SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 3, 1998
Pharmos Corporation
(Exact name of registrant as specified in its charter)
Nevada 0-11550 13-3207413
(State or other jurisdiction Commission File Number (I.R.S. Employer)
of incorporation or organization) Identification Number)
101 East 52nd Street, 36th Floor, New York, NY 10022
(Address of principal executive offices) (zip code)
(212) 838-0087
(Registrant's telephone number including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
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Item 5 Other Events
Pharmos has raised $5 million in gross proceeds in a private placement of
convertible preferred stock and warrants to CC Investments, LDC, an
institutional investor. The preferred stock is convertible into common shares.
Gemini Capital, a division of R.D. Kushnir & Co., acted as placement agent in
the transaction.
Item 7 Exhibits
(a) Exhibits
*10.1 Form of Warrant dated as of February 4, 1998 between the Company and the
Investors and the Company and the Placement Agent
*10.2 Form of Registration Rights Agreement dated as of February 4, 1998
between the Company and the Investors
*10.3 Certificate of Designation of Series C Convertible Participating
Preferred Stock
*10.4 Form of Securities Purchase Agreement dated as of February 4, 1998
between the Company and the Investors
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* Filed herewith
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMOS CORPORATION
Date: February , 1998 /s/ Robert Cook
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Robert Cook
Chief Financial Officer
EXHIBIT 10.1
VOID AFTER 5:00 P.M. NEW YORK, NEW YORK
TIME ON February 4, 2003
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
Right to Purchase 100,000 Shares of
Common Stock, par value $.03 per share
Date: February 4, 1998
PHARMOS CORPORATION
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, the undersigned or its registered
assigns (each a "Holder"), is entitled to purchase from Pharmos Corporation, a
Nevada corporation (the "Company"), at any time or from time to time during the
period specified in Section 2 hereof, __________ fully paid and nonassessable
shares of the Company's common stock, par value $.03 per share (the "Common
Stock"), at an exercise price of _____ per share (the "Exercise Price"). This
Warrant is being issued pursuant to that certain Securities Purchase Agreement
dated as of January 30, 1998 between the Company and the signatories thereto
(the "Securities Purchase Agreement"). The number of shares of Common Stock
purchasable hereunder (the "Warrant Shares") and the Exercise Price are subject
to adjustment as provided in Section 4 hereof. The term "Warrants" means this
Warrant and the other warrants of the Company issued pursuant to the terms of
the Securities Purchase Agreement.
The term "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to Holder if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported sale price of such security in the over-the-counter market or the
electronic bulletin board of such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such
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date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the Company and reasonably acceptable to the
Holder with the costs of such appraisal to be borne by the Company.
This Warrant is subject to the following terms, provisions, and conditions:
1. Mechanics of Exercise. Subject to the provisions hereof, including, without
limitation, the limitations contained in Section 8(f) hereof, this Warrant
may be exercised as follows:
(a) Manner of Exercise. This Warrant may be exercised by the Holder,
in whole or in part, by the surrender of this Warrant (or evidence of loss,
theft, destruction or mutilation thereof in accordance with Section 8(c)
hereof), together with a completed exercise agreement in the Form of
Exercise Agreement attached hereto as Exhibit 1 (the "Exercise Agreement"),
to the Company at the Company's principal executive offices (or such other
office or agency of the Company as it may designate by notice to the
Holder), and upon (i) payment to the Company in cash, by certified or
official bank check or by wire transfer for the account of the Company, of
the Exercise Price for the Warrant Shares specified in the Exercise
Agreement or (ii) if the Holder elects to effect a Cashless Exercise (as
defined in Section 12(c) below), delivery to the Company of a written
notice of an election to effect a Cashless Exercise for the Warrant Shares
specified in the Exercise Agreement. The Warrant Shares so purchased shall
be deemed to be issued to the Holder or Holder's designees, as the record
owner of such shares, as of the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered,
and payment (or notice of an election to effect a Cashless Exercise) shall
have been made for such shares as set forth above.
(b) Issuance of Certificates. Subject to Section 1(c), certificates
for the Warrant Shares so purchased, representing the aggregate number of
shares specified in the Exercise Agreement, shall be delivered to the
Holder within a reasonable time, not exceeding four (4) business days,
after this Warrant shall have been so exercised (the "Delivery Period").
The certificates so delivered shall be in such denominations as may be
requested by the Holder and shall be registered in the name of Holder or
such other name as shall be designated by such Holder. If this Warrant
shall have been exercised only in part, then, unless this Warrant has
expired, the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the Holder a new Warrant representing the number
of shares with respect to which this Warrant shall not then have been
exercised.
(c) Exercise Disputes. In the case of any dispute with respect to an
exercise, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with this Section. If such dispute
involves the calculation of the Exercise Price, the Company shall submit
the disputed calculations to an independent accounting firm of national
standing, reasonably acceptable to the Holder and the Company via facsimile
within three (3) business days of receipt of the Exercise Agreement. The
accounting firm shall audit the calculations and notify the Company and the
converting Holder of the results no later than two
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(2) business days from the date it receives the disputed calculations. The
accounting firm's calculation shall be deemed conclusive, absent manifest error.
The Company shall then issue the appropriate number of shares of Common Stock in
accordance with this Section.
(d) Fractional Shares. No fractional shares of Common Stock are to be
issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Exercise Price of a
share of Common Stock; provided that in the event that sufficient funds are
not legally available for the payment of such cash adjustment any
fractional shares of Common Stock shall be rounded up to the next whole
number.
(e) Buy-In. If (i) the Company fails for any reason to deliver during
the Delivery Period shares of Common Stock to Holder upon an exercise of
this Warrant and (ii) after the applicable Delivery Period with respect to
such an exercise, Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to make delivery upon a sale by Holder of
the shares of Common Stock (the "Sold Shares") which Holder was entitled to
receive upon such exercise (a "Buy-in"), the Company shall pay Holder (in
addition to any other remedies available to Holder) the amount by which (x)
Holder's total purchase price (including brokerage commission, if any) for
the shares of Common Stock so purchased exceeds (y) the lesser of (A) the
Exercise Price or (B) the net proceeds received by Holder from the sale of
the Sold Shares. Holder shall provide the Company written notification
indicating any amounts payable to Holder pursuant to this subsection.
2. Period of Exercise. This Warrant is exercisable at any time or from time to
time on or after the first (1st) anniversary of the date hereof and before
5:00 P.M., New York, New York time on the fifth (5th) anniversary of the
date hereof (the "Exercise Period").
3. Certain Agreements of the Company. The Company hereby covenants and agrees
as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in
accordance with the terms of this Warrant, be validly issued, fully
paid, and non-assessable and free from all taxes, liens, claims and
encumbrances.
(b) Reservation of Shares. During the Exercise Period, the Company shall
at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) Listing. The Company shall promptly secure the listing of the shares
of Common Stock issuable upon exercise of this Warrant upon the Nasdaq
National Market System, the Nasdaq SmallCap Market, the New York Stock
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Exchange or the American Stock Exchange as required by Section 4.9 of
the Securities Purchase Agreement and upon each national securities
exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed and shall maintain, so
long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon
the exercise of this Warrant; and the Company shall so list on each
national securities exchange or automated quotation system, as the
case may be, and shall maintain such listing of any other shares of
capital stock of the Company issuable upon the exercise of this
Warrant so long as any shares of the same class shall be listed on
such national securities exchange or automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by amendment of its
charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by it
hereunder, but will at all times in good faith assist in the carrying
out of all the provisions of this Warrant and in the taking of all
such actions as may reasonably be requested by the Holder of this
Warrant in order to protect the exercise privilege of the Holder of
this Warrant, consistent with the tenor and purpose of this Warrant.
Without limiting the generality of the foregoing, the Company (i) will
not increase the par value of any shares of Common Stock receivable
upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) will take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the exercise
of this Warrant.
4. Antidilution Provisions. During the Exercise Period, the Exercise Price and
the number of Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 4. In the event that any adjustment of the
Exercise Price as required herein results in a fraction of a cent, such
Exercise Price shall be rounded up or down to the nearest cent.
(a) Adjustment of Exercise Price and Number of Shares upon Issuance of
Common Stock. Except as otherwise provided in Section 4(c) and 4(e)
hereof, if and whenever
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after the initial issuance of this Warrant, the Company issues or
sells, or in accordance with Section 4(b) hereof is deemed to have
issued or sold, any shares of Common Stock for no consideration or for
a consideration per share less than the Exercise Price as in effect on
the date of issuance of such shares of Common Stock (a "Dilutive
Issuance"), then effective immediately upon the Dilutive Issuance, the
Exercise Price will be adjusted in accordance with the following
formula:
E' = (E) (O + P/E) / (CSDO)
where:
E' = the adjusted Exercise Price
E = the then current Exercise Price;
O = the number of shares of Common Stock outstanding immediately
prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in Section
4(b) hereof, received by the Company upon such Dilutive
Issuance; and
CSDO = the total number of shares of Common Stock Deemed Outstanding
(as herein defined) immediately after the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under Section 4(a) hereof, the
following will be applicable:
(i) Issuance of Rights or Options. If the Company in any manner
issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common
Stock or other securities exercisable, convertible into or
exchangeable for Common Stock ("Convertible Securities"), but not
to include the grant or exercise of any shares of Common Stock,
or options or rights to acquire Common Stock, which may hereafter
be granted or exercised under any employee or Director benefit
plan of the Company now existing or to be implemented in the
future, so long as the issuance of such stock, options or rights
is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of
a committee of non-employee
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directors established for such purpose (such warrants, rights and
options to purchase Common Stock or Convertible Securities are
hereinafter referred to as "Options"), and the price per share
for which Common Stock is issuable upon the exercise of such
Options is less than the Exercise Price as in effect on the date
of issuance ("Below Market Options"), then the maximum total
number of shares of Common Stock issuable upon the exercise of
all such Below Market Options (assuming full exercise, conversion
or exchange of Convertible Securities, if applicable) will, as of
the date of the issuance of such Below Market Options, be deemed
to be outstanding and to have been issued and sold by the Company
for the price per share provided for pursuant to such Below
Market Option. For purposes of the preceding sentence, the price
per share for which Common Stock is issuable upon the exercise of
such Below Market Options is determined by dividing (i) the total
amount, if any, received or receivable by the Company as
consideration for the issuance or granting of such Below Market
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise
of all such Below Market Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Below
Market Options, the minimum aggregate amount of additional
consideration payable upon the exercise, conversion or exchange
thereof at the time such Convertible Securities first become
exercisable, convertible or exchangeable, by (ii) the maximum
total number of shares of Common Stock issuable upon the exercise
of all such Below Market Options (assuming full conversion of
Convertible Securities, if applicable) on the date of issuance of
such Below Market Options. No further adjustment to the Exercise
Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Below Market Options or upon the
exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
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(ii) Issuance of Convertible Securities.
1) If the Company in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other
than where the same are issuable upon the exercise of
Options) and the price per share for which Common Stock is
issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is
less than the Exercise Price as in effect on the date of
issuance, then the maximum total number of shares of Common
Stock issuable upon the exercise, conversion or exchange of
all such Convertible Securities will, as of the date of the
issuance of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Company
for the price per share pursuant to such Convertible
Security. For the purposes of the preceding sentence, the
price per share for which Common Stock is issuable upon such
exercise, conversion or exchange is determined by dividing
(i) the total amount, if any, received or receivable by the
Company as consideration for the issuance or sale of all
such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the
Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become
exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon
the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise Price will
be made upon the actual issuances of such Common Stock upon
exercise, conversion or exchange of such Convertible
Securities.
2) If the Company in any manner issues or sells any Convertible
Securities with a
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fluctuating conversion or exercise price or exchange ratio
(a "Variable Rate Convertible Security"), then the price per
share for which Common Stock is issuable upon such exercise,
conversion or exchange for purposes of the calculation
contemplated by Section 4(b)(ii)(A) shall be deemed to be
the lowest price per share which would be applicable
assuming that (1) all holding period and other conditions to
any discounts contained in such Convertible Security have
been satisfied, and (2) the Market Price on the date of
issuance of such Convertible Security was 80% of the Market
Price on such date (the "Assumed Variable Market Price").
(iii) Change in Option Price or Conversion Rate. Except for the
grant or exercise of any stock or options which may
hereafter be granted or exercised under any employee or
Director benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-
employee members of the Board of Directors of the Company or
a majority of the members of a committee of non-employee
directors established for such purpose, if there is a change
at any time in (i) the amount of additional consideration
payable to the Company upon the exercise of any Options;
(ii) the amount of additional consideration, if any, payable
to the Company upon the exercise, conversion or exchange or
any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable
for Common Stock (other than under or by reason of
provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in
effect at such time had such Options or Convertible
Securities still outstanding provided for such changed
additional consideration or changed conversion rate, as the
case may be, at the time initially granted, issued or sold.
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(iv) Treatment of Expired Options and Unexercised Convertible
Securities. If, in any case, the total number of shares of
Common Stock issuable upon exercise of any Options or upon
exercise, conversion or exchange of any Convertible
Securities is not, in fact, issued and the rights to
exercise such option or to exercise, convert or exchange
such Convertible Securities shall have expired or
terminated, the Exercise Price then in effect will be
readjusted to the Exercise Price which would have been in
effect at the time of such expiration or termination had
such Options or Convertible Securities, to the extent
outstanding immediately prior to such expiration or
termination (other than in respect of the actual number of
shares of Common Stock issued upon exercise or conversion
thereof), never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued, granted or
sold for cash, the consideration received therefor for
purposes of this Warrant will be the amount received by the
Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other
reasonable expenses paid or incurred by the Company in
connection with such issuance, grant or sale. In case any
Common Stock, Options or Convertible Securities are issued
or sold for a consideration part or all of which shall be
other than cash, the amount of the consideration other than
cash received by the Company will be the fair market value
of such consideration except where such consideration
consists of freely-tradeable securities, in which case the
amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any
Common Stock, Options or Convertible Securities are issued
in connection with any merger or consolidation in which the
Company is the surviving corporation, the amount of
consideration therefor will be deemed to be the fair market
value of such portion of the net assets and business of the
non-surviving corporation as is attributable to such Common
Stock, Options or Convertible Securities,
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as the case may be. The fair market value of any
consideration other than cash or securities will be
determined in the good faith reasonable business judgment of
the Board of Directors.
(vi) Exceptions to Adjustment of Exercise Price. No adjustment to
the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and
outstanding on the date hereof in accordance with the terms
of such securities as of such date; (ii) upon the grant or
exercise of any shares of Common Stock, or options or rights
to acquire Common Stock, which may hereafter be granted or
exercised under any employee or Director benefit plan of the
Company now existing or to be implemented in the future, so
long as the issuance of such stock, options or rights is
approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the
members of a committee of non-employee directors established
for such purpose; (iii) upon the issuance of the Common
Shares (as defined in the Securities Purchase Agreement) or
Warrants in accordance with terms of the Securities Purchase
Agreement; or (iv) upon the exercise of the Warrants.
(c) Subdivision or Combination of Common Stock. If the Company, at
any time after the initial issuance of this Warrant, subdivides
(by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) its shares of
Common Stock into a greater number of shares, then, after the
date of record for effecting such subdivision, the Exercise Price
in effect immediately prior to such subdivision will be
proportionately reduced. If the Company, at any time after the
initial issuance of this Warrant, combines (by reverse stock
split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of
shares, then, after the date of record for effecting such
combination, the Exercise Price in effect immediately prior to
such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions
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of this Section 4, the number of shares of Common Stock issuable
upon exercise of this Warrant shall be adjusted by multiplying a
number equal to the Exercise Price in effect immediately prior to
such adjustment by the number of shares of Common Stock issuable
upon exercise of this Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted
Exercise Price.
(e) Major Transactions. If the Company shall consolidate with or
merge into any corporation or reclassify its outstanding shares
of Common Stock (other than by way of subdivision or reduction of
such shares) (each a "Major Transaction"), then each holder of a
Warrant shall thereafter be entitled to receive consideration, in
exchange for such Warrant, equal to the greater of, as determined
in the sole discretion of such holder, a warrant to purchase (at
the same aggregate exercise price and on the same terms and
conditions as the Warrant surrendered) the number of shares of
stock or securities or property of the Company, or of the entity
resulting from such consolidation or merger (the "Major
Transaction Consideration"), to which a holder of the number of
shares of Common Stock delivered upon exercise of such Warrant
would have been entitled upon such Major Transaction had the
holder of such Warrant exercised (without regard to any
limitations on exercise herein contained) the Warrant on the
trading date immediately preceding the public announcement of the
transaction resulting in such Major Transaction and had such
Common Stock been issued and outstanding and had such holder been
the holder of record of such Common Stock at the time of such
Major Transaction, and the Company shall make lawful provision
therefor as a part of such consolidation, merger or
reclassification. No sooner than twenty (20) days nor later than
five (5) days prior to the consummation of the Major Transaction,
but not prior to the public announcement of such Major
Transaction, the Company shall deliver written notice ("Notice of
Major Transaction") to each holder of Warrants, which Notice of
Major Transaction shall be deemed to have been delivered one (1)
business day following the Company's sending such notice by
telecopy (provided that the Company sends a confirming copy of
such notice on the same day by overnight courier) of such Notice
of Major Transaction. Such Notice of Major Transaction shall
indicate the amount and type of the Major Transaction
Consideration which
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such holder would receive under clause (i) of this paragraph (e).
If the Major Transaction Consideration does not consist entirely
of United States currency, such holder may elect to receive
United States currency in an amount equal to the value of the
Major Transaction Consideration in lieu of the Major Transaction
Consideration by delivering notice of such election to the
Company within five (5) days of the holder's receipt of the
Notice of Major Transaction.
(f) Distribution of Assets. In case the Company shall declare or make
any distribution of its assets (or rights to acquire its assets)
to holders of Common Stock as a partial liquidating dividend, by
way of return of capital or otherwise (including any dividend or
distribution to the Company's shareholders of cash or shares (or
rights to acquire shares) of capital stock of a subsidiary) (a
"Distribution"), at any time after the initial issuance of this
Warrant, then the Holder shall be entitled upon exercise of this
Warrant for the purchase of any or all of the shares of Common
Stock subject hereto, to receive the amount of such assets (or
rights) which would have been payable to the Holder had such
Holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to
such Distribution.
(g) Notices of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each
such case, the Company shall give notice thereof to the Holder,
which notice shall state the Exercise Price resulting from such
adjustment and the increase or decrease in the number of Warrant
Shares purchasable at such price upon exercise, setting forth in
reasonable detail the method of calculation and the facts upon
which such calculation is based. Such calculation shall be
certified by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the
Exercise Price in effect at the time such adjustment is otherwise
required to be made, but any such lesser adjustment shall be
carried forward and shall be made at the time and together with
the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1%
of such Exercise Price.
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(i) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other
distribution to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock
of any class or other rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or
merger of the Company with or into, or sale of all or
substantially all of its assets to, another corporation or
entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder (a) notice of the
date on which the books of the Company shall close or a record shall be taken
for determining the holders of Common Stock entitled to receive any such
dividend, distribution, or subscription rights or for determining the holders of
Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto, but in no event earlier than public announcement of such
proposed transaction or event. Failure to give any such notice or any defect
therein shall not affect the validity of the proceedings referred to in clauses
(i), (ii), (iii) and (iv) above.
(j) Certain Definitions.
(i) "Common Stock Deemed Outstanding" shall mean the number of
shares of Common Stock actually outstanding (not including
shares of
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Common Stock held in the treasury of the Company), plus (x)
in case of any adjustment required by Section 4(a) resulting
from the issuance of any Options, the maximum total number
of shares of Common Stock issuable upon the exercise of the
Options for which the adjustment is required (including any
Common Stock issuable upon the conversion of Convertible
Securities issuable upon the exercise of such Options), and
(y) in the case of any adjustment required by Section 4(a)
resulting from the issuance of any Convertible Securities,
the maximum total number of shares of Common Stock issuable
upon the exercise, conversion or exchange of the Convertible
Securities for which the adjustment is required, as of the
date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the Closing Bid
Price for the shares of Common Stock as reported to Nasdaq
Small-Cap National Market System for the trading day
immediately preceding such date, or (ii) if the Nasdaq
Small-Cap National Market System is not the principal
trading market for the Common Stock, the average of the last
reported bid prices on the principal trading market for the
Common Stock during the same period, or, if there is no bid
price for such period, the last reported sales price for
such period, or (iii) if market value cannot be calculated
as of such date on any of the foregoing bases, the Market
Price shall be the average fair market value as reasonably
determined by an investment banking firm selected by the
Company and reasonably acceptable to the Holders of a
majority in interest of the Warrants, with the costs of the
appraisal to be borne by the Company. The manner of
determining the Market Price of the Common Stock set forth
in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to
market value must be made under this Section 4.
(iii) "Common Stock," for purposes of this Section 4, includes
the Common Stock and any additional class of stock of the
Company having no preference as to dividends or
distributions on
<PAGE>
liquidation, provided that the shares purchasable pursuant
to this Warrant shall include only Common Stock in respect
of which this Warrant is exercisable, or shares resulting
from any subdivision or combination of such Common Stock, or
in the case of any reorganization, reclassification,
consolidation, merger, or sale of the character referred to
in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Cap Amount. Prior to Stockholder Approval (as defined in the Certificate of
Designation, Preferences and Rights attached as Exhibit A to the Securities
Purchase Agreement), in the event that Nasdaq Rule 4460(i) (or any
successor rule) applies to the Company, unless otherwise permitted by the
Nasdaq SmallCap Market or the Nasdaq National Market System if the Common
Stock of the Company trades on such market, in no event shall the Company
be required to issue more shares of Common Stock upon the exercise of the
Warrant than the maximum number of shares of Common Stock that the Company
can without stockholder approval so issue pursuant to such rule or rules,
which, as of the date of initial issuance of the shares of Preferred Stock
and Warrants, shall be the amount indicated to be the Cap Amount in the
officer's certificate delivered pursuant to the Securities Purchase
Agreement. The Cap Amount shall be allocated pro-rata to the Holders. A
Holder's allocable portion of the Cap Amount shall be applicable to both
shares of Preferred Stock and Warrants held by it and shall be applied to
such Preferred Stock and Warrants on the basis of the time of conversion or
exercise, as the case may be, thereof.
6. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder of such
shares for any issuance tax or other costs in respect thereof, provided
that the Company shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the Holder.
7. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle
the Holder to any voting rights or other rights as a shareholder of the
Company. No provision of this Warrant, in the absence of affirmative action
by the Holder to purchase Warrant Shares, and no mere enumeration herein of
the rights or privileges of the Holder, shall give rise to any liability of
the Holder for the Exercise Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
8. Transfer, Exchange, Redemption and Replacement of Warrant.
a. Restriction on Transfer. This Warrant and the rights granted to the
Holder are transferable, in whole or in part, upon surrender of this Warrant,
together with a properly executed assignment in the Form of Assignment attached
hereto as Exhibit 2, at the office or
<PAGE>
agency of the Company referred to in Section 8(e) below, provided, however, that
any transfer or assignment shall be subject to the provisions of Section 5.1 and
5.2 of the Securities Purchase Agreement. Until due presentment for registration
of transfer on the books of the Company, the Company may treat the registered
holder hereof as the owner and holder hereof for all purposes, and the Company
shall not be affected by any notice to the contrary. Notwithstanding anything to
the contrary contained herein, the rights described in Section 9 hereof are
assignable only in accordance with the provisions of that certain Registration
Rights Agreement, dated as of January 30, 1998, by and among the Company and the
other signatories thereto (the "Registration Rights Agreement").
b. Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable in increments of 10,000 or more of Warrant Shares, upon the
surrender hereof by the Holder at the office or agency of the Company referred
to in Section 8(e) below, for new Warrants, in the form hereof, of different
denominations representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the Holder of at the time of such surrender.
c. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction, or mutilation of this Warrant
or, in the case of any such loss, theft, or destruction, upon delivery, of an
indemnity agreement (or bond, in cases in which the Holder actually received the
original or replacement certificate for such Warrant from the Company)
reasonably satisfactory in form and amount to the Company, or, in the case of
any such mutilation, upon surrender and cancellation of this Warrant, the
Company, at its expense, will execute and deliver, in lieu thereof, a new
Warrant, in the form hereof, in such denominations as Holder may request.
d. Cancellation; Payment of Expenses. Upon the surrender of this Warrant in
connection with any transfer, exchange, or replacement as provided in this
Section 8, this Warrant shall be promptly canceled by the Company. The Company
shall pay all issuance taxes (other than securities transfer taxes) and charges
payable in connection with the preparation, execution, and delivery of Warrants
pursuant to this Section 8.
e. Warrant Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee and each prior owner
of this Warrant.
f. Additional Restriction on Exercise or Transfer. Notwithstanding anything
to the contrary contained herein, the Warrants shall not be exercisable by the
Holder to the extent (but only to the extent) that, if exercisable by Holder,
Holder or any of its affiliates (as defined under Rule 12b-2 of the Securities
Exchange Act of 1934, as amended) would beneficially own in excess of 4.9% of
the shares of Common Stock. To the extent the above limitation applies, the
determination of whether the Warrants shall be exercisable (vis-a-vis other
<PAGE>
securities owned by Holder) and of which Warrants shall be exercisable (as among
Warrants) shall be in the sole discretion of the Holder and submission of the
Warrants for exercise shall be deemed to be the Holder's determination of
whether such Warrants are exercisable (vis-a-vis other securities owned by
Holder) and of which warrants are exercisable (among Warrants) subject to such
aggregate percentage limitation. No prior inability to exercise Warrants
pursuant to this paragraph shall have any effect on the applicability of the
provisions of this paragraph with respect to any subsequent determination of
exercisability. For the purposes of this paragraph, beneficial ownership and all
determinations and calculations, including without limitation, with respect to
calculations of percentage ownership, shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13D and G thereunder. The provisions of this paragraph may be implemented in a
manner otherwise than in strict conformity with the terms this paragraph with
the approval of the Board of Directors of the Company and the Holder: (i) with
respect to any matter to cure any ambiguity herein, to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the intended
4.9% beneficial ownership limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such 4.9%
limitation; and (ii) with respect to any other matter, with the further consent
of the holders of a majority of the then outstanding shares of Common Stock. The
provisions of this paragraph may be waived by Holder at its election upon not
less than sixty-one (61) days prior written notice from Holder to the Company,
including, without limitation, a limited waiver to increase the 4.9% limit
herein contained to any other percentage specified by such Holder. The
limitations contained in this paragraph shall apply to a successor Holder of
Warrants if, and to the extent, elected by such successor Holder concurrently
with its acquisition of such Warrants, such election to be promptly confirmed in
writing to the Company (provided no transfer or series of transfers to a
successor Holder or Holders shall be used by a Holder to evade the limitations
contained in this paragraph).
9. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights
in respect of the Warrant Shares as are set forth in the Registration
Rights Agreement.
10. Notices. Any notice herein required or permitted to be given shall be in
writing and may be personally served or delivered by courier and shall be
deemed delivered at the time and date of receipt. The addresses for such
communications shall be:
<PAGE>
If to the Company:
Pharmos Corporation
33 Wood Avenue South, Suite 466
Iselin, NJ 08830
Telecopy: 732-603-3532
Attention: Chief Financial Officer
with a copy to:
Ehrenreich Eilenberg Krause & Zivian, LLP
11 East 44th Street, 17th Floor
New York, NY 10017
Telecopy: 212-986-2399
Attention: Adam D. Eilenberg
and if to the Holder, at such address as Holder shall have provided in writing
to the Company, or at such other address as each such party furnishes by notice
given in accordance with this Section 9.
11. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed in the State of New York. The Company
and each Holder irrevocably consent to the jurisdiction of the United
States federal courts located in the County of New York in the State of New
York in any suit or proceeding based on or arising under this Warrant and
irrevocably agree that all claims in respect of such suit or proceeding may
be determined in such courts. The Company and each Holder irrevocably
waives the defense of an inconvenient forum to the maintenance of such suit
or proceeding. The Company and each Holder further agrees that service of
process upon any other party to this Warrant mailed by the first class mail
shall be deemed in every respect effective service of process upon such
party in any suit or proceeding arising hereunder. Nothing herein shall
affect the right of the Company or any Holder to serve process in any other
manner permitted by law. The Company and each Holder agree that a final
nonappealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in
any other lawful manner.
12. Miscellaneous.
a. Amendments. This Warrant and any provision hereof may be amended or
waived by an instrument in writing signed by the Company and the
Holder to be affected by such amendment or waiver.
b. Descriptive Headings. The descriptive headings of the several Sections
of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions
hereof.
<PAGE>
c. Cashless Exercise. Notwithstanding anything to the contrary contained
in this Warrant, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive
offices with a written notice of the Holder's intention to effect a
cashless exercise, including a calculation of the number of shares of
Common Stock to be issued upon such exercise in accordance with the
terms hereof (a "Cashless Exercise"). In the event of a Cashless
Exercise, in lieu of paying the Exercise Price in cash, the Holder
shall surrender this Warrant for the number of shares of Common Stock
determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Market Price per
share of the Common Stock and the Exercise Price, and the denominator
of which shall be such then current Market Price per share of Common
Stock.
d. Assignability. This Warrant shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Holder and
its successors and assigns. The Holder shall notify the Company upon
the assignment of this Warrant.
* * *
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
PHARMOS CORPORATION
By:
Name:
Title:
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of common stock of Pharmos Corporation, a Nevada
corporation (the "Company"), evidenced by the attached Warrant, and [herewith
makes payment of the Exercise Price with respect to such shares in full/ elects
to effect a Cashless Exercise pursuant to the terms of the Warrant], all in
accordance with the conditions and provisions of said Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except in
compliance with the Warrant and otherwise under circumstances that will not
result in a violation of the Securities Act of 1933, as amended, or any state
securities laws.
(ii) The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder (or such other person or
persons indicated below) and delivered to the undersigned (or designee(s) at the
address (or addresses) set forth below:
Date:
Signature of Holder
Name of Holder (Print)
Address:
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
, and hereby irrevocably constitutes and appoints ______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Date:____________, _____,
In the presence of
Name:
Signature:
Title of Signing Officer or Agent (if any):
Address:
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made as of
February 4, 1998, by and among Pharmos Corporation, a Nevada corporation (the
"Company"), with headquarters located at 33 Wood Avenue South, Suite 466,
Iselin, New Jersey, 08830 and the undersigned (the "Initial Purchasers").
RECITALS
A. In connection with the Securities Purchase Agreement dated of even date
herewith by and between the Company and the Initial Purchasers (the "Securities
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Purchasers (i)
shares of Series C Convertible Participating Preferred Stock of the Company (the
"Preferred Stock") that is convertible into shares (the "Conversion Shares") of
the Company's common stock, par value $.03 per share (the "Common Stock") and
(ii) a Warrant (a "Warrant" and, when taken together with all of the warrants
issuable under the Securities Purchase Agreement, the "Warrants") entitling the
holder thereof to purchase the number of shares of Common Stock set forth in the
Warrant (the "Warrant Shares"), upon the terms and subject to the limitations
and conditions set forth in the Certificate of Designations, Preferences and
Rights with respect to such Preferred Stock (the "Certificate of Designation"),
in the form attached as Exhibit A to the Securities Purchase Agreement.
B. To induce the Initial Purchasers to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws.
AGREEMENTS
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company, and the Initial
Purchasers hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms shall have
the following meanings:
<PAGE>
(a) "Purchasers" means the Initial Purchasers and any transferees or
assignees who agree to become bound by the provisions of this Agreement in
accordance with Article IX hereof.
(b) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement by the United
States Securities and Exchange Commission (the "SEC").
(c) "Registrable Securities" means the Conversion Shares (including
any Conversion Shares issuable with respect to conversion default payments
under the Certificate of Designation) issued or issuable with respect to
the Preferred Stock, and the Warrant Shares issued or issuable with respect
to the Warrants (without regard to any limitations on conversion or
exercise), and any shares of capital stock issued or issuable, from time to
time (with any adjustments), on or in exchange for or otherwise with
respect to the Common Stock or any other Registrable Securities. For
purposes of this Agreement, each security described above shall cease to be
a Registrable Security when such security (i) has been effectively
registered under the Securities Act, and has been disposed of pursuant to
an effective registration statement covering such security, (ii) is
distributed to the public pursuant to Rule 144 (or any similar provisions
then in force) under the Act, or (iii) may be sold or transferred pursuant
to Rule 144(k) (or any similar provision then in force) under the Act.
(d) "Registration Statement" means a registration statement of the
Company under the Securities Act.
1.2 Capitalized Terms. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings set forth in the Securities
Purchase Agreement.
ARTICLE II
REGISTRATION
2.1 Mandatory Registration. The Company shall prepare, and, on or prior to
thirty (30) days after the date of the Closing (the "Filing Date"), file with
the SEC a Registration Statement on Form S-3 or, if Form S-3 is not then
available, on such form of Registration Statement as is then available to effect
a registration of all of the Registrable Securities covering the resale of all
of the Registrable Securities, which Registration Statement, to the extent
allowable under the Securities Act and the Rules promulgated thereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Preferred Stock and the exercise of the Warrants
(i) to prevent dilution resulting from stock splits, stock dividends or similar
transactions or (ii) by reason of changes in the Conversion Price of the
Preferred Stock or the Exercise Price of the Warrants in
<PAGE>
accordance with the terms thereof, as the case may be. The Registrable
Securities included in the Registration Statement shall be allocated among the
Purchasers as set forth in Section 11.11 hereof. The Registration Statement (and
each amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided to (and subject to the approval of
(which approval shall not be unreasonably withheld or denied)) the Initial
Purchasers and a single counsel for the Initial Purchasers prior to its filing
or other submission.
2.2 Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2.1 hereof involves an underwritten offering, the
Purchasers who hold a majority in interest of the Registrable Securities subject
to such underwritten offering, shall have the right to select a total of one
legal counsel to represent the Purchasers and an investment banker or bankers
and manager or managers to administer the offering, which investment banker or
bankers or manager or managers shall be reasonably satisfactory to the Company.
2.3 Payments by the Company. The Company shall cause the registration
statement to become effective as soon as practicable, but in no event later than
the ninetieth (90th) day following the date of the Closing (the "Registration
Deadline"). If (i) the registration statement(s) covering the Registrable
Securities required to be filed by the Company pursuant to Section 2.1 hereof is
not declared effective by the SEC on or before the Registration Deadline, or
(ii) after the registration statement has been declared effective by the SEC,
sales of all the Registrable Securities (including any Registrable Securities
required to be registered pursuant to Section 3.2 hereof) cannot be made
pursuant to the registration statement (by reason of a stop order or the
Company's failure to update the registration statement or any other reason
outside the control of the Initial Purchasers), then the Company will make
payments to the Purchasers in such amounts and at such times as shall be
determined pursuant to this Section 2.3 as partial relief for the damages to the
Purchasers by reason of any such delay in or reduction of their ability to sell
the Registrable Securities (which remedy shall not be exclusive of any other
remedies available at law or in equity). In such event, the Company shall pay to
each Purchaser (i) an amount equal to (A) .01 times (B) the aggregate purchase
price of the Preferred Stock held by such Purchaser (including, without
limitation, shares of Preferred Stock that have been converted into Conversion
Shares) for the first thirty (30) days (pro rated based on the number of days if
less than 30) following the Registration Deadline (the "Grace Period") prior to
the date the Registration Statement filed pursuant to Section 2.1 is declared
effective by the SEC (the "Effective Date"), and (ii) an amount equal to (x) (A)
.02 times (B) the aggregate purchase price of the Preferred Stock held by such
Purchaser (including, without limitation, shares of Preferred Stock that have
been converted into Conversion Shares) times (y) the sum of: (A) the number of
months (prorated per day for partial months) following the Grace Period prior to
the Effective Date plus (B) the number of months (prorated per day for partial
months) following the Grace Period but prior to the termination of the
Registration Period that sales cannot be made pursuant to the Registration
Statement after the Effective Date. Such amounts shall be paid in cash or, at
each Purchaser's option, may be convertible into Common Stock at the "Conversion
Price" (as defined in the Certificate of Designation). Any shares of Common
Stock issued upon conversion of such amounts shall be Registrable Securities. If
the Purchaser desires to convert or exercise the amounts due hereunder into
Registrable Securities it shall so notify the Company in
<PAGE>
writing within two (2) days prior to the date on which such amounts are first
payable in cash and such amounts shall be so convertible (pursuant to the terms
of the Certificate of Designation), beginning on the last day upon which the
cash amount would otherwise be due in accordance with the following sentence.
Payments of cash pursuant hereto shall be made within five (5) days after the
end of each period that gives rise to such obligation, provided that, if any
such period extends for more than thirty (30) days, payments shall be made for
each such thirty (30) day period within five (5) days after the end of such
thirty (30) day period.
2.4 Piggy-Back Registrations. If at any time prior to the expiration of the
Registration Period (as hereinafter defined) the Registration Statement required
to be filed and/or amended pursuant to this Agreement is not effective, and
during such period of ineffectiveness, the Company shall file with the SEC a
Registration Statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans), then the Company shall send to each Purchaser who
has a right to have Registrable Securities covered by a Registration Statement
pursuant to this Agreement written notice of such determination and, if within
ten (10) days after the date of such notice, such Purchaser shall so request in
writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities such Purchaser requests to be registered,
except that if, in connection with any underwritten public offering for the
account of the Company the managing underwriter(s) thereof shall impose a
limitation on the number of shares of Common Stock which may be included in the
Registration Statement because, in such underwriter(s)' judgment, marketing or
other factors dictate such limitation is necessary to facilitate public
distribution, then the Company shall be obligated to include in such
Registration Statement only such limited portion of the Registrable Securities
with respect to which such Purchaser has requested inclusion hereunder as the
underwriter shall permit. Any exclusion of Registrable Securities shall be made
pro rata among the Purchasers seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Purchasers; provided, however, that the Company shall not exclude any
Registrable Securities unless the Company has first excluded all outstanding
securities, the holders of which are not entitled to inclusion of such
securities in such Registration Statement or are not entitled to pro rata
inclusion with the Registrable Securities; and provided, further, however, that,
after giving effect to the immediately preceding proviso, any exclusion of
Registrable Securities shall be made pro rata with holders of other securities
having the right to include such securities in the Registration Statement. No
right to registration of Registrable Securities under this Section 2.4 shall be
construed to limit any registration required under Section 2.1 or 3.2 hereof. If
an offering in connection with which a Purchaser is entitled to registration
under this Section 2.4 is an underwritten offering, then each Purchaser whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Common Stock included in such underwritten offering.
<PAGE>
2.5 Eligibility for Form S-3. The Company represents and warrants that it
meets the current requirements for the use of Form S-3 for registration of the
sale by the Initial Purchasers and any other Purchaser of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3.
ARTICLE III
OBLIGATIONS OF THE COMPANY
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
3.1 The Company shall prepare promptly and file with the SEC the
Registration Statement required by Section 2.1, and cause such Registration
Statement relating to Registrable Securities to become effective as soon as
practicable after such filing, and keep the Registration Statement effective
pursuant to Rule 415 at all times until such date as is the earlier of (i) the
date on which all of the Registrable Securities have been sold (and no further
Registrable Securities may be issued in the future) and (ii) the date on which
all of the Registrable Securities (in the reasonable opinion of counsel to the
Initial Purchasers) may be immediately sold to the public without registration
and without restriction as to the number of Registrable Securities to be sold,
whether pursuant to Rule 144 or otherwise (the "Registration Period"). The
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein and all documents incorporated by reference
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein not misleading, except for any such untrue statement or
omission provided to the Company by any Purchaser which is provided in writing
by Purchaser expressly for use therein.
3.2 The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until the termination of the Registration Period or, if earlier, such time as
all of such Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
the Registration Statement. In the event the number of shares available under a
Registration Statement filed pursuant to this Agreement is, for any five (5)
consecutive trading days (the last of such five (5) trading days being the
"Registration Trigger Date"), insufficient to cover one hundred fifty percent
(150%) of the Registrable Securities issued or issuable upon conversion of the
Preferred Stock held by any Purchaser, the Company shall amend, if permissible,
the Registration Statement, or file a new Registration Statement (on the short
form available therefor, if applicable), or both, so as to cover one hundred
seventy-five percent (175%) of the Registrable Securities issued or issuable to
such Purchaser, in each case, as soon as practicable, but in any event within
five (5) business days in the
<PAGE>
case of an amendment and ten (10) business days in the case of a Registration
Statement after the Registration Trigger Date (based on the market price of the
Common Stock and other relevant factors on which the Company reasonably elects
to rely). The Company shall cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof.
3.3 The Company shall furnish to each Purchaser whose Registrable
Securities are included in the Registration Statement and its legal counsel (a)
promptly after the same is prepared and publicly distributed or filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2.1, each letter written by or on behalf of the Company to the SEC
or the staff of the SEC, and each item of correspondence from the SEC or the
staff of the SEC, in each case relating to such Registration Statement (other
than any portion, if any, thereof which contains information for which the
Company has sought confidential treatment), and (b) such number of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Purchaser may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned (or to be owned) by such Purchaser.
3.4 The Company shall use reasonable efforts to (a) register and qualify
the Registrable Securities covered by the Registration Statement under
securities laws of such jurisdictions in the United States as each Purchaser who
holds (or has the right to hold) Registrable Securities being offered reasonably
requests, (b) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (c) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (d) take all other actions which the Company reasonably
deems necessary or advisable to qualify the Registrable Securities for sale in
such jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (i) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3.4, (ii) subject itself to taxation in any such jurisdiction,
(iii) file a general consent to service of process in any such jurisdiction, or
(iv) provide any undertakings that cause the Company material expense or burden.
3.5 In the event the Purchasers who hold a majority in interest of the
Registrable Securities being offered in an offering pursuant to a Registration
Statement or any amendment or supplement thereto under Section 2.1 or 3.2 hereof
select underwriters for the offering in accordance with Section 2.2 of this
Agreement, the Company shall enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
3.6 As soon as practicable after becoming aware of such event, the Company
shall notify (by telephone and also by facsimile and, if telephone contact is
not made, by reputable overnight
<PAGE>
courier) each Purchaser of the happening of any event, of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and use its best efforts promptly
(but in any event within ten (10) days) to prepare a supplement or amendment to
the Registration Statement to correct such untrue statement or omission, and
deliver such number of copies of such supplement or amendment to each Purchaser
as such Purchaser may reasonably request.
3.7 The Company shall use its reasonable best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable time and to notify (by
telephone and also by facsimile and reputable overnight carrier) each Purchaser
who holds Registrable Securities being sold (or, in the event of an underwritten
offering, the managing underwriters) of the issuance of such order and the
resolution thereof.
3.8 The Company shall permit a single firm of counsel designated by the
Initial Purchasers to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects.
3.9 The Company shall make generally available to its security holders as
soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Section 11(a) of the Securities Act and Rule 158 under the
Securities Act) covering a twelve-month period beginning not later than the
first day of the Company's fiscal quarter next following the effective date of
the Registration Statement.
3.10 At the request of any Purchaser, the Company shall furnish, on the
date of effectiveness of the Registration Statement and thereafter from time to
time on such dates as a Purchaser may reasonably request (a) written
confirmation by the Company that the Registration Statement is effective and (b)
in connection with an underwritten offering, a letter, dated as of such
applicable date, from the Company's independent certified public accountants
addressed to the Purchasers and in form, scope and substance as customarily
given to underwriters in an underwritten public offering.
3.11 The Company shall make available at reasonable times for inspection by
(i) any Purchaser, (ii) any underwriter participating in any disposition
pursuant to the Registration Statement, (iii) one firm of attorneys and one firm
of accountants retained by the Purchasers, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), to enable each Inspector to exercise
its due diligence responsibility, if any, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
Records which the Company determines, in good faith, to be confidential and
which the Company
<PAGE>
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors for any reason unless the release of such Records is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction. Each
Purchaser agrees that it will, upon learning that disclosure of such Records is
sought in a court of competent jurisdiction, give notice to the Company and
allow the Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records deemed confidential by the Company. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and reasonable substance satisfactory to the
Company) with the Company with respect thereto, substantially in the form of
this Section 3.11.
3.12 The Company shall hold in confidence and not make any disclosure of
information concerning a Purchaser provided to the Company unless (a) disclosure
of such information is necessary to comply with federal or state securities
laws, (b) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (c) the release of such
information is ordered pursuant to a subpoena or other order from a court or
governmental body of competent jurisdiction or is otherwise required by
applicable law or legal process, (d) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement (to the knowledge of the Company), or (e) such Purchaser
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning a
Purchaser is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Purchaser prior
to making such disclosure, and allow the Purchaser, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
3.13 The Company shall cause the listing and the continuation of listing of
all the Registrable Securities covered by the Registration Statement on the
Nasdaq National Market System, the Nasdaq SmallCap Market, the New York Stock
Exchange or the American Stock Exchange, and cause the Registrable Securities to
be quoted or listed on each additional national securities exchange or quotation
system upon which the Common Stock is then listed or quoted.
3.14 The Company shall provide a transfer agent and registrar, which may be
a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.
3.15 The Company shall cooperate with the Purchasers who hold Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to the Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, as the managing underwriter
or underwriters, if any, or the Purchasers may reasonably request and registered
in such names as the managing underwriter or underwriters, if any, or the
Purchasers may request.
3.16 At the request of any Purchaser, the Company shall promptly prepare
and file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration
<PAGE>
Statement and the prospectus used in connection with the Registration Statement
as may be necessary in order to change the plan of distribution set forth in
such Registration Statement.
3.17 The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including, without limitation, the Securities Act and the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated by the
Commission).
3.18 The Company shall take all such other actions as any Purchaser or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities.
3.19 From and after the date of this Agreement, the Company shall not, and
shall not agree to, allow the holders of any securities of the Company to
include any of their securities in any Registration Statement or any amendment
or supplement thereto under Section 2.1 or 3.2 hereof without the consent of the
holders of a majority of the Registrable Securities.
ARTICLE IV
OBLIGATIONS OF THE PURCHASERS
In connection with the registration of the Registrable Securities, the
Purchasers shall have the following obligations:
4.1 It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Purchaser that such Purchaser shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least ten (10)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Purchaser of the information the
Company requires from each such Purchaser.
4.2 Each Purchaser, by such Purchaser's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statements and any amendments and supplements thereto hereunder, unless such
Purchaser has notified the Company in writing of such Purchaser's election to
exclude all of such Purchaser's Registrable Securities from the Registration
Statement.
4.3 Each Purchaser whose Registrable Securities are included in a
Registration Statement understands that the Securities Act may require delivery
of a prospectus relating thereto in connection with any sale thereof pursuant to
such Registration Statement, and each such Purchaser
<PAGE>
shall comply with the applicable prospectus delivery requirements of the
Securities Act in connection with any such sale.
4.4 [Intentionally Deleted].
4.5 Each Purchaser agrees that, upon receipt of written notice from the
Company of the happening of any event of the kind described in Section 3.6, such
Purchaser will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Purchaser's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.6 and, if so directed by the Company, such
Purchaser shall deliver to the Company (at the expense of the Company) or
destroy (and deliver to the Company a certificate of destruction) all copies in
such Purchaser's possession (other than a limited number of permanent file
copies), of the prospectus covering such Registrable Securities current at the
time of receipt of such notice.
4.6 Without limiting a Purchaser's rights under Section 2.1 or 3.2 hereof,
no Purchaser may participate in any underwritten distribution hereunder unless
such Purchaser (a) agrees to sell such Purchaser's Registrable Securities on the
basis provided in any underwriting arrangements in usual and customary form
entered into by the Company, (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (c)
agrees to pay its pro rata share of all underwriting discounts and commissions
and any expenses in excess of those payable by the Company pursuant to Article
V.
ARTICLE V
EXPENSES OF REGISTRATION
All expenses, other than underwriting discounts and commissions, incurred
in connection with registrations, filings or qualifications pursuant to Articles
II and III, including, without limitation, all registration, listing and
qualification fees, printers and accounting fees, the fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of one
counsel selected by the Purchasers pursuant to Section 2.2, hereof shall be
borne by the Company.
ARTICLE VI
INDEMNIFICATION
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
6.1 To the extent permitted by law, the Company will indemnify, hold
harmless and defend (a) each Purchaser who holds such Registrable Securities,
(b) each underwriter of Registrable Securities and (c) the directors, officers,
partners, members, employees, agents and persons who control any Purchaser
within the meaning of Section 15 of the Securities Act or Section 20 of the
<PAGE>
Securities Exchange Act of 1934, as amended (the "Exchange Act"), if any, (each,
an "Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6.3 with respect to the number of legal
counsel, the Company shall reimburse the Purchasers, each such underwriter and
controlling person, and each such other Indemnified Person, promptly as such
expenses are incurred and are due and payable, for any reasonable legal fees or
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6.1: (x) shall
not apply to an Indemnified Person with respect to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by such Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (y) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (z) with respect
to any preliminary prospectus, shall not inure to the benefit of any Indemnified
Person if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, if such corrected prospectus was timely made
available by the Company pursuant to Section 3.3 hereof, and the Indemnified
Person was promptly advised in writing not to use the incorrect prospectus prior
to the use giving rise to a Violation and such Indemnified Person,
notwithstanding such advice, used it. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Purchasers pursuant to Article IX.
6.2 In connection with any Registration Statement in which a Purchaser is
participating, each such Purchaser agrees to indemnify, hold harmless and
defend, to the same extent and in the same manner set forth in Section 6.1, the
Company, each of its directors, each of its officers, its employees, agents and
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and any other stockholder
selling securities pursuant to the Registration Statement, together with its
directors, officers and members, and any
<PAGE>
person who controls such stockholder or underwriter within the meaning of the
Securities Act or the Exchange Act (each an "Indemnified Party"), against any
Claim to which any of them may become subject, under the Securities Act, the
Exchange Act or otherwise, insofar as such Claim arises out of or is based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Purchaser expressly for use in connection with
such Registration Statement; and subject to Section 6.3 such Purchaser will
reimburse any legal or other expenses (promptly as such expenses are incurred
and are due and payable) reasonably incurred by them in connection with
investigating or defending any such Claim; provided, however, that the indemnity
agreement contained in this Section 6.2 shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Purchaser, which consent shall not be unreasonably withheld;
provided, further, however, that a Purchaser shall be liable under this
Agreement (including this Section 6.2 and Article VII) for only that amount as
does not exceed the net proceeds actually received by such Purchaser as a result
of the sale of Registrable Securities pursuant to such Registration Statement.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of the Registrable Securities by the Purchasers pursuant to Article
IX. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6.2 with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, and the Indemnified Party failed to utilize such
corrected prospectus.
6.3 Promptly after receipt by an Indemnified Person or Indemnified Party
under this Article VI of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to made against any indemnifying party under this
Article VI, deliver to the indemnifying party a written notice of the
commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that such indemnifying party shall diligently pursue such defense and
that such indemnifying party shall not be entitled to assume such defense and an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
conflicts of interest between such Indemnified Person or Indemnified Party and
any other party represented by such counsel in such proceeding or the actual or
potential defendants in, or targets of, any such action include both the
Indemnified Person or the Indemnified Party and any such Indemnified Person or
Indemnified Party reasonably determines that there may be legal defenses
available to such Indemnified Person or Indemnified Party which are different
from or in addition to those available to such indemnifying party. The
indemnifying party shall pay for only one separate legal counsel for the
Indemnified Persons or the Indemnified Parties, as applicable, and such legal
counsel shall be selected by
<PAGE>
Purchasers holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates (with the approval of
the Initial Purchasers if they hold Registrable Securities included in such
Registration Statement), if the Purchasers are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Article VI, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Article VI shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
ARTICLE VII
CONTRIBUTION
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Article
VI to the fullest extent permitted by law; provided, however, that (i) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who is a
holder of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (ii) contribution (together with any indemnification or
other obligations under this Agreement) by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
ARTICLE VIII
REPORTS UNDER THE EXCHANGE ACT
With a view to making available to the Purchasers the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the SEC that may at any time permit the Purchasers to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
8.1 File with the SEC in a timely manner and make and keep available all
reports and other documents required of the Company under the Securities Act and
the Exchange Act so long as the Company remains subject to such requirements (it
being understood that nothing herein shall limit the Company's obligations under
Section 4.3 of the Securities Purchase Agreement) and the filing and
availability of such reports and other documents is required for the applicable
provisions of Rule 144; and
8.2 Furnish to each Purchaser so long as such Purchaser holds Preferred
Stock, Warrants or Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii)
<PAGE>
a copy of the most recent annual or quarterly report of the Company and such
other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Purchasers to sell such
securities pursuant to Rule 144 without registration.
ARTICLE IX
ASSIGNMENT OF REGISTRATION RIGHTS
The rights of the Purchasers hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assigned by each Purchaser to any transferee of all or any portion
of the Preferred Stock or the Registrable Securities if: (a) the Purchaser
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company within a reasonable time
after such assignment, (b) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (i) the name and
address of such transferee or assignee, and (ii) the securities with respect to
which such registration rights are being transferred or assigned, (c) following
such transfer or assignment, the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act or applicable
state securities laws, (d) at or before the time the Company receives the
written notice contemplated by clause (ii) of this sentence, the transferee or
assignee agrees in writing for the benefit of the Company to be bound by all of
the provisions contained herein, and (e) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
ARTICLE X
AMENDMENT OF REGISTRATION RIGHTS
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with written consent of the Company and Purchasers who
hold a majority interest of the Registrable Securities. Any amendment or waiver
effected in accordance with this Article X shall be binding upon each Purchaser
and the Company. Notwithstanding the foregoing, no amendment or waiver shall
retroactively affect any Purchaser without its consent or prospectively
adversely affect any Purchaser who no longer owns any Preferred Stock, Warrants
or Registrable Securities without its consent. Neither Article VI nor Article
VII hereof may be amended or waived in a manner adverse to a Purchaser without
its consent.
ARTICLE XI
MISCELLANEOUS
11.1 A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
<PAGE>
11.2 Any notices herein required or permitted to be given shall be in
writing and may be personally served or delivered by courier or by confirmed
telecopy, and shall be deemed delivered at the time and date of receipt (which
shall include telephone line facsimile transmission). The addresses for such
communications shall be:
If to the Company:
Pharmos Corporation
33 Wood Avenue South
Suite 466
Iselin, NJ 08830
Attention: Chief Financial Officer
with a copy to:
Ehrenreich, Eilenberg, Krause & Zivian, LLP
11 East 44th Street
17th Floor
New York, NY 10017
Attn: Adam D. Eilenberg
If to CC Investments, LDC:
CC Investments, LDC
Corporate Centre, West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
with a copy to:
Castle Creek Partners, LLC
440 South LaSalle Street
Suite 700
Chicago, Illinois 60605
Telecopy: (312) 362-4500
Attention: John D. Ziegelman
<PAGE>
and with a copy to:
Altheimer & Gray
10 South Wacker Drive
Chicago, Illinois 60606
Telecopy: (312) 715-4800
Attention: Peter H. Lieberman, Esq.
and if to any other Purchaser, at such address as such Purchaser, shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11.2.
11.3 Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
11.4 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed in the State of New York. The Company irrevocably consents to the
jurisdiction of the federal courts located in the State of New York and the
state courts of the State of New York located in the County of New York in the
State of New York in any suit or proceeding based on or arising under this
Agreement and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in such courts. Each party irrevocably waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The parties hereto further agree that service of process upon the parties hereto
mailed by first class mail shall be deemed in every respect effective service of
process upon each such party in any such suit or proceeding. Nothing herein
shall affect either party's right to serve process in any other manner permitted
by law. The parties hereto agree that a final non-appealable judgment in any
such suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
11.5 This Agreement, the Preferred Stock, Warrants and the Securities
Purchase Agreement (including all schedules and exhibits thereto and all
certificates and opinions required thereby) constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement, the Preferred
Stock, the Warrants and the Securities Purchase Agreement supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
11.6 Subject to the requirements of Article IX hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto. Notwithstanding anything to the contrary contained
herein, including, without limitation, Article IX, the rights of a Holder
hereunder shall be assignable to and exercisable by a bona fide pledgee of the
Registrable Securities in connection with a Holder's margin or brokerage
accounts.
<PAGE>
11.7 The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
11.8 This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto, by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
11.9 Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
11.10 All consents and other determinations to be made by the Purchasers or
the Initial Purchasers pursuant to this Agreement shall be made by the
Purchasers or the Initial Purchasers holding a majority of the Registrable
Securities (determined as if all Preferred Stock then outstanding had been
converted into Registrable Securities) held by all Purchasers or Initial
Purchasers, as the case may be.
11.11 The initial number of Registrable Securities included on any
Registration Statement and each increase to the number of Registrable Securities
included thereon shall be allocated pro rata among the Purchasers based on the
number of Registrable Securities held by each Purchaser at the time of such
establishment or increase, as the case may be. In the event a Purchaser shall
sell or otherwise transfer any of such holder's Registrable Securities, each
transferee shall be allocated a pro rata portion of the number of Registrable
Securities included on a Registration Statement for such transferor. Any shares
of Common Stock included on a Registration Statement and which remain allocated
to any person or entity which does not hold any Registrable Securities shall be
allocated to the remaining Purchasers, pro rata based on the number of shares of
Registrable Securities then held by such Purchasers. For purposes of making the
pro rata allocations set forth in this paragraph, all Preferred Stock then
outstanding shall be deemed to have been converted into Registrable Securities.
11.12 If any provision of this Agreement shall be invalid or unenforceable,
such invalidity or unenforceability shall not affect the validity or
enforceability of the remainder of this Agreement.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
PHARMOS CORPORATION
By: ______________________________________
Its: ______________________________
Initial Purchasers:
CC INVESTMENTS, LDC
By: ______________________________________
Its: ______________________________
GEMINI CAPITAL,
a Division of R.D. Kushnir & Co.
By: _____________________________________
Its: _____________________________
DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES C CONVERTIBLE PARTICIPATING PREFERRED STOCK
OF
PHARMOS CORPORATION
I. DESIGNATION AND AMOUNT
The designation (this "Certificate of Designation") of this series, which
consists of ten thousand (10,000) shares of Preferred Stock of Pharmos
Corporation, a Nevada corporation (the "Company"), is the Series C Convertible
Participating Preferred Stock (the "Preferred Stock") and the stated value shall
be One Thousand Dollars ($1,000.00) per share (the "Face Amount").
II. DIVIDENDS
The Preferred Stock will bear no dividends.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "Bankruptcy Event" shall mean any one or more of the following: (i) the
commencement of any voluntary proceeding by the Company seeking entry of an
order for relief under Title 11 of the United States Code or seeking any similar
or equivalent relief under any other applicable federal or state law concerning
bankruptcy, insolvency, creditors' rights or any similar law; (ii) the making by
the Company of a general assignment for the benefit of its creditors; (iii) the
commencement of any involuntary proceeding respecting the Company seeking entry
of an order for relief against the Company in a case under Title 11 of the
United States Code or seeking any similar or equivalent relief under any other
applicable federal or state law concerning bankruptcy, insolvency, creditors'
rights or any similar law, which proceeding is not dismissed within sixty (60)
days after its commencement; (iv) entry of a decree or order respecting the
Company by a court having competent jurisdiction, which decree or order (x)
results in the appointment of a receiver, liquidator, assignee, examiner,
custodian, trustee, sequestrator (or other similar official) for the Company or
for any substantial part of its property or (y) orders the winding up,
liquidation,
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dissolution, reorganization, arrangement, adjustment, or composition of the
Company or any of its debts; (v) the voluntary appointment by the Company of a
receiver, liquidator, assignee, examiner, custodian, trustee, sequestrator (or
other similar official) for the Company or for any substantial part of its
property; (v) the bringing of an involuntary action for the appointment of a
receiver, liquidator, assignee, examiner, custodian, trustee, sequestrator (or
other similar official) for the Company or for any substantial part of its
property which is not dismissed within sixty (60) days or which results in an
adjudication or appointment or an order for relief; (vi) the failure by the
Company to pay, or its admission in writing of its inability to pay, its debts
generally as they become due; (vii) the exercise by any creditor of any right in
connection with an interest of such creditor in any substantial and material
part of the Company's property, including, without limitation, foreclosure upon
all or any such part of the Company's property, replevin, or the exercise of any
rights or remedies provided under the Uniform Commercial Code with regard
thereto; (viii) the calling by the Company of a general meeting of its creditors
or any portion of them; (ix) the failure by the Company to file an answer or
other pleading denying the material allegations of any proceeding described
herein that is filed against it; and (x) the consent by the Company to any of
the actions, appointments, or proceedings described herein or the failure of the
Company to contest in good faith any such actions, appointments, or proceedings.
B. "Closing Bid Price" means, for any security as of any date, the closing
bid price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to holders of the Preferred
Stock (each, a "Holder") then holding a majority of the then outstanding shares
of Preferred Stock ("Majority Holders") if Bloomberg Financial Markets is not
then reporting closing bid prices of such security (collectively, "Bloomberg"),
or if the foregoing does not apply, the last reported sale price of such
security in the over-the-counter market on the electronic bulletin board of such
security as reported by Bloomberg, or, if no sale price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the Company and reasonably acceptable to the
Majority Holders, with the costs of such appraisal to be borne by the Company.
C. "Conversion Date" means, for any Optional Conversion, the date specified
in the notice of conversion (the "Notice of Conversion"), so long as the copy of
the Notice of Conversion is faxed (or delivered by other means) to the Company's
Attorney (as defined below) (with a copy to the Company) before 6:00 p.m.,
Eastern time, on the Conversion Date indicated in the Notice of Conversion. If
the Notice of Conversion is not so faxed or otherwise delivered before such
time, then the Conversion Date shall be the business day following the date on
which the Notice of Conversion is faxed (or delivered by other means). The
Conversion Date for the Required Conversion at Maturity shall be the Maturity
Date (as such terms are defined herein). Copies of Notices of Conversion
delivered to the Company shall be delivered to Pharmos Corporation, 33
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Wood Avenue South, Suite 466, Iselin, New Jersey 08330 (Facsimile No.:
732-603-3532). "Company's Attorney" shall mean Mr. Adam Eilenberg at Ehrenreich,
Eilenberg, Krause & Zivian, LLP, 11 East 44th Street, 17th Floor, New York, New
York 10017 (Facsimile No.: 212-986-2399), or such other attorney as Holders are
notified of in writing from time to time by the Company.
D. "Conversion Price" means, with respect to any Conversion Date occurring
(i) during the period ending one hundred and eighty (180) days following the
date of original issuance of the Preferred Stock (the "Initial Conversion
Period"), the Variable Conversion Price, and (ii) after the Initial Conversion
Period, the lower of the Fixed Conversion Price and the Variable Conversion
Price, subject to adjustment as provided herein.
E. "Fixed Conversion Price" means one hundred and twenty percent (120%) of
the average of the Closing Bid Prices of the common stock, $.03 par value per
share, of the Company (the "Common Stock") for the trading days beginning on the
date which is one hundred and fifty-one (151) days, and ending on the date which
is one hundred and eighty (180) days, following the First Closing (as defined in
the Securities Purchase Agreement) (subject to equitable adjustment for any
stock splits, stock dividends, reclassifications or similar events during such
period)
F. "Premium" means 1000 x (N/365) x (.05).
N = the number of days from the applicable Closing to, and including,
the Conversion Date.
G. "Low Trade Price" means, for any security as of any date, the lowest
trade price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing does not apply, the low reported trade price of such security in
the over-the-counter market on the electronic bulletin board of such security as
reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the low trade price of any market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc.
H. "Variable Conversion Price" means, as of any Conversion Date, 90% of the
average of the Low Trade Prices of the Common Stock for the five (5) consecutive
trading days ending on the trading day immediately preceding the Conversion Date
(subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events during the such five (5) trading day
period), subject to adjustment as provided herein.
I. "NASDAQ Trigger Date" means the fifth (5th) day of any five consecutive
trading days during which the number of shares of Common Stock issuable upon
conversion of all shares of Preferred Stock and upon the issuance of the Warrant
Shares (as defined in the Securities Purchase Agreement (as defined below))
exceeds sixty-six and two-thirds percent (66 2/3%) of the Cap Amount (as herein
defined).
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IV. CONVERSION
A. Conversion at the Option of the Holder. Subject to the limitations on
conversions contained in Section IV.G, each Holder may, at any time and from
time to time beginning on the earlier of (i) the sixtieth (60th) day after the
First Closing, (ii) the effectiveness of a registration statement of the Company
under the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively the "Securities Act")
as contemplated by the Registration Rights Agreement, (iii) the occurrence of a
material adverse change or development in the business, properties, operations,
financial condition, operating results or prospects of the Company and its
subsidiaries, taken as a whole on a consolidated basis (a "Material Adverse
Change"), (iv) the occurrence of a Bankruptcy Event, and (v) the occurrence of a
Redemption Event (as herein defined) convert (an "Optional Conversion") any or
all of its shares of Preferred Stock into a number of fully paid and
non-assessable shares of Common Stock determined, for each share of Preferred
Stock so to be converted, in accordance with the following formula:
(Premium + 1000)
------------------
Conversion Price
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
Holder shall fax (or otherwise deliver) a copy of the fully executed Notice of
Conversion in the form attached hereto as Schedule 1 to the Company. Upon
receipt by the Company of the fax copy of a Notice of Conversion from a Holder,
the Company or the Company's Attorney (any such confirmation notice by the
Company's Attorney shall be binding upon the Company) shall immediately send,
via fax, a confirmation to such Holder stating that the Notice of Conversion has
been received, the date upon which the Company expects to deliver the Common
Stock issuable upon such conversion and the name and telephone number of a
contact person at the Company regarding the conversion. No later than one (1)
business day after receipt of such confirmation of receipt to Notice of
Conversion the Holder shall surrender or cause to be surrendered to a reputable
overnight courier for next business day delivery (two (2) business day delivery
if from outside the United States) to the Company, the certificates representing
the Preferred Stock being converted (the "Preferred Stock Certificates")
accompanied by duly executed stock powers and a copy of the Notice of Conversion
(or, in lieu thereof, materials contemplated by Section XIV.B., if applicable).
C. Delivery of Common Stock Upon Conversion. Upon the delivery of a Notice
of Conversion, the Company shall, no later than the later of (a) the third (3rd)
business day following the Conversion Date and (b) the day that is the first
business day (two (2) business days following delivery if from outside the
United States) following the date of delivery of the Preferred Stock
Certificates by the Holder in accordance herewith (or satisfaction of the
provisions of Section XIV.B, if applicable) (the "Delivery Period"), deliver to
the Holder (or at its direction) (x) that number of shares of Common Stock
issuable upon conversion of such shares of Preferred Stock being converted and
(y) a certificate representing the number of shares of Preferred Stock not being
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converted, if any. The person or persons entitled to receive shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder of such shares at the close of business on the Conversion Date and
such shares shall be issued and outstanding as of such date. In lieu of
delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program (the
"FAST Program"), and further provided that the resale of such shares of Common
Stock is covered by a then effective registration statement if required by the
FAST Program, upon request of a Holder, the Company shall use its reasonable
efforts to cause its transfer agent to electronically transmit the Common Stock
issuable upon conversion to the Holder by crediting the account of Holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system. The Company shall use its reasonable efforts to participate in the FAST
Program.
D. Taxes. The Company shall pay any and all taxes (other than transfer
taxes) which may be imposed with respect to the issuance and delivery of the
shares of Common Stock pursuant to conversion of the Preferred Stock.
E. No Fractional Shares. No fractional shares of Common Stock are to be
issued upon the conversion of Preferred Stock, but the Company shall instead
round up to the next whole number the number of shares of Common Stock to be
issued upon such conversion.
F. Conversion Disputes. In the case of any dispute with respect to a
conversion, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with Sections IV.A and IV.C hereof. If
such dispute involves the calculation of the Conversion Price, the Company shall
submit the disputed calculations to an independent accounting firm of national
standing, reasonably acceptable to Holder and to the Company, via facsimile
within three (3) business days of receipt of the Notice of Conversion. The
accounting firm shall audit the calculations and notify the Company and the
Holder of the results no later than two (2) business days from the date it
receives the disputed calculations. The accounting firm's calculation shall be
deemed conclusive, absent manifest error. The Company shall not be liable with
respect to penalties or premiums which have accrued or are payable with respect
to such shares of Preferred Stock or Common Stock: (a) for the first occurrence
in which Company is the non-prevailing party in such a dispute if the Company
has a reasonable, good faith basis for such dispute, and (b) in all cases, to
the extent that the Holder is the non-prevailing party with respect to specific
shares of Preferred Stock or Common Stock which are the subject of such dispute.
The Company shall then issue the appropriate number of shares of Common Stock in
accordance with Sections IV.A and IV.C hereof.
G. Limitation on Conversions. The conversion of shares of Preferred Stock
shall be subject to the following limitations (each of which limitations shall
be applied independently):
(i) Cap Amount. Prior to Stockholder Approval (as herein defined), in
the event that Nasdaq Rule 4460(i) or any successor rule) applies to the
Company, unless otherwise permitted
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by the Nasdaq SmallCap Market, or the Nasdaq National Market System if the
Common Stock of the Company trades on such market, in no event shall the
Company be required to issue more shares of Common Stock upon conversion of
the Preferred Stock and the exercise of the Warrants (as defined in the
Securities Purchase Agreement) than the maximum number of shares of Common
Stock that the Company can without stockholder approval so issue pursuant
to such rule or rules (the "Cap Amount"), which, as of the date of initial
issuance of shares of Preferred Stock and Warrants, shall be the amount
indicated to be the Cap Amount in the officer's certificate delivered
pursuant to the Securities Purchase Agreement. The Cap Amount shall be
allocated pro-rata to the Holders as provided in Article XIV.C. A Holder's
allocable portion of the Cap Amount shall be applicable to both shares of
Preferred Stock and Warrants held by it and shall be applied to such
Preferred Stock and Warrants on the basis of the time of conversion or
exercise, as the case may be, thereof. In the event the Company is
prohibited from issuing shares of Common Stock as a result of the operation
of this subparagraph (i), the Company shall comply with Article VIII.
(ii) Five Percent Holdings. Notwithstanding anything to the contrary
contained herein, the Preferred Stock shall not be convertible by a Holder
to the extent (but only to the extent) that, if convertible by such Holder,
such Holder, or any of its affiliates (as defined under Rule 12b-2 of the
Securities Exchange Act of 1934, as amended), would beneficially own in
excess of 4.9% of the shares of Common Stock. To the extent the foregoing
limitation applies, the determination of whether Preferred Stock shall be
convertible (vis-a-vis other securities owned by such Holder) and of which
Preferred Stock shall be convertible (as among shares of Preferred Stock)
shall be in the sole discretion of the Holder and submission of the
Preferred Stock for conversion shall be deemed to be the Holder's
determination of whether such Preferred Stock is convertible (vis-a-vis
other securities owned by such Holder) and of which shares of Preferred
Stock are convertible (as among shares of Preferred Stock), subject to such
aggregate percentage limitation. No prior inability to convert Preferred
Stock pursuant to this Section shall have any effect on the applicability
of the provisions of this Section with respect to any subsequent
determination of convertibility. For the purposes of this Section,
beneficial ownership and all determinations and calculations, including
without limitation, with respect to calculations of percentage ownership,
shall be made in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13D and G thereunder. The
provisions of this Section may be implemented in a manner otherwise than in
strict conformity with the terms of this Section with the approval of the
Board of Directors of the Company and a Holder: (i) with respect to any
matter to cure any ambiguity herein, to correct this subsection (or any
portion thereof) which may be defective or inconsistent with the intended
4.9% beneficial ownership limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such 4.9%
limitation; and (ii) with respect to any other matter, with the further
consent of the holders of majority of the then outstanding shares of Common
Stock. The provisions of this Section may be waived by any Holder at its
election upon not less than sixty-one (61) days prior written notice from
such Holder to the Company, including, without limitation, a limited waiver
to increase the 4.9% limit herein contained to any other percentage
specified by such Holder. The limitations contained in this Section shall
apply to a successor Holder of Preferred Stock if, and to the extent,
elected by such successor Holder concurrently with its acquisition of such
Preferred Stock, such election to be promptly confirmed in writing to the
Company (provided no
<PAGE>
transfer or series of transfers to a successor Holder or Holders shall be
used by a Holder to evade the limitations contained herein).
H. Required Conversion at Maturity. Subject to the limitations set forth in
Section IV.G. and provided all shares of Common Stock issuable upon conversion
of all outstanding shares of Preferred Stock and exercise of all outstanding
Warrants (in each case, without giving effect to any limitation on conversion or
exercise) are then (i) authorized and reserved for issuance, (ii) registered
under the Securities Act of 1933, as amended (the "Securities Act") for resale
by all holders of such shares of Preferred Stock and Warrants, (iii) eligible to
be traded on either the Nasdaq National Market System, the Nasdaq SmallCap
Market, the New York Stock Exchange or the American Stock Exchange, each share
of Preferred Stock outstanding on the third (3rd) anniversary of the First
Closing (the "Maturity Date") (and any accrued and unpaid Conversion Default
Payments), automatically shall be converted into shares of Common Stock on such
date in accordance with the conversion formula set forth in Section IV.A (the
"Required Conversion at Maturity"), except as to any Holder who elects otherwise
in the event that a Bankruptcy Event or Redemption Event has occurred prior to
the Maturity Date and shall be continuing as of the Maturity Date; provided,
however, that the Maturity Date will be extended for up to ninety (90) days
after the third anniversary of the First Closing (the "Extension Period") and
the shares of Preferred Stock shall be converted as provided herein at any time
during the Extension Period if any failure to satisfy clauses (ii) and (iii) of
this sentence are satisfied for a continuous period of at least five (5) trading
days during the Extension Period and no Bankruptcy Event or Redemption Event
exists at any time during such period. If a Required Conversion at Maturity
occurs, the Company and the Holders shall follow the applicable conversion
procedures set forth in this Article IV; provided, however, that a Notice of
Conversion shall be deemed to be delivered to the Company on the Maturity Date.
V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK
A. Reserved Amount. The Company shall have authorized and reserved and keep
available for issuance not less than ten million 10,000,000 (subject to
equitable adjustment for any stock splits, stock dividends, reclassification or
similar events) shares of Common Stock (the "Reserved Amount") solely for the
purpose of effecting the conversion of the Preferred Stock and the Warrants. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock a sufficient number of shares of Common Stock to
provide for the full conversion of all outstanding Preferred Stock and exercise
of the Warrants and issuance of the shares of Common Stock in connection
therewith. The Reserved Amount shall be allocated among the Holders as provided
in Section XIV.C. Notwithstanding anything to the contrary set forth in this
Agreement and notwithstanding the ten (10) and ninety (90) day periods referred
to in clause (vi) of Section VIII.A. of this Certificate of Designation, to the
extent the Company has authorized and unissued shares of Common Stock which are
not reserved for another purpose, such shares shall be used to satisfy
conversions of Preferred Stock and exercise of the Warrants and issuance of
shares of Common Stock in connection therewith. In addition, during any period
in which the Reserved Amount is less than one hundred seventy-five percent
(175%) of the number of shares of Common
<PAGE>
Stock issuable on five consecutive trading days upon conversion of the
outstanding Preferred Stock and exercise of the then outstanding Warrants (in
each case without giving effect to any limitation on conversion or exercise
thereof), the Company shall not reserve shares of Common Stock for any purposes
other than the conversion of the Preferred Stock or the exercise of the Warrant.
B. Increases to Reserved Amount. Without limiting any other provision of
this Article V, if the Reserved Amount for any five (5) consecutive trading days
(the last of such five (5) trading days being the "Authorization Trigger Date")
is less than one hundred fifty percent (150%) of the number of shares of Common
Stock issuable on such trading days upon conversion of the outstanding Preferred
Stock and exercise of the then outstanding Warrants (in each case without giving
effect to any limitation on conversion or exercise thereof) then the Company
shall immediately notify the Holders of such occurrence and shall immediately
take all necessary action (including stockholder approval to authorize the
issuance of additional shares of Common Stock) to increase the Reserved Amount
to one hundred and seventy-five percent (175%) of the number of shares of Common
Stock issuable upon conversion of the outstanding Preferred Stock and exercise
of all outstanding Warrants (in each case, without giving effect to any
limitation on conversion or exercise thereof) (the "Reset Reserved Amount);
provided, however, that following the date on which the Company has authorized
and reserved and made available for issuance the Reset Reserved Amount, the
provisions of this Article V shall be reset and any subsequent Authorization
Trigger Date shall occur only if the Reset Reserved Amount for any five (5)
consecutive trading days is less than one hundred and fifty percent (150%) of
the number of shares of Common Stock issuable on such trading days upon
conversion of the outstanding Preferred Stock and the exercise of the then
outstanding Warrants (in each case without giving effect to any limitation or
conversion or exercise thereof).
VI. COMPLIANCE WITH CAP AMOUNT RESTRICTIONS
A. Share Authorization. The Company shall, on or before each of (a) thirty
days following each NASDAQ Trigger Date and (b) unless Stockholder Approval (as
herein defined) has already been obtained, the date one hundred twenty (120)
days after the date of the First Closing (each such date, a "Proxy Filing
Deadline"), prepare and file with the Securities and Exchange Commission an
appropriate proxy statement (which complies with U.S. federal securities law) in
order to solicit by proxy the authorization by the stockholders of the Company
(such stockholder approval, when obtained, being defined as the "Stockholder
Approval") of the issuance of shares of Common Stock upon conversion of shares
of Preferred Stock pursuant to the terms hereof and the exercise of the Warrants
pursuant to the terms thereof in the aggregate in excess of twenty (20) percent
of the outstanding shares of Common Stock and to eliminate any prohibitions
under the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the Company
or any of its securities on the Company's ability to issue shares of Common
Stock in excess of the Cap Amount. The Company shall submit all such matters for
which Stockholder Approval is required to its Stockholders for their
authorization and approval on or before sixty (60) days after any Proxy Filing
Deadline and shall use its best efforts to obtain Stockholder Approval on or
before ninety (90) days after such Proxy Filing Deadline.
<PAGE>
B. Obligation to Notify. If at any time a NASDAQ Trigger Date occurs, the
Company shall immediately notify the Holders of such occurrence.
VII. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a Holder submits a
Notice of Conversion (or is deemed to submit such notice pursuant to Section
IV.H) and the Company fails for any reason (other than because such issuance
would exceed such Holder's allocated portion of the Reserved Amount or the Cap
Amount, for which failure the Holders shall have the remedies set forth in
Article VIII) to deliver, on or prior to the expiration of the Delivery Period
for such conversion, such number of shares of Common Stock to which such Holder
is entitled upon such conversion, or (y) the Company provides notice (including
by way of public announcement) to any Holder at any time of its intention not to
issue shares of Common Stock upon exercise by any Holder of its conversion
rights in accordance with the terms of this Certificate of Designation (other
than because such issuance would exceed such Holder's allocated portion of the
Reserved Amount or the Cap Amount) (each of (x) and (y) being a "Conversion
Default"), then the Company shall pay to the affected Holder, in the case of a
Conversion Default described in clause (x) above, and to all Holders, in the
case of a Conversion Default described in clause (y) above, an amount equal to
one thousand dollars ($1,000)for each day such Conversion Default exists until
the fifth (5th) business day following the receipt by facsimile by the Company
of the Notice of Conversion. If, following the fifth (5th) business day
following receipt by facsimile by the Company of the Notice of Conversion, the
Company continues to fail for any reason to deliver such shares of Common Stock
to which such Holder is entitled upon such conversion, then the Company shall
pay to the affected Holder, in the case of a Conversion Default described in
clause (x) above, and to all Holders, in the case of a Conversion Default
described in clause (y) above, an amount equal to (i) one percent (1%) of the
Face Amount of the Preferred Stock with respect to which the Conversion Default
exists (which amount shall be deemed to be the aggregate Face Amount of all
outstanding Preferred Stock in the case of a Conversion Default described in
clause (y) above) for each day such Conversion Default exists (ii) plus any
Premium.
The payments to which a Holder shall be entitled pursuant to this Section
VII.A are referred to herein as "Conversion Default Payments." Conversion
Default Payments shall be made the fifth (5th) business day following written
demand by a Holder for payment therefor and otherwise in accordance with and
subject to the provisions of Section XIV.E. "Cure Date" means (i) with respect
to a Conversion Default described in clause (x) of its definition, the date the
Company effects the conversion of the portion of the Preferred Stock submitted
for conversion and (ii) with respect to a Conversion Default described in clause
(y) of its definition, the date the Company undertakes in writing to issue
Common Stock in satisfaction of all conversions of Preferred Stock in accordance
with the terms of this Certificate of Designation (provided the Company in fact
thereafter so satisfies such conversions).
B. Repayment Option. If a Holder has not received certificates for all
shares of Common
<PAGE>
Stock on or before the tenth (10th) day after receipt by facsimile by the
Company of the Notice of Conversion for any reason (other than because such
issuance would exceed such Holder's allocated portion of the Reserved Amount or
the Cap Amount, for which failure the Holders shall have the remedies set forth
in Article VIII, or because such Holder has failed to meet the requirements of
Section IV.B which require the delivery of certificates or the satisfaction of
Section XIV.B), then the affected Holder in the case of a Conversion Default of
the type described in clause (x) of Section VII.A, and all Holders, in the case
of a Conversion Default of the type described in clause (y) of Section VII.A,
shall have the option (the "Repayment Option"), exercisable within thirty (30)
days from the date upon which the Company is in full compliance with this
Certificate of Designation, including, without limitation, payment of all
Conversion Default Payments and payment of any and all damages owed to Holder,
by delivery of a written notice to the Company (the "Repayment Option Notice"),
to receive repayment, in cash, of all of the shares of Preferred Stock held by
such Holders, in the case of a Conversion Default described in clause (y) of
Section VII.A above, or any of the shares of Preferred Stock which are subject
to a Conversion Default held by such Holders, in the case of a Conversion
Default described in clause (x) of Section VII.A above, at a price per share of
one hundred and fifty percent (150%) of the Face Amount of the Preferred Stock
plus any accrued penalties pursuant to Section VII.A to the date of such
repayment; provided, however, that if prior to the date of delivery to the
Company of a Repayment Option Notice and no later than seven (7) days from the
expiration of the Delivery Period, the Holder receives certificates for all
shares of Common Stock, then the Repayment Option with respect to such Holder
shall be suspended until such time as Holder again has not received certificates
for all shares of Common Stock on or before the tenth (10th) day after receipt
by facsimile by the Company of the Notice of Conversion for any reason (other
than because such issuance would exceed such Holder's allocated portion of the
Reserved Amount or the Cap Amount, for which failure the Holders shall have the
remedies set forth in Article VIII). A Holder shall provide the Company written
notification indicating any amounts payable to such Holder pursuant to this
Section VII.B. Such payments shall be made within five (5) business days of the
Company's receipt of such notice and otherwise in accordance with and subject to
the provisions of Section XIV.
VIII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption Events. A "Redemption Event" means any one of the following:
1.1 the Common Stock (or any portion thereof) is suspended from
trading on any of, or is not listed (and authorized) for trading on any of,
the Nasdaq National Market System, the Nasdaq SmallCap Market, the American
Stock Exchange, or the New York Stock Exchange for an aggregate of five (5)
trading days in any nine (9) month period;
1.2 the Company fails, and any such failure continues uncured for ten
(10) days after the Company has been notified thereof in writing by the
Holder, to remove any restrictive legend on any certificate or any shares
of Common Stock issued to the Holders of Preferred Stock or Warrants upon
conversion of the Preferred Stock or Warrants (as the case may be) as and
when
<PAGE>
required by this Certificate of Designation, the Securities Purchase
Agreement, dated contemporaneously herewith, by and among the Company and
the other signatories thereto (the "Securities Purchase Agreement"), or the
Registration Rights Agreement, dated contemporaneously herewith, by and
among the Company and the other signatories thereto (the "Registration
Rights Agreement"), it being understood and agreed that the provisions of
this Certificate of Designation and such agreements with respect to the
removal of restrictive legends shall be strictly construed in accordance
with the requirements thereof;
1.3 the Company materially breaches any material covenant or other
material term of this Certificate of Designation, the Securities Purchase
Agreement, the Warrants or the Registration Rights Agreement and such
breach continues for a period of ten (10) business days after written
notice thereof to the Company and no remedy is otherwise available under
this Article VIII other than pursuant to this paragraph VIII(A)(iii);
1.4 any representation or warranty of the Company made in any
agreement, statement or certificate given in writing in connection with the
issuance of the Preferred Stock (including, without limitation, the
Warrants, the Securities Purchase Agreement or the Registration Rights
Agreement), shall be false or misleading in any material respect when made
and the breach of which has had or could reasonably be expected to have a
material adverse effect on the Company or on the Holder with respect to its
investment in shares of Preferred Stock or Warrants or shares of Common
Stock issuable upon conversion of the Preferred Stock or upon exercise of
the Warrants;
1.5 the Registration Statement required to be filed by the Corporation
pursuant to the Registration Rights Agreement, has not been filed within
thirty (30) days of the First Closing or has not been declared effective by
the one hundred and eightieth (180th) day following the First Closing or
such Registration Statement, after being declared effective, cannot be
utilized by the Holders of Preferred Stock and the Warrants for the resale
of all of their Registrable Securities (as defined in the Registration
Rights Agreement) for a period of eight (8) consecutive business days or
for an aggregate of more than twenty (20) days in any twelve month period;
(vi) the Company fails to increase the Reserved Amount: (A) within ten
(10) days following an Authorization Trigger Date if such increase requires
solely approval of the Company's Board of Directors, or (B) within ninety
(90) days following an Authorization Trigger Date if such increase requires
approval of the Company's shareholders;
(vii) the Company fails to eliminate the Cap Amount prohibitions set
forth herein within ninety (90) days following any Proxy Filing Deadline;
(vii) the Company fails to obtain the effectiveness of any amendment
to an existing registration statements within ten (10) business days or of
any new registration statement within twenty (20) business days following a
Registration Trigger Date (as defined in the Registration Rights Agreement)
as required by Section 2.3 of the Registration Rights Agreement; or
<PAGE>
(ix) If, prior to the first anniversary of the date of the First
Closing, Dr. Haim Aviv ceases to hold the position of Chairman and Chief
Executive Officer of the Company, other than for reasons which are not
under his or the Company's control.
B. Redemption By Holder. Upon the occurrence of a Redemption Event (other
than a Redemption Event set forth in clause (iii) of Section VIII.A. above which
has been cured by the Company), each Holder shall have the right to elect at any
time and from time to time by delivery of a Redemption Notice (as defined
herein) to the Company to require the Company to purchase for cash for an amount
per share equal to the Redemption Amount (as defined herein), (i) in the case of
a Redemption Event described in clause (i) through (iii) or (ix), any or all of
the then outstanding shares of Preferred Stock held by such Holder, (ii) in the
case of a Redemption Event described in clause (vi), a portion of the Holder's
Preferred Stock such that, after giving effect to such purchase, the Holder's
allocated portion of the Reserved Amount exceeds one hundred and seventy-five
percent (175%) of the total number of Common Stock issuable to such Holder upon
conversion of its Preferred Stock and exercise of its Warrants (in each case
without giving effect to any limitation on conversion or exercise with respect
thereto), (iii) in the case of a Redemption Event described in clause (vii), a
portion of the Holder's Preferred Stock such that, after giving effect to such
purchase, the Holder's allocated portion of the Cap Amount exceeds one hundred
and fifty (150%) of the total number of Common Stock issuable to such Holder
upon conversion of its Preferred Stock and exercise of its Warrant (in each case
without giving effect to any limitation on conversion or exercise with respect
thereto) and (iv) in the case of a Redemption Event described in clause (viii),
a portion of the Holder's Preferred Stock such that, after giving effect to such
purchase, the Holder's allocated portion of the Registrable Securities (as
defined in the Registration Rights Agreement) exceeds one hundred and
seventy-five percent (175%) of the total number of shares of Common Stock
issuable to such Holder upon conversion of its Preferred Stock and exercise of
its Warrants (in each case without giving effect to any limitation on conversion
or exercise with respect thereto).
C. Definition of Redemption Amount. The "Redemption Amount" with respect to
a share of Preferred Stock means an amount equal to the greater of (i) 1.2 times
the aggregate Face Amount of the Preferred Stock for which a demand is being
made and (ii) an amount determined by the following formula:
Face Amount + Premium + Penalty
----------- ------- -------
X M C P
where:
"CP" means the Conversion Price in effect on the date of the
Redemption Notice; and
"M" means the average of the closing bid price of the Company's
Common Stock during the period beginning on the date of the Redemption
Notice and ending on the date of the redemption, as reported on the
principal securities exchange or trading market on which the Common
Stock is
<PAGE>
traded.
"Penalty" means the Conversion Default penalty referred to in
Section VII.A.
D. Redemption Defaults. The Company shall pay a Holder the Redemption
Amount, in cash, with respect to each share of Preferred Stock which is subject
to a written notice electing such redemption (a "Redemption Notice") within five
(5) business days of the Company's receipt of such Redemption Notice. In the
event the Company is not able to purchase all of the shares of Preferred Stock
subject to Redemption Notices, the Company shall redeem shares of Preferred
Stock from each Holder pro rata, based on the total number of shares of
Preferred Stock included by such Holder in the Redemption Notice relative to the
total number of shares of Preferred Stock in all of the Redemption Notices;
provided the foregoing shall not be deemed to limit the Company's obligation to
purchase shares of Preferred Stock hereunder.
E. Additional Cap Amount Remedies. Upon a Redemption Event described in
clause (vii) of Section VIII.A, which is not cured by the Company within thirty
(30) days (after taking into account the ninety (90) day period provided for
therein), any Holder who is so prohibited from converting its Preferred Stock
may, notwithstanding the Cap Amount or restrictions with respect thereto, elect
any one or more of the following: (i) require, with the consent of the Majority
Holders (including any shares of Preferred Stock held by the requesting Holder),
the Company to terminate the listing of its Common Stock on the Nasdaq SmallCap
Market and, at such Holders' election, to list the Common Stock on the
over-the-counter electronic bulletin board; and (ii) require the Company to
issue shares of Common Stock in accordance with such holder's Notice of
Conversion at a conversion price equal to the Conversion Price in effect on the
date of the Holder's written notice to the Company of its election to receive
shares of Common Stock pursuant to this subparagraph (ii); or (iii) require the
Company to issue shares of Common Stock in accordance with such holder's Notice
of Conversion but at a Conversion Price equal to the Closing Bid Price on the
day before the date of the Holder's written notice to the Company of its
election to receive shares of Common Stock pursuant to this subparagraph.
F. Redemption at Company's Option.
(a) So long as no Redemption Event shall have occurred and provided the
Company is not in material violation of its obligations under the Securities
Purchase Agreement, the Registration Rights Agreement, the Pharmos Corporation
Stock Purchase Warrants, or this Certificate, then the Company shall have the
right to redeem ("Redemption at Company's Election") all or any portion of the
then outstanding Preferred Stock (other than Preferred Stock which is the
subject of a Notice of Conversion delivered prior to the delivery date of the
Optional Redemption Notice (as herein defined)) for the Optional Redemption
Amount (as herein defined), which right shall be exercisable in accordance with
the provisions of this Section VIII.F at any time prior to the Maturity Date or,
if applicable, at any time prior to the last day of the Extension Period, but in
any event only if and so long as the Redemption Condition is satisfied on the
date the Company delivers the Optional Redemption Notice. The Redemption at
Company's Election may only be exercised
<PAGE>
by the Company for Optional Redemption Amounts in increments of One Million
Dollars ($1,000,000) by delivery of an Optional Redemption Notice in accordance
with the redemption procedures set forth below; provided, however, that the
Redemption at Company's Election may be exercised for smaller amounts in the
event of the Company's redemption of all of the outstanding Preferred Stock. Any
Redemption at Company's Election pursuant to this Section VIII.F shall be made
ratably among Holders in proportion to the amount of Preferred Stock then
outstanding. Holders may convert all or any part of their Preferred Stock
selected for redemption hereunder into Common Stock at the Conversion Price by
delivering a Notice of Conversion to the Company at any time prior to the
Effective Time of Redemption (as herein defined).
(i) The "Optional Redemption Amount" means an amount equal to the number of
shares of Preferred Stock being redeemed multiplied by:
1.2 x A x M
-----------
CP
where:
"A" means the Face Amount + Premium + Penalty with respect to such
shares of Preferred Stock being redeemed
"CP" means the Conversion Price in effect on the delivery date of the
Optional Redemption Notice; and,
"M" means the average Closing Bid Price of the Company's Common Stock
during the ten consecutive trading day period ending on the day immediately
preceding the date on which the Optional Redemption Notice is delivered to
Holder.
(ii) The "Redemption Condition" shall be satisfied if the average Closing
Bid Price equals 200% or more of the Closing Bid Price on the date of the First
Closing (as defined in the Securities Purchase Agreement) for the ten (10)
consecutive days immediately prior to the date the Company delivers the Optional
Redemption Notice.
(b) The Company shall effect the Redemption at Company's Election under
this Section VIII.F by giving at least ten (10) business days prior written
notice (the "Optional Redemption Notice"), of the date on which such redemption
is to become effective (the "Effective Time of Redemption") to Holders of
Preferred Stock selected for redemption at the address and facsimile number of
such Holder appearing in the Company's register for the Preferred Stock. The
Optional Redemption Notice shall indicate the shares of Preferred Stock selected
for redemption and the Optional Redemption Amount. The Optional Redemption
Notice shall be deemed to have been delivered to a Holder: (i) if such fax is
received by such holder on or prior to 3:00 p.m. Chicago time, on the time and
date of transmission of Company's fax; and (ii) if such fax is received by
Holder after 3:00 p.m. Chicago time, on the next business day following the date
of transmission of
<PAGE>
Company's fax; provided that, for any notice required under this subsection
VIII.F(b) to be valid, a copy of such notice must be sent to the Holders on the
same day by overnight courier.
(c) The Company may not deliver an Optional Redemption Notice to a Holder
unless on or prior to the date of delivery of such Optional Redemption Notice,
the Company shall have deposited with an escrow agent reasonably satisfactory to
such Holder, as a trust fund, cash sufficient in amount to pay all amounts to
which Holders are entitled upon such redemption pursuant to subsection (a) of
this Section VIII.F, with irrevocable instructions and authority to such escrow
agent to complete the redemption thereof in accordance with this Section VIII.F.
Any Optional Redemption Notice delivered in accordance with the immediately
preceding sentence shall be accompanied by a statement executed by a duly
authorized officer of the escrow agent, certifying the amount of funds which
have been deposited with such transfer agent or escrow agent and that the
transfer agent or escrow agent has been instructed and agrees to act as
redemption agent hereunder.
(d) The Optional Redemption Amount shall be paid to each Holder whose
Preferred Stock is being redeemed at the Effective Time of Redemption; provided,
however, that the Company shall not be obligated to deliver any portion of the
Optional Redemption Amount to a Holder until either such Holder delivers the
Preferred Stock being prepaid to the office of the Company or the transfer agent
as provided in this subsection, or such Holder notifies the Company or the
transfer agent that such Preferred Stock has been lost, stolen or destroyed and
delivers documentation in accordance with Section XIV.B hereof. Notwithstanding
anything herein to the contrary, in the event that the shares of Preferred Stock
being redeemed are not delivered to the Company or the transfer agent, the
redemption of the Preferred Stock pursuant to this Section VIII.F shall still be
deemed effective as of the Effective Time of Redemption and the Optional
Redemption Amount shall be paid to each Holder whose Preferred Stock is being
redeemed by 5:00 p.m., Chicago time, on the next business day following the date
on which the shares of Preferred Stock are actually delivered to the Company or
the transfer agent.
(e) If the Company fails to pay, when due and owing, any Optional
Redemption Amount, then each Holder entitled to receive such Optional Redemption
Amount shall have the right, at any time and from time to time, to require the
Company, upon written notice, to immediately convert (in accordance with the
terms of Section VIII.E) any or all of the Preferred Stock which is the subject
of Redemption at Company's Election into shares of Common Stock at the lowest
Conversion Price in effect during the twenty (20) consecutive trading days
following the Effective Time of Redemption.
IX. RANK; PARTICIPATION
A. Rank. All shares of the Preferred Stock shall rank (i) prior to the
Common Stock; (ii) pari passu with all shares of the Company's Series B
Preferred Stock, prior to any other class of Capital Stock of the Company now
outstanding and prior to any class or series of capital stock of
<PAGE>
the Company hereafter created (collectively, with the Common Stock, "Junior
Securities"); (iii) pari passu with any class or series of capital stock of the
Company hereafter created specifically ranking, by its terms, on parity with the
Preferred Stock (the "Pari Passu Securities"); and (iv) junior to any class or
series of capital stock of the Company hereafter created (with the consent of
the Holders obtained in accordance with Article XIII hereof, provided that no
such consent shall be required from and after the date on which less than five
percent (5%) of the originally issued Preferred Stock remains outstanding)
specifically ranking, by its terms, senior to the Preferred Stock (the "Senior
Securities"), in each case as to distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
B. Participation. Subject to the rights of the holders (if any) of Pari
Passu Securities and Senior Securities, the Holders shall, as Holders of
Preferred Stock, be entitled to such dividends paid and distributions made to
the holders of Common Stock to the same extent as if such Holders had converted
such Preferred Stock into Common Stock (without regard to any limitations on
conversion herein or elsewhere contained) and had such Common Stock been issued
on the day before the record date for said dividend or distribution. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
X. LIQUIDATION PREFERENCE
A. Liquidation of the Company. If a Bankruptcy Event shall occur and, on
account of any such event, the Company shall liquidate, dissolve or wind up, or
if the Company shall otherwise liquidate, dissolve or wind up (a "Liquidation
Event"), no distribution shall be made to the Holders of any shares of capital
stock of the Company (other than Senior Securities) upon liquidation,
dissolution or winding up unless prior thereto the Holders shall have received
the Liquidation Preference (as herein defined) with respect to each share. If,
upon the occurrence of a Liquidation Event, the assets and funds available for
distribution among the Holders and holders of Pari Passu Securities shall be
insufficient to permit the payment to such Holders of the preferential amounts
payable thereon, then the entire assets and funds of the Company legally
available for distribution to the Preferred Stock and the Pari Passu Securities
shall be distributed ratably among such shares in proportion to the ratio that
the Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.
B. Certain Acts Not a Liquidation. The purchase or redemption by the
Company of stock of any class, in any manner permitted by law, shall not, for
the purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Company. Neither the consolidation or merger of the Company with or into any
other entity nor the sale or transfer by the Company of less than substantially
all of its assets shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Company.
C. Definition of Liquidation Preference. The "Liquidation Preference" with
respect to a share of Preferred Stock means an amount equal to the Face Amount
thereof plus the Premium with respect thereto plus any other amounts that may be
due from the Company with respect thereto
<PAGE>
through the date of final distribution. The Liquidation Preference with respect
to any Pari Passu Securities shall be as set forth in the charter of the
Company.
XI. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
First Closing, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification
or other similar event, the Fixed Conversion Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is
decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Fixed Conversion Price shall be
proportionately increased.
B. Certain Public Announcements. In the event that (i) the Company
makes a public announcement that it intends to consolidate or merge with
any other entity (other than a merger in which the Company is the surviving
or continuing entity and its capital stock is unchanged and there is no
distribution thereof)) or to sell or transfer all or substantially all of
the assets of the Company or (ii) any person, group or entity (including
the Company) publicly announces a tender offer in connection with which
such person, group or entity seeks to purchase 50% or more of the Common
Stock (the date of the announcement referred to in clause (i) or (ii) of
this paragraph is hereinafter referred to as the "Announcement Date"), and
in either such event only if twenty percent (20%) or more of the originally
issued Preferred Stock is then outstanding, then the Conversion Price
shall, effective upon the Announcement Date and continuing through the
consummation of the proposed tender offer or transaction or the Abandonment
Date (as defined below), be equal to the lesser of (x) the Conversion Price
calculated as provided in Article IV and (y) the Conversion Price which
would have been applicable for Conversion occurring on the Announcement
Date. From and after the Abandonment Date, as the case may be, the
Conversion Price shall be determined as set forth in Article IV. The
"Abandonment Date" means with respect to any proposed transaction or tender
offer for which a public announcement as contemplated by this paragraph has
been made, the date which is seven (7) trading days after the date upon
which the Company (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the
termination or abandonment of the proposed transaction or tender offer
which causes this paragraph to become operative.
C. Major Transactions. If the Company shall consolidate with or merge
into any corporation as to which (a) the common stock or other securities
to be issued to the Company's holders of Common Stock (the "Exchange
Securities") are not publicly traded, (b) the average daily trading volume
of the Exchange Securities reported by Bloomberg during the ninety (90) day
period ending on the date on which such transaction is publicly disclosed
is less than five hundred thousand dollars ($500,000) per day, or (c) the
historical one hundred day volatility of the Exchange Securities reported
by Bloomberg during the period ending on the date on which such transaction
is publicly disclosed is less than sixty percent (60%) (a "Major
Transaction"), then each Holder shall thereafter
<PAGE>
be entitled to receive consideration, in exchange for each share of
Preferred Stock held by it, equal to the greater of, as determined in the
sole discretion of such Holder: (i) the number of shares of stock or
securities or property of the Company, or of the entity resulting from such
Major Transaction (the "Major Transaction Consideration"), to which a
Holder of the number of shares of Common Stock delivered upon conversion of
such shares of Preferred Stock would have been entitled upon such Major
Transaction had the Holder exercised its right of conversion (without
regard to any limitations on conversion herein or elsewhere contained) on
the trading date immediately preceding the public announcement of the
transaction resulting in such Major Transaction and had such Common Stock
been issued and outstanding and had such Holder been the holder of record
of such Common Stock at the time of the consummation of such Major
Transaction, and (ii) 125% of the Face Amount of such shares of Preferred
Stock in cash; and the Company shall make lawful provision therefor as a
part of such Major Transaction. No sooner than ten (10) business days nor
later than five (5) business days prior to the consummation of the Major
Transaction, but not prior to the public announcement of such Major
Transaction, the Company shall deliver written notice ("Notice of Major
Transaction") to each Holder, which Notice of Major Transaction shall be
deemed to have been delivered one (1) business day after the Company's
sending such notice by fax (provided that the Company sends a confirming
copy of such notice on the same day by overnight courier) of such Notice of
Major Transaction. Such Notice of Major Transaction shall indicate the
amount and type of the Major Transaction Consideration which such Holder
would receive under clause (i) of this Section XI.B. If the Major
Transaction Consideration does not consist entirely of United States
currency, such Holder may elect to receive United States currency in an
amount equal to the value of the Major Transaction Consideration in lieu of
the Major Transaction Consideration by delivering notice of such election
to the Company within five (5) business days of the Holder's receipt of the
Notice of Major Transaction.
D. [Intentionally Deleted].
E. Purchase Rights. If at any time after the First Closing, subject to
the limitations contained herein, the Company issues any Convertible
Securities or rights to purchase stock, warrants, securities or other
property (the "Distributed Items") pro rata to the record holders of any
class of Common Stock, then the Holders will be entitled to acquire, upon
the terms applicable to such Distributed Items, the aggregate Distributed
Items which such Holder could have acquired if such Holder had held the
number of shares of Common Stock acquirable upon complete conversion of the
Preferred Stock (without regard to any limitations on conversion or
exercise herein or elsewhere contained) immediately before the date on
which a record is taken for the grant, issuance or sale of such Distributed
Items, or, if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale
of such Distributed Items.
F. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment pursuant to this Article XI, the Company, at its expense,
shall promptly compute such adjustment or readjustment and prepare and
furnish to each Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any
time of any Holder, furnish to such Holder a like
<PAGE>
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other securities or property which
at the time would be received upon conversion of a share of Preferred
Stock.
XII. VOTING RIGHTS
The holders of Preferred Stock shall have no voting power whatsoever,
except as otherwise provided by applicable law.
Notwithstanding the above, the Company shall provide each Holder with prior
notification of any meeting of the stockholders (and copies of proxy materials
and all other information sent to stockholders). If the Company takes a record
of its stockholders for the purpose of determining stockholders entitled to (a)
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the Company, or
any proposed merger, consolidation, liquidation, dissolution or winding up of
the Company, the Company shall mail a notice to each Holder, at least twenty
(20) days prior to the record date specified therein (or thirty (30) days prior
to the consummation of the transaction or event, whichever is earlier, but in no
event earlier than public announcement of such proposed transaction), of the
date on which any such record is to be taken for the purpose of such vote,
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such vote, dividend, distribution, right or other
event to the extent known at such time.
To the extent that under applicable law the vote of the holders of the
Preferred Stock, voting separately as a class or series, as applicable, is
required to authorize a given action of the Company, the affirmative vote or
consent of the Holders of at least a majority of the shares of the Preferred
Stock represented at a duly held meeting at which a quorum is present or by
written consent of the Majority Holders (except as otherwise may be required by
applicable law shall constitute the approval of such action by the class. To the
extent that under applicable law Holders are entitled to vote on a matter with
holders of Common Stock, voting together as one class, each share of Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible at the lower of the Fixed
Conversion Price or the Variable Conversion Price then in effect (without giving
effect to any limitation on conversion with respect thereto) using the record
date for the taking of such vote of stockholders as the date as of which the
Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
The Company shall not, without first obtaining the approval of the Majority
Holders and, to the extent their interests may be adversely affected, each
initial Holder of Preferred Stock: a. alter or change the rights, preferences or
privileges of the Preferred Stock; b. alter or change the rights,
<PAGE>
preferences or privileges of any capital stock of the Company so as to affect
adversely the Preferred Stock; c. create any Senior Securities; d. increase the
authorized number of shares of Preferred Stock; e. redeem (other than shares of
Common Stock, or options or rights to acquire Common Stock, purchased from
employees or directors of the Company pursuant to any stock option or other
equity incentive plan adopted by the Company prior to the date of the First
Closing or adopted by the Company in the good faith business judgment of the
Board of Directors after the date of the First Closing), or declare or pay any
cash dividend or distribution on, any Junior Securities; or (g) do any act or
thing not authorized or contemplated by this Certificate of Designations which
would result in any taxation with respect to the Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended, or any comparable
provision of the Internal Revenue Code as hereafter from time to time amended
(or otherwise suffer to exist any such taxation as a result thereof).
XIV. MISCELLANEOUS
A. Cancellation of Preferred Stock. If any shares of Preferred Stock are
converted pursuant to Article IV, the shares so converted shall be canceled,
shall return to the status of authorized but unissued preferred stock of no
designated series, and shall not be issuable by the Company as Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence
of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (or bond, in cases in which the Holder actually received the original
or replacement certificate for such Preferred Stock from the Company) reasonably
satisfactory to the Company, or (z) in the case of mutilation, upon surrender
and cancellation of the Preferred Stock Certificate(s), the Company shall
execute and deliver new Preferred Stock Certificate(s) of like tenor and date.
However, the Company shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the Holder contemporaneously requests the
Company to convert such Preferred Stock.
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and
Reserved Amount shall be allocated to the Holders in the same proportion as the
number of shares of Preferred Stock held by such Holder bears to the aggregate
number of outstanding shares of Preferred Stock. Each increase to the Cap Amount
or Reserved Amount shall be allocated pro rata among the Holders based on the
number of shares of Preferred Stock held by each Holder at the time of the
increase in the Cap Amount or Reserved Amount, as the case may be. In the event
a Holder shall sell or otherwise transfer any of such Holder's shares of
Preferred Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Preferred Stock shall be allocated to the remaining Holders, pro rata
based on the number of shares of Preferred Stock then held by such Holders. In
the event the application of the Cap Amount or the Reserved Amount would prevent
the conversion of a portion of the Preferred Stock or the exercise of a portion
of the Warrants, each Holder may determine in the sole exercise
<PAGE>
of its discretion, subject to the provisions of this Certificate of Designation,
whether and in what amounts Preferred Stock will be converted or whether and in
what amounts Warrants will be exercised.
D. Statements of Available Shares. Upon request, the Company shall deliver
to each Holder a written report notifying the Holders of any occurrence which
prohibits the Company from issuing Common Stock upon any such conversion. The
report shall also specify (i) the total number of shares of Preferred Stock
outstanding as of the date of the request, (ii) the total number of shares of
Common Stock issued upon all conversions of Preferred Stock through the date of
the request, (iii) the total number of shares of Common Stock which are reserved
for issuance upon conversion of the Preferred Stock as of the date of the
request, and (iv) the total number of shares of Common Stock which may
thereafter be issued by the Company upon conversion of the Preferred Stock
before the Company would exceed the Cap Amount and Reserved Amount. The Company
shall, within five (5) days after delivery to the Company of a written request
by any Holder, provide all of the information enumerated in clauses (i) - (v) of
this Section XIV.D and make public disclosure thereof if such information would
constitute material nonpublic information.
E. Payment of Cash; Defaults. Whenever the Company is required to make any
cash payment to a Holder under this Certificate of Designation (as a Conversion
Default Payment, Redemption Amount or otherwise), such cash payment shall be
made to the Holder by the method ( by certified or cashier's check or wire
transfer of immediately available funds) elected by such Holder. If such payment
is not delivered when due (any such amount not paid when due being a "Default
Amount") such Holder shall thereafter be entitled to interest on the unpaid
amount at a per annum rate equal to the lower of twenty-four percent (24%) or
the highest interest rate permitted by applicable law until such amount is paid
in full to the Holder. In addition, and notwithstanding anything to the contrary
contained in this Certificate, a Holder may elect in writing to convert all or
any portion of accrued Default Amounts, at any time and from time to time, into
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the default with respect thereto through the cure date
for such default. In the event that a Holder elects to convert all or any
portion of the Default Amounts into Common Stock, the Holder shall so notify the
Company on a Notice of Conversion of such portion of the Default Amounts which
such Holder elects to so convert and such conversion shall otherwise be effected
in accordance with the provisions of, and subject to limitations contained in,
Article IV.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
Holder of Preferred Stock, the shares covered thereby shall be deemed converted
into shares of Common Stock and the Holder's rights as a Holder of such
converted shares of Preferred Stock shall cease and terminate, excepting only
the right to receive certificates for such shares of Common Stock and to any
remedies provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Company to comply with the terms of this
Certificate of Designation. Notwithstanding the foregoing, if a Holder has not
received certificates for all shares of Common Stock on or before the tenth
(10th) business day after the expiration of the Extended Delivery Period with
respect to a conversion of Preferred Stock for any reason, then (unless the
Holder otherwise
<PAGE>
elects to retain its status as a holder of Common Stock) the Holder shall regain
the rights of a holder of Preferred Stock with respect to such unconverted
shares of Preferred Stock and the Company shall, as soon as practicable, return
such unconverted shares to the Holder. In all cases, the Holder shall retain the
right to elect between or among any of its rights and remedies (including,
without limitation, (i) the right to receive Conversion Default Payments
pursuant to Section VII.A to the extent required thereby for such Conversion
Default and any subsequent Conversion Default and (ii) the right with respect to
conversions in accordance with Section XIV.E, to the extent applicable) for the
Company's failure to convert Preferred Stock.
G. Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a Holder's right to actual damages for any failure by
the Company to comply with the terms of this Certificate of Designation
(including, without limitation, damages incurred to effect "cover" of shares of
Common Stock anticipated to be received upon a conversion hereunder but not
received in accordance with the terms hereof); provided, however, that in the
event that an action is brought by a Holder or by the Company in connection
herewith the non-prevailing party shall pay the costs (including, without
limitation, reasonable attorney's fees and expenses) incurred by the other
party(ies) to such action. The Company covenants to each Holder that there shall
be no characterization concerning this instrument other than as expressly
provided herein. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder hereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of Preferred
Stock and that the remedy at law for any such breach may he inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the Holders shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.
H. Specific Shall Not Limit General; Construction. No specific provision
contained in this Certificate of Designation shall limit or modify any more
general provision contained herein. This Certificate of Designation shall be
deemed to be jointly drafted by the Company and all Purchasers and shall not be
construed against any person as the drafter hereof.
I. Failure or Indulgence Not Waiver. Except as otherwise explicitly set
forth in this Certificate of Designation, no failure or delay on the part of a
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, not shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
<PAGE>
Schedule 1
NOTICE OF CONVERSION
To: Pharmos Corporation
33 Wood Avenue South
Iselin, New Jersey 08330
Telecopy: [(732) 603-3526]
Attn: Chief Financial Officer
The undersigned hereby irrevocably elects to convert shares of Series C
Preferred Stock (the "Conversion"), represented by stock certificate Nos(s).
(the "Preferred Stock Certificates") into ordinary shares of common stock
("Common Stock") of Pharmos Corporation (the "Company") according to the terms
and conditions of the Certificate of Designations, Preferences and Rights of
Series C Convertible Participating Preferred Stock (the "Certificate of
Designation"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series C Convertible Participating Preferred Stock shall be made pursuant to the
registration of the Common Stock under the Securities Act of 1933, as amended
(the "Act"), or pursuant to an exemption from registration under the Act.
The following paragraphs are only effective if the applicable box is checked:
The undersigned hereby requests that the Company electronically transmit
the Common Stock issuable pursuant to this Notice of Conversion to the
account of the undersigned's Prime Broker (which is ) with DTC through its
Deposit Withdrawal Agent Commission System.
The undersigned hereby requests foreign delivery of the Common Stock to the
address indicated below.
Date of Conversion:
Applicable Conversion Price:
Amount of Accrued and Unpaid Premium on
the Face Amount to be converted, if any:
<PAGE>
Amount of Conversion Default Payments to
be Converted, if any:
Number of Shares of Common Stock to be
Issued:
Signature:
Name:
Address:
Ehrenreich, Eilenberg, Krause & Zivian, LLP
11 East 44th Street
17th Floor
New York, NY 10017
Attention: Adam Eilenberg, Esq.
Facsimile No.: (212) 986-2399
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT ("Agreement") is entered into as of
February 4, 1998, by and between Pharmos Corporation, a Nevada corporation (the
"Company"), with headquarters located at 33 Wood Avenue South, Suite 466,
Iselin, New Jersey 08830 and the purchasers (each a "Purchaser" and together the
"Purchasers") set forth on the execution pages hereof, with regard to the
following:
RECITALS
A. The Company and Purchasers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D ("Regulation D"), as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act").
B. Purchasers desire to purchase, upon the terms and conditions stated in
this Agreement, (i) Series C Convertible Participating Preferred Stock of the
Company having the rights set forth in the Certificate of Designations,
Preferences and Rights (the "Certificate of Designation") attached hereto as
Exhibit A (the "Preferred Stock" or the "Convertible Securities"), which shall
be convertible into shares of the Company's Common Stock, par value $.03 per
share (the "Common Stock") and (ii) a Warrant in the form of Exhibit B hereto (a
"Warrant" and, when taken together with all of the warrants issued hereunder,
the "Warrants") entitling the holder thereof to purchase the number of shares
(the "Warrant Shares") of Common Stock as set forth below. The shares of Common
Stock issuable upon conversion of or otherwise pursuant to the Preferred Stock
are referred to herein as the "Conversion Shares". The Preferred Stock, the
Warrants and the Conversion Shares are collectively referred to herein as the
"Securities."
C. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement in
the form attached hereto as Exhibit C (the "Registration Rights Agreement"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act, the rules and regulations promulgated thereunder and
applicable state securities laws.
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Purchasers hereby agree as
follows:
<PAGE>
ARTICLE I.
PURCHASE AND SALE OF SECURITIES
A. Purchase of Preferred Stock and Warrants. Subject to the terms and the
satisfaction or waiver of the conditions set forth in this Agreement, the
issuance, sale and purchase of the Preferred Stock and Warrants shall be
consummated in two (2) separate closings. The first closing is hereinafter
referred to as the "First Closing" and the second closing is hereinafter
referred to as the "Second Closing" (the First Closing and the Second Closing
sometimes referred to herein as a "Closing"). The purchase price (the "Purchase
Price") per share of Preferred Stock shall be equal to $1,000. Each Purchaser
shall purchase the number of shares of Preferred Stock set forth on the
signature page executed by such Purchaser.
1.1 The Company may elect to consummate the Second Closing by (and only by)
delivering a notice satisfying the conditions of this Section (the "Second
Closing Notice") to Purchasers at least three (3) business days prior to the
date that the Company desires to consummate the Second Closing. The Second
Closing may be consummated (i) no earlier than the effectiveness of the
Registration Statement contemplated by Section 2.3 of the Registration Rights
Agreement (the "Registration Statement"), and (ii) no later than one hundred and
eighty (180) days following the date of the First Closing. In the Second Closing
Notice, the Company shall represent to Purchasers that: (i) the Registration
Statement is effective; (ii) the Company elects to consummate the transactions
contemplated hereby as the Second Closing and (iii) the conditions set forth in
Section 7.2 hereof have been satisfied.
1.2 On the date of the First Closing, subject to the satisfaction (or
waiver) of the conditions set forth in Articles VI and VII, and notwithstanding
any election by the Company, the Company shall issue and sell to each Purchaser,
and each Purchaser shall purchase from the Company (i) 70% of the number of
shares of Preferred Stock set forth below such Purchaser's name on the signature
pages hereof and (ii) a Warrant entitling the holder thereof to purchase 100
Warrant Shares for each share of Preferred Stock purchased pursuant to the First
Closing. The aggregate purchase price for the Securities purchased at the First
Closing shall be five million dollars ($5,000,000).
1.3 On the date of the Second Closing (if any), subject to the satisfaction
(or waiver) of the conditions set forth in Articles VI and VII, the Company
shall issue and sell to each Purchaser and each Purchaser shall purchase from
the Company (i) 30% of the number of shares of Preferred Stock set forth below
such Purchaser's name on the signature page hereof and (ii) a Warrant entitling
the holder thereof to purchase 100 Warrant Shares for each share of Preferred
Stock purchased pursuant to the Second Closing. The aggregate purchase price for
the Securities purchased at the Second Closing (if any) shall be three million
dollars ($3,000,000). The Conversion Price of the Preferred Stock and the
Exercise Price under the Warrant shall be the same for the Second Closing as for
the First Closing.
B. Form of Payment. At each of the First Closing and Second Closing, each
Purchaser
<PAGE>
shall pay the aggregate Purchase Price for the Preferred Stock and Warrant being
purchased by such Purchaser by wire transfer to the Company, in accordance with
the Company's written wiring instructions, against delivery of duly executed
stock certificates for the same, and the Company shall deliver such Preferred
Stock and certificates representing the Warrants against delivery of such
aggregate Purchase Price. The obligations in this Agreement of each Purchaser
shall be separate from the obligations of each other Purchaser and shall relate
solely to the number of shares to be purchased by such Purchaser. The
obligations of the Company with respect to each Purchaser shall be separate from
the obligations of each other Purchaser and shall not be conditioned as to any
Purchaser upon the performance of the obligations of any other Purchaser. The
obligations of each Purchaser with respect to the Company shall be separate from
the obligations of each other Purchaser with respect to the Company. Except as
otherwise set forth in this Agreement, the obligations of each Purchaser shall
not be conditioned upon the performance of the obligations of any other
Purchaser.
C. Closing Dates. Subject to the satisfaction (or waiver) of the conditions
set forth in Articles VI and VII below, the date and time of the issuance, sale
and purchase of the Securities pursuant to this Agreement shall be (i) for the
First Closing, within two (2) business days of the execution of this Agreement
and (ii) for the Second Closing, on the day three (3) business days following
receipt by all Purchasers of the Second Closing Notice from the Company. Each
Closing shall occur at 10:00 a.m. Chicago time, at the offices of Altheimer &
Gray, 10 S. Wacker Drive, Chicago, IL 60606.
ARTICLE II.
PURCHASER'S REPRESENTATIONS AND WARRANTIES
Each Purchaser represents and warrants, solely with respect to itself and
its purchase hereunder and not with respect to any other Purchaser or the
purchase hereunder by any other Purchaser (and no Purchaser shall be deemed to
make or have any liability for any representation or warranty made by any other
Purchaser), to the Company as set forth in this Article II. No Purchaser makes
any other representations or warranties, express or implied, to the Company in
connection with the transactions contemplated hereby and any and all prior
representations and warranties, if any, which may have been made by a Purchaser
to the Company in connection with the transactions contemplated hereby shall be
deemed to have been merged in this Agreement and any such prior representations
and warranties, if any, shall not survive the execution and delivery of this
Agreement.
A. Investment Purpose. Purchaser is purchasing the Convertible Securities
and the Warrants for Purchaser's own account for investment only and not with a
view toward or in connection with the public sale or distribution thereof.
Purchaser will not resell the Securities except pursuant to sales that are
exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act. Purchaser understands that Purchaser must
bear the economic risk of this investment indefinitely, unless the Securities
are registered pursuant to the Securities Act and any applicable state
securities laws or an exemption from such registration is available, and that
<PAGE>
the Company has no present intention of registering any such Securities other
than as contemplated by the Registration Rights Agreement. By making the
representations in this Section 2.1, the Purchaser does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption from registration under the Securities
Act.
B. Accredited Investor Status. Purchaser is, and was at the time Purchaser
was offered the Securities, an "accredited investor" as that term is defined in
Rule 501(a) of Regulation D. Purchaser is able to bear the economic risk of an
investment in the Securities, is able to afford a complete loss of such
investment, and has carefully evaluated the merits and risks of such investment.
C. Reliance on Exemptions. Purchaser understands that the Convertible
Securities are being offered and sold to Purchaser in reliance upon specific
exemptions from the registration requirements of the United States federal and
state securities laws and that the Company is relying upon the truth and
accuracy of, and Purchaser's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of Purchaser set forth herein in
order to determine the availability of such exemptions and the eligibility of
Purchaser to acquire the Convertible Securities, and Purchaser consents to such
reliance.
D. Information. Purchaser and its counsel have been furnished all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Convertible Securities which have been
specifically requested by Purchaser. Purchaser has been afforded the opportunity
to ask questions of the Company and has received what Purchaser believes to be
complete and satisfactory answers to any such inquiries. Neither such inquiries
nor any other due diligence investigation conducted by Purchaser or any of its
representations shall modify, amend or affect Purchaser's right to rely on the
Company's representations and warranties contained in Article III. Purchaser
understands that Purchaser's investment in the Securities involves a high degree
of risk.
E. Governmental Review. Purchaser understands that no United States federal
or state agency or any other government or governmental agency has passed upon
or made any recommendation or endorsement of the Securities or an investment
therein.
F. Transfer or Resale. Purchaser understands that (i) except as provided in
the Registration Rights Agreement, the Securities have not been and are not
being registered under the Securities Act or any state securities laws, and may
not be transferred unless subsequently registered thereunder or an exemption
from such registration is available (which exemption the Company expressly
agrees may be established as contemplated in clauses (b) and (c) of Section 5.1
hereof); (ii) any sale of such Securities made in reliance on Rule 144 under the
Securities Act (or a successor rule) ("Rule 144") may be made only in accordance
with the terms of said Rule and further, if said Rule is not applicable, any
resale of such Securities without registration under the Securities Act under
circumstances in which the seller may be deemed to be an underwriter (as that
term is defined
<PAGE>
in the Securities Act) may require compliance with some other exemption under
the Securities Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder (in each case,
other than pursuant to this Agreement or the Registration Rights Agreement).
G. Legends. Purchaser understands that, subject to Article V hereof, the
certificates for the Convertible Securities, and until such time as the
Conversion Shares have been registered under the Securities Act as contemplated
by the Registration Rights Agreement or otherwise may be sold by Purchaser
pursuant to Rule 144, the certificates for the Conversion Shares will bear a
restrictive legend (the "Legend") in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED,
SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
H. Authorization; Enforcement. This Agreement and the Registration Rights
Agreement have been duly and validly authorized, executed and delivered on
behalf of Purchaser and are valid and binding agreements of Purchaser
enforceable against Purchaser in accordance with their terms.
I. Residency. Purchaser is a resident of the jurisdiction set forth under
Purchaser's name on the signature page hereto executed by Purchaser.
J. Acknowledgments Regarding Placement Agent. Purchaser acknowledges that
Gemini Capital, a division of R.D. Kushner & Co., is acting as placement agent
(the "Placement Agent") for the Securities being offered hereby and will be
compensated by the Company for acting in such capacity. Purchaser further
acknowledges that the Placement Agent has acted solely as placement agent in
connection with the offering of Securities by the Company, that the information
and data provided to Purchaser in connection with the transactions contemplated
hereby have not been subjected to independent verification by the Placement
Agent, and that the Placement Agent makes no representation or warranty with
respect to the accuracy or completeness of such information, data or other
related disclosure material. Purchaser further acknowledges that in making its
decision to enter into this Agreement and purchase the Securities it has relied
on its own examination of the Company and the terms of, and consequences of
holding, the Securities. Purchaser further acknowledges that the provisions of
this Section 2.10 are for the benefit of, and may be enforced by, the Placement
Agent.
<PAGE>
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that:
A. Organization and Qualification. The Company and each of its subsidiaries
is a corporation duly organized, validity existing and in good standing under
the laws of the State of Nevada and has the requisite corporate power and
authority to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
where the failure to so qualify would have a Material Adverse Effect. "Material
Adverse Effect" means any material adverse effect on either (i) the business,
operations, properties, financial condition, operating results or prospects of
the Company and its subsidiaries, taken as a whole on a consolidated basis or
(ii) the transactions contemplated hereby.
B. Authorization; Enforcement. (a) The Company has the requisite corporate
power and authority to enter into and perform this Agreement, the Warrants and
the Registration Rights Agreement, and to issue and sell, and perform its
obligations with respect to, the Convertible Securities and the Warrants in
accordance with the terms hereof and to issue the Conversion Shares in
accordance with the terms and conditions of the Certificate of Designation and
the Warrant Shares in accordance with the terms and conditions of the Warrant;
(b) the execution, delivery and performance of this Agreement and the
Registration Rights Agreement by the Company and the consummation by it of the
transactions contemplated hereby and thereby (including without limitation the
issuance of the Convertible Securities and the Warrants and the reservation for
issuance and issuance of the Conversion Shares and the Warrant Shares) have been
duly authorized by all necessary corporate action and, except as set forth on
Schedule 3.2 hereof, no further consent or authorization of the Company, its
board of directors, or its stockholders or any other person, body or agency is
required with respect to any of the transactions contemplated hereby or thereby
(whether under rules of the Nasdaq SmallCap Market or the Nasdaq National Market
System ("Nasdaq"), the National Association of Securities Dealers or otherwise);
(c) this Agreement, the Registration Rights Agreement and the Convertible
Securities have been duly executed and delivered by the Company; and (d) this
Agreement, the Registration Rights Agreement and the Convertible Securities
constitute legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their terms.
C. Capitalization. The capitalization of the Company as of the date hereof,
including the authorized capital stock, the number of shares issued and
outstanding, the number of shares reserved for issuance pursuant to the
Company's stock option plans, the number of shares reserved for issuance
pursuant to securities (other than the Convertible Securities and the Warrants)
exercisable for, or convertible into or exchangeable for any shares of Common
Stock and the number of shares to be initially reserved for issuance upon
conversion of the Convertible Securities and the exercise of the Warrants is set
forth on Schedule 3.3. All of such outstanding shares of capital stock have
been, or upon issuance will be, validly issued, fully paid and non-assessable.
No shares of
<PAGE>
capital stock of the Company (including the Preferred Stock and the Conversion
Shares) are subject to preemptive rights or any other similar rights of the
stockholders of the Company or any liens or encumbrances (except for liens and
encumbrances created by or through the actions of the holders of such capital
stock). Except as disclosed in Schedule 3.3, as of the date of this Agreement,
(i) there are no outstanding options, warrants, scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into or exercisable or exchangeable for, any shares of
capital stock of the Company or any of its subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its subsidiaries, and (ii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the Securities Act
(except the Registration Rights Agreement). The Company has furnished to
Purchaser true and correct copies of the Company's Certificate of Incorporation
as currently in effect ("Certificate of Incorporation"), and the Company's
By-laws as currently in effect (the "By-laws"). The Company has set forth on
Schedule 3.3 all instruments and agreements (other than the Certificate of
Incorporation and By-laws) governing securities convertible into or exercisable
or exchangeable for Common Stock of the Company (and the Company shall provide
to Purchaser copies thereof upon the request of Purchaser). The Company shall
provide Purchaser with a written update of this representation signed by the
Company's Chief Executive Officer or Chief Financial Officer on behalf of the
Company as of the date of the Closing.
D. Issuance of Shares. The Conversion Shares and Warrant Shares are duly
authorized and reserved for issuance, and, upon conversion of the Convertible
Securities in accordance with the terms hereof and thereof, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances (except for those encumbrances created by or through the
actions of a Purchaser or otherwise arising under this Agreement, the
Registration Rights Agreement or the Warrants) and will not be subject to
preemptive rights or other similar rights of stockholders of the Company. The
Convertible Securities and Warrants are duly authorized and reserved for
issuance, and are validly issued, fully paid and non-assessable, and free from
all taxes, liens claims and encumbrances (except for those encumbrances created
by or through the actions of a Purchaser or otherwise arising under this
Agreement, the Registration Rights Agreement or the Warrants) and are not and
will not be subject to preemptive rights or other similar rights of stockholders
of the Company. The Board of Directors of the Company has unanimously approved
the issuance of shares of Common Stock upon conversion of shares of Preferred
Stock and upon the exercise of the Warrants pursuant to the terms hereof in the
aggregate in excess of twenty percent (20%) of the outstanding shares of Common
Stock (the "Rule 4460(i) Authorization"). Accordingly, no further corporate
authorization or approval (other than the Stockholder Approval (as defined in
Section 4.14)) is required under the rules of the Nasdaq with respect to the
transaction contemplated by this Agreement, including, without limitation, the
issuance of the Conversion Shares and the Warrant Shares and the inclusion
thereof on the Nasdaq.
E. No Conflicts. The execution, delivery and performance of this Agreement
and the Registration Rights Agreement by the Company, and the consummation by
the Company of the
<PAGE>
transactions contemplated hereby and thereby (including, without limitation, the
issuance and reservation for issuance, as applicable, of the Convertible
Securities and Conversion Shares) will not (a) result in a violation of the
Certificate of Incorporation or By-laws, (b) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party (except for such conflicts,
defaults, terminations, amendments, accelerations, and cancellations as would
not, individually or in the aggregate, have a Material Adverse Effect), or (c)
result in a violation of any law, rule, regulation, order, judgment or decree
(including, without limitation, U.S. federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries, or by which
any property or asset of the Company or any of its subsidiaries, is bound or
affected, which violation is reasonably likely to have a Material Adverse
Affect. Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation, by-laws or other organizational documents, and
neither the Company nor any of its subsidiaries is in default (and no event has
occurred which, with notice or lapse of time or both, would put the Company or
any of its subsidiaries in default) under, nor has there occurred any event
giving others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, except
for possible defaults or rights as would not, individually or in the aggregate,
have a Material Adverse Effect. The business of the Company and its subsidiaries
is not being conducted, and shall not be conducted so long as a Purchaser owns
any of the Securities, in violation of any law, ordinance, rule, regulation,
order, judgment or decree of any governmental entity, court or arbitration
tribunal except for possible violations the sanctions for which either singly or
in the aggregate would not have a Material Adverse Effect. Except as set forth
on Schedule 3.5, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency or any regulatory or self-regulatory agency in order for it
to execute, deliver or perform any of its obligations under this Agreement or
the Registration Rights Agreement or to perform its obligations in accordance
with the terms hereof or thereof. The Company is not in violation of the listing
requirements of Nasdaq and the Company is not currently aware of any facts or
circumstances which would reasonably cause the Company to believe that the
Common Stock will be de-listed in the foreseeable future.
F. Registration and SEC Documents. The Common Stock is registered under
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and has been so registered since January 30, 1984. Except as disclosed in
Schedule 3.6, since December 31, 1995, the Company has timely filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Exchange Act (all of the
foregoing filed after December 31, 1995 and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein, being referred to herein as the "SEC Documents"). The Company
has delivered to each Purchaser true and complete copies of the SEC Documents,
except for exhibits, schedules and incorporated documents (the SEC documents
filed prior to the date hereof, the "Filed SEC Documents"). As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules
<PAGE>
and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. To the best of Company's knowledge, none of the statements made
in any such SEC Documents is, or has been, required to be updated or amended
under applicable law. The financial statements of the Company included in the
SEC Documents have been prepared in accordance with U.S. generally accepted
accounting principles, consistently applied, and the published or otherwise
promulgated rules and regulations of the SEC during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
do not include footnotes or are condensed or summary statements) and present
fairly in all material respects the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, immaterial
year-end audit adjustments). Except as set forth in the most recent financial
statements of the Company included in the Filed SEC Documents, the Company has
no liabilities, contingent or otherwise, other than (i) liabilities incurred
subsequent to the date of such financial statements in the ordinary course of
business and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in such financial statements, in the case of each of
clauses (i) and (ii) next above, which are in nature and amount consistent with
the Company's past business practices and are consistent, in all material
respects, with the budgets of the Company for the years 1997 and 1998. The Filed
SEC Documents contain a complete and accurate list of all material undischarged
written or oral contracts, agreements, leases or other instruments to which the
Company or any subsidiary is a party or by which the Company or any subsidiary
is bound or to which any of the properties or assets of the Company or any
subsidiary is subject (each a "Contract"). None of the Company, its subsidiaries
or, to the best knowledge of the Company, any of the other parties thereto, is
in breach or violation of any Contract, which breach or violation would have a
Material Adverse Effect. No event, occurrence or condition exists which, with
the lapse of time, the giving of notice, or both, would become a breach or
default by the Company or its subsidiaries under any Contract which breach or
default would have a Material Adverse Effect.
G. Absence of Certain Changes. Since September 30, 1997, there has been no
material adverse change in the business, properties, operations, financial
condition, results of operations or prospects of the Company taken as a whole,
except as disclosed in Schedule 3.7.
H. Absence of Litigation. Except as disclosed in Schedule 3.8, there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, governmental agency or authority, or self-regulatory organization
or body pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company, any of its subsidiaries, or any of
their respective directors or officers in their capacities as such, wherein an
unfavorable decision, ruling or finding would have a Material Adverse Effect or
would adversely affect the transactions contemplated by this Agreement or any of
the documents contemplated hereby or which would
<PAGE>
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of such
other documents. There are no facts which, if known by a potential claimant or
governmental agency or authority, would be reasonably likely to give rise to a
claim or proceeding which, if asserted or conducted with results unfavorable to
the Company or any of its subsidiaries, would be reasonably likely to have a
Material Adverse Effect.
I. Disclosure. No information relating to or concerning the Company set
forth in this Agreement or provided to Purchaser in connection with the
transactions contemplated hereby contains an untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements made
herein or therein, in light of the circumstances under which they were made, not
misleading. The Company has no knowledge of any adverse fact or circumstance
with respect to the Company which is material (within the meaning of the federal
securities laws of the United States) which has not been publicly disclosed. For
purposes of this Agreement, the Company shall be deemed to have knowledge of a
fact or circumstance if an officer of the Company knew, or reasonably should
have known, of such matter after due inquiry. The Company has not provided to
the Purchasers any material non-public information.
J. Acknowledgment Regarding Purchaser's Purchase of the Securities. The
Company acknowledges and agrees that Purchaser is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement or the transactions contemplated hereby, that this Agreement and
the transactions contemplated hereby, and the relationship between each
Purchaser and the Company, are "arms-length", and that any statement made by
Purchaser, or any of its representatives or agents, in connection with this
Agreement or the transactions contemplated hereby is not advice or a
recommendation, is merely incidental to Purchaser's purchase of the Securities
and has not been relied upon in any way by the Company, its officers, directors
or other representatives; provided that the Company has relied on the
Purchaser's "accredited investor" representations set forth in Article II of
this Agreement. The Company further represents to Purchaser that the Company's
decision to enter into this Agreement and the transactions contemplated hereby
has been based solely on an independent evaluation by the Company and its
representatives.
K. Current Public Information. The Company is currently eligible to
register the resale of the Conversion Shares on a registration statement on Form
S-3 under the Securities Act.
L. No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has conducted any "general solicitation," as described in
Rule 502(C) under Regulation D, with respect to any of the Securities being
offered hereby.
M. No Integrated Offering. Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales of any security or solicited any offers to buy any security
under circumstances that would prevent the parties hereto from consummating the
transactions contemplated hereby pursuant to an exemption from
<PAGE>
registration under the Securities Act pursuant to the provisions of Regulation
D. The transactions contemplated hereby are exempt from the registration
requirements of the Securities Act, assuming the accuracy of the representations
and warranties herein contained of each Purchaser to the extent relevant for
such determination.
N. No Brokers. The Company has taken no action which would give rise to any
claim by any person for brokerage commissions, finder's fees or similar payments
by Purchaser relating to this Agreement or the transactions contemplated hereby,
except for dealings with the Placement Agent (the fees of which shall be paid in
full by the Company). The Company will indemnify each Purchaser from and against
any fees and expenses sought or other claims made by the Placement Agent.
O. Acknowledgment of Dilution. The number of Conversion Shares issuable
upon conversion of the Convertible Securities may increase substantially in
certain circumstances, including the circumstance wherein the trading price of
the Common Stock declines. The Company's executive officers and directors have
studied and understand the nature of the securities being sold hereunder and
recognize that they have a potential dilutive effect. The board of directors of
the Company has concluded in its good faith business judgment that such issuance
is in the best interests of the Company and its stakeholders. The Company
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Convertible Securities and the Warrant Shares upon exercise of the Warrants
is binding upon it and enforceable in accordance with the applicable provisions
of this Agreement, the Certificate of Designation, the Warrants, the
Registration Rights Agreement and the other agreements, instruments and
documents delivered in connection with this Agreement regardless of the dilution
that such issuance may have on the ownership interests of other stockholders or
stakeholders.
P. Intellectual Property. Each of the Company and its subsidiaries owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") used or necessary for the conduct of its
business as now being conducted and as previously described in the Company's
Annual Report on Form 10-K for its most recently ended fiscal year, except for
such Intangibles which, if not possessed by the Company, would not have a
Material Adverse Effect on the Company. Neither the Company nor any subsidiary
of the Company infringes on or is in conflict with any right of any other person
with respect to any Intangibles nor is there any claim of infringement made by a
third party against or involving the Company or any of its subsidiaries, which
infringement, conflict or claim, individually or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect.
Q. Foreign Corrupt Practices. Neither the Company, nor any of its
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any
<PAGE>
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
R. Key Employees. Each Key Employee (as defined below) is currently serving
the Company in the capacity disclosed in Schedule 3.18. No Key Employee, to the
best of the knowledge of the Company and its subsidiaries, is, or is now
expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. The Company is not aware that any Key Employee has any
intention to terminate or limit his employment with, or services to, the Company
or any of its subsidiaries, nor is any such Key Employee subject to any
constraints (e.g., litigation) which would cause such employee to be unable to
devote his full time and attention to such employment or services. "Key
Employee" means each of Dr. Haim Aviv, Dr. Gadi Riesenfeld, Dr. Anat Biegon, and
Mr. Robert Cook.
ARTICLE IV.
COVENANTS
A. Best Efforts. The Company shall use its best efforts to satisfy timely
each of the conditions described in Articles VI and VII of this Agreement;
provided, however, that in the case of Section 7.2, such best efforts
requirement set forth in this Section 4.1 shall only apply in the event that the
Company elects to proceed with the Second Closing by delivering a Second Closing
Notice.
B. Securities Laws. The Company agrees to file a Form D with respect to the
Securities with the SEC as required under Regulation D and to provide a copy
thereof to each Purchaser on or prior to the date of the First Closing. The
Company agrees to file a Form 8-K disclosing this Agreement and the transactions
contemplated hereby with the SEC within ten (10) days following the date of the
First Closing. The Company shall, on or prior to the date of each Closing, take
such action as is necessary to sell the Securities to each Purchaser in
accordance with applicable securities laws of the states of the United States,
and shall provide evidence of any such action so taken to each Purchaser on or
prior to the date of each Closing. Without limiting any of the Company's
obligations under this Agreement, the Registration Rights Agreement or the
Certificate of Designation, from and after the date of the First Closing,
neither the Company nor any person acting on its behalf shall take any action
which would adversely affect any exemptions from registration under the
Securities Act with respect to the transactions contemplated hereby.
C. Reporting Status. So long as any Purchaser beneficially owns any of the
Securities, the Company shall timely file all reports required to be filed with
the SEC pursuant to the Exchange Act, and the Company shall not terminate its
status as an issuer required to file reports under the
<PAGE>
Exchange Act even if the Exchange Act or the rules and regulations thereunder
would permit such termination.
D. Use of Proceeds. The Company shall use the proceeds from the sale of the
Preferred Stock only for working capital and general corporate purposes.
E. Restriction on Issuance of Securities. (a) For a period of one hundred
and eighty (180) days following the date of the First Closing, the Company shall
not issue or agree to issue, (except (i) to Purchasers pursuant to this
Agreement, (ii) pursuant to a merger or acquisition or sale of assets entered
into by the Company undertaken in the business judgement of the Board of
Directors of the Company, the primary purpose of which is not to raise equity
capital or (iii) a public offering of the Company's securities), any equity
securities at a price less than the fair market value thereof (less any
customary underwriting discount) or any variably priced equity securities or
equity like securities of the Company (or any variably priced security
convertible into or exercisable or exchangeable, directly or indirectly, for
equity or equity like securities of the Company) (each of the foregoing being a
"Restricted Security"); provided, however, that the foregoing restriction shall
apply only for so long as the Purchasers continue to hold thirty percent (30%)
of the Preferred Stock (or equity securities into which such Preferred Stock was
converted) on the date of such issuance. Following such one hundred and eighty
(180) day period, the Company may issue Restricted Securities provided that any
securities so issued (and any securities issued or issuable, directly or
indirectly, upon conversion, exercise or exchange of any of such securities)
shall be ineligible for conversion, exercise, exchange, sale, resale and
registration under Federal and state securities laws for a period of two hundred
and seventy (270) days following the First Closing.
F. Expenses. The Company shall pay to each Purchaser, or, at the First
Closing such Purchasers shall be entitled to withhold from the Purchase Price,
reimbursement for the expenses reasonably incurred by CC Investments, LDC and
its affiliates and advisors in connection with the negotiation, preparation,
execution, and delivery of this Agreement and the other agreements to be
executed in connection herewith, including, without limitation, such Purchaser's
and its affiliates' and advisors' due diligence and attorneys' fees and expenses
(the "Expenses"); provided, however, that such reimbursement of Expenses shall
not exceed $50,000. In addition, from time to time thereafter, upon any
Purchaser's written request, subject to such $50,000 limit, the Company shall
pay to such Purchaser such Expenses, if any, not so paid at the First Closing
and/or covered by such payment, in each case to the extent reasonably incurred
by such Purchaser.
G. Information. For so long as the Purchasers continue to hold twenty
percent (20%) of the Preferred Stock (or equity securities into which such
Preferred Stock was converted), the Company agrees to send the following reports
to each Purchaser until such Purchaser transfers, assigns or sells all of its
Securities: (a) within three (3) business days after the filing with the SEC, a
copy of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, any
proxy statements and any Current Reports on Form 8-K; and (b) within one (1)
business day after release, copies of all press releases issued by the Company
or any of its subsidiaries. The Company further agrees to promptly provide to
any Holder any information with respect to the Company, its
<PAGE>
properties, or its business or Holder's investment as such Holder may reasonably
request; provided, however, that the Company shall not be required to give any
Holder any material non-public information. If any information requested by a
Holder from the Company contains material non-public information, the Company
shall inform the Holder in writing that the information requested contains
material non-public information and shall in no event provide such information
to Holder without the express prior written consent of such Holder after being
so informed.
H. Conduct of Business. The Company shall not make any investment or enter
into any line of business which is inconsistent with the description of the
Company's business as set forth in the SEC Documents.
I. Listing. For so long as any Purchaser owns any of the Securities, the
Company shall continue the listing and trading of its Common Stock on the Nasdaq
SmallCap Market, the Nasdaq National Market System, the New York Stock Exchange
or the American Stock Exchange, secure and maintain listing and trading of the
Conversion Shares and Warrant Shares on such exchange, and comply in all
respects with the Company's reporting, filing and other obligations under the
by-laws or rules of such exchange.
J. Prospectus Delivery Requirement. Each Purchaser understands that the
Securities Act may require delivery of a prospectus relating to the Common Stock
in connection with any sale thereof pursuant to a registration statement under
the Securities Act covering the resale by such Purchaser of the Common Stock
being sold, and each Purchaser shall comply with the applicable prospectus
delivery requirements of the Securities Act in connection with any such sale.
K. Intentional Acts or Omissions. The Company shall not intentionally
perform any act which if performed, or intentionally omit to perform any act
which, if omitted to be performed, would prevent or excuse the performance of
this Agreement or any of the transactions contemplated hereby (including,
without limitation, pursuant to any agreements or documents obtained by the
Company as a condition to any Closing hereunder).
L. Corporate Existence. So long as any Purchaser beneficially owns any
Preferred Stock, the Company shall maintain its corporate existence, except in
the event of a merger, consolidation or sale of all or substantially all of the
Company's assets which complies with Section XI.C of the Certificate of
Designation.
M. Share Authorization. The Company covenants and agrees the Company shall
solicit and obtain Stockholder Approval (as defined in the Certificate of
Designation) within the time periods set forth in Article VI of the Certificate
of Designation.
N. Hedging Transactions. The Company understands that some or all of the
Purchasers are so-called "hedge" funds and the Company hereby expressly agrees
that each Purchaser shall not in any way be prohibited or restricted from any
purchases or sales of any securities or other instruments of, or related to, the
Company or any of its securities, including, without limitation,
<PAGE>
puts, call, futures contracts, short sales and hedging and arbitrage
transactions. Each Purchaser acknowledges that such purchases, sales and other
transactions may be subject to various Federal and state securities laws and
agrees to comply with all such applicable securities laws in connection
therewith and that such purchases, sales and other transactions will not be
effected with the intention of reducing the price of the Common Stock. Each
Purchaser agrees that it shall not transfer the Preferred Stock or Warrants to
any third party unless such third party agrees in writing to be bound by this
Section 4.14.
ARTICLE V.
LEGEND REMOVAL, TRANSFER, AND CERTAIN SALES
A. Removal of Legend. The Legend shall be removed and the Company shall
issue or cause to be issued a certificate without any legend to the holder of
any Security upon which such Legend is stamped, and a certificate for a security
shall be originally issued without any legend, if, unless otherwise required by
applicable federal or state securities laws, (a) the sale of such Security is
registered under the Securities Act, (b) such holder provides the Company with
an opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions (the reasonable cost of which shall be borne
by the Company), to the effect that a public sale or transfer of such Security
may be made without registration under the Securities Act, (c) such Security can
be sold pursuant to Rule 144 and a registered broker dealer provides to the
Company's transfer agent and counsel copies of (i) a "will sell" letter
satisfying the guidelines established by the SEC and its staff from time to time
and (ii) a customary seller's representation letter with respect to such a sale
to be made pursuant to Rule 144 and (iii) a Form 144 in respect of such Security
executed by such holder and filed (or mailed for filing) with the SEC or (d)
such security can be sold pursuant to Rule 144(k). Each Purchaser agrees to sell
all Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Securities Act. In the event the Legend is
removed from any Security or any Security is issued without the Legend and
thereafter the effectiveness of a registration statement covering the resale of
such Security is suspended or the Company determines that a supplement or
amendment thereto is required by applicable securities laws, then upon
reasonable advance notice to Purchaser holding such Security, the Company may
require that the Legend be placed on any such Security that cannot then be sold
pursuant to an effective registration statement or with respect to which the
opinion referred to in clause (b) next above has not been rendered, which Legend
shall be removed when such Security may be sold pursuant to an effective
registration statement or such holder provides the opinion with respect thereto
described in clause (b) next above.
<PAGE>
B. Transfer Agent Instructions. The Company shall instruct its transfer
agent to issue certificates, registered in the name of each Purchaser or its
nominee, for the Conversion Shares and Warrant Shares in such amounts as
specified from time to time by such Purchaser to the Company upon, and in
accordance with, the conversion of the Preferred Stock and the exercise of the
Warrants. Such certificates shall bear a legend only in the form of the Legend
and only to the extent permitted by Section 5.1 above. The Company agrees that
no instruction other than such instructions referred to in this Article V or
otherwise contemplated by this Agreement, and no stop transfer instructions
other than stop transfer instructions to give effect to Section 2.6 and Section
2.7 hereof in the case of the Conversion Shares prior to registration of the
Conversion Shares under the Securities Act, will be given by the Company to its
transfer agent with respect to the Preferred Stock, the Warrants, the Conversion
Shares or the Warrant Shares. Nothing in this Section shall affect in any way a
Purchaser's obligations and agreement set forth in Section 5.1 hereof to resell
the Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. Without limiting
the foregoing, but subject to Section 5.1 above, if (a) a Purchaser provides the
Company with an opinion of counsel, which opinion of counsel shall be in form,
substance and scope customary for opinions of counsel in comparable transactions
(the reasonable cost of which shall be borne by the Company), to the effect that
the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from registration or (b) a Purchaser transfers Securities to an
affiliate or pursuant to Rule 144, the Company shall permit the transfer, and,
in the case of the Conversion Shares, promptly instruct its transfer agent to
issue one or more certificates in such name and in such denomination as
specified by such Purchaser in order to effect such a transfer or sale. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Purchaser by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Article V will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Article V, that a Purchaser shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
ARTICLE VI.
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
A. Conditions to the Company's Obligation to Sell. The obligation of the
Company hereunder to issue and sell the Convertible Securities to a Purchaser at
each Closing is subject to the satisfaction, as of the date of each Closing and
with respect to such Purchaser, of each of the following conditions thereto,
provided that these conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion:
a. Such Purchaser shall have executed the signature page to this
Agreement and the Registration Rights Agreement and delivered the same to
the Company.
<PAGE>
b. Such Purchaser shall deliver the applicable Purchase Price for the
Convertible Securities purchased at the Closing.
c. The representations and warranties of such Purchaser shall be true
and correct as of the date when made and as of the Closing as though made
at that time, and such Purchaser shall have performed, satisfied and
complied in all material respects with the covenants and agreements
required by this Agreement to be performed or complied with by such
Purchaser at or prior to the Closing.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which restricts or prohibits the consummation of any of the
transactions contemplated by this Agreement.
e. The aggregate purchase price paid to the Company for the Securities
purchased pursuant to the First Closing shall be Five Million Dollars
($5,000,000), and the aggregate purchase price for the Securities purchased
at the second closing shall be Three Million Dollars ($3,000,000), in both
cases net of the reasonable fees and expenses of Purchaser reimbursable
pursuant to Section 4.6 hereof and net of any fees paid directly to the
placement agent.
ARTICLE VII.
CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE
A. Conditions to the First Closing. The obligation of each Purchaser
hereunder to purchase the Convertible Securities and Warrants to be purchased by
it on the date of the First Closing is subject to the satisfaction of each of
the following conditions, provided that these conditions are for each
Purchaser's sole benefit and may be waived by such Purchaser (with respect to
it) at any time in such Purchaser's sole discretion:
a. The Company shall have executed the signature page to this
Agreement and the Registration Rights Agreement and delivered the same to
Purchaser.
b. The Company shall have delivered duly executed certificates for the
Preferred Stock and Warrants (in such denominations as Purchaser shall
request) being so purchased by Purchaser at the Closing.
c. The Company shall have delivered copies of resolutions of the
Company's board of directors, a certificate of the Company's secretary, and
any other documents or certificates evidencing corporate proceedings as
required by Purchaser, all in form reasonably satisfactory to Purchaser.
<PAGE>
d. The Company shall have reserved for issuance at least ten million
(10,000,000) shares of Common Stock issuable upon conversion of the
Preferred Stock and at least one million forty thousand (1,040,000) shares
of Common Stock issuable upon exercise of the Warrants.
e. The Common Stock shall be listed on the Nasdaq SmallCap Market, the
Nasdaq National Market System, the New York Stock Exchange or the American
Stock Exchange and trading in the Common Stock shall not have been
suspended by the Nasdaq SmallCap Market, the Nasdaq National Market System,
the New York Stock Exchange or the American Stock Exchange, the SEC or
other regulatory authority and the Company shall not be aware of any facts
or circumstances which would reasonably cause the Company to believe that
the Common Stock will be de-listed in the foreseeable future.
f. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing as though made at
that time and the Company shall have performed, satisfied and complied with
the covenants and agreements required by this Agreement to be performed or
complied with by the Company at or prior to the First Closing. Purchaser
shall have received a certificate, executed by the Chief Executive Officer
or Chief Financial Officer of the Company, dated as of the First Closing to
the foregoing effect and as to such other matters as may be reasonably
requested by Purchaser. Notwithstanding the foregoing, if there shall occur
any facts or circumstances subsequent to the date of this Agreement but
prior to the First Closing which cause any of the representations and
warranties of the Company hereunder to be untrue, the Company shall deliver
to Purchaser a written notice for each Purchaser's execution, setting forth
such facts and circumstances (the "Disclosure Notice"), and Purchaser may,
at Purchaser's option either (i) decline to proceed with the First Closing,
in which case this Agreement (other than Section 4.6 hereof) shall be
deemed null and void and of no further force or effect, and the Company and
each Purchaser shall be released from all obligations and liabilities under
this Agreement (other than the Company's obligations under Section 4.6
hereof), or (ii) execute and deliver to the Company the Disclosure Notice
and proceed with the First Closing and the consummation of the transactions
contemplated by this Agreement, in which case the representations and
warranties of the Company made as of the execution and delivery of this
Agreement and as of the First Closing shall be deemed to be amended to
incorporate the facts and circumstances set forth in the Disclosure Notice.
g. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
h. Purchaser shall have received the officer's certificate described
in Section 3.3, dated as of the First Closing.
<PAGE>
i. Purchaser shall have received on the date of the First Closing
opinions of the Company's outside legal counsel (including, without
limitation, an enforceability opinion under New York law and an opinion of
the Company's Nevada legal counsel opining as to Nevada law), dated as of
the First Closing from firms and in form and substance reasonably
acceptable to Purchasers (the exact form of which shall have been delivered
to Purchaser not later than two (2) days prior to the First Closing), and,
without limitation, containing a so-called 10b-5 opinion, in the form
attached hereto as Exhibit D.
j. The Company's transfer agent has agreed to act in accordance with
irrevocable instructions in the form attached hereto as Exhibit E.
k. The Company shall have entered into an agreement with Haim Aviv,
Ph.D. restricting dispositions of Common Stock beneficially owned by such
person and in the form attached hereto as Exhibit F and shall have obtained
a proxy therefrom in the form attached hereto as Exhibit G.
l. The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Nevada and a copy thereof
certified by the Secretary of State of Nevada shall have been delivered to
Purchaser.
B. Conditions to the Second Closing. The obligation of each Purchaser
hereunder to purchase the Convertible Securities and Warrants to be purchased by
it on the date of the Second Closing is subject to the satisfaction of each of
the following conditions, provided that these conditions are for each
Purchaser's sole benefit and may be waived by such Purchaser (with respect to
it) at any time in such Purchaser's sole discretion:
a. The Company shall have executed the signature page to this
Agreement and the Registration Rights Agreement and delivered the same to
Purchaser.
b. The Company shall have delivered duly executed certificates for the
Preferred Stock and Warrants (in such denominations as Purchaser shall
request) being so purchased by Purchaser at the Closing.
c. The Company shall have delivered copies of resolutions of the
Company's board of directors, a certificate of the Company's secretary, and
any other documents or certificates evidencing corporate proceedings as
required by Purchaser, all in form reasonably satisfactory to Purchaser.
d. The Company shall have registered under the Registration Statement
the greater of (A) two hundred percent (200%) of the number of shares of
Common Stock issuable upon conversion of the Preferred Stock and the
exercise of the Warrants, or (B) 11,040,000 shares of Common Stock.
<PAGE>
e. The Company shall have reserved for issuance the greater of (A) two
hundred percent (200%) of the number of shares of Common Stock issuable
upon conversion of the Preferred Stock and the exercise of the Warrants, or
(B) 11,040,000 shares of Common Stock.
f. The Common Stock shall be listed on the Nasdaq SmallCap Market, the
Nasdaq National Market System, the New York Stock Exchange or the American
Stock Exchange and trading in the Common Stock shall not have been
suspended by the Nasdaq SmallCap Market, the Nasdaq National Market System,
the New York Stock Exchange or the American Stock Exchange, the SEC or
other regulatory authority and the Company shall not be aware of any facts
or circumstances which would reasonably cause the Company to believe that
the Common Stock would be delisted in the foreseeable future.
g. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Second Closing as though
made at that time and the Company shall have performed, satisfied and
complied with the covenants and agreements required by this Agreement to be
performed or complied with by the Company at or prior to the Second
Closing. Purchaser shall have received a certificate, executed by the Chief
Executive Officer or Chief Financial Officer of the Company, dated as of
the Second Closing to the foregoing effect and as to such other matters as
may be reasonably requested by Purchaser. Notwithstanding the foregoing, if
there shall occur any facts or circumstances subsequent to the date of this
Agreement but prior to the Second Closing which cause any of the
representations and warranties of the Company hereunder to be untrue, the
Company shall deliver to Purchaser a written notice for each Purchaser's
execution, setting forth such facts and circumstances (the "Disclosure
Notice"), and Purchaser may, at Purchaser's option either (i) decline to
proceed with the Second Closing, in which case the Company and each
Purchaser shall be released from all obligations and liabilities under this
Agreement to consummate the Second Closing (other than the Company's
obligations under Section 4.6 hereof), or (ii) execute and deliver to the
Company the Disclosure Notice and proceed with the Second Closing and the
consummation of the transactions contemplated by this Agreement, in which
case the representations and warranties of the Company made as of the
execution and delivery of this Agreement and as of the Second Closing shall
be deemed to be amended to incorporate the facts and circumstances set
forth in the Disclosure Notice.
h. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
i. Purchaser shall have received the officer's certificate described
in Section 3.3, effective as of the Closing.
j. Purchaser shall have received on the date of the Second Closing
opinions of the Company's outside legal counsel (including, without
limitation, an enforceability
<PAGE>
opinion under New York law and an opinion of the Company's Nevada legal
counsel opining as to Nevada law), dated as of the Second Closing, from
firms and in form and substance reasonably acceptable to Purchasers (the
exact form of which shall have been delivered to Purchaser not later than
two (2) days prior to the Second Closing), including without limitation, a
so-called 10b-5 opinion, in the form attached hereto as Exhibit D.
k. The Company's transfer agent has agreed to act in accordance with
irrevocable instructions in the form attached hereto as Exhibit E.
l. The agreements with Haim Aviv, Ph.D. Stock in the forms attached
hereto as Exhibit F and Exhibit G shall continue to be effect.
m. The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Nevada and a copy thereof
certified by the Secretary of State of Nevada shall have been delivered to
Purchaser.
n. The average of Closing Bid Prices for the Common Stock during the
ten consecutive trading day period immediately preceding the date of the
Second Closing shall not have been less than Two Dollars ($2.00) per share.
o. A registration statement covering the Conversion Shares and the
Warrant Shares shall have been filed and declared effective by the SEC and
available for resales.
p. The Company shall, if required by the terms of this Agreement and
the Certificate of Designation, have received Shareholder Approval as set
forth in Section 4.13 hereof.
q. The Company shall have received FDA approval of the NDA submitted
for the drug Lotemax.
ARTICLE VIII.
GOVERNING LAW; MISCELLANEOUS
A. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed in the State of New York. The parties hereto
irrevocably consent to the jurisdiction of the United States federal courts
located in the State of New York and the state courts located in the County of
New York in the State of New York in any suit or proceeding based on or arising
under this Agreement or the transactions contemplated hereby and irrevocably
agree that all claims in respect of such suit or proceeding may be determined in
such courts. The parties irrevocably waive the defense of an inconvenient forum
to the maintenance of such suit or proceeding. Each party further agrees that
service of process upon any other party to this Agreement mailed by the first
class mail shall be deemed in every respect effective service of process upon
such party in any suit or
<PAGE>
proceeding arising hereunder. Nothing herein shall affect the right of any party
to serve process in any other manner permitted by law. The parties hereto agree
that a final non-appealable judgment in any such suit or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on such judgment
or in any other lawful manner.
B. Counterparts. This Agreement may be executed in two or more
counterparts, including, without limitation, by facsimile transmission, all of
which counterparts shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party. In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall cause additional
original executed signature pages to be delivered to the other parties.
C. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
D. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
E. Scope of Agreement; Amendments. Except as specifically set forth herein,
no Purchaser makes any representation, warranty, covenant or undertaking with
respect to the transactions contemplated hereby. No provision of this Agreement
may be waived other than by an instrument in writing signed by the party to be
charged with enforcement and no provision of this Agreement may be amended other
than by an instrument in writing signed by the Company and each Purchaser.
F. Notice. Any notice herein required or permitted to be given shall be in
writing and may be personally served or delivered by courier or by
facsimile-machine confirmed telecopy, and shall be deemed delivered at the time
and date of receipt (which shall include telephone line facsimile transmission).
The addresses for such communications shall be:
If to the Company:
Pharmos Corporation
33 Wood Avenue South
Suite 466
Iselin, New Jersey 08830
Telecopy: (732) 603-3532
Attention: President
<PAGE>
with a copy to:
Ehrenreich, Eilenberg, Krause & Zivian, LLP
11 East 44th Street, 17th Floor
New York, New York 10017
Telecopy: (212) 986-2399
Attention: Adam D. Eilenberg, Esq.
If to CC Investments, LDC:
CC Investments, LDC
Corporate Centre, West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
with a copy to:
Castle Creek Partners, LLC
333 West Wacker Drive
Suite 1410
Chicago, IL 60606
Telecopy: (312) 435-2636
Attention: Portfolio Manager
and with a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, IL 60606
Telecopy: (312) 715-4800
Attention: Peter H. Lieberman, Esq.
If to any other Purchaser, to such address set forth under such Purchaser's name
on the signature page hereto executed by such Purchaser. Each party shall
provide notice to the other parties of any change in address.
G. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and assigns. Neither the
Company nor any Purchaser shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, each Purchaser may assign its rights and
obligations hereunder to any of its "affiliates," as that term is defined under
the Exchange Act, without the consent of the Company so long as such affiliate
is an accredited investor. This provision shall not
<PAGE>
limit each Purchaser's right to transfer the Securities pursuant to the terms of
this Agreement. In addition, and notwithstanding anything to the contrary
contained in this Agreement, the Certificate of Designation, the Warrants or the
Registration Rights Agreement, the Securities may be pledged, and all rights of
Purchaser under this Agreement or any other agreement or document related to the
transaction contemplated hereby may be assigned, without further consent of the
Company, to a bona fide pledgee in connection with a Purchaser's margin or
brokerage accounts.
H. Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.
I. Survival. The representations and warranties of the Company and the
agreements and covenants set forth in Articles III, IV, V and VIII shall survive
the closing hereunder notwithstanding any due diligence investigation conducted
by or on behalf of Purchaser; provided, however, that the representations and
warranties with respect to the Preferred Stock shall terminate if a claim for
the breach thereof is not asserted on or before the first anniversary of the
date on which all of the Preferred Stock has been converted or has been redeemed
by the Company and all other representations and warranties shall terminate on
the earlier of the fifth anniversary of the First Closing and the date on which
all of the Warrants have been exercised in full; provided, however, that the
representations and warranties set forth in Sections 3.9, 3.10 and 3.15 shall
not terminate but shall continue indefinitely.
J. Indemnification. In consideration of the Purchaser's execution and
delivery of this Agreement and acquiring the Preferred Shares, the Conversion
Shares, the Warrants and the Warrant Shares hereunder and in addition to all of
the Company's other obligations under this Agreement, the Company shall defend,
protect, indemnify and hold harmless the Purchaser and each other holder of the
Preferred Stock, the Conversion Shares, the Warrants and the Warrant Shares and
all of their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the "Indemnified Liabilities"), incurred by an Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement, the
Certificate of Designation, the Warrants or the Registration Rights Agreement or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in this Agreement, the Certificate of Designation, the Warrants or the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim
brought or made against such Indemnitee and arising out of or resulting from the
execution, delivery, performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the
Indemnitees, any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds
<PAGE>
of the issuance of the Preferred Stock or the status of Purchaser or any holder
of the Preferred Stock, the Conversion Shares, the Warrants or the Warrant
Shares as an investor in the Company except for any such Indemnified Liabilities
which directly and primarily results from such Indemnitee's (i) gross negligence
and willful misconduct and (ii) intentional or grossly negligent breach by such
Indemnitee of any of its covenants herein. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction to each of
the Indemnified Liabilities which is permissible under applicable law.
K. Public Filings; Publicity. Immediately following execution of this
Agreement, the Company shall issue a press release, which shall be subject to
the prior review and approval of the Purchasers, with respect to the
transactions contemplated hereby. Prior to the expiration of ten (10) days
following the date of the First Closing, the Company shall file a Form 8-K
regarding the transaction contemplated by this Agreement; such Form 8-K shall
have as exhibits thereto the material documents executed in connection with this
transaction contemplated hereby. The Company and each Purchaser shall have the
right to approve before issuance any press releases (including the foregoing
press release), SEC or other filings, or any other public statements, with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Purchaser, to make
any press release or SEC, NASDAQ, NASD or exchange filings with respect to such
transactions as is required by applicable law and regulations (although each
Purchaser shall (to the extent time permits) be consulted by the Company in
connection with any such press release prior to its release and shall be
provided with a copy thereof).
L. Further Assurances. Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
M. Remedies. No provision of this Agreement providing for any remedy to a
Purchaser shall limit any remedy which would otherwise be available to such
Purchaser at law or in equity. Nothing in this Agreement shall limit any rights
a Purchaser may have with any applicable federal or state securities laws with
respect to the investment contemplated hereby.
N. Termination. In the event that the First Closing shall not have occurred
within forty-eight (48) hours of the execution of this Agreement, unless the
parties agree otherwise, this Agreement shall terminate. * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused
this Agreement to be duly executed as of the date first above written.
PURCHASER:
CC INVESTMENTS, LDC
By: ______________________________________
Its: ______________________________
AGGREGATE NUMBER OF
PREFERRED SHARES: 500
COMPANY:
PHARMOS CORPORATION
By: ____________________________________
Its: ____________________________
