EXHIBIT 4.2
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT 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.
No. [_] $[_______]
Dated: September 1, 2000
PHARMOS CORPORATION
6% CONVERTIBLE DEBENTURE DUE FEBRUARY 28, 2002
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
Debentures of PHARMOS CORPORATION (the "Company"), a corporation duly organized
and existing under the laws of the state of Nevada, designated as the Company's
6% Convertible Debentures Due February 28, 2002, in an aggregate principal
amount of Eight Million U.S. Dollars (U.S. $8,000,000) (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to [____________________]
the initial holder hereof, or its order (including successors-in-interest, the
"Holder"), the principal sum of [_________________] on February 28, 2002 (the
"Maturity Date") and to pay interest on the principal sum outstanding under this
Debenture ("Outstanding Principal Amount"), at the rate of 6% per annum,
compounded semi-annually, payable in arrears on the first day of March and
September of each year and on the Maturity Date (each an "Interest Payment
Date"), with the first such payment due on March 1, 2000. Interest shall accrue
daily commencing on the date hereof and shall continue until payment in full of
all amounts due under this Debenture. The interest so payable will be paid to
the person in whose name this Debenture is registered on the records of the
Company regarding registration and transfers of the Debenture (the "Debenture
Register"). Capitalized terms used herein and not otherwise defined shall have
the meanings set forth in the Purchase Agreement dated as of September 1, 2000
between the Company and the Holder (the "Purchase Agreement") or the
Registration Rights Agreement dated as of September 1, 2000 between the Company
and the Holder (the "Registration Rights Agreement").
The interest on this Debenture is payable, at the Company's option:
(a) in such coin or currency of the United States as of the time of
payment is legal tender for payment of public and private debts, at the address
last appearing on the Debenture Register of the Company as designated in writing
by the Holder hereof from time to time;
<PAGE>
(b) by adding the amount thereof to the Outstanding Principal Amount
due under this Debenture ("PIK Interest"). For example, if the Outstanding
Principal Amount were $1,000 and the interest payment were $30, then the new
Outstanding Principal Amount after the Interest Payment Date would be $1,030.
Except as herein provided for interest, all amounts payable under this
Debenture shall be paid as provided in clause (a) above.
The Company shall exercise its option hereunder by delivering an
irrevocable statement in the form of Exhibit 1 hereto ("Payment Statement")
delivered at least ten (10) Trading Days prior to the applicable Interest
Payment Date and applicable for such Interest Payment Date only. If the Payment
Statement is not timely delivered to the Holder as provided herein, the payment
with respect to such Interest Payment Date shall be in PIK Interest. If the
Company selects cash interest in the Payment Statement and fails to deliver such
cash on or before the Interest Payment Date, the Holder shall have the right to
require the Company to pay PIK Interest in lieu thereof. Any PIK Interest when
so added to the Outstanding Principal Amount due under this Debenture shall, for
all purposes of this Debenture, be deemed to be part of the principal
indebtedness evidenced by this Debenture including, without limitation, for
purposes of determining interest payable hereunder after the applicable Interest
Payment Date for which such PIK Interest is paid and amounts convertible into
Common Shares hereunder after the applicable Interest Payment Date for which
such PIK Interest is paid.
The Company will pay any principal due and all accrued and unpaid interest
due upon this Debenture to the person that is the Holder of this Debenture on
the records of the Company as of the applicable Interest Payment Date and
addressed to such Holder at the last address appearing on the Debenture
Register.
The Outstanding Principal Amount and interest due hereunder shall bear
interest, from and after the day following the occurrence and during the
continuance of an Event of Default hereunder, at the per annum rate equal to the
lower of the Citibank Prime Rate per annum plus six (6%) percent or the highest
rate permitted by law. The Holder shall have the option to receive such interest
as cash interest or PIK Interest and shall exercise its option by delivering to
the Company a statement in a form substantially similar to the Payment Statement
which shall be effective until the Holder delivers an additional statement to
the contrary. If the Holder elects to receive the interest in cash, it shall be
payable on demand.
Additional cash payments (referred to as "delay payments") may be required
pursuant to the Registration Rights Agreement if there occurs an "Interfering
Event" (as defined therein), or pursuant to the Purchase Agreement under the
terms set forth in Section 3.14 therein. Such delay payments, if not paid in
cash when due, may be treated by the Holder in its sole discretion as being
added to the Outstanding Principal Amount due under this Debenture.
Subject to applicable law, any interest otherwise payable that is not paid
for any applicable period because it would exceed the highest rate permitted by
law shall become
2
<PAGE>
payable whenever the payment thereof, together with other interest due for any
such subsequent period, would not exceed such highest legal rate.
The Holder of this Debenture is entitled to certain rights and remedies
pursuant to the Purchase Agreement and Registration Rights Agreement, including
without limitation provisions requiring mandatory redemption of the Debenture.
This Debenture does not provide voting rights to the Holder.
This Debenture is subject to the following additional provisions:
1. Exchange.
(a) The Debentures are exchangeable for an equal aggregate principal
amount of Debentures of different denominations, as requested by the Holder
surrendering the same. No service charge will be made for such registration or
transfer or exchange.
(b) The Debentures are also exchangeable for Debentures identical to
those exchanged except that the new Debentures shall set forth the actual
Conversion Price, which shall be determined promptly after the close of business
on the 7th Trading Day following Closing Date, in accordance herewith by the
Company and the Investors. In the event that the Company and the Investors do
not agree on the actual Conversion Price, an accountant mutually designated by
the Company and the Holder(s) shall make such determination. No service charge
will be made for such registration or transfer or exchange.
2. Transfers. This Debenture may be transferred or exchanged in the United
States only in compliance with the Securities Act of 1933, as amended (the
"Act") and applicable state securities laws, or applicable exemptions therefrom.
Prior to due presentment for transfer of this Debenture, the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided, whether or not this Debenture is overdue.
3. Definitions. For purposes hereof the following definitions shall apply:
"Act" shall have the meaning set forth in Section 2.
"Adjustment Date" shall have the meaning set forth in Section 7(b)(i).
"Affected Conversion Price" shall have the meaning set forth in
Section 7(a).
"Call Amount" shall have the meaning set forth in Section 6(a).
"Change in Control Consideration" shall have the meaning set forth in
Section 4 hereof.
3
<PAGE>
"Change in Control Conversion Price" shall have the meaning set forth
in Section 4 hereof.
"Change in Control Transaction" shall mean (i) any consolidation or
merger of the Company with or into any other corporation or other entity or
person (whether or not the Company is the surviving corporation) occurs, or any
other corporate reorganization or transaction or series of related transactions
in which in excess of 50% of the Company's voting power is transferred through a
merger, consolidation, tender offer or similar transaction occurs; or (ii) any
person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), together with its affiliates and associates (as
such terms are defined in Rule 405 under the Act), beneficially owns or is
deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act
without regard to the 60-day exercise period) in excess of 50% of the Company's
voting power; (iii) there is a replacement of more than one-half of the members
of the Company's Board of Directors which is not approved by those individuals
who are members of the Company's Board of Directors on the date thereof; or (iv)
in one or a series of related transactions there is a sale or transfer of all or
substantially all of the assets of the Company, determined on a consolidated
basis.
"Closing Date" shall mean the date of the original issuance of this
Debenture.
"Common Stock" shall mean the common stock, par value $0.03, of the
Company.
"Company" shall have the meaning set forth in the Preamble.
"Conversion Notice" shall have the meaning set forth in Section 5(d).
"Convertible Securities " shall have the meaning set forth in Section
7(b)(ii).
"Conversion Price" shall have the meaning set forth in Section 5(c).
"Conversion Rate" shall have the meaning set forth in Section 5(b).
"Debenture" shall have the meaning set forth in the Preamble.
"Debentures" shall have the meaning set forth in the Preamble.
"Debenture Register" shall have the meaning set forth in the Preamble.
"Delay payments" shall have the meaning set forth in the Preamble.
"DTC" shall have the meaning set forth in Section 5(d).
"DWAC" shall have the meaning set forth in Section 5(d).
4
<PAGE>
"Escrow Agreement" shall have the meaning set forth in the Purchase
Agreement.
"FAST" shall have the meaning set forth in Section 5(d).
"Holder Conversion Date" shall have the meaning set forth in Section
5(d).
"Interest Payment Date" shall have the meaning set forth in the
Preamble.
"Maturity Date" shall have the meaning set forth in the Preamble.
"Market Price for Shares of Common Stock" shall mean the price of one
share of Common Stock determined as follows:
(i) If the Common Stock is approved for trading on the NASDAQ
National Market System or the Nasdaq Small-Cap Market, the last reported "bid"
price thereon on the date of valuation;
(ii) If (i) does not apply and the Common Stock is listed on NYSE
or the American Stock Exchange, the closing bid price on such exchange on the
date of valuation;
(iii) If neither (i) nor (ii) apply but the Common Stock is
quoted in the over-the-counter market, another recognized exchange, on the pink
sheets or bulletin board, (A) the last sales price on the date of valuation or,
if there is no such sales price, (B) the mean between the last reported "bid"
and "asked" prices thereof on the date of valuation; and
(iv) If neither clause (i), (ii) or (iii) above applies, the
market value as determined by a nationally recognized investment banking firm or
other nationally recognized financial advisor retained by the Company for such
purpose, taking into consideration, among other factors, the earnings history,
book value and prospects for the Company, and the prices at which shares of
Common Stock recently have been traded. Such determination shall be conclusive
and binding on all persons.
"NYSE" shall mean the New York Stock Exchange.
"Outstanding Principal Amount" shall have the meaning set forth in the
Preamble.
"Payment Statement" shall have the meaning set forth in the Preamble.
"PIK Interest" shall have the meaning set forth in the Preamble.
"Pricing Period" shall have the meaning set forth in Section 5(c).
5
<PAGE>
"Public Announcement" shall mean any public filing with the Securities
and Exchange Commission, any press release by either the Company or a third
party or any other public statement, that announces a proposed transaction
which, if consummated, would constitute a Change in Control Transaction.
"Purchase Agreement" shall have the meaning set forth in the Preamble.
"Redemption Date" shall have the meaning set forth in Section 6(a).
"Redemption Notice" shall have the meaning set forth in Section 6(a).
"Redemption Occurrence" shall have the meaning set forth in Section
6(a).
"Redemption Price" shall have the meaning set forth in Section 4(a).
"Registration Statement" shall have the meaning set forth in the
Registration Rights Agreement.
"Registration Rights Agreement" shall have the meaning set forth in
"Restricted Ownership Percentage" shall have the meaning set forth in
Section 12.
"Trading Day" shall mean a day on which the Common Stock is traded on
the NASDAQ Small-Cap Market or principal exchange on which the Common Stock has
been listed (or any similar organization or agency succeeding such market or
exchange's functions of reporting prices).
4. Change in Control, Etc.
(a) If at any time there occurs any Change in Control Transaction,
Holder shall be entitled, at its sole option, to have the Company redeem this
Debenture in whole or in part at a Redemption Price equal to 115% of the
Outstanding Principal Amount of this Debenture plus all accrued but unpaid
interest and delay payments on this Debenture (the "Redemption Price"). Such
Holder shall be entitled to make such election at any time a Public Announcement
of a pending and up to 10 days after the effective date of the Change in Control
Transaction.
(b) If at any time there occurs a Public Announcement of a pending
Change in Control Transaction in which the public shareholders of the Company
are to receive consideration, a portion of which is capital stock or any
security convertible into capital stock of another entity in exchange for shares
of Common Stock ("Change in Control Consideration"), then prompt provision shall
be made in a manner reasonably acceptable to the Holders so that each Holder
shall have the right (in addition to its other rights under this Debenture):
(i) following the closing of the transaction covered by such
Public Announcement, to convert its Debentures into the Change in Control
6
<PAGE>
Consideration that such Holder would have been or would be entitled to receive
had it converted all of its Debentures into Common Stock (notwithstanding any
restrictions imposed upon the Holder pursuant to this Debenture or the Purchase
Agreement in its ability to do so) immediately prior to the Change in Control
Transaction at the Change in Control Conversion Price (as defined below), and
acquired the Change in Control Consideration as a shareholder of the Company; or
(ii) following such Public Announcement, convert its Debentures
into Common Stock at the Change in Control Conversion Price (as defined below).
The "Change in Control Conversion Price" shall mean a price,
subject to adjustments in the same manner as adjustments to the Conversion
Price, equal to the lesser of: (i) the then existing Conversion Price (as
defined in Section 5(c) below); (ii) 100% of the lowest Market Price for Shares
of Common Stock for any of the four Trading Days immediately preceding the
Public Announcement of the Change in Control Transaction; and (iii) 85% of the
lowest Market Price for Shares of Common Stock on the three Trading Days
immediately following the Public Announcement. The Market Price for Shares of
Common Stock shall be appropriately adjusted for stock splits, reverse splits,
stock dividends and other dilutive events, including those events occurring in
connection with the Change in Control Transaction, that occur during the Trading
Days referred to above.
5. Conversion at the Option of the Holder. The Holder of this Debenture
shall have the following conversion rights:
(a) Holder's Right to Convert. Upon the earlier to occur of: (i) the
effectiveness of the Registration Statement under the Act; or (ii) 90 days
following the Closing Date, up to 50% of the initial principal amount of this
Debenture may be converted at the option of the Holder during any 30 day
calendar period, into fully paid, validly issued and non-assessable shares of
Common Stock; provided that this Debenture shall be immediately convertible in
whole in the event of: (i) delivery by the Company of a Redemption Notice
pursuant to Section 6; (ii) in the event that there is a Public Announcement or
this Debenture shall become redeemable at the Holder's option pursuant to
Section 4; (iii) any material default or breach of the Purchase Agreement, the
Escrow Agreement, the Registration Rights Agreement, any Warrant or this
Debenture; or (iv) any Event of Default or any event which, with the giving of
notice or the passage of time or both, would constitute an Event of Default. If
this Debenture is converted in part, the remaining portion or this Debenture not
so converted shall remain entitled to the conversion rights provided herein.
(b) Conversion Rate. The Outstanding Principal Amount of this
Debenture that is converted into shares of Common Stock at the option of the
Holder shall be convertible into the number of shares of Common Stock which
results from application of the following formula:
7
<PAGE>
P + I + D
------------------------------
Conversion Price
P = Outstanding Principal Amount of this Debenture submitted for conversion
as of the Holder Conversion Date
I = accrued but unpaid interest (not previously added to principal) on P as
of the Holder Conversion Date
D = delay payments (not previously added to principal) on P as of the
Holder Conversion Date
The number of shares of Common Stock into which each $1,000
principal amount of this Debenture hereto may be converted pursuant to this
paragraph hereof is hereafter referred to as the "Conversion Rate."
(c) Conversion Price. Subject to adjustments pursuant to Sections 4
and 7, this Debenture will have a conversion price (the "Conversion Price")
equal to 105% of the average of the Market Prices for Shares of Common Stock for
the 7 Trading Days leading up to and ending on, and the 7 Trading Days
immediately following, the Closing Date (the "Pricing Period").
(d) Mechanics of Conversion. In order to convert this Debenture (in
whole or in part) into full shares of Common Stock, the Holder (i) shall give
written notice in the form of Exhibit 2 hereto (the "Conversion Notice") by
facsimile to the Company at such office that the Holder elects to convert the
principal amount (plus accrued but unpaid interest and delay payments) specified
therein, which such notice and election shall be revocable by the Holder at any
time prior to its receipt of the Common Stock upon conversion, and (ii) if the
entire Outstanding Principal Amount is being converted, as soon as practicable
after such notice, shall surrender this Debenture, duly endorsed, by either
overnight courier or 2-day courier, to the principal office of the Company;
provided, however, that the Company shall not be obligated to issue certificates
evidencing the shares of the Common Stock issuable upon such conversion (where
the entire Outstanding Principal Amount is being converted) unless either the
Debenture evidencing the principal amount is delivered to the Company as
provided above, or the Holder notifies the Company that such Debenture(s) have
been lost, stolen or destroyed and promptly executes an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such lost, stolen or destroyed Debentures.
The Holder shall not be required to physically surrender this
Debenture to the Company unless the full Outstanding Principal Amount
represented by this Debenture is being converted. The Holder and the Company
shall maintain records showing the Outstanding Principal Amount so converted and
the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Debenture upon each such conversion. In the event of any
dispute or discrepancy, such records of the Company shall be controlling and
determinative in the absence of manifest error. Notwithstanding
8
<PAGE>
the foregoing, if this Debenture is converted as aforesaid, the Holder may not
transfer this Debenture unless the Holder first physically surrenders this
Debenture to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new Debenture of like tenor, registered as the
Holder may request, representing in the aggregate the remaining Outstanding
Principal Amount represented by this Debenture. The Holder and any assignee, by
acceptance of this Debenture or a new Debenture, acknowledge and agree that, by
reason of the provisions of this paragraph, following conversion of any portion
of this Debenture, the Outstanding Principal Amount represented by this
Debenture may be less than the Outstanding Principal Amount and the accrued
interest set forth on the face hereof.
The Company shall issue and deliver within three Trading Days of
the delivery to the Company of such Conversion Notice, to such Holder of
Debenture(s) at the address of the Holder, or to its designee, a certificate or
certificates for the number of shares of Common Stock to which the Holder shall
be entitled as aforesaid, together with a calculation of the Conversion Rate and
a Debenture or Debentures for the principal amount of Debentures not submitted
for conversion. The date on which the Conversion Notice is given (the "Holder
Conversion Date") shall be deemed to be the date the Company received by
facsimile the Conversion Notice, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date. In the event that such Holder or its designee has not received such
certificate or certificates within ten (10) calendar days of the Company's
receipt of the Conversion Notice, the Holder may, in addition to any other
rights or remedies it may have, revoke its Conversion Notice.
In lieu of delivering physical certificates representing the
Common Shares issuable upon conversion of Debentures or the Warrant Shares (as
defined in the Purchase Agreement) deliverable upon exercise of Warrants (as
defined in the Purchase Agreement), provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Shares and Warrant Shares issuable upon conversion or exercise to the Holder, by
crediting the account of Holder's prime broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery
described above shall apply to the electronic transmittals through the DWAC
system. The parties agree to coordinate with DTC to accomplish this objective.
The conversions pursuant to Sections 5 shall be deemed to have been made
immediately prior to the close of business on the Holder Conversion Date. The
person or persons entitled to receive the Common Shares issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such Common Shares at the close of business on the Holder Conversion Date.
6. Company Option to Redeem.
(a) In the event that, during the one year period following the
Closing Date, the Market Price for Shares of Common Stock exceeds 200% of the
Conversion Price for 20 consecutive Trading Days (a "Redemption Occurrence"),
then the
9
<PAGE>
Company may state its intention to redeem all, but not less than all, of the
Debentures (all or none) for a cash price equal to the Outstanding Principal
Amount of the Debentures plus all accrued but unpaid interest and delay payments
thereon (the "Call Amount") by providing an irrevocable, written notice (the
"Redemption Notice") to the Holder; provided that such Redemption Notice shall
be sent within 20 days of a Redemption Occurrence and must be sent concurrently
to the holders of all Debentures. The Redemption Notice shall indicate that the
Company seeks to redeem the Debenture and shall set the date for the Company's
redemption of the Debenture (the "Redemption Date"), which date shall be not
less than 10 Trading Days, [nor more than 20 Trading Days] from the date the
Redemption Notice is delivered (the "Post-Notice Period").
(b) Notwithstanding the foregoing, the Company may not effect a
redemption of the Notes pursuant to Section 6(a) above unless:
(i) Effective Registration (as defined in the Purchase Agreement)
existed at all times during the Redemption Occurrence and at all times
thereafter up to and including the Redemption Date;
(ii) No material default or breach exists, and no event shall
have occurred which constitutes (or would constitute with notice or the passage
of time or both) a material default or breach of the Purchase Agreement, the
Escrow Agreement, the Registration Rights Agreement, any Warrant or this
Debenture;
(iii) Conversion by the Holder on the Redemption Date will not
exceed the limits on a Holder's right to convert under Section 12 below.
However, at the option of the Holder, (i) the portion of the Outstanding
Principal Amount that may not be converted by reason of such Section 12 shall be
paid to the Holder in cash, if any, in an amount equal to the greater of the
Call Amount and the Conversion Value (as defined in the Registration Rights
Agreement) or (ii) the redemption of the portion of the Outstanding Principal
Amount that may not be converted by reason of such Section 12 shall be deferred
until such time as the conversion hereof shall not exceed such limits.
(c) The redemption shall occur on the Redemption Date at the offices
of Holder's counsel. If the Company fails to pay the Call Amount in full on the
Redemption Date in immediately available funds, (i) the Company shall lose its
right to redeem any Debenture in accordance with this Section 6 and (ii) in
addition to any other rights or remedies it may have, the Holder shall have the
right to require the Company to repurchase this Debenture (or any portion
thereof, as selected by the Holder) at a price equal to 110% of the purchase
price pursuant to Section 6(b)(iii) above pursuant to a written notice to the
Company.
(d) Nothing in this Debenture shall limit the Holder's right to
convert after a Redemption Notice has been received but before actual
redemption.
10
<PAGE>
7. Stock Splits; Dividends; Adjustments; Reorganizations.
(a) If the Company, at any time while the Debentures are outstanding,
shall (i) pay a stock dividend or otherwise make a distribution or distributions
on any equity securities (including investments or securities convertible into
or exchangeable for such equity securities) in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock into a larger number of shares,
(iii) combine outstanding shares of Common Stock into a smaller number of
shares, then each Affected Conversion Price (as defined below) shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding before such event and of which the denominator shall be
the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 7(a) shall become effective immediately
after the record date for the determination of shareholders entitled to receive
such dividend or distribution and shall become effective immediately after the
effective date in the case of an issuance, a subdivision or a combination.
As used herein, the Affected Conversion Prices (each an "Affected
Conversion Price") shall refer to: (i) the Conversion Price; and (ii) each
Market Price for Shares of Common Stock occurring on any Trading Day included in
the Pricing Period, which Trading Day occurred before the record date in the
case of events referred to in clause (i) of this Section 7(a) and the effective
date in the case of the events referred to in clauses (ii) and (iii) of this
Section 7(a).
In the event that the Company issues or sells any Common Stock or securities
which are convertible into or exchangeable for its Common Stock, or any warrants
or other rights to subscribe for or to purchase or any options for the purchase
of its Common Stock at a per share of Common Stock selling price ("Per Share
Selling Price") which is less than the Conversion Price on the Trading Day next
preceding such issue or sale or, in the case of issuances to holders of its
Common Stock, the date fixed for the determination of stockholders entitled to
receive such warrants, rights or options (the "Adjustment Date"), then the
Conversion Price per share shall be adjusted downward to equal such lower Per
Share Selling Price effective concurrently with such issue or sale.
Notwithstanding the foregoing, this provision shall not apply to
shares or options issued or which may be issued pursuant to (i) the Company's
current or future employee, director or bona fide consultant option plans or
shares issued upon exercise of options, warrants or rights outstanding on the
date of the Agreement and listed in the Company's most recent periodic report
filed under the Exchange Act, (ii) strategic corporate alliances not undertaken
principally for financing purposes, (iii) arrangements with the Holder or (iv)
acquisitions of other entities by the Company.
For the purposes of the foregoing adjustment, in the case of the
issuance of any convertible securities, warrants, options or other rights to
subscribe for or to purchase or exchange for, shares of Common Stock
("Convertible Securities"), the maximum number of shares of Common Stock
issuable upon exercise, exchange or conversion of such Convertible Securities
shall be deemed to be issued and outstanding based upon a Per Share Selling
Price equal to the lowest price at which Common Stock can be acquired pursuant
to the Convertible Securities, provided that no further adjustment shall be made
11
<PAGE>
upon the actual issuance of Common Stock upon exercise, exchange or conversion
of such Convertible Securities.
(b) If the Company, at any time while the Debentures are outstanding,
shall distribute to all holders of shares of Common Stock evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 7(b) above), then the prices
referred to in (ii) of the definition of the Affected Conversion Prices set
forth in Section 7(a) above shall be reduced to equal the relevant Affected
Conversion Price multiplied by a fraction (i) the numerator of which is equal to
(A) the Market Price for Shares of Common Stock on the record date for the
distribution minus (B) the price allocable to one share of Common Stock of the
value (as jointly determined in good faith by the board of directors of the
Company and the Holder) of any and all such evidences of indebtedness, shares of
capital stock, other securities or property, so distributed and (ii) the
denominator of which is equal to the Market Price for Shares of Common Stock on
the record date for the distribution.
(c) In the event that at any time or from time to time after the
Closing Date, the Common Stock issuable upon the conversion of the Debentures is
changed into the same or a different number of shares of any class or classes of
stock, whether by merger, consolidation, recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
or reorganization provided for elsewhere in this Section 7), then and as a
condition to each such event provision shall be made in a manner reasonably
acceptable to the Holders of Debentures so that each Holder of Debentures shall
have the right thereafter to convert such Debenture into the kind of stock
receivable upon such recapitalization, reclassification or other change by
holders of shares of Common Stock, all subject to further adjustment as provided
herein. In such event, the formulae set forth herein for conversion and
redemption shall be equitably adjusted to reflect such change in number of
shares or, if shares of a new class of stock are issued, to reflect the market
price of the class or classes of stock (applying the same factors used in
determining the Conversion Price) issued in connection with the above described
transaction.
(d) Whenever any element of the Conversion Price is adjusted pursuant
to Section 7, the Company shall promptly mail to each Holder of the Debentures,
a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
(e) In the event of any taking by the Company of a record date of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
security or right convertible or exchangeable into or entitling the holder
thereof to receive additional shares of Common Stock, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall deliver
to each Holder of Debentures at least 20 days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution, security or right and the amount
and character of such dividend, distribution, security or right.
12
<PAGE>
(f) If the Company, at any time while the Debentures are outstanding,
shall distribute to all holders of Shares of Common Stock evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 7(b) above) then the Holder
shall participate in such distribution on a pro rata basis with the holders of
shares of Common Stock entitled to receive such dividend, distribution,
issuance, subdivision or combination as if the Holder held that number of shares
of Common Stock that the Holder would have been entitled to receive hereunder
upon conversion of the Debenture (without regard to Section 12) immediately
prior to the record date fixed for determination of shareholders entitled to
receive such dividend, at the Conversion Price then in existence.
8. Fractional Shares. No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder. The
number of shares of Common Stock that are issuable upon any conversion shall be
rounded up to the nearest whole share.
9. Reservation of Stock Issuable Upon Conversion.
(a) Reservation Requirement. The Company covenants that it will at all
times reserve and keep available out of its authorized and unissued Common Stock
solely for the purpose of issuance upon conversion of the Debentures as herein
provided, free from preemptive rights or any other present or contingent
purchase rights of persons other than the Holders of the Debentures, 160% of the
maximum number of shares of Common Stock as shall be issuable (taking into
account the adjustments and restrictions of Sections 5 and 7 hereof) upon the
conversion of all of the Debentures pursuant hereto. The Company covenants that
all shares of Common Stock that shall be so issuable shall upon issue, be duly
and validly authorized, issued and fully paid and nonassessable. Without in any
way limiting the foregoing, so long as any Debentures remain outstanding the
Company agrees to reserve and at all times keep available solely for purposes of
conversion of Debentures such number of authorized but unissued shares of Common
Stock that is set forth in the Purchase Agreement.
(b) Deficiency. If the Company does not have a sufficient number of
shares of Common Stock available to satisfy the Company's obligations to a
Holder of Debentures upon receipt of a Conversion Notice or is otherwise unable
to issue such shares of Common Stock in accordance with the terms of this
Agreement such Holder shall be entitled to the rights and remedies set forth in
the Registration Rights Agreement.
10. No Reissuance of the Debenture. No Debentures acquired by the Company
by reason of redemption, purchase, exchange or otherwise shall be reissued, and
all such Debentures shall be retired.
11. No Impairment. The Company shall not intentionally take any action
which would impair the rights and privileges of the Debentures set forth herein
or the Holders thereof.
12. Limitations on Holder's Right to Convert.
13
<PAGE>
(a) Notwithstanding anything to the contrary contained herein, the
number of shares of Common Stock that may be acquired by the Holder upon
conversion of this Debenture pursuant to the terms hereof shall not exceed a
number that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder (other than by virtue of the ownership of
securities or rights to acquire securities that have limitations on the holder's
right to convert, exercise or purchase similar to the limitation set forth
herein), together with all shares of Common Stock deemed beneficially owned
(other than by virtue of the ownership of securities or rights to acquire
securities that have limitations on the right to convert, exercise or purchase
similar to the limitation set forth herein) by the Holder's "affiliates" (as
defined in Rule 144 of the Act) ("Aggregation Parties") that would be aggregated
for purposes of determining whether a group under Section 13(d) of the
Securities Exchange Act of 1934 as amended, exists, would exceed 9.99% of the
total issued and outstanding shares of the Common Stock (the "Restricted
Ownership Percentage"). Each Holder shall have the right (i) at any time and
from time to time to reduce its Restricted Ownership Percentage immediately upon
notice to the Company and (ii) (subject to waiver) at any time and from time to
time, to increase its Restricted Ownership Percentage immediately in the event
of the announcement as pending or planned, of a Change of Control Transaction.
(b) The Holder covenants at all times on each day (each such day being
referred to as a "Covenant Day") as follows: During the balance of such Covenant
Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and
the succeeding 61 days being referred to as the "Covenant Period") such Holder
will not acquire shares of Common Stock pursuant to any right existing at the
commencement of the Covenant Period to the extent the number of shares so
acquired by such Holder and its Aggregation Parties (ignoring all dispositions)
would exceed:
(x) the Restricted Ownership Percentage of the total number of
shares of Common Stock outstanding at the commencement of the
Covenant Period,
minus
(y) the number of shares of Common Stock owned by such Holder and
its Aggregation Parties at the commencement of the Covenant
Period.
A new and independent covenant will be deemed to be given by the
Holder as of each moment of each Covenant Day. No covenant will terminate,
diminish or modify any other covenant. The Holder agrees to comply with each
such covenant. This Section 12 controls in the case of any conflict with any
other provision of any other agreement to which the Company and the Holder may
be parties.
(c) The Company's obligation to issue shares of Common Stock which
would exceed such limits referred to in this Section 12 shall be suspended to
the extent necessary until such time, if any, as shares of Common Stock may be
issued in compliance with such restrictions.
14
<PAGE>
13. Obligations Absolute. No provision of this Debenture, the Purchase
Agreement or the Registration Rights Agreement shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, and interest and delay payments on, this Debenture or to issue
shares of Common Stock in response to a Conversion Notice at the time, place and
rate, and in the manner, herein prescribed.
14. Waivers of Demand, Etc. The Company hereby expressly and irrevocably
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and will be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
15. Replacement Debenture. In the event that any Holder notifies the
Company that its Debenture(s) have been lost, stolen or destroyed, replacement
Debenture(s) identical in all respects to the original Debenture(s) (except for
registration number and Outstanding Principal Amount, if different than that
shown on the original Debenture(s)), shall be issued to the Holder, provided
that the Holder executes and delivers to the Company an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such Debenture.
16. Payment of Expenses; Issue Taxes. The Company agrees to pay all debts
and expenses, including reasonable attorneys' fees, which may be incurred by the
Holder in enforcing the provisions of this Debenture and/or collecting any
amount due under this Debenture, the Escrow Agreement, the Purchase Agreement,
any Warrant or the Registration Rights Agreement. The Company shall pay any and
all issue and other taxes (excluding any income, franchise or similar taxes)
that maybe payable in respect of any issue or delivery of shares of Common Stock
on conversion of any Debenture pursuant hereto.
17. Defaults. If one or more of the following described "Events of Default"
shall occur with respect to any of the Debentures:
(a) the Company shall default in the payment of (i) interest on this
Debenture or any other Debenture issued pursuant to the Purchase
Agreement (subject to the Company's option to pay PIK Interest),
and such default shall continue for five (5) days after the due
date thereof, or (ii) the principal of this Debenture or any
other Debenture issued pursuant to the Purchase Agreement; or
(b) any of the representations or warranties made by the Company in
any of the Debentures, in the Purchase Agreement, the Escrow
Agreement, the Registration Rights Agreement, any Warrant or in
any certificate or financial or other statements heretofore or
hereafter furnished by or on behalf of the Company in connection
15
<PAGE>
with the execution and delivery of this Debenture or such other
documents shall be false or misleading at the time made; or
(c) the Company shall fail to materially perform or observe any
covenant or agreement in the Purchase Agreement, the Escrow
Agreement, any Warrant or the Registration Rights Agreement, or
any other covenant, term, provision, condition, agreement or
obligation of the Company under any of the Debentures and such
failure shall continue uncured for a period of ten (10) days
after notice of such failure; or
(d) the Company shall (1) become insolvent; (2) admit in writing its
inability to pay its debts generally as they mature; (3) make an
assignment for the benefit of creditors or commence proceedings
for its dissolution; or (4) apply for or consent to the
appointment of a trustee, liquidator or receiver for it or for a
substantial part of its property or business; or
(e) a trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business
without its consent and shall not be discharged within forty-five
(45) days after such appointment; or
(f) any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties
or assets of the Company and shall not be dismissed within
forty-five (45) days thereafter; or
(g) the Company shall, in one or a series of transactions, sell or
otherwise transfer all or substantially all of its assets; or
(h) bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings, or relief under any bankruptcy law or any
law for the relief of debt shall be instituted by or against the
Company and, if instituted against the Company shall not be
dismissed within forty-five (45) days after such institution, or
the Company shall by any action or answer approve of, consent to,
or acquiesce in any such proceedings or admit to any material
allegations of, or default in answering a petition filed in any
such proceeding; or
(i) the Company shall be in default of any other of its indebtedness
exceeding $500,000, or any other event shall have occurred such
that as a result thereof the holders thereof shall have
accelerated or shall have the right (upon the giving of notice,
the passage of time, or both) to accelerate such indebtedness; or
16
<PAGE>
(j) a "going private" transaction under Rule 13e-3 promulgated
pursuant to the Exchange Act shall have been announced; or
(k) a tender offer by the Company under Rule 13e-4 promulgated
pursuant to the Exchange Act shall have been announced;
then, or at any time thereafter, in the case of Events of Default arising
from the events described in paragraphs (a), (b), (c), (g) (i), (j) and (k),
unless such Event of Default shall have been waived in writing by the Holder
(which waiver shall not be deemed to be a waiver of any subsequent default) at
the option of the Holder and in the Holder's sole discretion, the Holder may
declare the Debenture immediately due and payable and concurrently demand
payment thereof, and the Holder may immediately, and without expiration of any
period of grace, enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law. In the event of
Events of Default arising from the events described in paragraphs (d), (e), (f)
or (h) above, this Debenture shall become immediately due and payable without
further action or notice. In the event that the Debenture is due and payable
pursuant to this provision, the Debenture shall be redeemed at the Premium
Redemption Price (as defined in the Registration Rights Agreement).
18. Savings Clause. In case any provision of this Debenture is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Debenture will not in any way
be affected or impaired thereby, and such provision shall remain effective in
all other jurisdictions.
19. Entire Agreement. This Debenture and the agreements referred to in this
Debenture constitute the full and entire understanding and agreement between the
Company and the Holder with respect to the subject hereof. Neither this
Debenture nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the Company and the Holder.
20. Assignment, Etc. Subject to Section 7.8 of the Purchase Agreement, the
Holder (but not the Company) may without notice, transfer or assign this
Debenture or any interest herein and may mortgage, encumber or transfer any of
its rights or interest in and to this Debenture or any part hereof and, without
limitation, each assignee, transferee and mortgagee (which may include any
affiliate of the Holder) shall have the right to transfer or assign its
interest. Each such assignee, transferee and mortgagee shall have all of the
rights of the Holder under this Debenture. The Company agrees that, subject to
compliance with the Purchase Agreement, after receipt by the Company of written
notice of assignment from the Holder or from the Holder's assignee, all
principal, interest and other amounts which are then and thereafter become due
under this Debenture shall be paid to such assignee at the place of payment
designated in such notice. This Debenture shall be binding upon the Company and
its successors and affiliates and shall inure to the benefit of the Holder and
its successors and assigns.
17
<PAGE>
21. No Waiver. No failure on the part of the Holder to exercise, and no
delay in exercising any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
22. Certificate. The Company shall, upon the written request at any time of
any Holder of Debentures, furnish or cause to be furnished to such Holder a
certificate prepared by the chief financial officer of Company setting forth any
adjustments or readjustments of the Conversion Price pursuant to this Debenture
and any right of the Holder to receive additional shares of Common Stock or any
other equity or debt security pursuant to Section 7.
23. Notices. The Company shall distribute to the Holders of Debentures
copies of all notices, materials, annual and quarterly reports, proxy
statements, information statements and any other documents distributed generally
to the holders of shares of Common Stock of the Company, at such times and by
such method as such documents are distributed to such holders of such Common
Stock, but shall not directly or indirectly provide material non-public
information to the Holder without such Holder's prior written consent.
24. Specific Enforcement. The Company agrees that irreparable damage would
occur in the event that any of the provisions of this Debenture were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the Holders of Debentures shall be entitled to swift
specific performance, injunctive relief or other equitable remedies to prevent
or cure breaches of the provisions of this Debenture and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which any of them may be entitled under agreement, at law or in equity.
25. Miscellaneous. Unless otherwise provided herein, any notice or other
communication to a party hereunder shall be sufficiently given if in writing and
personally delivered, facsimiled or mailed to said party by certified mail,
return receipt requested, at its address set forth herein or such other address
as either may designate for itself in such notice to the other and
communications shall be deemed to have been received when delivered personally
or, if sent by mail or facsimile, then when actually received by the party to
whom it is addressed. Whenever the sense of this Debenture requires, words in
the singular shall be deemed to include the plural and words in the plural shall
be deemed to include the singular. Paragraph headings are for convenience only
and shall not affect the meaning of this document.
26. GOVERNING LAW; CONSENT TO JURISDICTION. THIS DEBENTURE SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS TO BE EXECUTED AND PERFORMED
18
<PAGE>
ENTIRELY WITHIN SUCH STATE. THE COMPANY (I) HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK
COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATED TO THIS DEBENTURE 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. THE COMPANY CONSENTS TO PROCESS BEING SERVED IN ANY SUCH
SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AS PROVIDED
HEREIN 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 LAW.
Signature Page Follows
19
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
PHARMOS CORPORATION
By:
-------------------------------
Name:
Title:
Signature page to 6% Convertible Debenture of PHARMOS CORPORATION
20
<PAGE>
EXHIBIT 1
PAYMENT STATEMENT
Date:______________
To: [Name of Holder of Debenture] ("Holder")
Re: 6% Convertible Debenture Due February 28, 2002 ("Debenture") of PHARMOS
CORPORATION (the "Company"), in the Outstanding Principal Amount of US$________.
The Company hereby irrevocably elects to pay interest on the
Debenture, for the Interest Payment Date indicated below, in the following
manner (the Company should check its selection):
____ cash interest; or
____ PIK Interest.
Interest Payment Date: _________________________
If the selection above is PIK Interest, the Company should fill in the
following:
Outstanding Principal Amount prior
to issuance of this Payment Statement: US$_____________
PIK Interest: US$_____________
Outstanding Principal Amount after
issuance of this Payment Statement: US$_____________
The Company hereby certifies to the Holder, its successors and assigns
that the Outstanding Principal Amount due under the Debenture after delivery of
this Payment Statement equals the amount indicated below. Capitalized terms used
in this Payment Statement and not otherwise defined shall have the meaning
ascribed thereto in the Debenture.
<PAGE>
IN WITNESS WHEREOF, this Payment Statement has been duly executed and
delivered on the date first written above.
PHARMOS CORPORATION
By:
------------------------------
Name:
Title:
22
<PAGE>
EXHIBIT 2
(To be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
FOR
6% CONVERTIBLE DEBENTURE DUE FEBRUARY 28, 2002
The undersigned, as Holder of the 6% Convertible Debenture Due February 28,
2002 of PHARMOS CORPORATION (the "Company"), in the outstanding principal amount
of U.S. $_____________ (the "Debenture"), hereby elects to convert that portion
of the outstanding principal amount of the Debenture shown on the next page into
shares of Common Stock, $0.03 par value per share (the "Common Stock"), of the
Company according to the conditions of the Debenture, as of the date written
below. The undersigned hereby requests that share certificates for the Common
Stock to be issued to the undersigned pursuant to this Conversion Notice be
issued in the name of, and delivered to, the undersigned or its designee as
indicated below. If shares 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.
Conversion Information: NAME OF HOLDER:____________________________________
By:____________________________________________________
Print Name:
Print Title:
Print Address of Holder:
___________________________________________________
___________________________________________________
Issue Common Stock to:_____________________________
at:________________________________________________
Electronically transmit and credit Common Stock to:
[________________} at:
___________________________________________________
Date of Conversion
___________________________________________________
Applicable Conversion Rate
THE COMPUTATION OF THE NUMBER OF COMMON SHARES TO
BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE
<PAGE>
Page 2 to Conversion Notice for: _______________________________________
(Name of Holder)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
A. Outstanding Principal Amount converted: $__________
B. Accrued, unpaid interest on Outstanding Principal
Amount converted: $__________
C. Delay payments due Holder on Outstanding Principal
Amount converted: $__________
------------
Total dollar amount converted (total of A + B + C) $__________
============
Exchange Price $__________
Number of Shares of Common Stock = Total dollar amount converted = $__________
-----------------------------
Conversion Price $
Number of shares of Common Stock = ________________________________
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for shares of Common Stock in the following amount(s):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Please issue and deliver _____ new Debenture(s) in the following amounts:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
2
