PHARMOS CORPORATION
33 Wood Avenue South, Suite 466
Iselin, NJ 08830
(732) 603-3526
----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
----------------------------------------------------
NOTICE IS HEREBY GIVEN, that the Annual Meeting of the Stockholders of
Pharmos Corporation (the "Company") will be held in New York, New York at 5:00
p.m. on September 16, 1998 at The Waldorf-Astoria, 301 Park Avenue, New York, NY
10022, (i) for the election of Directors of the Company to hold office until the
next annual meeting of the stockholders and until their successors are duly
elected and qualified; (ii) to approve the issuance of certain shares of the
Company's common stock, par value $.03 (the "Common Stock"), upon conversion of
the Company's Series C Convertible Participating Preferred Stock; (iii) to amend
the Company's 1997 Incentive and Non-Qualified Stock Option Plan; and (iv) to
transact such other business as may properly come before the meeting or any
adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on August 14, 1998
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the Annual Meeting.
If you do not expect to be personally present at the meeting, but wish your
stock to be voted for the business to be transacted thereat, the Board of
Directors requests that you fill in, sign and date the enclosed proxy and
promptly return it by mail in the postage paid envelope provided.
BY ORDER OF THE BOARD OF DIRECTORS
Haim Aviv, Ph.D.
Chairman of the Board
August 17, 1998
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND PROMPTLY RETURN IT IN THE
ENVELOPE PROVIDED. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES.
<PAGE>
PHARMOS CORPORATION
33 Wood Avenue South, Suite 466
Iselin, NJ 08830
(732) 603-3526
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
To be held on September 16, 1998
INTRODUCTION
The Annual Meeting is called to elect members of the Board of Directors, to
approve the issuance of certain shares of Common Stock upon conversion of Series
C Convertible Participating Preferred Stock and to amend the Company's 1997
Incentive and Non-Qualified Stock Option Plan. The Meeting, however, will be
open for the transaction of such other business as may properly come before it
although, as of the date of this proxy statement, management does not know of
any other business that will come before the Annual Meeting. If any other
matters do come before the Annual Meeting, the persons named in the enclosed
form of proxy are expected to vote said proxy in accordance with their judgment
on such matters.
This proxy statement and the accompanying proxy card are first being mailed
to stockholders on or about August 17, 1998. A copy of the Annual Report for the
fiscal year ended December 31, 1997, which includes audited financial
statements, is included herewith for those stockholders of record as of August
14, 1998, the record date for the Annual Meeting.
The solicitation of proxies in the accompanying form is made by, and on
behalf of, the Board of Directors, and no compensation will be paid therefor.
There will be no solicitation of proxies other than by mail or personal
solicitation by officers and employees of the Company. The Company will make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of proxy material to the beneficial owners of
shares held of record by such persons, and such persons will be reimbursed for
reasonable expenses incurred by them in connection therewith. A stockholder
executing the accompanying proxy has the power to revoke it at any time prior to
the exercise thereof by filing with the Secretary of the Company: (i) a duly
executed proxy bearing a later date; or (ii) a written instrument revoking the
proxy.
With regard to the election of Directors, votes may be cast in favor of or
withheld from each nominee. Abstention and "Broker Non-votes" (as defined below)
are counted for purposes of determining whether a quorum is present at the
Annual Meeting, but do not represent votes cast with respect to any proposal.
"Broker Non-votes" are shares held by a broker or nominee for which an executed
proxy is received by the Company, but are not voted as to one or more proposals
because instructions have not been received from the beneficial owners or
persons entitled to vote and the broker or nominee does not have discretionary
voting power.
<PAGE>
VOTING SECURITIES
The Board of Directors has fixed the close of business on August 14, 1998
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the Annual Meeting.
As of July 31, 1998, the outstanding capital stock of the Company consisted
of 37,270,949 shares of Common Stock. Each holder of Common Stock is entitled to
one vote for each share of Common Stock held by him or her at the close of
business on the record date.
The shares for which the accompanying proxy is solicited will be voted
providing the proxy is executed and returned by the stockholder prior to the
Annual Meeting.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of July 31, 1998 by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Stock, (ii) each of the Company's Directors, and (iii)
all current Directors and executive officers of the Company as a group. Except
as otherwise noted, each person listed below has sole voting and dispositive
power with respect to the shares listed next to such person's name.
Amount
Name and Address of of Beneficial Percentage
Beneficial Ownership Ownership of Total (1)
- - -------------------- --------- ------------
Haim Aviv, Ph.D.(2) 1,229,805 3.3%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
Marvin P. Loeb(3) 298,996 *
Trimedyne, Inc.
2810 Barranca Road
Irvine, CA 92714
E. Andrews Grinstead III(4) 104,078 *
Hybridon, Inc.
620 Memorial Drive
Cambridge, MA 02139
Stephen C. Knight, M.D. 0 *
Epix Medical Inc.
71 Rogers Street
Cambridge, MA 02142
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<PAGE>
Amount
Name and Address of of Beneficial Percentage
Beneficial Ownership Ownership of Total (1)
- - -------------------- --------- ------------
David Schlachet(4) 11,667 *
Strauss Holdings Ltd.
16 Bazel Street
Petach-Tikva, Israel 49510
Fredric D. Price(5) 31,750 *
AMBI Inc.
771 Old Saw Mill River
Road
Tarrytown, NY 10591
Mony Ben Dor 0 0
The Israel Corporation
4 Weizman St.
Tel-Aviv 61336, Israel
All Directors and 1,805,079 4.8%
Executive Officers
as a group
(10 persons)(6)
- - ----------
* Indicates ownership of less than 1%.
(1) Based on 37,270,949 shares of Common Stock outstanding, plus each
individual's currently exercisable warrants or options. Assumes that no
other individual will exercise any warrants and/or options.
(2) Includes 276,153 shares of Common Stock held in the name of Avitek Ltd., of
which Dr. Aviv is the Chairman of the Board of Directors and the principal
stockholder, and, as such, shares the right to vote and dispose of such
shares. Also includes currently exercisable options and warrants to
purchase 317,876 shares of Common Stock.
(3) Held jointly with his wife. Also includes currently exercisable options and
warrants to purchase 48,340 shares of Common Stock. Does not include shares
held by his adult children, his grandchildren or a trust for the benefit of
his grandchildren.
(4) Consists of currently exercisable options and warrants to purchase Common
Stock.
(5) Includes currently exercisable options and warrants to purchase 30,000
shares of Common Stock.
(6) Based on the number of shares of Common Stock outstanding, plus 640,744
currently exercisable warrants and/or options held by the Directors and
executive officers.
-4-
<PAGE>
ITEM 1 - ELECTION OF DIRECTORS
Seven Directors are to be elected at the Annual Meeting to hold office
until the next annual meeting of stockholders and until their successors have
been duly elected and qualified. The election of Directors requires the
affirmative vote of a plurality of shares cast of Common Stock voting together
present or represented at a meeting at which a quorum (one-third (1/3) of the
outstanding shares of Common Stock) is present or represented. Abstention and
Broker Non-votes are counted for purposes of determining whether a quorum is
present, but do not represent votes cast with respect to any proposal. It is the
intention of the persons named in the accompanying proxy form to vote FOR the
election of the seven persons named in the table below as Directors of the
Company, unless authority to do so is withheld. Proxies cannot be voted for a
greater number of persons than the nominees named. In the event that any of the
below listed nominees for Director should become unavailable for election for
any presently unforeseen reason, the persons named in the accompanying proxy
form have the right to use their discretion to vote for a substitute.
The following table sets forth the name, age and position of each Director
and executive officer:
Name Age Position
- - ---- --- --------
Haim Aviv, Ph.D. 57 Chairman, Chief Executive
Officer, Chief Scientist
Marvin P. Loeb 71 Director
E. Andrews Grinstead III 53 Director
Stephen C. Knight, M.D. 38 Director
David Schlachet 52 Director
Mony Ben Dor 52 Director
Georges Anthony Marcel,
M.D., Ph.D. 57 Director (Nominee)
Gad Riesenfeld, Ph.D. 54 President and Chief
Operating Officer
Robert W. Cook 43 Vice President Finance and
Chief Financial Officer
Anat Biegon, Ph.D. 44 Vice President/Research
and Development
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<PAGE>
Haim Aviv, Ph.D., is Chairman of the Board of Directors, Chief Executive
Officer, and Chief Scientist of the Company and co-founded in 1990, Pharmos
Corporation, a New York corporation ("Old Pharmos"), which merged into the
Company on October 29, 1992 (the "Merger"). Dr. Aviv also served as Chairman,
Chief Executive Officer and Chief Scientist of Old Pharmos prior to the Merger.
Dr. Aviv was the co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a
publicly-traded company engaged in the development of products using recombinant
DNA, its General Manager and Chief Scientist from 1980 to 1985, and a Director
and Senior Scientific Consultant until August 1993. Prior to that time, Dr. Aviv
was a professor of molecular biology at the Weizmann Institute of Science. Dr.
Aviv is the principal stockholder of Avitek Ltd., a stockholder of the Company.
Dr. Aviv is also an officer and/or significant stockholder of several
privately-held Israeli pharmaceutical and venture capital companies and is the
Chairman of the Israel National Committee for Biotechnology.
E. Andrews Grinstead, III, a Director of the Company since 1991, is
Chairman and Chief Executive Officer of Hybridon, Inc., a publicly-held
biotechnology company. Mr. Grinstead joined Hybridon in 1991. From 1987 to
October 1990, he was Managing Director and group head of the life sciences group
at Paine Webber, Inc. From 1986 to 1987, Mr. Grinstead was Managing Director and
group head of the life sciences group at Drexel Burnham Lambert. From 1984 to
1986, he was a Vice President at Kidder, Peabody & Co., Inc., where he developed
the life sciences corporate finance specialty group. Prior to his seven years on
Wall Street, Mr. Grinstead served in a variety of operational and executive
positions with Eli Lilly & Company, most recently as general manager of
Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical Operations.
Since 1991, Mr. Grinstead has served as a Director of EcoScience Corporation, a
development-stage company engaged in the development of biopesticides, and since
1996, as a Director of Meridian Medical Technologies, Inc., a pharmaceutical and
medical device company. Since 1994, Mr. Grinstead has served as a member of the
Board of Trustees for the Albert B. Sabine Vaccine Foundation, a 501(c)(3)
charitable foundation dedicated to disease prevention. Mr. Grinstead was
appointed to the President's Council of the National Academy of Sciences and the
Institute of Medicine in 1992.
Marvin P. Loeb, a Director, was Chairman of the Board of the Company (then
known as Pharmatec, Inc.) from December 1982 through October 1992. He has been
Chairman of Trimedyne, Inc. (and its subsidiaries), a publicly-held company
engaged in the manufacture of lasers, optical fibers and laser delivery systems,
since April 1981; a Director of Gynex Pharmaceuticals, Inc., from April 1986
until its merger with and into Biotechnology General Corporation in 1993, a
publicly-held company engaged in the development and commercialization of
pharmaceutical products; a Director of Petrogen, Inc., a privately-held company
engaged in the genetic engineering of bacteria for cleanup of oil waste and
toxic waste, from April 1987 to April 1992 (Chairman from November 1980 to
December 1982 and from July 1983 to April 1987); Chairman of Automedix Sciences,
Inc., an inactive, publicly-held company engaged in the
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<PAGE>
development of products for treating cancer and other diseases, from September
1980 to August 1995; Chairman of Cardiomedics, Inc., a privately-held company
engaged in the manufacturing of heart assist devices, from May 1986; Chairman of
Xtramedics, Inc., a publicly-held company developing a feminine hygiene product,
from November 1986 to February 1994 and a Director of Xtramedics from November
1986 until May 1994; Chairman of Ultramedics, Inc., an inactive, privately-held
company developing blood treatment products, since November 1988; and President
and Director of Marvin P. Loeb & Co. since 1965, and Master Health Services,
Inc. since 1972, both of which are family-held companies engaged in licensing of
inventions and financial consulting.
Stephen C. Knight, M.D., a Director of the Company since 1994, is Chief
Financial Officer and Senior Vice President of Financial Business Development at
Epix Medical, Inc. Prior to joining Epix Medical in July 1996, Dr. Knight was a
Senior Consultant at Arthur D. Little, Inc. While at Arthur D. Little, Dr.
Knight specialized in mergers and acquisitions, strategic planning, and
valuation in the pharmaceutical industry. Dr. Knight has performed medical
research at the National Institutes of Health, AT&T Bell Laboratories, and Yale
and Columbia Universities. Dr. Knight received an M.D. from the Yale University
School of Medicine and a Master's Degree from the Yale School of Organization
and Management.
David Schlachet, a Director of the Company since 1994, is Vice President of
the Strauss Group and C.E.O. of Strauss Holdings (Strauss Holdings incorporates
the activities of the Group, comprised of its core business, the food industry,
and other holdings in the area of commercial T.V., retail chains and investment
banking). In June 1997, Mr. Schlachet was elected Chairman of the Board of Elite
Industries Ltd. when the Strauss Group acquired control of Elite, one of the
largest food companies in Israel, with operations in Western and Eastern Europe.
Elite is a leader in the Israeli coffee, chocolate, confectionery and salty
snack markets. Mr. Schlachet was Vice President of Finance and Administration at
the Weizmann Institute of Science in Rehovot, Israel, from 1990 to December
1996. Mr. Schlachet was responsible for the Institute's administration and
financial activities, including personnel, budget and finance, funding,
investments, acquisitions and collaboration with the industrial and business
communities. From 1989 to 1990, Mr. Schlachet was President and Chief Executive
Officer of Yeda Research and Development Co., Ltd., a marketing and licensing
company at the Weizmann Institute of Science. Mr. Schlachet is a Director of
Taya Investment Company Ltd., an Israeli publicly-held investment company.
Mony Ben Dor, a Director of the Company since 1997, is Vice President of
The Israel Corporations, Ltd. and Chairman of two publicly traded subsidiaries:
H.L. Finance and Leasing and Albany Bonded International Trade. He is also a
director of a number of subsidiary companies of Israel Chemicals Ltd. From 1992
to 1997, Mr. Ben Dor was Vice President of Business Development for Clal
Industries Ltd. (a subsidiary of Clal Israel), which is one of the leading
investment groups in Israel. He was actively involved in the acquisition of
companies including Jaffora Ltd. and a portfolio of pharmaceutical companies
including Pharmaceutical Resources Inc. and Finetech Ltd. He served as a
director representing Clal Industries in all of the
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<PAGE>
acquired companies as well as other companies of Clal Industries. Prior to his
position at Clal Industries Ltd., Mr. Ben Dor served as Business Executive at
the Eisenberg Group of companies.
Georges Anthony Marcel, M.D., Ph.D., a nominee for Director of the Company,
is President and Chief Executive Officer of TMC Development S.A., a
biopharmaceutical consulting firm based in Paris, France. Prior to founding TMC
Development in 1992, Dr. Marcel held a number of senior executive positions in
the pharmaceutical industry, including Chief Executive Officer of Amgen's French
subsidiary, Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf. Dr. Marcel teaches biotechnology industrial
issues and European regulatory affairs at the Faculties of Pharmacy of Paris and
Lille. Dr. Marcel is also a member of the Gene Therapy Advisory Committee at the
French Medicines Agency.
Gad Riesenfeld, Ph.D., was named President in February 1997 and Chief
Operating Officer in March 1995 and served as Executive Vice President from
December 1994 to February 1997. He had been the Vice President of Corporate
Development and General Manager of Florida Operations since October 1992 and was
employed by Pharmos Ltd. from March 1992 until the Merger. Prior thereto, he was
engaged in free-lance consulting relating to the commercialization of
intellectual property, primarily in the pharmaceutical and medical fields. From
March 1990 through May 1991 Dr. Riesenfeld was a Director and Manager of
Kamapharm Ltd., a private company specializing in human blood products. Prior
thereto, from May 1986, he was Managing Director of Galisar Ltd., a private
company involved in extracorporeal blood therapy.
Robert W. Cook was named Vice President -- Finance and Chief Financial
Officer in January 1998. From May 1995 until joining the Company, he was a vice
president in GE Capital's commercial finance subsidiary, based in New York. From
1978 until 1995, Mr. Cook held a variety of corporate finance and capital
markets positions at The Chase Manhattan Bank, both in the U.S. and in several
overseas locations. He was named a managing director of Chase in January 1986.
Mr. Cook holds a degree in international finance from The American University,
Washington, D.C.
Anat Biegon, Ph.D., was named Vice President of Research and Development in
December 1994. Dr. Biegon became head of Research and Development for the
Company in 1994. From 1992 to 1994, Dr. Biegon was a director in Pharmos Ltd.'s
Department of Pharmacology. From 1991 to 1992, she was a Staff Physiologist at
the University of California at Berkeley's Lawrence Berkeley Laboratory,
Division of Research Medicine and Radiation Biophysics. From 1990 to 1991, Dr.
Biegon was a Research Associate Professor in the Department of Psychiatry at New
York University Medical Center. From 1988 to 1990, she was an Associate
Professor in the Department of Neurobiology at the Weizmann Institute of
Science.
-8-
<PAGE>
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During the 1997 fiscal year, there were 5 meetings of the Board of
Directors. A quorum of Directors was present, either in person or by telephonic
hookup, for all of the meetings. Actions were also taken during the year by the
unanimous written consent of the Directors.
The members of the Audit Committee in 1997 were David Schlachet and Fredric
Price. Actions of the Audit Committee were taken during the year by the
unanimous written consent of the Directors. The Audit Committee has been
delegated the responsibility of reviewing with the independent auditors the
plans and results of the audit engagement, reviewing the adequacy, scope and
results of the internal accounting controls and procedures, reviewing the degree
of independence of the auditors, reviewing the auditor's fees and recommending
the engagement of the auditors to the full Board of Directors.
In 1997, the Compensation and Stock Option Committee consisted of Messrs.
Loeb and Grinstead. Actions of the Compensation and Stock Option Committee were
taken during the year by the unanimous written consent of the Directors. The
Compensation and Stock Option Committee has the full power and authority to
interpret the provisions and supervise the administration of the Company's stock
option plans and to grant options outside of these plans and the authority to
review all matters relating to personnel of the Company.
The Board of Directors does not have a standing nominating committee.
Executive Compensation
The following table summarizes the total compensation of the Chief
Executive Officer of the Company for 1997 and the two previous years, as well as
all other executive officers of the Company who received compensation in excess
of $100,000 for 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Stock
Name/ Restricted Underlying
Principal Position Year Salary Bonus Other Stock Options
- - ------------- ---- ---- ---- ----- ------- --------
<S> <C> <C> <C> <C> <C>
Haim Aviv, Ph.D
Chairman, Chief 1997 $227,471 $ 40,000 $ 16,119 (1)
Executive Officer, and 1996 236,453 27,435 (1)
Chief Scientist 1995 200,230 324,376
Gad Riesenfeld, Ph.D
President and 1997 $175,000 44,948 (2)
Chief Operating Officer 1996 150,000 43,798 (2)
1995 136,664 34,481 (2) 79,333
Alan M. Mark
Acting Chief 1997 $255,000 (3)
Financial Officer(4) 1996 150,000 (3)
Anat Biegon, Ph.D
Vice President of 1997 $ 81,873 $ 20,456 $ 27,860 (1)
Research and 1996 85,516 26,565 (1)
Development
</TABLE>
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<PAGE>
- - ----------
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
(3) Consists of non-employee compensation.
(4) Acting Chief Financial Officer from July 1996 through July 1997. On January
1, 1998, Mr. Robert W. Cook was appointed Vice President Finance and Chief
Financial Officer of the Company.
The following tables set forth information with respect to the named
executive officers concerning the grant, repricing and exercise of options
during the last fiscal year and unexercised options held as of the end of the
fiscal year.
Option Grants for the Year
Ended December 31, 1997:
None.(1)(2)(3)
- - ------------
(1) In 1997, the Company issued warrants to purchase an aggregate of 1,030,000
shares of common stock to certain employees of the Company. Of such
warrants, 955,000 were granted at an exercise price of $1.59 per share and
75,000 were granted at an exercise price of $1.66 per share, 250,000 were
issued to Dr. Aviv, 175,000 were issued to Dr. Riesenfeld, and 125,000 were
issued to Dr. Biegon. Such warrants become exercisable in increments of 25%
each, on their respective anniversary dates, in the years 1998, 1999, 2000
and 2001. All of such warrants expire in the year 2007.
(2) In 1997, the Company issued an aggregate of 201,052 warrants to Alan Mark.
Of such warrants 15,000 were issued at an exercise price of $1.59 per
share, 15,000 were issued at an exercise price of $1.22 per share and
171,052 were issued at an exercise price of $1.38 per share. The 171,052
warrants were issued as a finders fee for a private placement transaction
that was completed in March 1997.
(3) On January 9, 1998, the Company issued options to purchase an aggregate of
100,000 shares of common stock at an exercise price of $2.00 to Robert W.
Cook, the Company's new Chief Financial Officer. Of such options, 25,000
vested immediately, and the remainder will become exercisable in increments
of 25,000 on January 1, 1999, January 1, 2000 and January 1, 2001,
respectively.
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<PAGE>
Aggregated Option Exercises
for the Year Ended December 31, 1997
and Option Values as of December 31, 1997:
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of Unexercised In-the-Money Options at
Shares Options at December 31, 1997 December 31, 1997
Acquired on Value ---------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- - ---- ------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Haim Aviv,
Ph.D 0 0 255,376 69,000 $72,000 $48,000
Gad
Riesenfeld, 0 0 57,466 21,867 $48,000 $32,000
Ph.D
Anat Biegon, 0 0 34,426 16,107 $36,000 $24,000
Ph.D
</TABLE>
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<PAGE>
REPORT OF COMPENSATION COMMITTEE
The following report of the Compensation Committee is provided solely to
the shareholders of the Company pursuant to the requirements of Schedule 14A
promulgated under the Securities Exchange Act of 1934, and shall not be deemed
to be "filed" with the Securities and Exchange Commission for the purpose of
establishing statutory liability. This Report shall not be deemed to be
incorporated by reference in any document previously or subsequently filed with
the Securities and Exchange Commission that incorporates by reference all or any
portion of this Proxy Statement.
The Compensation and Stock Option Committee of the Board of Directors
establishes the general compensation policies of the Company, establishes the
compensation plans and specific compensation levels for executive officers, and
administers the 1997 Incentive and Non-Qualified Stock Option Plan as well as
the Company's other Stock Option Plans. The Compensation and Stock Option
Committee is composed of two independent, non-employee Directors who have no
interlocking relationships as defined by the Securities and Exchange Commission
other than as described below (see "Compensation Committee Interlocks and
Insider Participation").
The Compensation and Stock Option Committee, being responsible for
overseeing and approving executive compensation and grants of stock options, is
in a position to appropriately balance the current cash compensation
considerations with the longer-range incentive-oriented growth outlook
associated with stock options. The main objectives of the Company's compensation
structure include rewarding individuals for their respective contributions to
the Company's performance, providing executive officers with a stake in the
long-term success of the Company and providing compensation policies that will
attract and retain qualified executive personnel.
The Compensation and Stock Option Committee believes that the chief
executive officer's (CEO) compensation should be heavily influenced by Company
performance. Although Dr. Aviv's existing agreements with the Company (see
"Employment/Consulting Contracts/Directors' Compensation") provide for a base
level of salary and consulting compensation, the Committee determines the
appropriate level of bonuses and increases, if any, based in large part on
Company performance. The Committee also considers the salaries of CEOs of
comparably-sized companies and their performance.
Stock options are granted to the CEO, as to other executives, primarily
based on the executive's ability to influence the Company's long-term growth.
The Compensation and Stock Option Committee has adopted similar policies
with respect to compensation of other officers of the Company. The Committee
establishes base salaries that are within the range of salaries for persons
holding similarly responsible positions at other companies. In addition, the
Committee considers factors such as relative Company
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<PAGE>
performance, the individual's past performance and future potential in
establishing the base salaries of executive officers.
As with the CEO, the number of options granted to the other officers is
determined by the subjective evaluation of the executive's ability to influence
the Company's long-term growth. All options are granted at no less than the
current market price. Since the value of an option bears a direct relationship
to the Company's stock price, it is an effective incentive for managers to
create value for stockholders. The Committee therefore views stock options as an
important component of its long-term, performance-based compensation philosophy.
Members of the Compensation and
Stock Option Committee
Marvin P. Loeb
E. Andrews Grinstead III
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<PAGE>
EMPLOYMENT/CONSULTING CONTRACTS/DIRECTORS' COMPENSATION
Haim Aviv, Ph.D. In addition to serving as Chairman of the Board and Chief
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renews for additional one-year periods unless either the
Company or Dr. Aviv terminates the agreement at least 90 days prior to a
scheduled expiration date. The agreement has been renewed on an annual basis and
presently expires on May 3, 1999. Dr. Aviv is entitled to severance pay equal to
25% of his salary in the event of termination or non-renewal without cause.
Under the agreement, Dr. Aviv is required to render certain consulting services
to the Company and in consideration therefore, Dr. Aviv is entitled to receive
$170,000 per year, subject to yearly increases and review.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief
Executive Officer under an employment agreement with Dr. Aviv pursuant to which
Dr. Aviv receives $50,000 per year, subject to yearly increases and review. Dr.
Aviv is required to devote at least 50% of his business time and attention to
the business of Pharmos, Ltd. and to serve on its Board of Directors.
Gad Riesenfeld, Ph.D. In October 1992, Old Pharmos entered into a one-year
employment agreement with Dr. Riesenfeld, which is automatically renewable for
successive one-year terms unless either party gives three months prior notice of
non-renewal. Under the Agreement, Dr. Riesenfeld devotes his full time to
serving as President of the Company. Dr. Riesenfeld's annual gross salary is
$175,000.
Robert W. Cook. In 1998, the Company entered into a one-year employment
agreement with Mr. Cook, which is automatically renewable for successive
one-year terms unless the Company gives 90 days' prior written notice, or Mr.
Cook gives 60 days' prior written notice, of non-renewal. Under the Agreement,
Mr. Cook devotes his full time to serving as Vice President -- Finance and Chief
Financial Officer of the Company. Mr. Cook's annual gross salary is $165,000.
Directors' Compensation. In 1997, Directors did not receive any
compensation for service on the Board or for attending Board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation and Stock Option Committee in 1997 were
Messrs. Loeb and Grinstead. Prior to the Merger (October 1992), Mr. Loeb was
Chairman of the Board of the Company. There were no interlocks on the
Compensation and Stock Option Committee in 1996.
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<PAGE>
PERFORMANCE GRAPH
The following graph compares the Company's cumulative stockholder's return
for the five year period ended December 31, 1997 with the cumulative total
return of the NASDAQ Equity Market Index and the NASDAQ Pharmaceuticals Index
over the same period.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
For 1998 Proxy:
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Composite 100.00 114.80 112.22 158.70 195.19 239.52
Nasdaq Pharmaceuticals 100.00 89.13 67.019 122.72 123.07 127.18
Pharmos Corporation 100.00 65.63 11.43 12.24 12.24 16.66
</TABLE>
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<PAGE>
TRANSACTIONS AND/OR INDEBTEDNESS WITH MANAGEMENT
None.
SECTION 16 FILINGS
No person who, during the fiscal year ended December 31, 1997, was a
director, officer or beneficial owner of more than ten percent of the Company's
Common Stock [which is the only class of securities of the Company registered
under Section 12 of the Securities Exchange Act of 1934 (the "Act")], a
"Reporting Person", failed to file on a timely basis, reports required by
Section 16 of the Act during the most recent fiscal year. The foregoing is based
solely upon a review by the Company of Forms 3 and 4 during the most recent
fiscal year as furnished to the Company under Rule 16a-3(d) under the Act, and
Forms 5 and amendments thereto furnished to the Company with respect to its most
recent fiscal year, and any representation received by the Company from any
reporting person that no Form 5 is required.
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<PAGE>
ITEM 2 - PROPOSAL TO APPROVE THE ISSUANCE OF CERTAIN SHARES
OF COMMON STOCK ON CONVERSION OF SERIES C PREFERRED STOCK
Background
Creation of C Preferred and Warrants
The Board of Directors on January 30, 1998 created a new series of 10,000
shares of Series C Convertible Participating Preferred Stock (the "C
Preferred"). A copy of the Designations, Preferences and Rights of Series C
Convertible Preferred Stock of Pharmos Corporation (the "Certificate of
Designation") which created the C Preferred is attached hereto as Exhibit A. The
summary of the terms of the C Preferred in this Proxy Statement is qualified in
its entirety by the terms set forth in the Certificate of Designation.
Each share of C Preferred has a face value of $1,000 per share, and accrues
a premium at 5% per annum for conversion purposes (the "Premium"). The C
Preferred was not convertible during the 60-day period from February 3, 1998,
the first date of issuance of shares of Series C Preferred, until April 4, 1998.
From that date until August 2, 1998, the C Preferred was convertible into a
number of shares of Common Stock equal to (i) $1,000 (ii) divided by a
conversion price which equals 90% of the average of the low trade prices of the
Common Stock for the five consecutive trading days ending on the trading day
immediately preceding the conversion date (the "Variable Conversion Price"). On
or after August 2, 1998, the conversion price will equal the lower of the
Variable Conversion Price or a price equal to 120% of the average of the closing
bid prices of the Common Stock for the trading days beginning on July 4, 1998
and ending on August 2, 1998.
Upon the occurrence of certain events, the conversion formula for C
Preferred is adjusted. For example, if the Company publicly announces an
intention to merge or sell its assets, or if a third party publicly announces a
tender offer for at least 50% of the Company's outstanding Common Stock, the
conversion price of the C Preferred is the lesser of (x) the conversion price as
normally calculated and (y) the conversion price which would have been
applicable for a conversion occurring on the date such public announcement was
made by the Company or the third party. In addition, if the Company is acquired
by another entity, and the securities received by the Company's shareholders are
not publicly traded or are thinly traded, the holders of the C Preferred are
entitled to receive the greater of (i) the number of shares of the surviving
entity they would have received had they converted their shares of C Preferred
on the trading date immediately prior to the public announcement of the
acquisition or (ii) 125% of the face amount of the C Preferred (that is, 125% of
$1,000 per share, or $1,125).
The C Preferred automatically converts into Common Stock on February 3,
2001 if the Registration Statement (as defined below) is then effective and the
Company is then listed on the Nasdaq National Market System or the Nasdaq Small
Cap Market ("Nasdaq"). The Certificate of
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<PAGE>
Designation also provides for terms on which the Company may redeem the C
Preferred for cash.
The face value of the C Preferred, together with the Premium, is preferred
in liquidation against the holders of Company's Common Stock and other Junior
Securities (as defined). With certain exceptions, the consent of the holders of
the C Preferred is required before the Company can issue senior or pari passu
securities, and for the declaration of dividends on any junior stock. The C
Preferred generally has no voting rights.
The Certificate of Designation provides for certain penalties (including
the accrual of certain payment and mandatory redemption at prices set forth in
the Certificate of Designation) if, among other things, the Company fails timely
to effectuate conversion of the C Preferred (whether or not there is a
sufficient number of authorized shares of Common Stock to effectuate a
conversion), if the Company is not listed on Nasdaq, if the effectiveness of the
Registration Statement is suspended for a certain period of time) or if, prior
to February 3, 1999, Dr. Haim Aviv ceases to hold the position of Chairman of
the Board and Chief Executive Officer of the Company, other than reasons which
are not under his or the Company's control.
In order to effectuate the placement the transaction referred to below, the
Board also authorized the issuance of five-year warrants in the form of Exhibit
B to purchase shares of Common Stock at $2.67 per share (the "Warrants"). The
Warrants provide for anti-dilution adjustments in certain events, including the
sale by the Company of Common Stock at less than the exercise price of the
Warrants. The summary of the terms of the Warrants set forth herein is qualified
in its entirety by reference to the actual form of the Warrants set forth in
Exhibit B.
Nasdaq Rule 4310(25)(H)(i)(d) and Certain Required Redemptions
NASDAQ Rule 4310(25)(H)(i)(d) (the "Rule") provides (with certain
exceptions not relevant here) that, without shareholder approval, a company
listed on the Nasdaq Small Cap Market may not in any transaction issue a number
of shares equal to more than 20% of the number of shares of Common Stock then
outstanding. Although the Rule was not in effect as of the initial issuance of
the first 5,000 shares of C Preferred on February 3, 1998, the Company, in the
interests of caution, has taken the approach that the Rule is applicable to such
issuance since all conversions of the C Preferred have occurred and will occur
after the effectiveness of the Rule on February 23, 1998.
As of February 3, 1998, there were outstanding 31,033,048 shares of Common
Stock of the Company, so that the Company on that date could issue 6,206,609
shares under the Rule. Accordingly, the C Preferred provides that, unless the
Company obtains the approval of its stockholders to issue more than 6,206,609
shares under the Rule, the Company is to redeem, and is not to permit conversion
of, any shares of C Preferred whose conversion would otherwise cause the Company
to issue a total number of shares of Common Stock in excess of that permitted by
the Rule. The Company is required to give to each holder notice of redemption (a
"notice of redemption") of the shares which are to be redeemed and not
converted. The redemption price in
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<PAGE>
such circumstance is the greater of (x) 120% of the face amount of the shares of
C Preferred being redeemed (that is, 120% of $1,000, or $1,200) or (y) the
product of (A) a fraction, the numerator of which is the sum of the face amount
of the shares of C Preferred being redeemed, the Premium and any applicable
penalty, and the denominator of which is the applicable conversion price in
effect on the date of the notice of redemption and (B) the average closing bid
price (without any discount) during the period beginning on the date of the
notice of redemption and ending on the date of redemption. The Company cannot at
this time determine the number of shares of C Preferred which it may be required
to redeem, because the number of shares of Common Stock issuable on conversion
of the C Preferred depends in part on the market price of the Common Stock at
the time of conversion. Redemptions under this paragraph are referred to in this
Proxy Statement as Rule 4310(25)(H) Redemptions.
The Company has agreed in favor of the holders of the C Preferred to seek
shareholder approval at the Annual Meeting for the issuance of all shares
issuable on conversion of the C Preferred in order that the Company not be
required to make the redemption referred to in the preceding paragraph. Proxies
for such approval are being solicited hereby.
Issuance of C Preferred and Warrants
On February 3, 1998, the Company issued 5,000 shares of C Preferred to one
purchaser (the "Purchaser"). The Company also issued to the purchaser 500,000
Warrants. The aggregate price of the securities sold was $5,000,000. The Company
paid a finder's fee of $250,000 and issued four-year warrants to purchase an
aggregate of 150,000 shares at an exercise price of $2.28 per share in
connection with this investment. A copy of the Securities Purchase Agreement is
attached hereto as Exhibit C.
The Purchaser agreed to purchase an additional 3,000 shares of C Preferred,
and obtain an additional 300,000 Warrants, for additional aggregate
consideration of $3,000,000 (the "Second Tranche") if certain conditions were
satisfied by the Company, including obtaining approval from the US Food and Drug
Adminstration for the Company's New Drug Application (NDA) to market the
Company's opthalmic anti-inflammatory drug, Lotemax(TM). All necessary
conditions have currently been satisfied by the Company, but the Company has
elected not to close on the Second Tranche.
The Company agreed to promptly file a registration statement (the
"Registration Statement") at its expense to register the sale of shares of
Common Stock issuable on conversion of the C Preferred and on exercise of the
Warrants (as well as the warrants issued to the finder). The Registration
Statement was declared effective by the Securities and Exchange Commission on
July 24, 1998. The Company also agreed that prior to August 3, 1998, it would
not without approval by the Purchaser make any private placement of equity
securities for cash, except that no such approval was required for placements
which raised funds for acquisitions. During the period from August 3 through
November 2, 1998, the Company may raise equity securities in a
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<PAGE>
private placement transaction, but a registration of such securities cannot
become effective prior to November 3, 1998 without the Purchaser's approval.
Proposal and Considerations
The Company proposes that the shareholders approve the issuance of all
shares of Common Stock which are issuable on conversion of the C Preferred in
order that the Company not be required to make Rule 4310(25)(H) Redemptions.
Such redemptions would require the expenditure of cash which could otherwise be
applied by the Company for corporate purposes.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL
(ITEM 2 ON THE ENCLOSED PROXY CARD) TO APPROVE THE ISSUANCE OF CERTAIN SHARES OF
COMMON STOCK ON CONVERSION OF SERIES C PREFERRED STOCK.
ITEM 3 - PROPOSAL TO ADOPT THE INCENTIVE AND NON-QUALIFIED STOCK
OPTION PLAN
The Board of Directors has adopted, subject to stockholder approval, an
amendment (the "Amendment") to the 1997 Incentive and Non-Qualified Stock Option
Plan ("1997 Plan") authorizing the issuance of an additional 400,000 shares
under such plan, thereby increasing the aggregate number of shares issuable
under such plan from 600,000 to 1,000,000.
To date, options to purchase 500,000 shares of the Company's Common Stock
have been granted under the 1997 Plan and none of such options have been
exercised or terminated.
The adoption of the Amendment by the Board of Directors reflects a
determination by the Board that ensuring the continued availability of a
sufficient number of options available for grant under the 1997 Plan is
important to the Company's ongoing and continuing efforts to attract and retain
key senior management personnel and increase the interest of the Company's
executive officers in the Company's continuing success.
Since the granting of options under the 1997 Plan is discretionary, the
Company cannot at present determine the number of options that will be granted
in the future to any person or group of persons or the terms of any future
grant. Future option grants and the terms thereof will be determined by the
Compensation Committee in accordance with the terms of the 1997 Plan.
Set forth below is certain information concerning the 1997 Plan. A copy of
the 1997 Plan is available upon written request to the Company.
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<PAGE>
Description of 1997 Plan
The purpose of the 1997 Plan is to allow Directors, officers, key employees
and consultants of the Company and its subsidiaries to increase their
proprietary interest in, and to encourage such employees to remain in the employ
of, or maintain their relationship with, such entities. It is intended that
options granted under the 1997 Plan will qualify either as incentive stock
options under Section 422 of the Code or an non-qualified options. Options
granted under the 1997 Plan will only be exercisable for Common Stock.
The 1997 Plan is administered by a committee appointed by the Board of
Directors (the "Compensation Committee"). Members of the Compensation Committee
are not be eligible to receive options while they are members except to the
extent otherwise permitted under the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934. The Compensation Committee designates the
persons to receive options, the number of shares subject to the options and the
terms of the options, including the option price and the duration of each
option, subject to certain limitations.
The maximum number of shares of Common Stock available for issuance under
the 1997 Plan is 600,000 shares (1,000,000 if the Amendment is approved),
subject to adjustment in the event of stock splits, stock dividends, mergers,
consolidations and the like. Common Stock subject to options granted under the
1997 Plan that expire or terminate are available for options to be issued under
the 1997 Plan.
The price at which shares of Common Stock may be purchased upon exercise of
an incentive stock option must be at least 100% of the fair market value of
Common Stock on the date the option is granted (or at least 110% of fair market
value in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is
granted) of Common Stock with respect to which incentive stock options are
exercisable for the first time in any calendar year by an optionee under the
1997 Plan or any other plan of the Company or a subsidiary, shall not exceed
$100,000. The Compensation Committee will fix the time or times when, and the
extent to which, an option is exercisable, provided that no option will be
exercisable earlier than one year or later than ten years after the date of
grant (or five years in the case of a 10% Stockholder). The option price is
payable in cash or by check. However, the Board of Directors may grant a loan to
an employee, pursuant to the loan provision of the 1997 Plan, for the purpose of
exercising an option or may permit the option price to be paid in shares of
Common Stock at the then current fair market value, as defined in the 1997 Plan.
Upon termination of an optionee's employment or consultancy, all options
held by such optionee will terminate, except that any option that was
exercisable on the date employment or consultancy terminated may, to the extent
then exercisable, be exercised within three months thereafter (or one year
thereafter if the termination is the result of permanent and total disability
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<PAGE>
of the holder), and except such three month period may be extended by the
Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such three-month period, the option may be
exercised within one year after death by the decedent's estate or his legatees
or distributees, but only to the extent exercisable at the time of death.
The 1997 Plan provides that outstanding options shall vest and become
immediately exercisable in the event of a "sale" of the Company, including (i)
the sale of more than 75% of the voting power of the Company in a single
transaction or a series of transactions, (ii) the sale of substantially all
assets of the Company, (iii) approval by the stockholders of a reorganization,
merger or consolidation, as a result of which the stockholders of the Company
will own less than 50% of the voting power of the reorganized, merged or
consolidated company.
The Board of Directors may amend, suspend or discontinue the 1997 Plan, but
it must obtain stockholder approval to (i) increase the number of shares subject
to the 1997 Plan, (ii) change the designation of the class of persons eligible
to receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefor specifying a lower exercise price that is not less than the fair market
value of Common Stock on the date the new option is granted, (iv) remove the
administration of the 1997 Plan from the Compensation Committee, (v) render any
member of the Compensation Committee eligible to receive an option under the
1997 Plan while serving thereon, or (vi) amend the 1997 Plan in such a manner
that options issued under it intend to be incentive stock options, fail to meet
the requirements of Incentive Stock Options as defined in Section 422 of the
Code.
Under current federal income tax law, the grant of incentive stock options
under the 1997 Plan will not result in any taxable income to the optionee or any
deduction for the Company at the time the options are granted. The optionee
recognizes no gain upon the exercise of an option. However the amount by which
the fair market value of Common Stock at the time the option is exercised
exceeds the option price is an "item of tax preference" of the optionee, which
may cause the optionee to be subject to the alternative minimum tax. If the
optionee holds the shares of Common Stock received on exercise of the option at
least one year from the date of exercise and two years from the date of grant,
he will be taxed at the time of sale at long-term capital gains rates, if any,
on the amount by which the proceeds of the sale exceed the option price. If the
optionee disposes of the Common Stock before the required holding period is
satisfied, ordinary income will generally be recognized in an amount equal to
the excess of the fair market value of the shares of Common Stock at the date of
exercise over the option price, or, if the disposition is a taxable sale or
exchange, the amount of gain realized on such sale or exchange if that is less.
If, as permitted by the 1997 Plan, the Board of Directors permits an optionee to
exercise an option by delivering already owned shares of Common Stock valued at
fair market value) the optionee will not recognize gain as a result of the
payment of the option price with such already owned shares. However, if such
shares were acquired pursuant to the previous exercise of an option, and were
held less than one year after acquisition or less than two years from the date
of grant, the exchange will constitute a disqualifying disposition resulting in
immediate taxation of the gain on
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<PAGE>
the already owned shares as ordinary income. It is not clear how the gain will
be computed on the disposition of shares acquired by payment with already owned
shares.
The Company is currently in discussions with several emerging
pharmaceutical and biotechnology companies about potential business and/or
product consolidations, joint ventures, acquisitions, mergers or other business
combinations. If any such transaction is consummated, the existence of these
additional outstanding stock options under the 1997 Plan could have the effect
of reducing the aggregate consideration received by existing stockholders in
such transaction.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE AMENDMENT
(ITEM 3 ON THE ENCLOSED PROXY CARD) INCREASING THE NUMBER OF SHARES AUTHORIZED
FOR ISSUANCE UNDER THE 1997 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN BY
400,000 FROM 600,000 TO 1,000,000.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company has appointed Price Waterhouse LLP as its independent public
accountants to examine the financial statements of the Company for the current
fiscal year. The selection of Price Waterhouse LLP was approved by the Board of
Directors prior to their appointment. Price Waterhouse LLP has advised the
Company that they do not have any material financial interests in, or any
connection with (other than as independent auditors, tax advisors and management
consultants), the Company.
Price Waterhouse LLP is expected to be present at the Annual Meeting and
will have the opportunity to make a statement, if they desire to do so, and they
are expected to be available to respond to appropriate questions.
STOCKHOLDERS' PROPOSALS FOR 1999
ANNUAL MEETING OF STOCKHOLDERS
Proposals which stockholders intend to present at the 1998 annual meeting
of stockholders must be received by the Company by May 1, 1999 to be eligible
for inclusion in the proxy material for that meeting.
ANNUAL REPORT ON FORM 10-K
Upon sending a written request to Pharmos Corporation, 33 Wood Avenue
South, Suite 466, Iselin, NJ 08830, Attention: President, stockholders may
obtain, free of charge, a copy of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, and any amendments thereto, as filed
with the Securities and Exchange Commission.
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<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the only business which management
expects to be considered at the Annual Meeting is the election of Directors and
the adoption of the incentive and non-qualified stock option plan. If any other
matters come before the meeting, the persons named in the enclosed form of proxy
are expected to vote the proxy in accordance with their best judgment on such
matters.
BY ORDER OF THE BOARD OF DIRECTORS
HAIM AVIV, PH.D.
Chairman of the Board
Dated: August 17, 1998
1255/39/1998 Proxy
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<PAGE>
EXHIBIT A
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, 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,
<PAGE>
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 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,
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<PAGE>
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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<PAGE>
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
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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
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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.
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<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).
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B. Repayment Option. If a Holder 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, 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:
(a) 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;
(b) 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
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or Warrants upon conversion of the Preferred Stock or Warrants (as the case
may be) as and when 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;
(c) 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);
(d) 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;
(e) 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;
(i) 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;
(ii) the Company fails to eliminate the Cap Amount prohibitions
set forth herein within ninety (90) days following any Proxy Filing
Deadline;
(iii) 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
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(iv) 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
-------------------------------
C P X M
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 traded.
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"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 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
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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 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
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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 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.
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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 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.
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<PAGE>
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
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
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<PAGE>
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 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
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<PAGE>
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, 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.
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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 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
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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 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
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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.
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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: ____________________________
Amount of Conversion Default
Payments to be Converted, if any: ________________
<PAGE>
Number of Shares of
Common Stock to be Issued: _______________________
Signature: _______________________________________
Name: ____________________________________________
Adress: __________________________________________
Ehrenreich, Eilenberg, Krause & Zivian, LLP
11 East 44th Street
17th Floor
New York, NY 10017
Attention: Adam Eilenberg, Esq.
Facsimile No.: (212) 986-2399
<PAGE>
EXHIBIT B
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 500,000 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, 500,000 fully paid and nonassessable
shares of the Company's common stock, par value $.03 per share (the "Common
Stock"), at an exercise price of $2.67 per share (the "Exercise Price"). This
Warrant is being issued pursuant to that certain Securities Purchase Agreement
dated as of February 4, 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
<PAGE>
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 Holder with the costs
of such appraisal to be borne by the Company.
This Warrant is subject to the following terms, provisions, and conditions:
I. 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 (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.
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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.
II. 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").
III. 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 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
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<PAGE>
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.
IV. 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 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:
1. 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
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<PAGE>
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 (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.
(2) Issuance of Convertible Securities.
(i) 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.
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<PAGE>
(ii) If the Company in any manner issues or sells any Convertible
Securities with a 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").
(3) 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.
(4) 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.
(5) 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
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<PAGE>
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, 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.
(6) 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 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
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<PAGE>
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
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.
I. Other Notices. In case at any time:
(a) 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;
(b) 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;
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(c) 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
(d) 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.
(a) "Common Stock Deemed Outstanding" shall mean the number of shares
of Common Stock actually outstanding (not including shares of 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.
(b) "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
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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.
(c) "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 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.
V. 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.
VI. 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.
VII. 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.
VIII. 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 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
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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 February 4, 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
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
-11-
<PAGE>
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).
IX. 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.
X. 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:
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.
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<PAGE>
XI. 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.
XII. 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.
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.
* * *
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<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.
( 310531.12 - 8/6/98, 17:01 PM )
<PAGE>
EXHIBIT C
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.
(a) 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.
(b) 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).
(c) 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.
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<PAGE>
B. Form of Payment. At each of the First Closing and Second Closing, each
Purchaser 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
the Company has no present intention of registering any such Securities other
than as contemplated
-3-
<PAGE>
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 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
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<PAGE>
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.
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<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 capital stock of the Company (including the Preferred Stock and the
Conversion Shares) are subject
-6-
<PAGE>
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 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
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(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 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
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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 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
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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 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.
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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 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.
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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 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.
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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 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.
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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, 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.
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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.
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
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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.
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.
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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.
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
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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.
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.
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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.
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
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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 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.
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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 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
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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
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
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<PAGE>
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 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
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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 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
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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.
* * *
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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: ______________________________
