EXHIBIT 4.1
PURCHASE AGREEMENT
PURCHASE AGREEMENT ("Agreement") dated as of September 1, 2000 between
Pharmos Corporation, a Nevada corporation (the "Company"), and each person or
entity listed as an investor on Schedule I attached to this Agreement (each
individually an "Investor" and collectively the "Investors"). Undefined terms
contained herein shall have the meaning ascribed to them in the Debentures.
W I T N E S S E T H:
WHEREAS, the Company desires to sell and issue to the Investors, and the
Investors wish to purchase from the Company, 6% Convertible Debentures due
February 28, 2002 (the "Debentures"), in the aggregate principal amount of
$8,000,000 at an aggregate purchase price of $8,000,000, having the rights and
privileges set forth in the Debentures in the form of Exhibit 1A attached
hereto, on the terms and conditions set forth herein; and
WHEREAS, pursuant to the terms of the Debentures, the Debentures will be
convertible into shares ("Common Shares") of common stock, par value $.03, of
the Company ("Common Stock"); and
WHEREAS, to induce the Investors to purchase the Debentures, the Company
has agreed to issue to the Investors warrants (the "Warrants") exercisable for
shares of Common Stock ("Warrant Shares") in the form attached as Exhibit 1B;
and
WHEREAS, the Investors will have registration rights with respect to such
Common Shares and the Warrant Shares pursuant to the terms of that certain
Registration Rights Agreement to be entered into between the Company and the
Investors substantially in the form of Exhibit 4.2(e) hereto ("Registration
Rights Agreement");
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
Purchase and Sale of Debentures and Warrants, Etc.
Section 1.1 Issuance of Debentures and Warrants.
(a) Issuance. Upon the following terms and conditions, the Company
shall issue and sell to each Investor severally, and each Investor severally
shall purchase from the Company, the outstanding principal amount of Debentures
and the number of Warrants indicated next to such Investor's name on Schedule I
attached hereto.
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(b) Purchase Price. The purchase price for the Debentures and Warrants
to be acquired by each Investor (the "Purchase Price") shall be the Purchase
Price set forth next to such Investor's name on Schedule I.
(c) The Closing.
(i) The closing of the purchase and sale of the Debentures and
the Warrants (the "Closing") shall take place at the offices of
Kleinberg, Kaplan, Wolff & Cohen, P.C. ("Investors' Counsel") or at
such other place as is mutually agreeable, at 10:00 am., local time
on: (x) the date on which the last to be fulfilled or waived of the
conditions set forth in Article 4 hereof and applicable to the Closing
shall be fulfilled or waived in accordance herewith, or (y) such other
time and place and/or on such other date as the Investors and the
Company may agree. The date on which the Closing occurs is referred to
herein as the "Closing Date".
(ii) On the Closing Date, the Company shall deliver to each
Investor (x) one or more Debentures (with the number of and
outstanding principal amount of each debenture to be as reasonably
requested by such Investor) representing the aggregate Debentures
purchased hereunder by such Investor at the Closing registered in the
name of such Investor or its nominee and (y) the Warrants registered
in the name of Investor or its nominee in such denominations as
reasonably requested by such Investor, and such Investor shall deliver
to the Company fifty percent (50%) of the Purchase Price for the
Debentures purchased by such Investor hereunder by wire transfer in
immediately available funds to an account designated in writing by the
Company, with each investor funding the remaining 50% of its Purchase
Price to the Escrow Agent (as defined below) as provided in paragraph
(c)(iii) below. The delivery of payment by each Investor of the
Purchase Price applicable to it as set forth in paragraphs c(ii) and
c(iii) shall constitute a payment delivered to the Company in
satisfaction of such Investor's obligation to pay the Purchase Price
hereunder. In addition, each party shall deliver all documents,
instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing. In addition, at
the Closing, the Company shall pay (or Millennium Partners, LP ("MLP")
shall pay for the account of the Company, with such payment being
credited towards MLP's payment of the Purchase Price under this
paragraph c(ii)) to the Investors' Counsel its legal fees and
disbursements as set forth in Section 3.4.
(iii) On the Closing Date, each Investor severally shall deliver
fifty percent (50%) of its Purchase Price to Kleinberg, Kaplan, Wolff
& Cohen, P.C. (the "Escrow Agent") for deposit in an escrow account
pursuant to the terms of an escrow agreement, dated the Closing Date,
by and among the Company, the Investors and the Escrow Agent in the
form of Exhibit 1C attached (the "Escrow Agreement").
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ARTICLE 2
Representations and Warranties
Section 2.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to each of the
Investors as of the date hereof and on the Closing Date:
(a) Organization and Qualification; Material Adverse Effect. The
Company is a corporation duly incorporated and existing in good standing under
the laws of the State of Nevada and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any direct or indirect subsidiaries (defined as any entity of which the
Company owns, directly or indirectly, 50% or more of the equity or voting power)
other than the subsidiaries listed on Schedule 2.1(a) attached hereto. Except
where specifically indicated to the contrary, all references in this Agreement
to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries
of the Company. Except where specifically indicated to the contrary, all
references in this Article 2 to the Company shall be deemed to refer to the
Company and its consolidated subsidiaries. Each of the Company and its
subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary other than
those in which the failure so to qualify would not have a Material Adverse
Effect. "Material Adverse Effect" means any adverse effect on the business,
operations, properties or financial condition of the entity with respect to
which such term is used and which is (either alone or together with all other
adverse effects) material to such entity and other entities controlling or
controlled by such entity taken as a whole, and any material adverse effect on
the transactions contemplated under this Agreement, the Registration Rights
Agreement or any other agreement or document contemplated hereby or thereby.
(b) Authorization; Enforcement. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Debentures, the Warrants, the Escrow Agreement and the Registration Rights
Agreement (the "Transaction Documents") and to issue the Debentures and the
Warrants in accordance with the terms hereof and thereof, (ii) the execution and
delivery of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated hereby and thereby, including the issuance of
the Common Shares and the Warrant Shares, have been duly authorized by all
necessary corporate action, and no further consent or authorization of the
Company or its Board of Directors (or any committee or subcommittee thereof) or
stockholders is required, (iii) the Transaction Documents have been duly
executed and delivered by the Company and (iv) the Transaction Documents
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of creditors' rights and remedies or by other equitable principles of general
application.
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(c) Capitalization. The authorized capital stock of the Company
consists of 80,000,000 shares of Common Stock and 1,250,000 shares of preferred
stock; as of August 29, 2000 there were 52,718,072 shares of Common Stock and no
shares of preferred stock issued and outstanding; and, except as set forth on
Schedule 2.1(c), no shares of Common Stock and no shares of preferred stock were
reserved for issuance to persons other than the Investors. All of the
outstanding shares of the Company's Common Stock and preferred stock have been
validly issued and are fully paid and nonassessable. No shares of capital stock
are entitled to preemptive rights and, except as set forth on Schedule 2.1(c),
there are no outstanding options and outstanding warrants for shares of Common
Stock (excluding the Warrants). Except as set forth on Schedule 2.1(c)(i), there
are no other scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights exchangeable for or
convertible into, any shares of capital stock of the Company, or contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of capital stock of the Company or
options, warrants, scrip, rights to subscribe to, or commitments to purchase or
acquire, any shares, or securities or rights convertible or exchangeable into
shares, of capital stock of the Company. Attached hereto as Exhibit 2.1(c)(i) is
a true and correct copy of the Company's Certificate of Incorporation (the
"Charter"), as in effect on the date hereof, and attached hereto as Exhibit
2.1(c)(ii) is a true and correct copy of the Company's By-Laws, as in effect on
the date hereof (the "By-Laws").
(d) Issuance of Common Shares. The Common Shares and the Warrant
Shares are duly authorized and reserved for issuance and, upon such conversion
in accordance with the Debentures and/or exercise in accordance with the
Warrants such Common Shares and Warrant Shares, as the case may be, will be
validly issued, fully paid and non-assessable, free and clear of any and all
liens, claims and encumbrances, and (subject to the registration of such shares
in accordance with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act" or the "Act") and the Securities Exchange Act of
1934, as amended (the "Exchange Act") entitled to be traded on the Nasdaq Small
Cap Market (or the American Stock Exchange, the New York Stock Exchange, or the
Nasdaq National Market System, collectively with the Nasdaq Small Cap Market,
the "Approved Markets"), and the holders of such Common Shares and Warrant
Shares shall be entitled to all rights and preferences accorded to a holder of
Common Stock. The outstanding shares of Common Stock are currently listed on the
Nasdaq Small Cap Market.
(e) No Conflicts. The execution, delivery and performance the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby and the issuance of the Debentures
and the Warrants (collectively, the "Securities") do not and will not (i) result
in a violation of the Company's Charter or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent,
patent license or instrument to which the Company or any of its subsidiaries is
a party (collectively, "Company Agreements"), or (iii) result in a violation of
any federal, state, local or foreign law, rule, regulation, order, judgment or
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decree (including 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, except (other than
in the case of clause (i) above) where such violation would not reasonably be
expected to have a Material Adverse Effect. The business of the Company and its
direct and indirect subsidiaries is being conducted in material compliance with
(i) its Charter and By-Laws, (ii) all Company Agreements and (iii) all
applicable laws, ordinances or regulations of any governmental entity, except
(other than in the case of clause (i) above) where such violation would not
reasonably be expected to have a Material Adverse Effect. Except for filings,
consents and approvals required under applicable state and federal securities
laws or the rules and regulations of the applicable Approved Markets and covered
by the Registration Rights Agreement, the Company is not required under federal,
state, local or foreign law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement, the Registration Rights Agreement, the
Debentures and the Warrants or to issue and sell the Debentures, Warrants or the
Common Shares and Warrants Shares issuable upon conversion or exercise thereof
except for the registration provisions provided in the Registration Rights
Agreement.
(f) SEC Documents; No Non-Public Information; Financial Statements.
The Common Stock of the Company is registered pursuant to Section 12(g) of the
Exchange Act and the Company and its subsidiaries have filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the Securities and Exchange Commission ("SEC") pursuant to the reporting
requirements of the Exchange Act, including all such proxy information,
solicitation statements and registration statements, and any amendments thereto
required to have been filed (all of the foregoing including filings incorporated
by reference therein being referred to herein as the "SEC Documents"). The
Company has not directly or indirectly provided, and will not directly or
indirectly provide, to the Investors any material non-public information or any
information which, according to applicable law, rule or regulation, should have
been disclosed publicly by the Company but which has not been so disclosed. 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 and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The SEC Documents contain all material information concerning the
Company and its subsidiaries, and no event or circumstance has occurred prior to
the date hereof or will have occurred on the Closing Date which would require
the Company to disclose such event or circumstance in order to make the
statements in the SEC Documents not misleading but which has not, or will have
not, been so disclosed.
(g) Financial Statements. The financial statements of the Company and
its subsidiaries included in the SEC Documents comply as to form and substance
in
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all material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis 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 may not include footnotes, may be
condensed or summary statements) and fairly present in all material respects the
financial position of the Company and its subsidiaries as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). The audited financial statements of each of the Company and its
subsidiaries for the fiscal year ending December 31, 1999 have been prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis 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 may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company and its subsidiaries, as
the case may be, as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
(h) Principal Exchange/Market. The principal market on which the
Common Stock is currently traded is the Nasdaq Small Cap Market.
(i) No Material Adverse Change. Since June 30, 2000, no Material
Adverse Effect has occurred or exists, and no event or circumstance has occurred
that with notice or the passage of time or both is reasonably likely to result
in a Material Adverse Effect with respect to the Company or its subsidiaries.
(j) No Undisclosed Liabilities. The Company and its subsidiaries have
no liabilities or obligations not disclosed in the Pre-Agreement SEC Documents
(as defined below), other than those liabilities incurred in the ordinary course
of the Company's or its subsidiaries' respective businesses since June 30, 2000,
which liabilities, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company or its direct or indirect subsidiaries.
(k) No Undisclosed Events or Circumstances. To the best knowledge of
the Company, no material event or circumstance has occurred or exists with
respect to the Company or its direct or indirect subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(l) No General Solicitation. Neither the Company, nor any of its
affiliates, or, to its knowledge, any person acting on its or their behalf has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D
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under the Securities Act) in connection with the offer or sale of the
Debentures, the Warrants, Common Shares or the Warrant Shares.
(m) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor to its knowledge any person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would require
registration of the Debentures, the Warrants, the Common Shares or Warrant
Shares under the Act.
The issuance of the Debentures, Warrants, Common Shares or Warrant Shares
to the Investors will not be integrated with any other issuance of the Company's
securities (past, current or future) which requires stockholder approval under
the rules of the NASDAQ Small Cap Market.
(n) Form S-3. The Company is eligible to file the Registration
Statement (as defined in the Registration Rights Agreement) on Form S-3 under
the Act and rules promulgated thereunder, and Form S-3 is permitted to be used
for the transactions contemplated hereby under the Act and rules promulgated
thereunder.
(o) Intellectual Property. The Company and/or its wholly-owned
subsidiaries owns or has licenses to use certain patents, copyrights and
trademarks ("intellectual property") associated with its business. The Company
and its subsidiaries have all intellectual property rights which are needed to
conduct the business of the Company and its subsidiaries as it is now being
conducted or as proposed to be conducted as disclosed in the SEC Documents. The
Company and its subsidiaries have no reason to believe that the material
intellectual property rights which it owns are invalid or unenforceable or that
the use of such intellectual property by the Company or its subsidiaries
infringes upon or conflicts with any right of any third party, and neither the
Company nor any of its subsidiaries has received notice of any such infringement
or conflict, which individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect. The Company and its subsidiaries
have no knowledge of any infringement of its intellectual property by any third
party.
(p) Poison Pill Provisions. Neither Company nor its wholly-owned
subsidiaries have a stockholder rights plan. None of the acquisition of
Debentures, Warrants, Common Shares or Warrant Shares nor the deemed beneficial
ownership of shares of Common Stock prior to, or the acquisition of such shares
pursuant to, the conversion of Debentures or the exercise of the Warrants will
in any event under any circumstance trigger the poison pill provisions of any
other or subsequently adopted plan or agreement, or a substantially similar
occurrence under any successor or similar plan.
(q) No Litigation. Except as set forth in the reports or documents
filed at least 5 Trading Days prior to the Closing Date by the Company pursuant
to Section 13(a) or 15(d) of the Exchange Act (the "Pre-Agreement SEC
Documents"), no litigation or claim (including those for unpaid taxes) against
the Company or any of its subsidiaries is pending or, to the Company's
knowledge, threatened, and no other event has occurred, which if determined
adversely could reasonably be expected to have a
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Material Adverse Effect on the Company or could reasonably be expected to
materially and adversely affect the transactions contemplated hereby. There is
no legal proceeding described in the Pre-Agreement SEC Documents that could
reasonably be expected to have a Material Adverse Effect on the Company.
(r) Brokers. The Company has taken no action which would give rise to
any claim by any person, other than Ladenburg Thalmann & Co., Inc. and SmallCaps
OnLine LLC (collectively, the "Brokers"), for brokerage commissions, finder's
fees or similar payments by the Company or any Investor relating to this
Agreement or the transactions contemplated hereby. The Company shall be
responsible for any payments to the Brokers.
(s) Other Investors. Other than the Securities and except as set forth
on Schedule 2.1(s)(i), there are no outstanding securities issued by the Company
that are entitled to registration rights under the Act. Other than the
Securities and except as set forth on Schedule 2.1(s)(ii), there are no
outstanding securities issued by the Company that are directly or indirectly
convertible into, exercisable into, or exchangeable for, shares of Common Stock
of the Company, or that have anti-dilution or similar rights that would be
affected by the issuance of the Debentures, the Common Shares, the Warrants or
the Warrant Shares.
(t) Certain Transactions. Except as disclosed in the Pre-Agreement SEC
Documents, none of the officers, directors, or key employees of the Company is
presently a party to any transaction with the Company or any of its subsidiaries
(other than for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.
(u) Permits; Compliance. The Company and each of its subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "Company Permits"), except where
failure to possess such Company Permits would not have a Material Adverse Effect
on the Company and there is no action pending or, to the knowledge of the
Company, threatened regarding suspension or cancellation of any of the Company
Permits except for such Company Permits the failure of which to possess, or the
cancellation or suspension of which, would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. To the best of its
knowledge, neither the Company nor any of its subsidiaries is in material
conflict with, or in material default or material violation of, any of the
Company Permits. Since December 31, 1999, neither the Company nor any of its
subsidiaries has received any notification with respect to possible material
conflicts, material defaults or material violations of applicable laws.
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(v) Insurance. The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its direct and indirect
subsidiaries are engaged. Neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.
(w) Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's management, to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) Environmental Matters. Except as otherwise disclosed in the
Pre-Agreement SEC Documents, the Company and each of its subsidiaries is in
compliance in all respects with all applicable state and federal environmental
laws except where any such non-compliance would not reasonably be expected to
have a Material Adverse Effect on the Company and no event or condition has
occurred that may interfere with the compliance by the Company or any of its
subsidiaries with any environmental law or that may give rise to any liability
under any environmental law that, individually or in the aggregate, would have a
Material Adverse Effect.
(y) Solvency.
(i) Based on the financial condition of the Company as of the
Closing Date, the Company's fair saleable value of its assets exceeds
the amount that will be required to be paid on or in respect of the
Company's existing debts and other liabilities (including known
contingent liabilities) as they mature.
(ii) Based on the financial condition of the Company as of the
Closing Date, the Company's assets do not constitute unreasonably
small capital to carry out its business for the year 2000 as now
conducted and as proposed to be conducted including the Company's year
2000 capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof.
(iii) The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the
timing
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and amounts of cash to be payable on or in respect of its debt). Based
on the financial condition of the Company as of the Closing Date, the
current cash flow of the Company, together with the proceeds the
Company would receive, were it to liquidate all of its assets, after
taking into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt when such
amounts are required to be paid.
(iv) Neither the Company nor any of its subsidiaries is subject
to any bankruptcy, insolvency or similar proceeding.
(z) Taxes. All federal, state, city and other tax returns, reports and
declarations required to be filed or extended by or on behalf of the Company and
each of its subsidiaries have been filed or extended and all such filed returns
are complete and accurate and disclose all taxes (whether based upon income,
operations, purchases, sales, payroll, licenses, compensation, business,
capital, properties or assets or otherwise) required to be paid in the periods
covered thereby. All taxes required to be withheld by or on behalf of the
Company or any such subsidiary in connection with amounts paid or owing to any
employees, independent contractor, creditor or other party have been withheld,
and such withheld taxes have either been duly and timely paid to the proper
governmental authorities or set aside in accounts for such purposes.
(aa) Title to Properties; Encumbrances. Schedule 2.1(aa) contains a
complete and accurate list of all material real property, leaseholds, or other
interests therein owned by the Company and its subsidiaries. Each of the Company
and its subsidiaries owns (with good and marketable title in the case of real
property) all the properties and assets (whether real, personal, or mixed and
whether tangible or intangible ("Company Property")) that it purports to own.
Other than the leased property, all material Company Property is free and clear
of all encumbrances and are not, in the case of real property (which, for this
purpose, shall not include the Company's interest as tenant in leaseholds),
subject to any rights of way, building use restrictions, exceptions, variances,
reservations or limitations of any nature, except, with respect to all such
properties and assets, (a) mortgages, liens or security interests shown on
Schedule 2.1(aa) as securing specified liabilities or obligations, with respect
to which no default (or event that, with notice or lapse of time or both, would
constitute a default) exists, (b) liens for current taxes not yet due, and (c)
with respect to real property, (i) minor imperfections of title, if any, none of
which is substantial in amount, materially detracts from the value or impairs
the use of the property subject thereto, or impairs the operations of the
Company or any of its subsidiaries, and (ii) zoning laws and other land use
restrictions (including, but not limited to, easements of records) that do not
impair the present or anticipated use of the property subject thereto. All
buildings, plans, and structures owned by the Company or any of its subsidiaries
lie wholly within the boundaries of the real property owned by the Company or
such subsidiaries, and do not encroach upon the property of, or otherwise
conflict with the property rights of, any other person.
(bb) No Reliance on Investors. The Company acknowledges and agrees
that each Investor is acting solely in the capacity of an arm's length purchaser
with respect to this Agreement and the Registration Rights Agreement and the
performance
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under the Debentures and the Warrants and the transactions contemplated hereby
and thereby. The Company further acknowledges that no Investor is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement and the Registration Rights Agreement and the
performance under the Debentures and the Warrants and the transactions
contemplated hereby and thereby. The Company further represents to the Investor
that the Company's decision to enter into this Agreement and the Registration
Rights Agreement and the performance under the Debentures and the Warrants has
been based solely on the independent evaluation by the Company and its
representatives.
(cc) Foreign Corrupt Practices Act. Neither the Company, nor any
director, officer, agent, employee or other person acting on behalf of the
Company or any Subsidiary has, in the course of acting for, or on behalf of, the
Company, directly or indirectly used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; directly or indirectly made any direct or indirect unlawful
payment to any foreign or domestic government or party 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 any similar treaties of
the United States; or directly or indirectly made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government or party official or employee.
(dd) MFN and Variable Rate Transactions. The Company has not entered
into any MFN Transaction or Variable Rate Transaction (other than transactions
entered into with the Investors), pursuant to which: (1) securities or potential
obligations to issue securities are still outstanding or (2) the issuance
conversion, or exercise, as the case may be, of the Debentures or the Warrants
trigger, or may in the future trigger, an adjustment.
The term "MFN Transaction" shall mean a transaction in which the Company
issues or sells any securities in a capital raising transaction or series of
related transactions (the "MFN Offering") which grants to an investor (the "MFN
Investor") the right to receive additional shares (including without limitation
as a result of a lower conversion, exchange or exercise price but excluding
customary antidilution protections) based upon subsequent transactions of the
Company on terms more favorable than those granted to such MFN Investor in such
MFN Offering. As used herein, term "Variable Rate Transaction" shall mean a
transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of, Common Stock either (x) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the Common Stock at any time
after the initial issuance of such debt or equity securities, or (y) with a
fixed conversion, exercise or exchange price that is subject to being reset at
some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock (but
excluding standard stock split anti-dilution
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provisions), or (ii) any securities of the Company pursuant to an "equity line"
structure which provides for the sale, from time to time, of securities of the
Company which are registered for resale under the Act.
Section 2.2 Representations and Warranties of the Investors. Each of the
Investors, severally (as to itself) and not jointly hereby makes the following
representations and warranties to the Company as of the date hereof and on the
Closing Date:
(a) Organization and Qualification. Such Investor is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and is duly qualified to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary except where the failure to be so qualified or in good
standing would not reasonably be expected to have a Material Adverse Effect on
such Investor.
(b) Authorization; Enforcement. (i) Such Investor has the requisite
power and authority to enter into and perform this Agreement, the Escrow
Agreement and the Registration Rights Agreement to purchase the Debentures and
to acquire the Warrants being sold to it hereunder and to acquire the Common
Shares and the Warrant Shares, (ii) the execution and delivery of this
Agreement, the Escrow Agreement and the Registration Rights Agreement by such
Investor and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate or partnership
action, and (iii) this Agreement, the Escrow Agreement and the Registration
Rights Agreement constitute valid and binding obligations of such Investor
enforceable against such Investor in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
(c) No Conflicts. The execution, delivery and performance of this
Agreement, the Escrow Agreement and the Registration Rights Agreement and the
performance under the Debentures and Warrants and the consummation by such
Investor of the transactions contemplated hereby and thereby do not and will not
(i) result in a violation of such Investor's organizational documents, (ii)
conflict with any agreement, indenture or instrument to which such Investor is a
party, or (iii) result in a material violation of any law, rule, or regulation,
or any order, judgment or decree of any court or governmental agency applicable
to such Investor. Such Investor is not required to obtain any consent or
authorization of any governmental agency in order for it to perform its
obligations under this Agreement, the Escrow Agreement and the Registration
Rights Agreement.
(d) Investment Representations.
(i) Access to Other Information. Such Investor acknowledges that
the Company has made available to such Investor the opportunity to
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examine such additional documents from the Company and to ask
questions of, and receive full answers from, the Company concerning,
among other things, the Company, its financial condition, its
management, its prior activities and any other information which such
Investor considers relevant or appropriate in connection with entering
into this Agreement.
(ii) Risks of Investment. Such Investor acknowledges that the
Securities and the Common Shares and Warrant Shares issuable upon
conversion and/or exercise of the Securities have not been registered
under the Act. Such Investor is familiar with the provisions of Rule
144 and understands that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Act
or some other exemption from the registration requirements of the Act
will be required in order to dispose of the Securities and the Common
Shares and Warrant Shares issuable upon conversion and/or exercise of
the rights granted in the Securities, and that such Investor may be
required to hold the Securities and the Common Shares and Warrant
Shares issuable upon conversion and/or exercise of the Securities
received under this Agreement for a significant period of time prior
to reselling them, subject to the Company successfully registering the
Common Shares and Warrant Shares pursuant to the Registration Rights
Agreement. Such Investor is capable of assessing the risks of an
investment in the Securities and is fully aware of the economic risks
thereof.
(iii) Investment Representation. Such Investor is purchasing the
Debentures, and Warrants and may purchase the Common Shares, and
Warrants Shares in each case, for its own account and not with a view
to distribution in violation of any securities laws. Such Investor has
no present intention to sell the Debentures, Warrants, Common Shares
or Warrant Shares in violation of federal or state securities laws and
such Investor has no present arrangement (whether or not legally
binding) to sell the Debentures, Warrants, Common Shares or Warrant
Shares to or through any person or entity; provided, however, that by
making the representations herein, such Investor does not agree to
hold the Debentures, Warrants, Common Shares or Warrant Shares for any
minimum or other specific term and reserves the right to dispose of
the Debentures, Warrants, Common Shares or Warrant Shares at any time
in accordance with federal and state securities laws applicable to
such disposition.
(iv) Restricted Securities. It acknowledges and understands that
the terms of issuance have not been reviewed by the SEC or by any
state securities authorities and that the Securities have been issued
in reliance on the certain exemptions for non-public offerings under
the Act, which exemptions depend upon, among other things, the
representations made and information furnished by such Investor,
including the bona fide nature of such Investor's investment intent as
expressed above.
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(v) Ability to Bear Economic Risk. It is an "accredited" investor
as defined in Rule 501 of Regulation D, as amended, under the Act, and
that it (i) is able to bear the economic risk of its investment in the
Debentures, (ii) is able to hold the Debentures for an indefinite
period of time, (iii) can afford a complete loss of its investment in
the Debentures and (iv) has adequate means of providing for its
current needs.
(vi) No Public Solicitation. At no time was such Investor
presented with or solicited by any general mailing, leaflet, public
promotional meeting, newspaper or magazine article, radio or
television advertisement, or any other form of general advertising or
general solicitation in connection with the issuance.
(vii) Reliance by the Company. Such Investor understands that the
Debentures and Warrants are being or will be, as the case may be,
offered and sold and that the Common Shares or Warrant Shares, as the
case may be, will be issued, in reliance on a transactional exemptions
from the registration requirements of federal and state securities
laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and
understandings of such Investor set forth herein in order to determine
the applicability of such exemptions and the suitability of such
Investor to acquire the Debentures and Warrants.
(e) Brokers. Such Investor has taken no written action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Company relating to this Agreement or the transactions
contemplated hereby.
ARTICLE 3
Covenants
Section 3.1 Registration and Listing; Effective Registration. For so long
as the Securities are outstanding, the Company will cause the Common Stock
issuable upon the exercise or conversion of the Securities to continue at all
times to be registered under Section 12(b) or Section 12(g) of the Exchange Act,
will comply in all respects with its reporting and filing obligations under the
Exchange Act, and will not take any action or file any document (whether or not
permitted by the Exchange Act or the rules thereunder) to terminate or suspend
such reporting and filing obligations. Until such time as no Securities are
outstanding, the Company shall continue the listing or trading of the Common
Stock on the Nasdaq Small Cap Market or one of the other Approved Markets and
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Approved Market on which the Common
Stock is listed. The Company shall cause the Common Stock to be listed on the
Nasdaq Small Cap Market no later than the registration of the Common Stock under
the Act, and at all times shall continue such listing(s) on one of the Approved
Markets. As used herein and in the Registration Rights Agreement, the Debenture
and the Warrants, the term "Effective
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Registration" shall mean: (i) the Company is in compliance with the Transaction
Documents; (ii) the resale of Registrable Securities (as defined in the
Registration Rights Agreement) is covered by an effective registration statement
and such registration statement is not subject to any suspension or stop orders;
(iii) the resale of such securities may be effected pursuant to a current and
deliverable prospectus that is not subject to any blackout or similar
circumstance; (iv) the securities are listed on an Approved Market and are not
subject to any trading suspension; (v) no Interfering Event (as described in the
Registration Rights Agreement) then exists; and (vi) none of the Company or any
direct or indirect subsidiary of the Company is subject to any bankruptcy,
insolvency or similar proceeding.
Section 3.2 Debentures on Conversion and Warrants on Exercise.
(a) Upon any conversion by an Investor (or then holder of Debentures)
of the Debentures pursuant to the terms thereof, the Company shall issue and
deliver to such Investor (or holder) within three (3) Trading Days of the
Conversion Date, a new Debenture for the principal amount of Debentures which
such Investor (or holder) has not yet elected to convert but which is evidenced
in part by the Debenture(s) submitted to the Company in connection with such
conversion (with the number of and denomination of such new Debenture(s)
designated by such Investor or holder).
(b) Upon any partial exercise by an Investor (or then holder of the
Warrants) of the Warrants, the Company shall issue and deliver to such Investor
(or holder) within three (3) days of the date on which such Warrants are
exercised, a new Warrant or Warrants representing the number of adjusted Warrant
Shares and/or Common Shares, as the case may be, in accordance with the terms of
Section 3 of such Warrants.
Section 3.3 Replacement Debentures and Warrants.
(a) The Debentures held by any Investor (or then holder) may be
exchanged by such Investor (or such holder) at any time and from time to time
for Debentures with different denominations of at least $500,000 representing an
equal aggregate number of Debentures or to reflect the actual Conversion Price
pursuant to Section 5(c) of the Debentures, as requested by such Investor (or
such holder) upon surrendering the same. No service charge will be made for such
registration or transfer or exchange.
(b) The Warrants will be exchangeable at the option of the Investor
(or then holder of the Warrants) at the office of the Company for other Warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of Warrant Shares and/or Common Shares, as the case
may be, as are purchasable under such Warrants. No service charge will be made
for such transfer or exchange.
Section 3.4 Expenses. The Company shall pay to the Investors' Counsel in
immediately available funds, at the Closing the sum of $15,000 ($20,000 less
$5,000 previously paid) for the payment of expenses (including legal fees)
incurred by the
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Investors in connection with the transactions contemplated by this Agreement. In
lieu thereof, MLP may allocate $15,000 of its payment of the non-escrowed
portion of its Purchase Price to the payment of such counsel, and such payment
to Investors' Counsel shall be credited towards the payment of the Purchase
Price due from MLP.
Section 3.5 Securities Compliance. The Company shall notify the SEC, in
accordance with their requirements, of the transactions contemplated by this
Agreement, the Debentures, the Registration Rights Agreement and the Warrants,
and shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Debentures hereunder, the Common Shares issuable upon conversion
thereof, the Warrants and the Warrant Shares issuable upon exercise of the
Warrants.
Section 3.6 Dividends or Distributions; Purchases of Equity Securities.
Except as provided in this Section 3.6 to the contrary, for so long as any
Debentures or Warrants remain outstanding, the Company agrees that it shall not
(a) declare or pay any dividends or make any distributions to any holder or
holders of Common Stock (other than dividends payable in Common Stock) in their
capacity as shareholders, or (b) purchase or otherwise acquire for value,
directly or indirectly, any shares of Common Stock or other equity security of
the Company; provided that the Company may purchase or acquire shares of Common
Stock that are hereafter issued to employees pursuant to employment, stock
repurchase or other similar agreements.
Section 3.7 Notices. The Company agrees to provide all holders of
Debentures and Warrants with copies of all notices and information, including
without limitation notices and proxy statements in connection with any meetings,
that are provided to the holders of shares of Common Stock, contemporaneously
with the delivery of such notices or information to such Common Stock holders.
Section 3.8 Use of Proceeds. The Company agrees that the proceeds received
by the Company from the sale of the Debentures and Warrants hereunder shall be
used for the late stage development of Dexanabinol and for working capital
purposes.
Section 3.9 Additional Financing. If, during the period of time commencing
on the date hereof and ending on the third month following the effectiveness of
the registration statement filed pursuant to the Registration Rights Agreement,
the Company shall seek to enter into any financing whatsoever, other than a
financing for gross proceeds of at least $40 million involving at least 20
investors unaffiliated with the Company, the Company shall not enter into such
transaction without the prior written consent of or majority in interest of the
Investors.
Section 3.10 Reservation of Stock Issuable Upon Conversion and Upon
Exercise of the Warrants. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the Debentures and the exercise of
the Warrants, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Debentures and
the full exercise of the Warrants and if at
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any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all the then outstanding Debentures
and the full exercise of the Warrants, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including without limitation engaging in best
efforts to obtain the requisite shareholder approval. Without in any way
limiting the foregoing, the Company agrees to reserve and at all times keep
available solely for purposes of conversion of Debentures and the exercise of
the Warrants such number of authorized but unissued shares of Common Stock that
is at least equal to 160% of the aggregate shares issuable upon conversion of
Debentures, and 100% of the aggregate shares issuable on exercise of the
Warrants, which number shall be appropriately adjusted for any stock split,
reverse split, stock dividend or reclassification of the Common Stock. If the
Company falls below the reserves specified in the immediately preceding sentence
and does not cure such non-compliance within 30 days of its start, then the
Investors will be entitled to the compensatory payments specified in Section
2(b)(i)(A) of the Registration Rights Agreement. If at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all the then outstanding Debentures or the full exercise of the
Warrants, the Investors shall be entitled to, inter alia, the premium price
redemption rights provided in the Registration Rights Agreement.
Section 3.11 Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article 4 of this Agreement.
Section 3.12 Limitations on Issuance of Debt, Liens and Transfers
(a) So long as any Debentures remain outstanding, the Company agrees
that neither the Company nor any of its subsidiaries shall (i) create, incur,
assume, guarantee, secure or in any manner become liable in respect of any debt
financing (other than purchase money financings, not to exceed $1,000,000 in the
aggregate), which is senior to the Debentures; or (ii) create, incur or permit
to exist any security interest, lien or other encumbrance on or with respect to
any of the assets of the Company or its subsidiaries other (1) than in
connection with the purchase money financings referred to above; (2)
non-consensual statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of the Company's business to the extent: (A) such
liens secure indebtedness which is not overdue or (B) such liens secure
indebtedness relating to claims or liabilities which are fully insured and being
contested in good faith by appropriate proceedings diligently pursued and
available to the Company, in each case prior to the commencement of foreclosure
or other similar proceedings and with respect to which adequate reserves have
been set aside on its books; (3) zoning restrictions, easements, licenses,
covenants and other restrictions affecting the use of real property which do not
interfere in any material respect with the use of such real property or ordinary
conduct of the business of the Company as presently conducted thereon or
materially impair the value of the real property which may be subject thereto;
and (4) liens arising by operation of law securing tax obligations, worker's
compensations, and lease obligations. No subsidiary of the Company shall have
any liability for any obligations under any debt financing.
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(b) The Company shall not contribute or transfer, in a single
transaction, or in a series of transactions, a material portion its assets to
any of its subsidiaries, other than a subsidiary that has delivered its
guarantee to the Investors in form and substance satisfactory to the Investors.
Section 3.13 Form D; Blue Sky Laws. The Company agrees to file a Form D
with respect to the Debentures, Warrants, Common Shares and Warrant Shares, as
required under Regulation D and to provide a copy thereof to each Investor
promptly after such filing. The Company shall, on or before each Closing Date,
take such action as the Company shall have reasonably determined is necessary to
qualify the Debentures, Warrants, Common Shares and Warrant Shares for sale to
the Investors at the Closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Investor on or prior to the Closing Date.
Section 3.14 Nasdaq Rule. The Investors shall, in the aggregate, be
entitled to convert Debentures into a total of 10,538,342 Common Shares (19.99%
of the Common Stock issued and outstanding on the date hereof, which number
shall be subject to readjustment for any stock split, stock dividend or
reclassification of the Common Stock) (the "20% Cap"). Each Investor shall be
entitled to convert that amount of its Debentures into such total number of
Common Shares equal to such Investor's pro rata share of the 20% Cap. Once an
Investor has received its total pro rata share upon conversion of its
Debentures, it may request that the Company redeem its remaining Debentures at a
price equal to the Premium Redemption Price (as defined in the Registration
Rights Agreement) plus accrued but unpaid interest and default payments in
effect at that time. If an Investor has converted all of its Debentures, but has
not depleted the total number of pro rata shares allocated to it, its remaining
pro rata shares shall be reallocated amongst the Investors still holding
Debentures on a pro rata basis. The restrictions and redemption obligations set
forth in this Section 3.14 (including, without limitation, an Investor's right
to redeem Debentures at the Premium Redemption Price) shall cease to apply if
(a) the Company obtains written shareholder approval to issue Common Shares in
excess of the 20% Cap pursuant to Nasdaq Rule 4460 or (b) the Company provides
the Investors with irrevocable written notice, based upon the advice of its
counsel, that any such issuance of Common Shares upon conversion of the
Debentures is not subject to the 20% Cap pursuant to Nasdaq Rule 4460. In the
event that the number of Common Shares issued or issuable upon conversion of the
Debentures exceeds 75% of the 20% Cap, the Company will use its best efforts
promptly to obtain either the shareholder approval or the irrevocable notice
described in the preceding sentence and to provide the Investors with a copy of
same without limiting the foregoing, the Company shall solicit the
aforementioned shareholder approval at the next shareholders meeting (for
whatever purpose it may be called) which, in any event, shall not be later than
within 75 days of such event, in which the Company will solicit the
aforementioned shareholder approval, will solicit proxies in favor of issuing
Common Shares in excess of the 20% Cap and will use its best efforts to have all
affiliates of the Company which own or control shares of Common Stock to vote
their shares in favor of such resolution.
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Section 3.15 Transactions With Affiliates. The Company agrees that any
transaction or arrangement between it or any of its subsidiaries and any
affiliate or employee of the Company shall be effected on an arms' length basis
in accordance with customary commercial practice and, except with respect to
grants of options and stock to service providers, including employees, shall be
approved by a majority of the Company's outside directors.
Section 3.16 Press Release. Immediately following the Closing, the Company
shall issue a press release in the form set forth in Schedule 3.16 hereto.
Investors shall have the opportunity to review such press release prior to its
issuance. No press release shall name the Investors except as shall be required
by law. If the Company fails to issue a press release within 1 business day of
the Closing, the Investors may issue a press release covering the Closing and
complying with any legal requirement applicable to the Investors.
Section 3.17 Form 8-K. Within 15 calendar days of the Closing, the Company
shall file a Form 8-K with the SEC which discloses the transactions contemplated
hereby and by the Registration Rights Agreement, Warrants and Debentures.
Investors shall have the opportunity to review such Form 8-K prior to its
filing.
Section 3.18 Limitation on Sales. Notwithstanding any other provision of
this Agreement, the Company shall not, for as long as any Debentures remain
outstanding, sell any Common Stock (or securities convertible into or
exchangeable for, Common Stock) during any 30 calendar day period in an amount
that would exceed (on a fully converted or exercised basis) in excess of 10% of
real average trading volume (determined as 50% of the trading volume reported by
Bloomberg, LP) for the immediately preceding 30 calendar day period; provided,
that the foregoing limitation shall not apply to sales by the Company, after the
three month anniversary of the Closing Date, to purchasers who are not
"underwriters" (within the meaning of the Securities Act) pursuant to a shelf
registration under Rule 415 under the Act, and which transactions are not
Variable Rate Transactions. This provision shall be of no further force or
effect, if following and during Effective Registration, the price per share of
Common Stock shall have closed above $5.00 (as adjusted for stock splits,
consolidation or stock dividends) for 20 consecutive Trading Days (as defined in
the Debentures).
ARTICLE 4
Conditions to Closings
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell
the Debentures and Warrants. The obligation hereunder of the Company to issue
and/or sell the Debentures and Warrants to the Investors at the Closing (unless
otherwise specified) is subject to the satisfaction, at or before the Closing,
of each of the applicable conditions set forth below. These conditions are for
the Company's sole benefit and may be waived by the Company at any time in its
sole discretion.
(a) Accuracy of the Investors' Representations and Warranties. The
representations and warranties of each Investor will be true and correct as of
the date
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when made and as of the Closing Date as though made at that time (except for
representations and warranties as of an earlier date, which will be true and
correct as of such date).
(b) Performance by the Investors. Each Investor shall have performed
all agreements and satisfied all conditions required to be performed or
satisfied by such Investor at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive, judicial
or administrative order, decree, ruling or injunction shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights Agreement
or the Debentures or the Warrants.
(d) Purchase Price. The Company shall have received the aggregate
Purchase Price from the Investors.
Section 4.2 Conditions Precedent to the Obligation of the Investors to
Purchase the Debentures and Warrants. The obligation hereunder of each Investor
to acquire and pay for the Debentures and Warrants at the Closing (unless
otherwise specified) is subject to the satisfaction, at or before the Closing,
of each of the applicable conditions set forth below. These conditions are for
each Investor's benefit and may be waived by each Investor at any time in its
sole discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct as of
the date when made and as of the Closing Date as though made at that time
(except for representations and warranties as of an earlier date, which shall be
true and correct as of such date).
(b) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive, judicial
or administrative order, decree, ruling or injunction shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights Agreement
or the Debentures or the Warrants.
(d) Opinion of Counsel. At the Closing, the Investors shall have
received an opinion of the independent counsel of the Company, in the form
attached hereto as Exhibit 4.2(d) and such other opinions, certificates and
documents as the Investors or their counsel shall reasonably require incident to
the Closing.
(e) Registration Rights Agreement. The Company and the Investors shall
have executed and delivered the Registration Rights Agreement in the form and
substance of Exhibit 4.2(e) attached hereto.
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(f) Adverse Changes. No event which had or is likely to have, in the
reasonable judgment of the Investors, a Material Adverse Effect on the Company
or any of its direct or indirect subsidiaries shall have occurred.
(g) Officer's Certificate. The Company shall have delivered to the
Investors a certificate in form and substance of Exhibit 4.2(g) attached hereto,
executed by an officer of the Company, certifying as to satisfaction of closing
conditions, incumbency of signing officers, and the true, correct and complete
nature of the Charter, By-Laws, good standing and authorizing resolutions of the
Company.
(h) Debentures and Warrants. The Investors shall have received
certificates representing the Debentures and Warrants in the form and substance
of Exhibit 1A and Exhibit 1B hereto.
(i) Escrow Agreement. The Company and the Investors shall have
executed and delivered the Escrow Agreement in the form of Exhibit 1C hereto.
ARTICLE 5
Legend and Stock
The Company will issue one or more certificates representing the Debentures
and the Warrants in the name of the Investor and in such denominations to be
specified by the Investor prior to (or from time to time subsequent to) Closing.
Each certificate representing the Debentures and the Warrants and any shares of
Common Stock issued upon conversion or exercise thereof initially shall be
stamped or otherwise imprinted with a legend substantially in the following
form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
TRANSFERRED, ASSIGNED, SOLD OR OFFERED FOR SALE EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL, IN FORM
AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, THAT
REGISTRATION IS NOT REQUIRED BECAUSE OF AN APPLICABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
The Company agrees to reissue Debentures and reissue or issue Warrants, as
the case may be, without the legend set forth above at such time as (i) the
holder thereof is permitted to dispose of such Debentures and/or Warrants and
Common Stock issuable upon conversion or exercise thereof pursuant to Rule 144
under the Act, or (ii) such Debentures and/or Warrants are sold to a purchaser
or purchasers who (in the opinion of counsel to the seller or such purchaser(s),
in form and substance reasonably satisfactory to the Company and its counsel)
are able to dispose of such shares publicly pursuant to an Effective
Registration or exemption.
Prior to the Registration Statement (as defined in the Registration Rights
Agreement) being declared effective, any Common Shares issued pursuant to
conversion
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of Debentures or Warrant Shares or Common Shares issued upon exercise of the
Warrants shall bear a legend in the same form as the legend indicated above.
Upon such Registration Statement becoming effective, or Rule 144 under the Act
becoming available the Company agrees to promptly, but no later than three (3)
Trading Days thereafter, issue new certificates representing such Common Shares
and Warrant Shares without such legend. Except as provided in Section 2(f) of
the Registration Rights Agreement, any Common Shares issued pursuant to
conversion of Debentures or shares of Common Stock issued upon exercise of the
Warrants after the Registration Statement has become effective shall be free and
clear of any legends, transfer restrictions and stop orders. Notwithstanding the
removal of such legend, each Investor agrees to sell the Common Shares and
Warrant Shares represented by the new certificates in accordance with the
applicable prospectus delivery requirements (if copies of a current prospectus
are provided to such Investor by the Company) or in accordance with an exemption
from the registration requirements of the Act.
Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement.
ARTICLE 6
Termination
Section 6.1 Termination by Mutual Consent. This Agreement may be terminated
at any time prior to the Closing by the mutual written consent of the Company
and a majority in interest of the Investors.
Section 6.2 Other Termination. This Agreement may be terminated by action
of the Board of Directors of the Company or by any of the Investors at any time
if the Closing shall not have been consummated by the third business day
following the date of this Agreement; provided, however, that the party (or
parties) prepared to close shall retain its (or their) right to sue for any
breach by the other party (or parties).
ARTICLE 7
Miscellaneous
Section 7.1 Stamp Taxes. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities and the
shares of Common Stock issued upon conversion or exercise thereof.
Section 7.2 Specific Performance; Consent to Jurisdiction; Jury Trial.
(a) The Company and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement, the Debentures, the Registration Rights Agreement and the Warrants
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Agreement and to enforce specifically the terms and
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<PAGE>
provisions hereof, this being in addition to any other remedy to which any of
them may be entitled by law or equity.
(B) THE COMPANY AND EACH OF THE INVESTORS (I) HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT, THE
NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED STATES SITTING IN NEW YORK
COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT AND (II) HEREBY WAIVES, AND AGREES NOT TO
ASSERT IN ANY SUCH SUIT ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE
COMPANY AND EACH OF THE INVESTORS CONSENTS TO PROCESS BEING SERVED IN ANY SUCH
SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE
ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH
SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
(C) THE COMPANY AND EACH INVESTOR HEREBY WAIVES ALL RIGHTS TO A TRIAL
BY JURY.
Section 7.3 Entire Agreement; Amendment. This Agreement, together with the
Registration Rights Agreement, the Warrants, the Debentures, the Escrow
Agreement and the agreements and documents executed in connection herewith and
therewith, contains the entire understanding of the parties with respect to the
matters covered hereby and thereby, supercedes any prior understanding,
memoranda or other written or oral agreements between or among any of them
respecting the matters covered hereby and thereby and, except as specifically
set forth herein or therein, neither the Company nor any Investor makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived or amended except by a written
instrument signed by both the Company and Investors holding at least a majority
of the then outstanding principal amount of Debentures; provided that for
purposes hereof, Debentures held by the Company or an affiliate of the Company
shall not be deemed outstanding. No provision of this Agreement may be waived or
amended other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought.
Section 7.4 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing by mail, facsimile or
personal delivery and shall be effective upon actual receipt of such notice. The
addresses for such communications shall be:
to the Company:
99 Wood Avenue South
Suite 301
Iselin, New Jersey 08830
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<PAGE>
Phone: (732) 452-9556
Attn: Robert W. Cook, Chief Financial Officer
with copies to:
Ehrenreich Eilenberg & Krause LLP
11 East 44th Street, 17th Floor
New York, New York 10017
Attention: Adam D. Eilenberg, Esq.
Phone: (212) 986-9700
Fax: (212) 986-2399
to the Investors:
To each Investor at the address and/or fax
number set forth on Schedule I of this
Agreement.
with copies to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue, 18th Floor
New York, New York 10176
Attention: Stephen M. Schultz, Esq.
Facsimile: (212) 986-8866
Any party hereto may from time to time change its address for notices by giving
at least 10 days' written notice of such changed address to the other parties
hereto.
Section 7.5 Indemnity. In consideration of the Investors' execution and
delivery of this Agreement, the Escrow Agreement and the Registration Rights
Agreement and in addition to all of the Company's other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless the Investors and all of their partners, officers, directors,
employees, members and direct or indirect investors and any of the foregoing
persons' agents or other representatives (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 any 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 the Transaction Documents or
any other certificate or document contemplated hereby or thereby, (b) any breach
of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate or document contemplated hereby
or thereby, (c) any cause of action, suit or claim brought or made against such
Indemnitee by a third party and arising out of or resulting from (i) the
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<PAGE>
execution, delivery, performance, breach by the Company or enforcement of the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Securities or (iii) the status of the Investor or holder of the
Securities as investors in the Company, and (d) the enforcement of this Section.
Notwithstanding the foregoing, Indemnified Liabilities shall not include any
liability of any Indemnitee to the extent it arises out of such Indemnitee's
willful misconduct, gross negligence, or fraudulent action(s). 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 of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 7.5
shall be the same as those set forth in Section 6 (other than Section 6(b)) of
the Registration Rights Agreement, including, without limitation, those
procedures with respect to the settlement of claims and Company's right to
assume the defense of claims.
Section 7.6 Waivers. No waiver by any party of any default with respect to
any provision, condition or requirement of this Agreement shall be deemed to be
a continuing waiver in the future or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.
Section 7.7 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
Section 7.8 Successors and Assigns. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The parties hereto may amend this
Agreement without notice to or the consent of any third party. The Company may
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of all Investors (which consent may be withheld for any
reason in their sole discretion). No Investor may assign this Agreement (in
whole or in part) or any rights or obligations hereunder without the consent of
the Company (which shall not be unreasonably withheld), except that an Investor
may assign its rights hereunder in connection with an assignment of Debentures
or Warrants; provided that: (i) no Investor may assign Debentures in an amount
less than $500,000 in principal amount, and (ii) any transferee of Debentures or
Warrants must agree in writing to be bound by the applicable terms of the
Transaction Documents.
Section 7.9 No 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.
Section 7.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
25
<PAGE>
APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN SUCH
STATE.
Section 7.11 Survival. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein shall
survive the Closing.
Section 7.12 Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
Section 7.13 Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of any Investor without
the express written agreement of such Investor, unless and until such disclosure
is required by law or applicable regulation, and then only to the extent of such
requirement. The Company agrees that it will deliver a copy of any public
announcement regarding the matters covered by this Agreement or any agreement
and document executed herewith to each Investor and any public announcement
including the name of an Investor to such Investor, reasonably in advance of the
release of such announcements.
Section 7.14 Severability. The parties acknowledge and agree that the
Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investor hereunder
are several and not joint, that no Investor shall have any responsibility or
liability for the representations, warrants, agreements, acts or omissions of
any other Investor, and that any rights granted to "Investors" hereunder shall
be enforceable by each Investor hereunder.
Section 7.15 Like Treatment of Holders; Redemption. Neither the Company nor
any of its affiliates shall, directly or indirectly, pay or cause to be paid any
consideration (immediate or contingent), whether by way of interest, fee,
payment for the redemption or conversion of Debentures or exercise of the
Warrants, or otherwise, to any holder of Debentures or Warrants, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions of the Debenture or this Agreement or the
Registration Rights Agreement or the Warrants, unless such consideration is
required to be paid to all holders of Debentures and Warrants bound by such
consent, waiver or amendment whether or not such holders so consent, waive or
agree to amend and whether or not such holders tender their Debentures or
Warrants for redemption, conversion or exercise. The Company shall not, directly
or indirectly, redeem any Debentures or Warrants unless such offer of redemption
is made pro rata to all holders of Debentures or Warrants, as the case may be,
on identical terms.
Section 7.16 No Strict Construction. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
Section 7.17 Rescission and Withdrawal Right. Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction
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<PAGE>
Documents, wherever the Investors exercise a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then the Investors may rescind
or withdraw, in their sole discretion from time to time upon written notice to
the Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.
Section 7.18 Obligations Absolute. The Company's obligations under the
Transaction Documents are unconditional and absolute and not subject to any
right of set off, counterclaim, delay or reduction.
Signature Page Follows
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
COMPANY:
PHARMOS CORPORATION
By:
-------------------------------------
Name:
Title:
INVESTORS:
MILLENNIUM PARTNERS, L.P.
By:
-------------------------------------
Name:
Title:
STRONG RIVER INVESTMENTS, INC.
By:
-------------------------------------
Name:
Title:
ST. ALBANS PARTNERS, LTD.
By:
-------------------------------------
Name:
Title:
Signature page to Pharmos Corporation Purchase Agreement
28
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EXHIBITS AND SCHEDULES
Schedule 1 List of Investors
Exhibit 1.1A Form of Debenture
Exhibit 1.1B Form of Warrant
Schedule 2.1(a) List of Subsidiaries
Schedule 2.1(c) Capitalization
Schedule 2.1(c)(i) Capitalization
Exhibit 2.1(c)(i) Certificate of Incorporation of the Company
Exhibit 2.1(c)(ii) By-Laws of the Company
Schedule 2.1 (s)(i) Outstanding securities entitled to registration rights
Schedule 2.1 (s)(ii) Outstanding securities affected by the issuance of
Debentures, etc.
Schedule 2.1(aa) Real Property
Schedule 3.16 Press Release
Exhibit 4.2(d) Opinion of Company Counsel
Exhibit 4.2(e) Registration Rights Agreement
Schedule 4.2(g) Officer's Certificate
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Outstanding
Principal Number
Amount Of
Investor Of Debentures Warrants Purchase Price Pro Rata Share
-------- ------------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Millennium Partners, L.P. $5,000,000 172,662 $5,000,000 62.5%
c/o Millennium Management, LLC
666 Fifth Avenue
New York, New York 10103
Fax: (212) 841-6302
Attn: Dan Cardella
Strong River Investments, Inc. $2,000,000 69,065 $2,000,000 25%
c/o Icaza, Gonzalez-Ruiz & Aleman
(BVI) Ltd.
Vanterpool Plaza, 2nd Floor
Wickhams Cay 1, Road Town
Tortola, British Virgin Islands
With copies to:
Cavallo Capital Corp.
660 Madison Avenue
18th Floor
New York, New York 10021
Phone: (212) 651-9000
Fax: (212) 651-9010
Attn: Mor Sagi
St. Albans Partners, Ltd. $1,000,000 34,532 $1,000,000 12.5%
c/o Camden Asset Management
2049 Century Park East
Suite 330
Los Angeles, California 90067
Phone: (310) 785-9755
Fax: (310) 785-9780
Attn: Janice Brooks
</TABLE>
