Section 24(a)
hereof, which aggregate value shall be determined by a nationally recognized
investment banking firm selected by a majority of the Board of Directors then
in office.  For purposes of the preceding
sentence, the value of the Common Shares shall be determined pursuant to
Section 11(d) hereof.  Any election
pursuant to this Section 24(c) by the Board of Directors must be made by
resolution within 60 days following the date on which the event described in
Section 11(a)(ii) hereof shall have occurred.  Following the occurrence of the event
described in Section 11(a)(ii) hereof, a majority of the Board of Directors
then in office may suspend the exercisability of the Rights for a period of up
to 60 days following the date on which the event described in
Section 11(a)(ii) hereof shall have occurred to the extent that such
directors have not determined whether to exercise their rights of exchange
under this Section 24(c).  In the
event of any such suspension, the Company shall issue a public announcement
stating that the exercisability of the Rights has been temporarily suspended.

(d)           The
Company shall not be required to issue fractions of Common Shares or to
distribute certificates which evidence fractional Common Shares.  In lieu of such fractional Common Shares, the
Company shall pay to the registered holders of the Right Certificates with
regard to which such fractional Common Shares would otherwise be issuable an
amount in cash equal to the same fraction of the current market value of a
whole Common Share.  For the purposes of
this Section 24(d), the current market value of a whole Common Share shall
be the closing price of a Common Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately after
the date of the first public announcement by the Company that an exchange is to
be effected pursuant to this Section 24.

 29
 

 

SECTION 25.       NOTICE OF CERTAIN EVENTS.

(a)           In case the Company
shall propose (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any other distribution to the
holders of its Preferred Shares (other than a regular quarterly cash dividend),
(ii) to offer to the holders of its Preferred Shares rights or warrants to
subscribe for or to purchase any additional Preferred Shares or shares of stock
of any class or any other securities, rights or options, (iii) to effect any
reclassification of its Preferred Shares (other than a reclassification
involving only the subdivision of outstanding Preferred Shares), (iv) to effect
any consolidation or merger into or with, or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole), to any
other Person, (v) to effect the liquidation, dissolution or winding up of the
Company, or (vi) to declare or pay any dividend on the Common Shares payable in
Common Shares or to effect a subdivision, combination or consolidation of the
Common Shares (by reclassification or otherwise than by payment of dividends in
Common Shares), then, in each such case, the Company shall give to each holder
of a Right Certificate, in accordance with Section 26 hereof, a notice of
such proposed action, which shall specify the record date for the purpose of such
stock dividend, or distribution of rights or warrants, or the date on which
such reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or the Preferred Shares, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least 10 days prior to the record
date for determining holders of the Preferred Shares for purposes of such
action, and in the case of any such other action, at least 10 days prior to the
date of the taking of such proposed action or the date of participation therein
by the holders of the Common Shares and/or the Preferred Shares, whichever
shall be the earlier.

(b)           In case the event
set forth in Section 11(a)(ii) hereof shall occur, then the Company shall
as soon as practicable thereafter give to each holder of a Right Certificate,
in accordance with Section 26 hereof, a notice of the occurrence of such
event, which notice shall describe the event and the consequences of the event
to holders of Rights under Section 11(a)(ii) hereof.

SECTION 26.       NOTICES.  Notices
or demands authorized by this Agreement to be given or made by the Rights Agent
or by the holder of any Right Certificate to or on the Company shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Rights Agent) as
follows:

Tapestry
Pharmaceuticals, Inc.

4840
Pearl East Circle, 300W

Boulder,
CO 80301

Attn:  General Counsel

Subject to the provisions of Section 21 hereof,
any notice or demand authorized by this Agreement to be given or made by the
Company or by the holder of any Right Certificate to or on the Rights Agent
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with the Company)
as follows:

 30
 

 

American Stock Transfer
& Trust Company

59 Maiden Lane

New York, NY 10038

Attn: 
Administration Department

Notices or demands authorized by this Agreement to be
given or made by the Company or the Rights Agent to the holder of any Right
Certificate shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.

SECTION 27.       SUPPLEMENTS AND AMENDMENTS.  Prior to the Distribution Date, the Company
and the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of the
Rights.  From and after the Distribution
Date, the Company and the Rights Agent shall, if the Company so directs, from
time to time supplement or amend any provision of this Agreement without the
approval of any holders of Right Certificates in order to (i) cure any
ambiguity, (ii) correct or supplement any provision contained herein which may
be defective or inconsistent with any other provisions herein, or (iii) change
any other provisions with respect to the Rights which the Company may deem
necessary or desirable; provided, however,
that no such supplement or amendment shall be made which would adversely affect
the interests of the holders of Rights (other than the interests of an
Acquiring Person or its Affiliates or Associates).  Any supplement or amendment adopted during
any period after any Person has become an Acquiring Person but prior to the
Distribution Date shall become null and void unless such supplement or
amendment could have been adopted by the Company from and after the
Distribution Date.  Any such supplement
or amendment shall be evidenced by a writing signed by the Company and the
Rights Agent.  Upon delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or amendment
unless the Rights Agent shall have determined in good faith that such
supplement or amendment would adversely affect its interest under this
Agreement.  Prior to the Distribution
Date, the interests of the holders of Rights shall be deemed coincident with
the interests of the holders of Common Shares.

SECTION 28.       DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.  For all purposes of this Agreement, any
calculation of the number of Common Shares outstanding at any particular time,
including for purposes of determining the particular percentage of such
outstanding Common Shares or any other securities of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act as
in effect on the date of this Agreement. 
The Board of Directors shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board, or the Company, or as may be necessary or advisable in
the administration of this Agreement, including without limitation, the right
and power to (i) interpret the provisions of this Agreement, and
(ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). 
All such actions, calculations, interpretations and determinations
(including, for purposes of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Board in 

 31
 

 

good faith, shall (x) be
final, conclusive and binding on the Rights Agent and the holders of the
Rights, and (y) not subject the Board to any liability to the holders of the
Rights.

SECTION 29.       SUCCESSORS.  All
the covenants and provisions of this Agreement by or for the benefit of the
Company or the Rights Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.

SECTION 30.       BENEFITS OF THIS AGREEMENT.  Nothing in this Agreement shall be construed
to give to any person or corporation other than the Company, the Rights Agent
and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders
of the Right Certificates (and, prior to the Distribution Date, the Common
Shares).

SECTION 31.       SEVERABILITY.  If
any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.

SECTION 32.       GOVERNING LAW. 
This Agreement and each Right Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Delaware and for
all purposes shall be governed by and construed in accordance with the laws of
such State applicable to contracts to be made and performed entirely within
such State.

SECTION 33.       COUNTERPARTS. 
This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.

SECTION 34.       DESCRIPTIVE HEADINGS. 
Descriptive headings of the several Sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.

 32
 

 

IN WITNESS WHEREOF,
parties whereto have caused this Agreement to be duly executed, all as of the
day and year first above written.

	
  ATTEST:

  	
   

  	
  TAPESTRY PHARMACEUTICALS, INC. 

  
	
   

  	
   

  	
   

  
	
  /s/ Jane C.
  Schatz

  	
   

  	
  /s/ Kai Larson

  
	
  Name: Jane
  C. Schatz

  	
   

  	
  Name: Kai Larson

  
	
  Title:
  Corp. Paralegal

  	
   

  	
  Title: V.P., Secretary,
  General Counsel

  
	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  AMERICAN STOCK TRANSFER & TRUST 

  
	
   

  	
   

  	
  COMPANY

  
	
  /s/ Susan Silher

  	
   

  	
   

  
	
  Name: Susan
  Silher

  	
   

  	
  /s/ Paula Caroppoli

  
	
  Title: Assistant
  Secretary

  	
   

  	
  Name: Paula Caroppoli

  
	
   

  	
   

  	
  Title: Vice President

  

 

 33

	
  SECTION 1.

  	
  CERTAIN DEFINITIONS

  	
  1

  
	
   

  	
   

  	
   

  
	
  SECTION 2.

  	
  APPOINTMENT OF RIGHTS AGENT

  	
  4

  
	
   

  	
   

  	
   

  
	
  SECTION 3.

  	
  ISSUE OF RIGHT CERTIFICATES

  	
  4

  
	
   

  	
   

  	
   

  
	
  SECTION 4.

  	
  FORM OF RIGHT CERTIFICATES

  	
  6

  
	
   

  	
   

  	
   

  
	
  SECTION 5.

  	
  COUNTERSIGNATURE AND REGISTRATION

  	
  6

  
	
   

  	
   

  	
   

  
	
  SECTION 6.

  	
  TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF
  RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES

  	
  7

  
	
   

  	
   

  	
   

  
	
  SECTION 7.

  	
  EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE
  OF RIGHTS

  	
  8

  
	
   

  	
   

  	
   

  
	
  SECTION 8.

  	
  CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES

  	
  9

  
	
   

  	
   

  	
   

  
	
  SECTION 9.

  	
  AVAILABILITY OF PREFERRED SHARES

  	
  10

  
	
   

  	
   

  	
   

  
	
  SECTION 10.

  	
  PREFERRED SHARES RECORD DATE

  	
  10

  
	
   

  	
   

  	
   

  
	
  SECTION 11.

  	
  ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR
  NUMBER OF RIGHTS

  	
  11

  
	
   

  	
   

  	
   

  
	
  SECTION 12.

  	
  CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
  SHARES

  	
  17

  
	
   

  	
   

  	
   

  
	
  SECTION 13.

  	
  CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS
  OR EARNING POWER

  	
  18

  
	
   

  	
   

  	
   

  
	
  SECTION 14.

  	
  FRACTIONAL RIGHTS AND FRACTIONAL SHARES

  	
  20

  
	
   

  	
   

  	
   

  
	
  SECTION 15.

  	
  RIGHTS OF ACTION

  	
  22

  
	
   

  	
   

  	
   

  
	
  SECTION 16.

  	
  AGREEMENT OF RIGHT HOLDERS

  	
  22

  
	
   

  	
   

  	
   

  
	
  SECTION 17.

  	
  RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER

  	
  22

  
	
   

  	
   

  	
   

  
	
  SECTION 18.

  	
  CONCERNING THE RIGHTS AGENT

  	
  23

  
	
   

  	
   

  	
   

  
	
  SECTION 19.

  	
  MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
  AGENT

  	
  23

  
	
   

  	
   

  	
   

  
	
  SECTION 20.

  	
  DUTIES OF RIGHTS AGENT

  	
  24

  
	
   

  	
   

  	
   

  
	
  SECTION 21.

  	
  CHANGE OF RIGHTS AGENT

  	
  26

  
	
   

  	
   

  	
   

  
	
  SECTION 22.

  	
  ISSUANCE OF NEW RIGHT CERTIFICATES

  	
  26

  
	
   

  	
   

  	
   

  
	
  SECTION 23.

  	
  REDEMPTION

  	
  27

  
	
   

  	
   

  	
   

  
	
  SECTION 24.

  	
  EXCHANGE

  	
  28

  
	
   

  	
   

  	
   

  
	
  SECTION 25.

  	
  NOTICE OF CERTAIN EVENTS

  	
  30

  
	
   

  	
   

  	
   

  
	
  SECTION 26.

  	
  NOTICES

  	
  30

  
	
   

  	
   

  	
   

  
	
  SECTION 27.

  	
  SUPPLEMENTS AND AMENDMENTS

  	
  31

  
	
   

  	
   

  	
   

  
	
  SECTION 28.

  	
  DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS,
  ETC.

  	
  31

  
	
   

  	
   

  	
   

  
	
  SECTION 29.

  	
  SUCCESSORS

  	
  32

  
	
   

  	
   

  	
   

  
	
  SECTION 30.

  	
  BENEFITS OF THIS AGREEMENT

  	
  32

  

 1
 

 

	
  SECTION 31.

  	
  SEVERABILITY

  	
  32

  
	
   

  	
   

  	
   

  
	
  SECTION 32.

  	
  GOVERNING LAW

  	
  32

  
	
   

  	
   

  	
   

  
	
  SECTION 33.

  	
  COUNTERPARTS

  	
  32

  
	
   

  	
   

  	
   

  
	
  SECTION 34.

  	
  DESCRIPTIVE HEADINGS

  	
  32

  

 

 2

 

CERTIFICATE OF DESIGNATION

OF

SERIES C JUNIOR PARTICIPATING PREFERRED STOCK

(Pursuant to Section 151 of the

Delaware General Corporation Law)

TAPESTRY PHARMACEUTICALS, INC.,
a corporation organized and existing under the General Corporation
Law of the State of Delaware (hereinafter called the “Company”),
hereby certifies that the following resolution was adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law at a meeting duly called and held on December 12, 2006:

RESOLVED,
that pursuant to the authority granted to and vested in the Board of
Directors of the Company in accordance with the provisions of its Second
Amended and Restated Certificate of Incorporation, the Board of Directors
hereby creates a series of Preferred Stock, par value $0.001 per share, of the
Company and hereby states the designation and number of shares, and fixes the
relative designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof (in addition to the
provisions set forth in the Certificate of Incorporation of the Company, which
are applicable to the Preferred Stock of all classes and series), as follows:

Series C Junior Participating Preferred Stock:

Section
1.              Designation and
Amount.  One hundred
thousand (100,000) shares of Preferred Stock, $0.001 par value, are designated “Series
C Junior Participating Preferred Stock” with the designations and the powers,
preferences and rights, and the qualifications, limitations and restrictions
specified herein (the “Junior Preferred Stock”).  Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Junior Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights
or warrants or upon the conversion of any outstanding securities issued by the
Company convertible into Junior Preferred Stock.

 1
 

 

Section
2.              Dividends and
Distributions.

(A)          Subject to the
rights of the holders of any shares of any series of Preferred Stock (or any
similar stock) ranking prior and superior to the Junior Preferred Stock with
respect to dividends, the holders of shares of Junior Preferred Stock, in
preference to the holders of Common Stock, par value $0.0075 per share (the “Common Stock”), of the Company, and
of any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of April, July,
October and January in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Junior Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a)
$l.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Junior Preferred Stock.  In the
event the Company shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Junior Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.

(B)          The Company shall
declare a dividend or distribution on the Junior Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in shares of
Common Stock); provided, that in the event no
dividend or distribution shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Junior
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.

(C)          Dividends shall
begin to accrue and be cumulative on outstanding shares of Junior Preferred
Stock from the Quarterly Dividend Payment Date next preceding the date of issue
of such shares, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Junior Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date.  Accrued but unpaid dividends shall not bear
interest.  Dividends paid on the shares
of Junior Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro

 2
 

 

rata on a share-by-share basis among all such shares
at the time outstanding.  The Board of
Directors may fix a record date for the determination of holders of shares of
Junior Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.

Section
3.              Voting Rights.  The holders of shares of
Junior Preferred Stock shall have the following voting rights:

(A)          Subject to the
provision for adjustment hereinafter set forth, each share of Junior Preferred
Stock shall entitle the holder thereof to 1,000 votes on all matters submitted
to a vote of the stockholders of the Company. 
In the event the Company shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a subdivision
or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Junior
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

(B)          Except as otherwise
provided herein, in any other Certificate of Designation creating a series of
Preferred Stock or any similar stock, or by law, the holders of shares of
Junior Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Company having general voting rights shall vote together
as one class on all matters submitted to a vote of stockholders of the Company.

(C)          Except as set forth
herein, or as otherwise provided by law, holders of Junior Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.

Section
4.              Certain Restrictions.

(A)          Whenever quarterly
dividends or other dividends or distributions payable on the Junior Preferred
Stock as provided in Section 2 are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Junior Preferred Stock outstanding shall have been paid in full, the
Company shall not:

(i)            declare or pay
dividends, or make any other distributions, on any shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Junior Preferred Stock;

(ii)           declare or pay
dividends, or make any other distributions, on any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Junior Preferred Stock, except dividends paid ratably on the Junior
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;

 3
 

 

(iii)         redeem or purchase or
otherwise acquire for consideration shares of any stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Junior
Preferred Stock, provided that the Company may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares of any
stock of the Company ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Junior Preferred Stock; or

(iv)          redeem or purchase
or otherwise acquire for consideration any shares of Junior Preferred Stock, or
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Junior Preferred Stock, except
in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.

(B)          The Company shall
not permit any subsidiary of the Company to purchase or otherwise acquire for
consideration any shares of stock of the Company unless the Company could,
under paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.

Section
5.              Reacquired Shares.  Any shares of Junior
Preferred Stock purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof.  All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock subject to the
conditions and restrictions on issuance set forth herein, in the Second Amended
and Restated Certificate of Incorporation, or in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock or as
otherwise required by law.

Section
6.              Liquidation, Dissolution
or Winding Up.  Upon
any liquidation, dissolution or winding up of the Company, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Junior
Preferred Stock unless, prior thereto, the holders of shares of Junior
Preferred Stock shall have received $1,000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares of
Junior Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock, or (2) to the holders of shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Junior Preferred Stock, except distributions made ratably on the
Junior Preferred Stock and all such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. 
In the event the Company shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a subdivision
or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares 

 4
 

 

of Common Stock, then in each such case the aggregate
amount to which holders of shares of Junior Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

Section
7.              Consolidation, Merger,
Etc.  In case the
Company shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case each share of Junior Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the provision
for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged.  In the event the Company
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of shares of
Junior Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.

Section
8.              No Redemption.  The shares of Junior
Preferred Stock shall not be redeemable.

Section
9.              Rank.  The Junior Preferred Stock
shall rank, with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the Company’s Preferred
Stock.

Section
10.            Amendment.  The Second Amended and
Restated Certificate of Incorporation of the Company shall not be amended in
any manner which would materially alter or change the powers, preferences or
special rights of the Junior Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Junior Preferred Stock, voting together as a single
class.

 5
 

 

IN WITNESS WHEREOF,  the undersigned have executed
this certificate as of December 13, 2006.

 

	
  

  	
   

  
	
   

  	
  Name:

  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  Title:

  

 

 6

 

Exhibit B to Rights Agreement

	
  FORM OF RIGHT CERTIFICATE

  
	
   

  
	
  Certificate No. R-

  	
           
  Rights

  

 

NOT EXERCISABLE AFTER DECEMBER 29, 2016 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS, UNLESS SUCH DATE IS EXTENDED. 
THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER RIGHT AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.

RIGHT CERTIFICATE

TAPESTRY PHARMACEUTICALS, INC.

This certifies that                                
or registered assigns, is the registered owner of the number of Rights set
forth above, each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Rights Agreement, dated as of December 12, 2006
(the “Rights Agreement”), between Tapestry
Pharmaceuticals, Inc., a Delaware corporation (the “Company”),
and American Stock Transfer & Trust Company 
(the “Rights Agent”), to purchase
from the Company at any time after the Distribution Date (as such term is
defined in the Rights Agreement) and prior to 5:00 p.m., Eastern time, on December 29, 2016,
unless such date is extended in accordance with the Rights Agreement, at the
office of the Rights Agent designated for such purpose, or at the office of its
successor as Rights Agent, one one-thousandth of a fully paid non-assessable share
of Series C Junior Participating Preferred Stock, par value $0.001 per share
(the “Preferred Shares”), of the
Company, at a purchase price of $16.00 per one one-thousandth of a Preferred
Share (the “Purchase Price”), upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase duly executed.  The number of
Rights evidenced by this Right Certificate (and the number of one one-thousandths
of a Preferred Share which may be purchased upon exercise hereof) set forth
above, and the Purchase Price set forth above, are the number and Purchase
Price as of December 29, 2006, based on the Preferred Shares as constituted at
such date.

From and after the time any Person becomes an
Acquiring Person, (as such terms are defined in the Rights Agreement), if the
Rights evidenced by this Right Certificate are beneficially owned by
(i) an Acquiring Person or an Affiliate or Associate of any such Acquiring
Person (as such terms are defined in the Rights Agreement), (ii) a transferee
of any such Acquiring Person, Associate or Affiliate who becomes a transferee
after the Acquiring Person becomes such, or (iii) under certain
circumstances specified in the Rights Agreement, a transferee of any such
Acquiring Person, Associate or Affiliate who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such, such Rights shall become
null and void without any further action and no holder hereof shall have any
right with respect to such Rights from and after the time any Person becomes an
Acquiring Person.

As provided in the Rights Agreement, the Purchase
Price and the number of one one-thousandths of a Preferred Share which may be
purchased upon the exercise of the Rights 

 B-1
 

 

evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.

This Right Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, as amended from time to
time, which terms, provisions and conditions are hereby incorporated herein by
reference and made a part hereof and to which Rights Agreement reference is
hereby made for a full description of the rights, limitations of rights,
obligations, duties and immunities hereunder of the Rights Agent, the Company
and the holders of the Right Certificates. 
Copies of the Rights Agreement are on file at the principal executive
offices of the Company and the above-mentioned offices of the Rights Agent.

This Right Certificate, with or without other Right
Certificates, upon surrender at the office of the Rights Agent designated for
such purpose, may be exchanged for another Right Certificate or Right
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of Preferred Shares as the Rights evidenced by
the Right Certificate or Right Certificates surrendered shall have entitled
such holder to purchase.  If this Right
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Right Certificate or Right Certificates for the
number of whole Rights not exercised.

Subject to the provisions of the Rights Agreement, the
Rights evidenced by this Certificate (i) may be redeemed by the Company at a
redemption price of $0.01 per Right or (ii) may be exchanged in whole or in
part for shares of the Company’s Common Stock, par value $0.0075 per share, or,
upon circumstances set forth in the Rights Agreement, cash, property or other
securities of the Company, including fractions of a share of Preferred Stock.

No fractional Preferred Shares will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which
are integral multiples of one one-thousandth of a Preferred Share, which may,
at the election of the Company, be evidenced by depositary receipts) but in
lieu thereof a cash payment will be made, as provided in the Rights Agreement.

No holder of this Right Certificate shall be entitled
to vote or receive dividends or be deemed for any purpose the holder of the
Preferred Shares or of any other securities of the Company which may at any
time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote
for the election of directors or upon any matter submitted to stockholders at
any meeting thereof, or to give or withhold consent to any corporate action, or
to receive notice of meetings or other actions affecting stockholders (except
as provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.

This Right Certificate shall not be valid or
obligatory for any purpose until it shall have been countersigned by the Rights
Agent.

 B-2
 

 

WITNESS the
facsimile signature of the proper officers of the Company and its corporate
seal.  Dated as of the           
day of                            ,
200      .

	
  Attest:

  	
   

  	
  Tapestry
  Pharmaceuticals, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  Title:

  	
   

  	
  Name:

  Title:

  

 

COUNTERSIGNED:

AMERICAN
STOCK TRANSFER & TRUST COMPANY,

as Rights Agent

	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 B-3
 

 

Form of Reverse Side of Right Certificate

FORM OF ASSIGNMENT

(To
be executed by the registered holder if such

holder desires to transfer the Right Certificate.)

FOR VALUE RECEIVED                                                                              
hereby sells, assigns and transfers unto

 

	
  

  
	
  (Please print
  name and address of transferee)

  

 

                                                                                                                                     
this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint                                        
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.

	
  Dated:

  	
   

  	
   

  

 

 

	
  

  	
   

  
	
   

  	
  Signature

  

 

 B-4
 

 

Signature
Guaranteed:

Signatures must be guaranteed by an “eligible
guarantor institution” as defined in Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934, as amended.

 

The undersigned hereby certifies that (1) the
Rights evidenced by this Right Certificate are not being sold, assigned or
transferred by or on behalf of a Person who is or was an Acquiring Person, an
Interested Stockholder or an Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement); and (2) after due inquiry and to the
best of the knowledge of the 
undersigned, the undersigned did not acquire the Rights evidenced by
this Right Certificate from any Person who is or was an Acquiring Person, an
Interested Stockholder, or an Affiliate or Associate thereof.

 

	
  

  	
   

  
	
   

  	
  Signature

  

 

 B-5
 

 

FORM OF ELECTION TO PURCHASE

(To
be executed if holder desires to exercise

Rights represented by the Right Certificate.)

To
American Stock Transfer & Trust Company:

The undersigned hereby irrevocably elects to exercise                                                  
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares be issued in the name of:

Please
insert social security

or other identifying number:                                  

 

	
  

  
	
  (Please print
  name and address)

  
	
   

  
	
   

  

 

 

If such number of Rights shall not be all the Rights
evidenced by this Right Certificate, a new Right Certificate for the balance
remaining of such Rights shall be registered in the name of and delivered to:

Please
insert social security

or other identifying number:                        

 

	
  

  
	
  (Please print
  name and address)

  
	
   

  
	
   

  

 

 

	
  Dated:

  	
   

  	
   

  

 

 

	
  

  	
   

  
	
   

  	
  Signature

  

 

 B-6
 

 

SIGNATURE
GUARANTEED:

Signatures must be guaranteed by an “eligible
guarantor institution” as defined in Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934, as amended.

 

The undersigned hereby certifies that (1) the Rights
evidenced by this Right Certificate are not beneficially owned by nor are they
being exercised on behalf of an Acquiring Person, an Interested Stockholder or
an Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement); and (2) after due inquiry and to the best of the knowledge of
the undersigned, the undersigned did not acquire the Rights evidenced by this
Right Certificate from any Person who is or was an Acquiring Person, an
Interested Stockholder, or an Affiliate or Associate thereof.

 

	
  

  	
   

  
	
   

  	
  Signature

  

 

 

NOTICE

The signature in the Form of Assignment or Form of
Election to Purchase, as the case may be, must conform to the name as written
upon the face of this Right Certificate in every particular, without alteration
or enlargement or any change whatsoever.

In the event the certification set forth above in the
Form of Assignment or the Form of Election to Purchase, as the case may be, is
not completed, the Company and the Rights Agent will deem the beneficial owner
of the Rights evidenced by this Right Certificate to be an Acquiring Person or
an Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.

 B-7

 

Exhibit C to Rights Agreement

TAPESTRY PHARMACEUTICALS, INC.

SUMMARY OF RIGHTS TO
PURCHASE

PREFERRED SHARES

On December 12, 2006, the Board of Directors of TAPESTRY PHARMACEUTICALS, INC.
(the “Company”) declared a dividend
of one preferred share purchase right (a “Right”) for
each outstanding share of common stock, par value $0.0075 per share (the “Common Shares”), of the
Company.  The dividend is effective as of
December 29, 2006 (the “Record Date”)
with respect to the stockholders of record on that date.  The Rights will also attach to new Common
Shares issued after the Record Date. 
Each Right entitles the registered holder to purchase from the Company
one one-thousandth of a share of Series C Junior Participating Preferred Stock,
par value $0.001 per share (the “Preferred Shares”),
of the Company at a price of $16.00  per
one one-thousandth of a Preferred Share (the “Purchase
Price”), subject to adjustment. 
Each Preferred Share is designed to be the economic equivalent of 1,000
Common Shares.  The description and terms
of the Rights are set forth in a Rights Agreement dated as of December 12, 2006
(the “Rights Agreement”), between
the Company and American Stock Transfer & Trust Company (the “Rights Agent”).

Detachment
and Transfer of Rights

Initially, the Rights will be evidenced by the stock
certificates representing Common Shares then outstanding, and no separate Right
Certificates will be distributed.  Until
the earlier to occur of (i) a public announcement that a person or group of
affiliated or associated persons, has become an “Acquiring Person” (as such
term is defined in the Rights Agreement) or (ii) 10 business days (or such
later date as the Board may determine) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer which
would result in the beneficial ownership by an Acquiring Person of 15% or more
of the outstanding Common Shares (the earlier of such dates being called the “Distribution Date”), the Rights will
be evidenced, with respect to any of the Common Share certificates outstanding
as of the Record Date, by such Common Share certificate.  In general, an “Acquiring Person” is a
person, the affiliates or associates of such person, or a group, which has
acquired beneficial ownership of 15% or more of the outstanding Common Shares; provided that certain “Excluded Stockholders” as defined in
the Rights Agreement may have greater beneficial ownership without becoming an “Acquiring
Person”.

The Rights Agreement provides that, until the
Distribution Date (or earlier redemption or expiration of the Rights), the
Rights will be transferable with and only with the Common Shares.  Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share certificates issued
after the Record Date upon transfer or new issuance of Common Shares will
contain a notation incorporating the Rights Agreement by reference.  Until the Distribution Date (or earlier
redemption or expiration of the Rights) the surrender or transfer of any
certificates for Common Shares outstanding as of the Record Date, even without
such notation or a copy of this Summary of Rights being attached thereto, will
also constitute the transfer of the Rights associated with the Common Shares
represented by such certificate.  As soon
as practicable following the Distribution Date, separate certificates
evidencing the Rights (“Right

 C-1
 

 

Certificates”)
will be mailed to holders of record of the Common Shares as of the close of
business on the Distribution Date and such separate Right Certificates alone
will evidence the Rights.

Exercisability of Rights

The Rights are not exercisable until the Distribution
Date.  The Rights will expire on December
29, 2016 (the “Final Expiration Date”),
unless the Final Expiration Date is extended or unless the Rights are earlier
redeemed or exchanged by the Company, in each case as described below.  Until a Right is exercised, the holder
thereof, as such, will have no rights as a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends.

The Purchase Price payable, and the number of
Preferred Shares or other securities or property issuable or payable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution.  The number of outstanding
Rights and the number of one one-thousandths of a Preferred Share issuable upon
exercise of each Right are also subject to adjustment in the event of a stock
split of the Common Shares or a stock dividend on the Common Shares payable in
Common Shares, or subdivisions, consolidations or combinations of the Common
Shares occurring, in any such case, prior to the Distribution Date.  With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price.  No fractional Preferred Shares will be issued
(other than fractions which are integral multiples of one one-thousandth of a
Preferred Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.

Terms
of Preferred Shares

Preferred Shares purchasable upon exercise of the Rights
will not be redeemable.  Each Preferred
Share will be entitled to a minimum preferential quarterly dividend payment of
$l per share but will be entitled to an aggregate dividend of 1,000 times the
dividend declared per Common Share.  In
the event of liquidation, the holders of the Preferred Shares will be entitled
to a minimum preferential liquidation payment of $1,000 per share but will be
entitled to an aggregate payment of 1,000 times the payment made per Common
Share.  Each Preferred Share will have 1,000
votes, voting together with the Common Shares. 
Finally, in the event of any merger, consolidation or other transaction
in which Common Shares are exchanged, each Preferred Share will be entitled to
receive 1,000 times the amount received per Common Share.  These rights are protected by customary
anti-dilution provisions.  Because of the
nature of the Preferred Shares’ dividend, liquidation and voting rights, the
value of the one one-thousandth interest in a Preferred Share purchasable upon
exercise of each Right should approximate the value of one Common Share.  The Preferred Shares would rank junior to any
other series of the Company’s preferred stock.

 C-2
 

 

TRIGGER
OF FLIP-IN AND FLIP-OVER RIGHTS

In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, proper provision shall be made
so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person or any affiliate or associate thereof (which will thereafter
be void), will thereafter have the right to receive upon exercise that number
of Common Shares having a market value of two times the exercise price of the
Right.  This right will commence on the
date of public announcement that a person has become an Acquiring Person (or
the effective date of a registration statement relating to distribution of the
rights, if later) and terminate 60 days later (subject to adjustment in the
event exercise of the rights is enjoined).

In the event that the Company is acquired in a merger
or other business combination transaction or 50% or more of its consolidated
assets or earning power are sold to an Acquiring Person, its affiliates or
associates or certain other persons in which such persons have an interest,
proper provision will be made so that each such holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the Right.

Redemption
and Exchange of Rights

At any time prior to the earliest of (i) the
close of business on the day of the first public announcement that a person has
become an Acquiring Person, or (ii) the Final Expiration Date, the Board
of Directors of the Company may redeem the Rights in whole, but not in part, at
a price of $0.01 per Right (the “Redemption Price”).  In general, the redemption of the Rights may
be made effective at such time on such basis with such conditions as the Board
of Directors in its sole discretion may establish  Immediately upon any redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.

At any time after any Person becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by such person or group which will
have become void), in whole or in part, at an exchange ratio of one Common
Share, or, under circumstances set forth in the Rights Agreement, cash,
property or other securities of the Company, including fractions of a Preferred
Share (or of a share of a class or series of the Company’s preferred stock
having equivalent designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions), per Right (with value equal to
such Common Shares).

Amendment
of Rights

The terms of the Rights generally may be amended by
the Board of Directors of the Company without the consent of the holders of the
Rights, except that from and after such time as the Rights are distributed no
such amendment may adversely affect the interests of the holders of the Rights
(excluding the interest of any Acquiring Person).

 C-3
 

 

Additional
Information

A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to a Current Report on
Form 8-K dated December 14, 2006.  A copy
of the Rights Agreement is available from the Company by writing to:  4840 Pearl East Circle, 300W, Boulder, CO
80301, Attn:  General Counsel.  This summary description of the Rights is not
intended to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.

 C-4Exhibit
10.27

MOTHERS
WORK, INC.

2005
EQUITY INCENTIVE PLAN

(As amended
through October 9, 2006)

SECTION 1.         Purpose; Definitions.  The purposes of the Mothers Work, Inc. 2005
Equity Incentive Plan (the “Plan”) are to: (a) enable Mothers Work,
Inc. (the “Company”) and its affiliated companies to recruit and retain
highly qualified personnel; (b) provide those personnel with an incentive
for productivity; and (c) provide those personnel with an opportunity to
share in the growth and value of the Company.

For purposes of the Plan, the following terms will
have the meanings defined below, unless the context clearly requires a
different meaning:

(a)   “Affiliate” means, with respect to a Person, a Person that
directly or indirectly controls, is controlled by, or is under common control
with such Person.

(b)   “Award” means an award of Options, SARs, Restricted Stock
or Restricted Stock Units made under this Plan.

(c)   “Award Agreement” means, with respect to any particular
Award, the written document that sets forth the terms of that particular Award.

(d)   “Board” means the Board of Directors of the Company, as
constituted from time to time; provided,
however, that if the Board appoints a Committee to perform some or
all of the Board’s administrative functions hereunder, references to the “Board”
will be deemed to also refer to that Committee in connection with matters to be
performed by that Committee.

(e)   “Cause” means (i) conviction of, or the entry of a
plea of guilty or no contest to, a felony or any other crime that causes the
Company or its Affiliates public disgrace or disrepute, or adversely affects
the Company’s or its Affiliates’ operations or financial performance,
(ii) gross negligence or willful misconduct with respect to the Company or
any of its Affiliates, including, without limitation fraud, embezzlement, theft
or proven dishonesty in the course of employment; (iii) alcohol abuse or
use of controlled drugs other than in accordance with a physician’s
prescription; or (iv) material breach of any agreement with or duty owed
to the Company or any of its Affiliates. 
Notwithstanding the foregoing, if a Participant and the Company (or any
of its Affiliates) have entered into an employment agreement, consulting
agreement or other similar agreement that specifically defines “cause,” then
with respect to such Participant, “Cause” shall have the meaning defined in
that employment agreement, consulting agreement or other agreement.

(f)    “Change
in Control” means the occurrence of any of the following, in one
transaction or a series of related transactions: (i) any “person” (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act) becoming a “beneficial
owner” (as defined in Rule 13d-3 

 

 

under the Exchange Act),
directly or indirectly, of securities of the Company representing more than 50%
of the voting power of the Company’s then outstanding securities; (ii) a consolidation, share exchange,
reorganization or merger of the Company resulting in the stockholders of the
Company immediately prior to such event not owning at least a majority of the
voting power of the resulting entity’s securities outstanding immediately
following such event; (iii) the sale or other disposition of all or
substantially all the assets of the Company, (iv) a liquidation or dissolution
of the Company, or (v) any similar event deemed by the Board to constitute a
Change in Control for purposes of this Plan.

(g)   “Code” means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.

(h)   “Committee” means a committee appointed by the Board in
accordance with Section 2 of the Plan.

(i)    “Director” means a member of the Board.

(j)    “Disability” means a condition rendering a Participant
Disabled.

(k)   “Disabled” will have the same meaning as set forth in
Section 22(e)(3) of the Code.

(l)    “Exchange Act” means the Securities Exchange Act of 1934,
as amended.

(m)  “Fair Market Value” means, as of any date: (i) if the
Shares are not then publicly traded, the value of such Shares on that date, as
determined by the Board in its sole and absolute discretion; or (ii) if
the Shares are publicly traded, the closing price for a Share on the principal
national securities exchange on which the Shares are listed or admitted to
trading or, if the Shares are not listed or admitted to trading on any national
securities exchange, but are traded in the over-the-counter market, the closing
sale price of a Share or, if no sale is publicly reported, the average of the
closing bid and asked quotations for a Share, as reported by The Nasdaq Stock
Market, Inc. (“Nasdaq”) or any comparable system or, if the Common Stock
is not listed on Nasdaq or a comparable system, the closing sale price of a
Share or, if no sale is publicly reported, the average of the closing bid and
asked prices, as furnished by two members of the National Association of
Securities Dealers, Inc. who make a market in the Common Stock selected from
time to time by the Company for that purpose.

(n)   “Incentive Stock Option” means any Option intended to be an
“Incentive Stock Option” within the meaning of Section 422 of the Code.

(o)   “Non-Employee
Director” will have the meaning set forth in Rule 16b-3(b)(3)(i)
promulgated by the Securities and Exchange Commission under the Exchange Act,
or any successor definition adopted by the Securities and Exchange Commission; provided, however, that the Board or the
Committee may, to the extent that it deems necessary to comply with
Section 162(m) of the Code or regulations thereunder, require that each “Non-Employee
Director” also be an “outside director” as that term is defined in regulations
under Section 162(m) of the Code.

 2
 

 

 

(p)   “Non-Qualified Stock Option” means any Option that is not
an Incentive Stock Option.

(q)   “Option” means any option to purchase Shares (including
Restricted Stock, if the Board so determines) granted pursuant to Section 5
hereof.

(r)    “Parent” means, in respect of the Company, a “parent
corporation” as defined in Sections 424(e) of the Code

(s)   “Participant” means an employee, consultant, Director, or
other service provider of or to the Company or any of its respective Affiliates
to whom an Award is granted.

(t)    “Person” means an individual, partnership, corporation,
limited liability company, trust, joint venture, unincorporated association, or
other entity or association.

(u)   “Restricted Stock” means Shares that are subject to
restrictions pursuant to Section 8 hereof.

(v)   “Restricted Stock Unit” means a right granted under and subject to restrictions pursuant to Section
8 hereof.

(w)  “SAR”
means a stock appreciation right granted under the Plan and described in Section
6 hereof.

(x)    “Shares” means shares of the Company’s common stock, par
value $.01, subject to substitution or adjustment as provided in Section
3(c) hereof.

(y)   “Subsidiary” means, in respect of the Company, a subsidiary
company as defined in Sections 424(f) and (g) of the Code.

SECTION 2.         Administration.  The Plan will be administered by the Board; provided, however, that the Board may at
any time appoint a Committee to perform some or all of the Board’s
administrative functions hereunder; and
provided further, that the authority of any Committee appointed
pursuant to this Section 2 will be subject to such terms and conditions
as the Board may prescribe and will be coextensive with, and not in lieu of,
the authority of the Board hereunder.

Subject to the
requirements of the Company’s by-laws and certificate of incorporation any
other agreement that governs the appointment of Board committees, any Committee
established under this Section 2 will be composed of not fewer than two
members, each of whom will serve for such period of time as the Board
determines; provided, however,
that if the Company has a class of securities required to be registered under
Section 12 of the Exchange Act, all members of any Committee established
pursuant to this Section 2 will be Non-Employee Directors.  From time to time the Board may increase the
size of the Committee and appoint additional members thereto, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and thereafter
directly administer the Plan.

 3
 

 

 

The Board will have full authority to grant Awards
under this Plan and determine the terms of such Awards.  Such authority will include the right to:

(a)   select the persons to whom Awards are granted (consistent with the
eligibility conditions set forth in Section 4);

(b)   determine the type of Award to be granted;

(c)   determine the number of Shares, if any, to be covered by each
Award;

(d)   establish the vesting or forfeiture terms of each Award;

(e)   determine whether and under what circumstances an Option may be
exercised without a payment of cash under Section 5(d); and

(f)    determine whether, to what extent and under what circumstances
Shares and other amounts payable with respect to an Award may be deferred
either automatically or at the election of the Participant.

The Board will have the authority to adopt, alter and
repeal such administrative rules, guidelines and practices governing the Plan
as it, from time to time, deems advisable; to establish the terms and form of
each Award Agreement; to interpret the terms and provisions of the Plan and any
Award issued under the Plan (and any Award Agreement); and to otherwise supervise
the administration of the Plan.  The
Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any Award Agreement in the manner and to the
extent it deems necessary to carry out the intent of the Plan.

All decisions made by the Board pursuant to the
provisions of the Plan will be final and binding on all persons, including the
Company and Participants.  No Director
will be liable for any good faith determination, act or omission in connection
with the Plan or any Award.

SECTION
3.         Shares Subject to the Plan.

(a)   Shares Subject to the Plan. 
The Shares to be subject to or related to Awards under the Plan will be
authorized and unissued Shares of the Company, whether or not previously issued
and subsequently acquired by the Company. 
The maximum number of Shares that may be issued in respect of Awards
under the Plan is 500,000.  The Company
will reserve for the purposes of the Plan, out of its authorized and unissued
Shares, such number of Shares. 
Notwithstanding the foregoing, no individual may granted Options or SARs
with respect to more than 200,000 Shares in any calendar year.  In addition, not more than 250,000 Shares
will be issued hereunder in respect of Restricted Stock or Restricted Stock
Units

(b)   Effect
of the Expiration or Termination of Awards. 
If and to the extent that an Option or SAR expires, terminates or is
canceled or forfeited for any reason without having been exercised in full, the
Shares associated with that Option or SAR will again become available for grant
under the Plan.  Similarly, if and to the
extent an Award of Restricted Stock or Restricted Stock Unit is canceled,
forfeited or repurchased for any reason, the Shares subject to that Award

 4
 

 

 

will again become
available for grant under the Plan.  In
addition, if any Share is withheld pursuant to Section 11(e) in
settlement of a tax withholding obligation associated with an Award, that Share
will again become available for grant under the Plan.

(c)   Other Adjustment.  In
the event of any recapitalization, stock split or combination, stock dividend,
spin-off, merger, reorganization or other similar event or transaction
affecting the Shares, substitutions or adjustments will be made by the Board to
the aggregate number, class and/or issuer of the securities that may be issued
under the Plan, to the number, class and/or issuer of securities subject to
outstanding Awards, and to the exercise price of outstanding Options or SARs,
in each case in a manner that reflects equitably the effects of such event or
transaction.

(d)   Change in Control. 
Notwithstanding anything to the contrary set forth in the Plan, upon or
in anticipation of any Change in Control, the Board may, in its sole and
absolute discretion and without the need for the consent of any Participant,
take one or more of the following actions contingent upon the occurrence of
that Change in Control: (i) cause any or all outstanding Options or SARs to
become vested and/or immediately exercisable, in whole or in part; (ii) cause
any or all outstanding Restricted Stock or Restricted Stock Units to become non-forfeitable, in whole or in part; (iii)
cancel any Option in exchange for a substitute option in a manner consistent
with the requirements of Treas. Reg. §1.424-1(a) (notwithstanding the
fact that the original Option may never have been intended to satisfy the
requirements for treatment as an Incentive Stock Option); (iv) cancel any
Restricted Stock, Restricted Stock Units or SAR in exchange for restricted
stock, restricted stock units or stock appreciation rights in respect of the
capital stock of any successor corporation or its parent; (v) cancel any Option
or SAR in exchange for cash and/or other substitute consideration with a value
equal to (A) the number of Shares subject to that Option or SAR, multiplied by
(B) the difference, if any, between the Fair Market Value per Share on the date
of the Change in Control and the exercise price of that Option or SAR; provided, that if the Fair Market Value per Share on the
date of the Change in Control does not exceed the exercise price of any such
Option or SAR, the Board may cancel that Option or SAR without any payment of
consideration therefor; or (vi) cancel any Restricted Stock Unit in exchange
for cash and/or other substitute consideration with a value equal to the Fair
Market Value per Share on the date of the Change in Control.  In the discretion of the Board, any cash or
substitute consideration payable upon cancellation of an Award may be subjected
to vesting terms substantially identical to those that applied to the cancelled
Award immediately prior to the Change in Control.

SECTION 4.         Eligibility.  Employees, Directors, consultants, and other
individuals who provide services to the Company or its Affiliates are eligible
to be granted Awards under the Plan; provided, however,
that only employees of the Company, its Parent or a Subsidiary are eligible to
be granted Incentive Stock Options.

SECTION
5.         Options.  Options granted under the Plan may be of two
types: (i) Incentive Stock Options or (ii) Non-Qualified Stock
Options.  Any Option granted under the
Plan will be in such form as the Board may at the time of such grant
approve.  Without limiting the generality
of Section 3(a), any or all of the Shares reserved for issuance under Section
3(a) may be issued in respect of Incentive Stock Options.

 5
 

 

 

The Award Agreement evidencing any Option will
incorporate the following terms and conditions and will contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the Board
deems appropriate in its sole and absolute discretion:

(a)   Option Price.  The
exercise price per Share purchasable under any Option will be determined by the
Board and will not be less than 100% of the Fair Market Value per Share on the
date of the grant.  However, any
Incentive Stock Option granted to any Participant who, at the time the Option
is granted, owns more than 10% of the voting power of all classes of shares of
the Company, its Parent or a Subsidiary will have an exercise price per Share
of not less than 110% of Fair Market Value per Share on the date of the grant.

(b)   Option Term.  The
term of each Option will be fixed by the Board, but no Option will be
exercisable more than 10 years after the date the Option is granted.  However, any Incentive Stock Option granted
to any Participant who, at the time such Option is granted, owns more than 10%
of the voting power of all classes of shares of the Company, its Parent or a
Subsidiary may not have a term of more than five years.  No Option may be exercised by any person
after expiration of the term of the Option.

(c)   Exercisability. 
Options will vest and be exercisable at such time or times and subject
to such terms and conditions as determined by the Board.

(d)   Method of Exercise. 
Subject to the terms of the applicable Award Agreement, the
exercisability provisions of Section 5(c) and the termination provisions
of Section 7, Options may be exercised in whole or in part from time to
time during their term by the delivery of written notice to the Company
specifying the number of Shares to be purchased.  Such notice will be accompanied by payment in
full of the purchase price, either by certified or bank check, or such other
means as the Board may accept.  As
determined by the Board, in its sole discretion, payment of the exercise price
of an Option may be made in the form of previously acquired Shares based on the
Fair Market Value of the Shares on the date the Option is exercised; provided, however, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of previously
acquired Shares may be authorized only at the time the Option is granted.

No Shares will be issued upon exercise of an Option
until full payment therefor has been made. 
A Participant will not have the right to distributions or dividends or
any other rights of a stockholder with respect to Shares subject to the Option
until the Participant has given written notice of exercise, has paid in full
for such Shares, if requested, has given the representation described in Section
11(a) hereof and fulfills such other conditions as may be set forth in the
applicable Award Agreement.

(e)   Incentive
Stock Option Limitations.  In the
case of an Incentive Stock Option, the aggregate Fair Market Value (determined
as of the time of grant) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by the Participant during any
calendar year under the Plan and/or any other plan of the Company, its Parent
or any Subsidiary will not exceed $100,000. 
For purposes of applying the foregoing limitation, Incentive Stock
Options will be taken into account in the order granted.  To the extent any Option does not meet such
limitation, that Option will be treated for all purposes as a Non-Qualified
Stock Option.

 6
 

 

 

(f)    Termination of Service. 
Unless otherwise specified in the applicable Award Agreement, Options
will be subject to the terms of Section 7 with respect to exercise upon
or following termination of employment or other service.

(g)   Transferability of Options. 
Except as may otherwise be specifically determined by the Board with
respect to a particular Option: (i) no Option will be transferable by the
Participant other than by will or by the laws of descent and distribution, and
(ii) during the Participant’s lifetime, an Option will be exercisable only by
the Participant (or, in the event of the Participant’s Disability, by his
personal representative).

SECTION 6.         Stock
Appreciation Rights.

(a)   Nature of Award. 
Upon the exercise of a SAR, its holder will be entitled to receive an
amount equal to the excess (if any) of: (i) the Fair Market Value of the
Shares covered by such SAR as of the date such SAR is exercised, over
(ii) the Fair Market Value of the Shares covered by such SAR as of the
date such SAR was granted.  Such amount
may be paid in either cash and/or Shares, as determined by the Board in its
sole and absolute discretion.

(b)   Terms and Conditions. 
The Award Agreement evidencing any SAR will incorporate the following
terms and conditions and will contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board deems appropriate in its
sole and absolute discretion:

(i)            Term
of SAR.  Unless otherwise specified
in the Award Agreement, the term of a SAR will be ten years.

(ii)           Exercisability.  SARs will vest and become exercisable at such
time or times and subject to such terms and conditions as will be determined by
the Board at the time of grant.

(iii)          Method
of Exercise.  Subject to terms of the
applicable Award Agreement, the exercisability provisions of Section
6(b)(ii)and the termination provisions of Section 7, SARs may be
exercised in whole or in part from time to time during their term by delivery
of written notice to the Company specifying the portion of the SAR to be
exercised.

(iv)          Termination
of Service.  Unless otherwise
specified in the Award Agreement, SARs will be subject to the terms of Section
7 with respect to exercise upon termination of employment or other service.

(v)           Non-Transferability.  Except as may otherwise be specifically
determined by the Board with respect to a particular SAR: (A) SARs may not be
sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in
any manner either voluntarily or involuntarily by operation of law, other than
by will or by the laws of descent or distribution, and (B) during the
Participant’s lifetime, SARs will be exercisable only by the Participant (or,
in the event of the Participant’s Disability, by his personal representative).

SECTION
7.         Termination of Service.  Unless
otherwise specified with respect to a particular Option or SAR in the
applicable Award Agreement, Options or SARs granted

 7
 

 

 

hereunder will be
exercisable after termination of service only to the extent specified in this Section
7.

(a)   Termination by Reason of Death.  If a Participant’s service with the Company
or any Affiliate terminates by reason of death, any Option or SAR held by such
Participant may thereafter be exercised, to the extent then exercisable or on
such accelerated basis as the Board may determine at or after grant, by the
legal representative of the estate or by the legatee of the Participant under
the will of the Participant, for a period expiring (i) at such time as may
be specified by the Board at or after grant, or (ii) if not specified by
the Board, then 12 months from the date of death, or (iii) if sooner than
the applicable period specified under (i) or (ii) above, upon the
expiration of the stated term of such Option or SAR.

(b)   Termination by Reason of Disability.  If a Participant’s service with the Company
or any Affiliate terminates by reason of Disability, any Option or SAR held by
such Participant may thereafter be exercised by the Participant or his personal
representative, to the extent it was exercisable at the time of termination, or
on such accelerated basis as the Board may determine at or after grant, for a
period expiring (i) at such time as may be specified by the Board at or
after grant, or (ii) if not specified by the Board, then 12 months from
the date of termination of service, or (iii) if sooner than the applicable
period specified under (i) or (ii) above, upon the expiration of the stated
term of such Option or SAR.

(c)   Cause.  If a
Participant’s service with the Company or any Affiliate is terminated for
Cause: (i) any Option or SAR not already exercised will be immediately and
automatically forfeited as of the date of such termination, and (ii) any
Shares for which the Company has not yet delivered share certificates will be
immediately and automatically forfeited and the Company will refund to the
Participant the Option exercise price paid for such Shares, if any.

(d)   Other Termination. 
If a Participant’s service with the Company or any Affiliate terminates
for any reason other than death, Disability or Cause, any Option or SAR held by
such Participant may thereafter be exercised by the Participant, to the extent
it was exercisable at the time of such termination, or on such accelerated
basis as the Board may determine at or after grant, for a period expiring
(i) at such time as may be specified by the Board at or after grant, or
(ii) if not specified by the Board, then 90 days from the date of
termination of service, or (iii) if sooner than the applicable period
specified under (i) or (ii) above, upon the expiration of the stated term of
such Option or SAR.

SECTION 8.         Restricted Stock.

(a)   Issuance.  Restricted Stock may be issued either alone
or in conjunction with other Awards.  The
Board will determine the time or times within which Restricted Stock may be
subject to forfeiture, and all other conditions of such Awards.  The purchase price for Restricted Stock may,
but need not, be zero.  The prospective
recipient of an Award of Restricted Stock will not have any rights with respect
to such Award, unless and until such recipient has delivered to the Company an
executed Award Agreement and has otherwise complied with the applicable terms
and conditions of such Award.

 8
 

 

 

(b)   Certificates.  A
share certificate will be issued in connection with each Award of Restricted
Stock.  Such certificate will be
registered in the name of the Participant receiving the Award, and will bear
the following legend and/or any other legend required by this Plan, the Award
Agreement or by applicable law:

THE TRANSFERABILITY OF THIS
CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THE MOTHERS WORK, INC. 2005 EQUITY INCENTIVE PLAN AND AN AWARD
AGREEMENT ENTERED INTO BETWEEN [THE PARTICIPANT] AND MOTHERS WORK, INC.  COPIES OF THAT PLAN AND AGREEMENT ARE ON FILE
IN THE PRINCIPAL OFFICES OF MOTHERS WORK, INC. AND WILL BE MADE AVAILABLE TO
THE HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF
THE COMPANY.

Share certificates
evidencing Restricted Stock will be held in custody by the Company or in escrow
by an escrow agent until the restrictions thereon have lapsed.  As a condition to any Award of Restricted
Stock, the Participant may be required to deliver to the Company a share power,
endorsed in blank, relating to the Shares covered by such Award.

(c)   Restrictions and Conditions.  The Award Agreement evidencing the grant of
any Restricted Stock will incorporate the following terms and conditions and
such additional terms and conditions, not inconsistent with the terms of the
Plan, as the Board deems appropriate in its sole and absolute discretion:

(i)            During
a period commencing with the date of an Award of Restricted Stock and ending at
such time or times as specified by the Board (the “Restriction Period”),
the Participant will not be permitted to sell, transfer, pledge, assign or
otherwise encumber Restricted Stock awarded under the Plan.  The Board may condition the lapse of
restrictions on Restricted Stock upon the continued employment or service of
the recipient, the attainment of specified individual or corporate performance
goals, or such other factors as the Board may determine, in its sole and
absolute discretion.

(ii)           Except as provided
in this paragraph (ii) or the applicable Award Agreement, once the
Participant has been issued a certificate or certificates for Restricted Stock,
the Participant will have, with respect to the Restricted Stock, all of the
rights of a stockholder of the Company, including the right to vote the Shares,
and the right to receive any cash distributions or dividends.  The Board, in its sole discretion, may
require cash distributions or dividends to be subjected to the same Restriction
Period as is applicable to the Restricted Stock with respect to which such
amounts are paid, or, if the Board so determines, reinvested in additional
Restricted Stock to the extent Shares are available under Section 3(a)
of the Plan.  Any distributions or
dividends paid in the form of securities with respect to Restricted Stock will
be subject to the same terms and conditions as the Restricted Stock with
respect to which they were paid, including, without limitation, the same
Restriction Period.

 9
 

 

 

(iii)          Subject
to the provisions of the applicable Award Agreement, if a Participant’s service
with the Company and it Affiliates terminates prior to the expiration of the
applicable Restriction Period, the Participant’s Restricted Stock that then
remains subject to forfeiture will then be forfeited automatically.

(iv)          If
and when the Restriction Period expires without a prior forfeiture of the
Restricted Stock subject to such Restriction Period (or if and when the
restrictions applicable to Restricted Stock are removed pursuant to Section
3(d) or otherwise), the certificates for such Shares will be replaced with
new certificates, without the restrictive legends described in Section 8(b)
applicable to such lapsed restrictions, and such new certificates will be
delivered to the Participant, the Participant’s representative (if the
Participant has suffered a Disability), or the Participant’s estate or heir (if
the Participant has died).

SECTION 9.         Restricted Stock Units.  Subject to the other terms of the Plan, the Board may grant Restricted
Stock Units to eligible individuals and may impose conditions on such units as
it may deem appropriate.  Each Restricted
Stock Unit shall be evidenced by an Award Agreement in the form that is
approved by the Board and that is not inconsistent with the terms and conditions
of the Plan.  Each Restricted Stock Unit
will represent a right to receive from the Company, upon fulfillment of any
applicable conditions, an amount equal to the Fair Market Value (at the time of
the distribution) of one Share. 
Distributions may be made in cash and/or Shares.  All other terms governing Restricted Stock
Units, such as vesting, time and form of payment and termination of units shall
be set forth in the applicable Award Agreement.

SECTION 10.       Amendments
and Termination.  The Board may amend, alter or discontinue the
Plan at any time.  However, except as
otherwise provided in Section 3, no amendment, alteration or
discontinuation will be made which would impair the rights of a Participant
with respect to an Award without that Participant’s consent or which, without
the approval of such amendment within 365 days of its adoption by the Board by
the Company’s stockholders in a manner consistent with Treas. Reg. § 1.422-3,
would: (i) increase the total number of Shares reserved for issuance
hereunder, or (ii) change the persons or class of persons eligible to
receive Awards.

SECTION
11.       General Provisions.

(a)   The Board may require each Participant to represent to and agree
with the Company in writing that the Participant is acquiring securities of the
Company for investment purposes and without a view to distribution thereof and
as to such other matters as the Board believes are appropriate.

(b)   All
certificates for Shares or other securities delivered under the Plan will be
subject to such share-transfer orders and other restrictions as the Board may
deem advisable under the rules, regulations and other requirements of the
Securities Act of 1933, as amended, the Exchange Act, any stock exchange upon
which the Shares are then listed, and any other applicable federal or state
securities law, and the Board may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.

 10
 

 

 

(c)   Nothing contained in the Plan will prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required.

(d)   Neither the adoption of the Plan nor the execution of any document
in connection with the Plan will: (i) confer upon any employee of the
Company or an Affiliate any right to continued employment or engagement with
the Company or such Affiliate, or (ii) interfere in any way with the right
of the Company or such Affiliate to terminate the employment of any of its
employees at any time.

(e)   No later than the date as of which an amount first becomes
includible in the gross income of the Participant for federal income tax
purposes with respect to any Award under the Plan, the Participant will pay to
the Company, or make arrangements satisfactory to the Company regarding the
payment of, any federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. 
Unless otherwise determined by the Board, the minimum required
withholding obligations may be settled with Shares, including Shares that are
part of the Award that gives rise to the withholding requirement.  The obligations of the Company under the Plan
will be conditioned on such payment or arrangements and the Company will have
the right to deduct any such taxes from any payment of any kind otherwise due
to the Participant.

SECTION 12.       Effective
Date of Plan.  Subject to the approval of the Plan by the
Company’s stockholders within 12 months of the Plan’s adoption by the Board,
the Plan will become effective on the date that it is adopted by the Board.

SECTION 13.       Term
of Plan.  The Plan will continue in effect until
terminated in accordance with Section 10; provided, however, that no Incentive Stock Option will be
granted hereunder on or after the 10th anniversary of the date of stockholder
approval of the Plan (or, if the stockholders approve an amendment that
increases the number of shares subject to the Plan, the 10th anniversary of the date of such approval); but provided further, that Incentive Stock
Options granted prior to such 10th anniversary may extend beyond that date.

SECTION 14.       Invalid
Provisions.  In the
event that any provision of this Plan is found to be invalid or otherwise
unenforceable under any applicable law, such invalidity or unenforceability
will not be construed as rendering any other provisions contained herein as
invalid or unenforceable, and all such other provisions will be given full
force and effect to the same extent as though the invalid or unenforceable
provision was not contained herein.

SECTION
15.       Governing Law.  The Plan and all Awards granted hereunder
will be governed by and construed in accordance with the laws and judicial
decisions of the Commonwealth of Pennsylvania, without regard to the
application of the principles of conflicts of laws.

 11
 

 

 

SECTION 16.       Board
Action.  Notwithstanding anything to the contrary set
forth in the Plan, any and all actions of the Board or Committee, as the case
may be, taken under or in connection with the Plan and any agreements,
instruments, documents, certificates or other writings entered into, executed,
granted, issued and/or delivered pursuant to the terms hereof, will be subject
to and limited by any and all votes, consents, approvals, waivers or other
actions of all or certain stockholders of the Company or other persons required
by:

(a)   the Company’s Certificate of Incorporation (as the same may be
amended and/or restated from time to time);

(b)   the Company’s Bylaws (as the same may be amended and/or restated
from time to time); and

(c)   any other agreement, instrument, document or writing now or
hereafter existing, between or among the Company and its stockholders or other
persons (as the same may be amended from time to time).

SECTION
17.       Notices.  Any notice to be given to the Company
pursuant to the provisions of this Plan must be given in writing and addressed,
if to the Company, to its principal executive office to the attention of its
Chief Financial Officer (or such other person as the Company may designate in
writing from time to time), and, if to a Participant, to the address contained
in the Company’s personnel files, or at such other address as that Participant
may hereafter designate in writing to the Company.  Any such notice will be deemed duly given: if
delivered personally or via recognized overnight delivery service, on the date
and at the time so delivered; if sent via telecopier or email, on the date and
at the time telecopied or emailed with confirmation of delivery; or, if mailed,
five (5) days after the date of mailing by registered or certified mail.

 12

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