<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: APRIL 24, 1998
(Date of earliest event reported)
THE IMMUNE RESPONSE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-18006 33-0255679
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5935 DARWIN COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (760) 431-7080
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 5. OTHER EVENTS
The Immune Response Corporation announced on April 30, 1998 that it had
sold 200 shares of its Series F Convertible Preferred Stock in return for gross
proceeds of $10,000,000 pursuant to the provisions of a Securities Purchase
Agreement dated as of April 24, 1998 among the Company and the investors listed
on the Schedule of Buyers attached thereto (the "Investors"). The Series F
Convertible Preferred Stock is convertible into Common Stock initially at a
conversion price equivalent to $14.07 per share of Common Stock. If the
Company's Common Stock does not trade at prices higher than $14.07 per share
over a period of time, the conversion price will be adjusted downward on
April 24, 1999 (or sooner if the Company issues Common Stock at less than $14.07
per share) and quarterly thereafter. The Series F Convertible Preferred Stock
bears a dividend of 7.5% per annum. In general, the dividend is payable in
shares of Common Stock. The Company has agreed to file a registration statement
with the Securities and Exchange Commission covering the resale of the Common
Stock issuable upon conversion of the Series F Convertible Preferred Stock.
Further, the Company has the option for one year to sell up to $10,000,000 more
of Series F Preferred Stock to the Investors if certain conditions are met.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) EXHIBITS
3(i) Restated Certificate of Incorporation of the Company, as
amended by Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock.
10.1 Securities Purchase Agreement dated as of April 24, 1998 by
and among the Company and the Investors.
10.2 Registration Rights Agreement dated as of April 24, 1998 by
and among the Company and the Investors.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 30, 1998.
THE IMMUNE RESPONSE CORPORATION
By /s/ Charles J. Cashion
------------------------------------------
Charles J. Cashion,
Senior Vice President, Finance &
Administration, Chief Financial Officer,
Secretary and Treasurer
-3-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3(i) Restated Certificate of Incorporation of the Company, as
amended by Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock.
10.1 Securities Purchase Agreement dated as of April 24, 1998 by
and among the Company and the Investors.
10.2 Registration Rights Agreement dated as of April 24, 1998 by
and among the Company and the Investors.
</TABLE>
-4-
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
THE IMMUNE RESPONSE CORPORATION
The Immune Response Corporation, a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
FIRST: The name of the corporation is The Immune Response
Corporation.
SECOND: The original Certificate of Incorporation of the corporation
was filed with the Secretary of State of Delaware on October 1, 1986. The
corporation was originally incorporated under the name Response Pharmaceuticals,
Inc.
THIRD: The Restated Certificate of Incorporation of said corporation,
as amended, shall be amended and restated to read in full as follows:
ARTICLE I.
The name of the corporation is The Immune Response Corporation.
ARTICLE II.
The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.
ARTICLE III.
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV.
A. The total number of shares of all classes of capital stock which
the corporation shall have authority to issue is forty-five million (45,000,000)
of which forty million (40,000,000) shares of the par value of One-Fourth of One
Cent ($.0025) each shall be Common Stock (the "Common Stock") and
-1-
<PAGE>
five million (5,000,000) shares of the par value of One-Tenth of One Cent
($.001) each shall be Preferred Stock (the "Preferred Stock").
The Preferred Stock may be issued in any number of series, as
determined by the Board of Directors of this corporation (the "Board of
Directors"). Except as otherwise provided in this Restated Certificate of
Incorporation, the Board of Directors is expressly authorized to provide for the
issue, in one or more series, of all or any of the shares of Preferred Stock
and, in the resolution or resolutions providing for such issue, to establish for
each such series the number of its shares, the voting powers, full or limited,
of the shares of such series, or that such shares shall have no voting powers,
and the designations, preferences and relative, participating, optional or other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof. The Board of Directors is also expressly authorized
(unless forbidden in the resolution or resolutions providing for such issue) to
increase or decrease (but not below the number of shares of the series then
outstanding) the number of shares of any series subsequent to the issuance of
shares of that series. In case the number of shares of any such series shall be
so decreased, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
B. The designation and amount of the initial series of Preferred
Stock and the powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated
as "Series E Participating Preferred Stock," $0.001 par value per share, and the
number of shares constituting such series shall be 20,000. Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series E
Participating Preferred Stock to a number less than that of the shares then
outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the corporation.
2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series E Participating Preferred Stock with respect to dividends, the holders of
shares of Series E Participating Preferred Stock in preference to the holders of
shares of Common Stock, par value $.0025 per share, of the corporation and any
other junior stock, shall be entitled
-2-
<PAGE>
to receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on the
first day of March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series E Participating Preferred Stock in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $100, or
(b) subject to the provision for adjustment hereinafter set forth, 1,000 times
the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series E Participating Preferred Stock. In the event the corporation
shall at any time after the close of business on February 26, 1992 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, by reclassification or
otherwise, then in each such case the amount to which holders of shares of
Series E Participating Preferred Stock were entitled immediately prior to such
event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The corporation shall declare a dividend or distribution on the
Series E Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $100 per share on the
Series E Participating Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series E Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series E
Participating Preferred Stock unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from
-3-
<PAGE>
the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series E Participating Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series E Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares of
Series E Participating Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall be no more than
30 days prior to the date fixed for the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series E Participating
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series E Participating Preferred Stock shall entitle the
holder thereof to 1,000 votes on all matters submitted to a vote of the
stockholders of the corporation. In the event the corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock into a greater number of shares, or (iii) combine the
outstanding Common Stock into a smaller number of shares, by
reclassification or otherwise, then in each such case the number of votes
per share to which holders of shares of Series E Participating Preferred
Stock were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock outstanding
immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series E Participating Preferred Stock and the holders of shares
of Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the corporation.
(C) (i) If at any time dividends on any Series E Participating
Preferred Stock shall be in
-4-
<PAGE>
arrears in an amount equal to six quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") which shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividend periods
and for the current quarterly dividend period on all shares of Series E
Participating Preferred Stock then outstanding shall have been declared and
paid or set apart for payment. During each default period, all holders of
Preferred Stock (including holders of the Series E Participating Preferred
Stock) with dividends in arrears in an amount equal to six quarterly
dividends thereon, voting as a class, irrespective of series, shall have
the right to elect two Directors.
(ii) During any default period, such voting right of the holders of
Series E Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C)
or at any annual meeting of stockholders, and thereafter at annual meetings
of stockholders, provided that neither such voting right nor the right of
the holders of any other series of Preferred Stock, if any, to increase, in
certain cases, the authorized number of Directors shall be exercised unless
the holders of ten percent (10%) in number of shares of Preferred Stock
outstanding shall be present in person or by proxy. The absence of a
quorum of the holders of Common Stock shall not affect the exercise by the
holders of Preferred Stock of such voting right. At any meeting at which
the holders of Preferred Stock shall exercise such voting right initially
during an existing default period, they shall have the right, voting as a
class, to elect Directors to fill such vacancies, if any, in the Board of
Directors as may then exist up to two Directors or, if such right is
exercised at an annual meeting, to elect two Directors. If the number
which may be so elected at any special meeting does not amount to the
required number, the holders of the Preferred Stock shall have the right to
make such increase in the number of Directors as shall be necessary to
permit the election by them of the required number. After the holders of
the Preferred Stock shall have exercised their right to elect Directors in
any default period and during the continuance of such period, the number of
Directors shall not be increased or decreased except by vote of the holders
of Preferred Stock as herein provided or pursuant to the rights of any
equity securities ranking senior to or pari passu with the Series E
Participating Preferred Stock.
-5-
<PAGE>
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors,
the Board of Directors may order, or any stockholder or stockholders owning
in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request,
the calling of a special meeting of the holders of Preferred Stock in
accordance with Article X. Notice of such meeting and of any annual
meeting at which holders of Preferred Stock are entitled to vote pursuant
to this paragraph (C)(iii) shall be given to each holder of record of
Preferred Stock by mailing a copy of such notice to him at his last address
as the same appears on the books of the corporation. Such meeting shall be
called for a time not earlier than ten days and not later than 60 days
after such order or request or in default of the calling of such meeting
within 60 days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate
not less than ten percent (10%) of the total number of shares of Preferred
Stock outstanding. Notwithstanding the provisions of this paragraph
(C)(iii), no such special meeting shall be called during the period within
60 days immediately preceding the date fixed for the next annual meeting of
the stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the corporation, if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of
Preferred Stock shall have exercised their right to elect two Directors
voting as a class, after the exercise of which right (x) the Directors so
elected by the holders of Preferred Stock shall continue in office until
their successors shall have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in paragraph (C)(ii) of this Section 3)
be filled by vote of a majority of the remaining Directors theretofore
elected by the holders of the class of stock which elected the Director
whose office shall have become vacant. References in this paragraph (C) to
Directors elected by the holders of a particular class of stock shall
include Directors elected by such Directors to fill vacancies as provided
in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors shall
cease,
-6-
<PAGE>
(y) the term of any Directors elected by the holders of Preferred Stock as
a class shall terminate, and (z) the number of Directors shall be such
number as may be provided for in, or pursuant to, the Certificate of
Incorporation or By-Laws irrespective of any increase made pursuant to the
provisions of paragraph (C)(ii) of this Section 3 (such number being
subject, however, to change thereafter in any manner provided by law or in
the Certificate of Incorporation or By-Laws). Any vacancies in the Board
of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors,
even though less than a quorum.
(D) Except as set forth herein, holders of Series E Participating
Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate
action.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series E Participating Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series E Participating
Preferred Stock outstanding shall have been paid in full, the corporation shall
not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series E Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series E Participating
Preferred Stock except dividends paid ratably on the Series E Participating
Preferred Stock and all such parity stock on which dividends are payable or
in arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series E Participating
-7-
<PAGE>
Preferred Stock provided that the corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in exchange
for shares of any stock of the corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series E
Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series E Participating Preferred Stock or any shares of stock ranking on a
parity with the Series E Participating Preferred Stock except in accordance
with a purchase offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The corporation shall not permit any subsidiary of the corporation to
purchase or otherwise acquire for consideration any shares of stock of the
corporation unless the corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. REACQUIRED SHARES. Any shares of Series E Participating Preferred
Stock purchased or otherwise acquired by the corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series E Participating Preferred Stock unless, prior thereto,
the holders of shares of Series E Participating Preferred Stock shall have
received per share, the greater of 1,000 times $1.00 or 1,000 times the payment
made per share of Common Stock, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series E Liquidation Preference"). Following the payment of
the full amount of the Series E Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series E Participating
-8-
<PAGE>
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series E Liquidation Preference by
(ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to
reflect such events as stock splits, stock dividends and recapitalization with
respect to the Common Stock) (such number in clause (ii), the "Adjustment
Number"). Following the payment of the full amount of the Series E Liquidation
Preference and the Common Adjustment in respect of all outstanding shares of
Series E Participating Preferred Stock and Common Stock, respectively, holders
of Series E Participating Preferred Stock and holders of shares of Common Stock
shall receive their ratable and proportionate share of the remaining assets to
be distributed in the ratio of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event there are not sufficient assets available to permit
payment in full of the Series E Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series E Participating Preferred Stock then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event there are
not sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to the
holders of Common Stock.
(C) In the event the corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, by reclassification or
otherwise, then in each such case the Adjustment Number in effect immediately
prior to such event shall be adjusted by multiplying such Adjustment Number by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
7. CONSOLIDATION, MERGER, ETC. In case the corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case the shares of Series E
Participating Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or
-9-
<PAGE>
exchanged. In the event the corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series E Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
8. REDEMPTION. The shares of Series E Participating Preferred Stock
shall not be redeemable.
9. RANKING. The Series E Participating Preferred Stock shall rank junior
to all other series of the corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
10. AMENDMENT. The Certificate of Incorporation and the By-Laws of the
corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series E
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of at least 66-2/3% of the outstanding shares of
Series E Participating Preferred Stock voting separately as a class.
11. FRACTIONAL SHARES. Series E Participating Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series E Participating Preferred Stock.
ARTICLE V.
Election of Directors need not be by written ballot.
ARTICLE VI.
The Board of Directors is expressly empowered to adopt, amend or
repeal By-Laws of the corporation; provided, however, that any adoption,
amendment or repeal of By-Laws of the corporation by the Board of Directors
shall require the approval of at least sixty-six and two-thirds percent
(66 2/3%) of the total number of authorized Directors (whether or not there
exist any vacancies in previously authorized directorships at the time any
resolution providing for adoption, amendment or
-10-
<PAGE>
repeal is presented to the Board of Directors). The stockholders shall also
have power to adopt, amend or repeal By-Laws of the corporation, provided,
however, that in addition to any vote of the holders of any class or series of
stock of the corporation required by law or by this Restated Certificate of
Incorporation the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of all of the then outstanding
shares of the stock of the corporation entitled to vote generally in the
election of Directors, voting together as a single class, shall be required for
such adoption, amendment or repeal by the stockholders of any provisions of the
By-Laws of the corporation.
ARTICLE VII.
Any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (whether or not by or in the
right of the corporation) by reason of the fact that he is or was a Director,
officer, incorporator, employee or agent of the corporation, or is or was
serving at the request of the corporation as a Director, officer, incorporator,
employee, partner, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including an employee benefit plan), shall
be entitled to be indemnified by the corporation to the full extent then
permitted by law against expenses (including attorneys' fees), judgments, fines
(including excise taxes assessed on a person with respect to an employee benefit
plan) and amounts paid in settlement incurred by him in connection with such
action, suit or proceeding. Such right of indemnification shall inure whether
or not the claim asserted is based on matters which antedate the adoption of
this Article VII. Such right of indemnification shall continue as to a person
who has ceased to be a Director, officer, incorporator, employee, partner,
trustee or agent and shall inure to the benefit of the heirs and personal
representatives of such a person. The indemnification provided by this Article
VII shall not be deemed exclusive of any other rights which may be provided now
or in the future under any provision currently in effect or hereafter adopted by
the By-Laws, by any agreement, by vote of stockholders, by resolution of
disinterested Directors, by provision of law or otherwise.
ARTICLE VIII.
No Director of the corporation shall be liable to the corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability (i) for any breach of the Director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a
-11-
<PAGE>
knowing violation of law; (iii) under section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the Director derived an
improper personal benefit.
ARTICLE IX.
Whenever a compromise or arrangement is proposed between the
corporation and its creditors or any class of them and/or between the
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the corporation under the
provisions of section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
corporation under the provisions of section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall if sanctioned by the
court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the corporation, as the case may be, and also on the
corporation.
ARTICLE X.
No action required or permitted to be taken at any annual or special
meeting of the stockholders may be taken without a meeting and the power of
stockholders to consent in writing, without a meeting, to the taking of any
action is specifically denied. Special meetings of the stockholders of the
corporation may be called only by the Chairman of the Board or the Chief
Executive Officer of the corporation or by a resolution adopted by the
affirmative vote of a majority of the Board of Directors.
ARTICLE XI.
The Board of Directors shall be divided into three classes, designated
Class I, Class II and Class III, as nearly equal in number as possible, and the
term of office of Directors of one class shall expire at each annual meeting of
stockholders, and in all cases as to each Director until such
-12-
<PAGE>
Director's successor shall be elected and shall qualify or until such Director's
earlier resignation, removal from office, death or incapacity. Additional
directorships resulting from an increase in number of Directors shall be
apportioned among the classes as equally as possible. The initial term of
office of Directors of Class I shall expire at the annual meeting of
stockholders in 1993; that of Class II shall expire at the annual meeting in
1994; and that of Class III shall expire at the annual meeting in 1995; and in
all cases as to each Director until such Director's successor shall be elected
and shall qualify or until such Director's earlier resignation, removal from
office, death or incapacity. At each annual meeting of stockholders the number
of Directors equal to the number of Directors of the class whose term expires at
the time of such meeting (or, if less, the number of Directors properly
nominated and qualified for election) shall be elected to hold office until the
third succeeding annual meeting of stockholders after their election.
ARTICLE XII.
Notwithstanding any other provision of this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then outstanding
shares of the stock of the corporation entitled to vote generally in the
election of Directors, voting together as a single class, shall be required to
amend in any respect or repeal this Article XII, or Articles VI, VII, VIII, X
and XI.
FOURTH: This Restated Certificate of Incorporation was duly adopted
by the Board of Directors of the corporation.
FIFTH: This Restated Certificate of Incorporation was duly adopted by
the stockholders in accordance with sections
-13-
<PAGE>
242 and 245 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, The Immune Response Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by its
President, James B. Glavin, and its Secretary, Charles J. Cashion, this 23rd day
of May, 1992.
THE IMMUNE RESPONSE CORPORATION
By /s/ James B. Glavin
-------------------------------------
James B. Glavin, President
Attest:
By /s/ Charles J. Cashion
--------------------------------
Charles J. Cashion
Secretary
-14-
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES F CONVERTIBLE PREFERRED STOCK
OF
THE IMMUNE RESPONSE CORPORATION
The Immune Response Corporation (the "COMPANY"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
of the Company by the Certificate of Incorporation, as amended, of the Company,
and pursuant to Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Company at a meeting duly held adopted
resolutions (i) authorizing a series of the Company's previously authorized
preferred stock, par value $.001 per share, and (ii) providing for the
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, of Four Hundred
(400) shares of Series F Convertible Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 400 shares of Series
F Convertible Preferred Stock (the "PREFERRED SHARES"), par value $.001 per
share, which shall have the following powers, designations, preferences and
other special rights:
(1) DIVIDENDS. The Preferred Shares shall bear dividends
("DIVIDENDS") at a rate of 7.5% per annum, which shall be cumulative, accrue
daily from the Issuance Date (as defined below) and be payable on the first day
of each Calendar Quarter (as defined below) beginning on the earlier of (a) the
first day of the Calendar Quarter immediately following the date on which the
Registration Statement (as defined below) is declared effective by the SEC (as
defined below) and (b) the first day of the Calendar Quarter immediately
following the date which is 120 days after the Issuance Date (each a "DIVIDEND
DATE"). If a Dividend Date is not a Business Day (as defined below) then the
Dividend shall be due and payable on the Business Day immediately following the
Dividend Date. Dividends shall be payable in shares of Common Stock at the
Dividend Conversion Rate (as defined below) or, at the option of the Company, in
cash, provided that the Dividends which accrued during any period shall be
payable in cash only if the Company provides written notice ("DIVIDEND ELECTION
NOTICE") to each holder of Preferred Shares at least 20 days prior to the
Dividend Date. Dividends to be paid in shares of Common Stock shall be paid in
a number of fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 2(h)) of Common Stock based on the Dividend
<PAGE>
Conversion Price on the Dividend Date. Notwithstanding the foregoing, the
Company shall not be entitled to pay Dividends in shares of Common Stock and
shall be required to pay such Dividends in cash if (a) any event constituting a
Triggering Event (as defined in Section 3(d)), or an event that with the passage
of time would constitute a Triggering Event if not cured, has occurred and is
continuing on the date of the Company's Dividend Election Notice or on the
Dividend Date, unless otherwise consented to in writing by the holder of
Preferred Shares entitled to receive such Dividend or (b) the Registration
Statement (as defined below) has not been declared effective by the Securities
and Exchange Commission (the "SEC") on or before the Dividend Date. Any accrued
and unpaid dividends which are not paid (in stock or cash as applicable) within
five (5) Business Days of such accrued and unpaid dividends' Dividend Date shall
bear interest at the rate of 18.0% per annum from such Dividend Date until the
same is paid (the "DEFAULT INTEREST").
(2) HOLDER'S CONVERSION OF PREFERRED SHARES. A holder of Preferred
Shares shall have the right, at such holder's option, to convert the Preferred
Shares into shares of the Company's common stock, par value $.0025 per share
(the "COMMON STOCK"), on the following terms and conditions:
(a) CONVERSION RIGHT. At any time or times on or after the
Issuance Date (as defined below), any holder of Preferred Shares shall be
entitled to convert any whole number of Preferred Shares into fully paid
and nonassessable shares (rounded to the nearest whole share in accordance
with Section 2(h)) of Common Stock, at the Conversion Rate (as defined
below); provided, however, that in no event shall any holder be entitled to
convert Preferred Shares in excess of that number of Preferred Shares
which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock
issuable upon conversion of the Preferred Shares with respect to which the
determination of such proviso is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by the
holder and its affiliates, and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the holder and its affiliates. Except as set forth
in the preceding sentence, for purposes of this Section 2(a), beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. The holder may waive the
foregoing limitations by written notice to the Company upon not less than
61 days prior notice (with such waiver taking effect only upon the
expiration of such 61 day notice period).
-2-
<PAGE>
(b) CONVERSION RATE. The number of shares of Common Stock
issuable upon conversion of each of the Preferred Shares pursuant to
Sections (2)(a) and 2(g) and Section 5 shall be determined according to the
following formula (the "CONVERSION RATE"):
Conversion Amount
-----------------
Conversion Price
For purposes of this Certificate of Designations, the following terms shall
have the following meanings:
(i) "CONVERSION PRICE" means (A) as of any Conversion
Date (as defined in Section 2(f)) or other date of determination (other than
the Maturity Date (as defined in Section 2(g)) of the applicable Preferred
Shares, the Fixed Conversion Price, subject to adjustment as provided herein
(including, without limitation, pursuant to Section 2(c)), and (B) as of the
Maturity Date of the applicable Preferred Shares, the Market Price as of such
date;
(ii) "FIXED CONVERSION PRICE" means 120% of the average
of the Closing Bid Prices (as defined below) of the Common Stock for the five
consecutive trading days immediately preceding the Issuance Date of the
applicable Preferred Shares, subject to adjustment as provided herein;
(iii) "CONVERSION AMOUNT" means the sum of (A) the
Additional Amount and (B) $50,000;
(iv) "ADDITIONAL AMOUNT" means, on a per share basis,
the sum of (A) unpaid Default Interest through the date of determination plus
(B) the result of the following formula: (.075)(N/365)($50,000);
(v) "GREATEST AVERAGE STOCK PRICE" means, for any
period of determination, the highest Market Price during such period;
(vi) "MARKET PRICE" means, with respect to any security
for any date, the average of the Closing Bid Prices for such security during
the 20 consecutive trading days immediately preceding such date of
determination;
(vii) "DIVIDEND CONVERSION PRICE" means, as of any date
of determination, the average of the Closing Bid Prices of the Common Stock
during the ten consecutive trading days immediately preceding the applicable
Dividend Date;
(viii) "ADJUSTMENT PRICE" means, as of any date of
determination, the average of the Closing Bid Prices of the Common Stock
during the 30 consecutive trading days immediately preceding such date of
determination; provided, however, that during the
-3-
<PAGE>
period beginning on the Initial Issuance Date and ending on the date which is
two years after the Initial Issuance Date, (A) the Adjustment Price with respect
to Preferred Shares issued on the Initial Issuance Date shall not be less than
$5.00 (subject to appropriate adjustments for stock splits, stock dividends and
other similar transactions relating to the Common Stock) and (B) the Adjustment
Price with respect to Preferred Shares issued after the Initial Issuance Date
shall be not less than the lesser of (I) $5.00 (subject to appropriate
adjustments for stock splits, stock dividends and other similar transactions
relating to the Common Stock) and (II) 50% of the average of the Closing Bid
Prices for the Common Stock on the five consecutive trading days immediately
preceding the Issuance Date of such Preferred Shares, subject in each case to
adjustment as provided herein; provided, further, that the minimum price for the
Adjustment Price described in the immediately preceding proviso (the "MINIMUM
ADJUSTMENT PRICE") shall not apply with respect to a Preferred Share at any time
after the Company has issued or sold, or is deemed to have issued or sold
(consistent with Section 2(d) below), any shares of Common Stock (other than
shares of Common Stock deemed to have been issued by the Company in connection
with an Approved Stock Plan (as defined below)) at a price per share (determined
consistent with the provisions of Section 2(d)) less than the Minimum Adjustment
Price with respect to such Preferred Share;
(ix) "CLOSING BID PRICE" means, for any security as of
any date, the last closing bid price for such security on The Nasdaq National
Market as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if The
Nasdaq National Market is not the principal trading market for such security,
the last closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing
bid price is reported for such security by Bloomberg, the last closing trade
price of such security as reported by Bloomberg, or, if no last closing trade
price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair
market value as mutually determined by the Company and the holders of a
majority of the outstanding Preferred Shares (including for purposes of this
determination any Preferred Shares with respect to which the Closing Bid
Price is being determined). If the Company and the holders of Preferred
Shares are unable to agree upon the fair market value of the Common Stock,
then such dispute shall be resolved pursuant to Section 2(f)(iii) with the
term "Closing Bid Price" being substituted for the term "Market Price." (All
such determinations to be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period).
(x) "N" means the number of days from, but excluding,
the last Dividend Date with respect to which dividends, along with any
Default Interest, has been paid by the Company on the applicable Preferred
Share through and including the Conversion Date
-4-
<PAGE>
or the Maturity Date for the Preferred Shares for which conversion and/or
redemption is being elected, as the case may be;
(xi) "ISSUANCE DATE" means, with respect to each
Preferred Share, the date of issuance of the applicable Preferred Share;
(xii) "INITIAL ISSUANCE DATE" means the first date on
which any Preferred Shares are issued by the Company;
(xiii) "BUSINESS DAY" means any day other than Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law to remain closed;
(xiv) "CALENDAR QUARTER" means, subject to Section
2(c)(ii), each of the period beginning on and including January 1 and ending
on and including March 31, the period beginning on and including April 1 and
ending on and including June 30, the period beginning on and including July 1
and ending on and including September 30, and the period beginning on and
including October 1 and ending on and including December 31;
(xv) "SECURITIES PURCHASE AGREEMENT" means that certain
securities purchase agreement between the Company and the initial holders of
the Preferred Shares;
(xvi) "CONVERSION SHARES" means shares of Common Stock
issuable upon conversion of Preferred Shares and any shares of Common Stock
issuable as payment of Dividends or Registration Delay Payments (as defined
in the Registration Rights Agreement).
(c) ADJUSTMENT TO FIXED CONVERSION PRICE -- MARKET PRICE OF
COMMON STOCK. In addition to any other adjustment to the Fixed Conversion Price
provided for in this Certificate of Designations, the Fixed Conversion Price
shall be subject to the following adjustments.
(i) ONE YEAR ADJUSTMENT. Subject to Section 2(c)(iii) below, in the
event that (A) the Greatest Average Stock Price during the period beginning
on and including the date which is 21 trading days after the Issuance Date
of the applicable Preferred Shares and ending on and including the date
which is one year after such Issuance Date (the "ONE YEAR ADJUSTMENT DATE")
is not greater than the Fixed Conversion Price on the Issuance Date
(subject to appropriate adjustment pursuant to Section 2(d)(ii)) of the
applicable Preferred Shares and (B) the Closing Bid Price on the One Year
Adjustment Date (or if the One Year Adjustment Date is not a trading day,
then the trading immediately preceding the One Year Adjustment Date) is not
greater than the Fixed Conversion Price as of such Issuance Date (subject
to appropriate adjustment pursuant
-5-
<PAGE>
to Section 2(d)(ii)), then from and after the date immediately following
the One Year Adjustment Date, the Fixed Conversion Price shall be equal to
the lesser of (x) the Adjustment Price on the One Year Adjustment Date and
(y) the Fixed Conversion Price in effect immediately prior to the One Year
Adjustment Date; subject to further adjustment as provided in this Section
2(c) and elsewhere in this Certificate of Designations.
(ii) CALENDAR QUARTER ADJUSTMENTS. Subject to Section 2(c)(iii)
below, in the event that (A) the Greatest Average Stock Price, during the
period beginning on and including the date which is 21 trading days after
the first day of any Calendar Quarter (ending after the One Year Adjustment
Date of the applicable Preferred Shares) and ending on the last day of such
Calendar Quarter, is not greater than the Fixed Conversion Price then in
effect of the applicable Preferred Shares and (B) the Closing Bid Price on
the last trading day of such Calendar Quarter (each a "CALENDAR QUARTER
ADJUSTMENT DATE") is not greater than the Fixed Conversion Price then in
effect, then from and after the date immediately following the Calendar
Quarter Adjustment Date, the Fixed Conversion Price shall be equal to the
lesser of (x) the Adjustment Price on the Calendar Quarter Adjustment Date
and (y) the Fixed Conversion Price in effect immediately prior to the
Calendar Quarter Adjustment Date; subject to further adjustment as provided
in this Section 2(c) and elsewhere in this Certificate of Designations.
Notwithstanding the foregoing, if at any time after the Issuance Date but
prior to the One Year Adjustment Date of the applicable Preferred Shares
the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock consistent with Section 2(d) (other than shares of
Common Stock deemed to have been issued by the Company in connection with
an Approved Stock Plan (as defined below)) for consideration per share less
than the Fixed Conversion Price in effect immediately prior to such
issuance or sale, then (A) the first Calendar Quarter Adjustment Date with
respect to such Preferred Shares shall occur on the last trading day of the
calendar month immediately following such issuance or sale (an "ALTERNATIVE
CALENDAR QUARTER ADJUSTMENT DATE") and (B) for purposes of this Section
2(c)(ii) and Section 6, a Calendar Quarter shall mean any three consecutive
calendar months ending on the month containing the first Alternative
Calendar Quarter Adjustment Date (the "FIRST ALTERNATIVE ADJUSTMENT MONTH")
or any calendar month which is a multiple of three months after the First
Alternative Adjustment Month. (For example, if such issuance or sale
occurs on January 15, 199X the first Alternative Calendar Quarter
Adjustment Date would be the last trading day of February 199X and a
Calendar Quarter would mean the three consecutive calendar months ended
February 199X and each May, August, November and February thereafter.)
(iii) TERMINATION OF ONE YEAR AND CALENDAR QUARTER ADJUSTMENTS.
Notwithstanding the provisions of Section 2(c)(i) and (ii) above, if at any
time following the Issuance Date of the applicable Preferred Shares the
Closing Bid Price of the Common Stock is at least 200% of the Fixed
Conversion Price on such Issuance Date (subject to appropriate adjustment
pursuant to Section 2(d)(ii)) on each trading day during
-6-
<PAGE>
a period of 20 consecutive trading days beginning after such Issuance Date,
then no further adjustment shall be made pursuant to this Section 2(c) at
any time after the last day of such 20-day period.
(d) ADJUSTMENT TO CONVERSION PRICE -- DILUTION AND OTHER EVENTS.
In order to prevent dilution of the rights granted under this Certificate of
Designations, the Minimum Adjustment Price and the Conversion Price will be
subject to adjustment from time to time as provided in this Section 2(d).
(i) ADJUSTMENT OF MINIMUM ADJUSTMENT PRICE UPON ISSUANCE OF
COMMON STOCK. If and whenever on or after the Issuance Date, the Company issues
or sells, or is deemed to have issued or sold, any shares of Common Stock (other
than shares of Common Stock deemed to have been issued by the Company in
connection with an Approved Stock Plan (as defined below)) for a consideration
per share less than a price (the "APPLICABLE PRICE") equal to the Fixed
Conversion Price in effect immediately prior to such issuance or sale, then
immediately after such issue or sale, the Minimum Adjustment Price, if any, then
in effect shall be reduced to an amount equal to the product of (x) the Minimum
Adjustment Price in effect immediately prior to such issue or sale and (y) the
quotient determined by dividing (1) the sum of (I) the product of the Applicable
Price and the number of shares of Common Stock Deemed Outstanding (as defined
below) immediately prior to such issue or sale, and (II) the consideration, if
any, received by the Company upon such issue or sale, by (2) the product of
(I) the Applicable Price and (II) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale. For purposes of determining
the adjusted Minimum Adjustment Price under this Section 2(d)(i), the following
shall be applicable:
(A) ISSUANCE OF OPTIONS. If the Company in any manner
grants any rights or options to subscribe for or to purchase Common Stock
(other than pursuant to an Approved Stock Plan or upon conversion of the
Preferred Shares) or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"OPTIONS" and such convertible or exchangeable stock or securities being
herein called "CONVERTIBLE SECURITIES") and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than the
Applicable Price, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. For purposes
of this Section 2(d)(i)(A), the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of
such Convertible Securities" is determined by dividing (I) the total
amount, if any, received or receivable by the Company as consideration for
the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all
such Options, plus in the case of such Options which relate to Convertible
Securities, the
-7-
<PAGE>
minimum aggregate amount of additional consideration, if any, payable to
the Company upon the issuance or sale of such Convertible Securities and
the conversion or exchange thereof, by (II) the total maximum number of
shares of Common Stock issuable upon exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No adjustment of the Minimum Adjustment Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such
Convertible Securities.
(B) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuable upon such conversion or
exchange is less than the Applicable Price, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of such
Convertible Securities shall be deemed to be outstanding and to have been
issued and sold by the Company for such price per share. For the purposes
of this Section 2(d)(i)(B), the "price per share for which Common Stock is
issuable upon such conversion or exchange" is determined by dividing (I)
the total amount received or receivable by the Company as consideration for
the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange
of all such Convertible Securities. No adjustment of the Minimum
Adjustment Price shall be made upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Minimum Adjustment Price had been or
are to be made pursuant to other provisions of this Section 2(d)(i), no
further adjustment of the Minimum Adjustment Price shall be made by reason
of such issue or sale.
(C) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If
the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of
any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock change at any time,
the Minimum Adjustment Price in effect at the time of such change shall be
readjusted to the Minimum Adjustment Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold; provided that no adjustment shall be made if such
adjustment would result in an increase of the Minimum Adjustment Price then
in effect.
-8-
<PAGE>
(D) CERTAIN DEFINITIONS. For purposes of determining
the adjusted Minimum Adjustment Price under this Section 2(d)(i), the
following terms have the meanings set forth below:
(I) "APPROVED STOCK PLAN" shall mean any
contract, plan or agreement which has been approved by the Board of
Directors of the Company, pursuant to which the Company's securities may be
issued to any employee, officer, director, consultant or other service
provider.
(II) "COMMON STOCK DEEMED OUTSTANDING" means, at
any given time, the number of shares of Common Stock actually outstanding
at such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock issuable
upon conversion of the Preferred Shares.
(E) EFFECT ON MINIMUM ADJUSTMENT PRICE OF CERTAIN
EVENTS. For purposes of determining the adjusted Minimum Adjustment Price
under this Section 2(d)(i), the following shall be applicable:
(I) CALCULATION OF CONSIDERATION RECEIVED. If
any Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the average of the Closing Bid Prices of such securities
for the five consecutive trading days immediately preceding the date of
receipt. In case any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Company. The determination of such appraiser
shall be binding upon all parties absent manifest error.
-9-
<PAGE>
(II) INTEGRATED TRANSACTIONS. In case any Option
is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01.
(III) TREASURY SHARES. The number of shares
of Common Stock outstanding at any given time does not include shares owned
or held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) RECORD DATE. If the Company takes a record
of the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock, Options
or in Convertible Securities, or (2) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date will be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(ii) ADJUSTMENT OF FIXED CONVERSION PRICE AND MINIMUM
ADJUSTMENT PRICE UPON SUBDIVISION OR COMBINATION OF COMMON STOCK. If the
Company at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Fixed
Conversion Price and the Minimum Adjustment Price in effect immediately
prior to such subdivision each will be proportionately reduced. If the
Company at any time combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Fixed Conversion Price and the Minimum
Adjustment Price in effect immediately prior to such combination each will
be proportionately increased.
(iii) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION,
MERGER OR SALE. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's
assets to another Person (as defined below) or other transaction which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Common Stock is referred to
herein as "ORGANIC CHANGE." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Preferred
Shares then outstanding) to insure that each of the holders of the
Preferred Shares will thereafter have the right to acquire and receive in
lieu of or in addition to (as the case may be) the shares of Common Stock
otherwise acquirable and receivable upon the conversion of such holder's
Preferred Shares, such
-10-
<PAGE>
shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the
number of shares of Common Stock which would have been acquirable and
receivable upon the conversion of such holder's Preferred Shares had such
Organic Change not taken place (without taking into account any limitations
or restrictions on the timing or amount of conversions). In any such case,
the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Preferred
Shares then outstanding) with respect to such holders' rights and interests
to insure that the provisions of this Section 2(d) and Section 2(e) will
thereafter be applicable to the Preferred Shares (including, in the case of
any such consolidation, merger or sale in which the successor entity or
purchasing entity is other than the Company, an immediate adjustment of the
Fixed Conversion Price to the value for the Common Stock reflected by the
terms of such consolidation, merger or sale, if the value so reflected is
less than the Fixed Conversion Price in effect immediately prior to such
consolidation, merger or sale and an immediate revision to the Adjustment
Price and the Minimum Adjustment Price to reflect the price of the common
stock of the surviving entity and the market in which such common stock is
traded). The Company will not effect any such consolidation, merger or
sale, unless prior to the consummation thereof, the successor entity (if
other than the Company) resulting from consolidation or merger or the
entity purchasing such assets assumes, by written instrument (in form and
substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding), the obligation to deliver to each
holder of Preferred Shares such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be entitled to
acquire. "PERSON" shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(iv) CERTAIN EVENTS. If any event occurs of the type
contemplated by the provisions of this Section 2(d) but not expressly
provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price and the Minimum Adjustment
Price so as to protect the rights of the holders of the Preferred Shares;
provided, however, that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 2(d).
(v) NOTICES.
(A) Immediately upon any adjustment of the Conversion
Price or the Minimum Adjustment Price, the Company will give written notice
thereof to each holder of the Preferred Shares, setting forth in reasonable
detail and certifying the calculation of such adjustment.
-11-
<PAGE>
(B) The Company will give written notice to each
holder of the Preferred Shares at least twenty (20) days prior to the date
on which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock, or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each
holder of the Preferred Shares at least twenty (20) days prior to the date
on which any Organic Change, dissolution or liquidation will take place and
in no event shall such notice be provided to such holder prior to such
information being made known to the public.
(e) PURCHASE RIGHTS. In addition to any adjustments of the
Conversion Price and the Minimum Adjustment Price pursuant to Section 2(d),
if at any time after the Issuance Date the Company grants, issues or sells
any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the holders of the Preferred
Shares will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Preferred Shares (without taking
into account any limitations or restrictions on the timing or amount of
conversions) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of the Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(f) MECHANICS OF CONVERSION. Subject to the Company's inability
to fully satisfy its obligations under a Conversion Notice (as defined
below) as provided for in Section 4:
(i) HOLDER'S DELIVERY REQUIREMENTS. To convert Preferred
Shares into full shares of Common Stock on any date (the "CONVERSION
DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m. Eastern Time, on such date,
a copy of a fully executed notice of conversion in the form attached hereto
as EXHIBIT I (the "CONVERSION NOTICE") to the Company or its designated
transfer agent (the "TRANSFER AGENT"), and (B) surrender to a common
carrier, for delivery to the Company or the Transfer Agent as soon as
practicable following such date, the original certificate(s) representing
the Preferred Shares being converted (or an indemnification undertaking
with respect to such shares in the case of their loss, theft or
destruction) (the "PREFERRED STOCK CERTIFICATE(S)") and the originally
executed Conversion Notice.
-12-
<PAGE>
(ii) COMPANY'S RESPONSE. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall, or shall cause
the Transfer Agent to, promptly, but in no event later than one Business
Day after receipt, send, via facsimile, a confirmation of receipt of such
Conversion Notice to such holder. Upon receipt by the Company or the
Transfer Agent of the Preferred Stock Certificate(s) to be converted
pursuant to a Conversion Notice, together with the originally executed
Conversion Notice, the Company or the Transfer Agent (as applicable) shall,
on the next Business Day following the date of receipt, (I) issue and
surrender to a common carrier for overnight delivery to the address
specified in the Conversion Notice, a certificate, registered in the name
of the holder or its designee, for the number of shares of Common Stock to
which the holder shall be entitled, or (II) credit such aggregate number of
shares of Common Stock to which the holder shall be entitled to the
holder's or its designee's balance account with The Depository Trust
Company. If the number of Preferred Shares represented by the Preferred
Stock Certificate(s) submitted for conversion is greater than the number of
Preferred Shares being converted, then the Company or Transfer Agent, as
the case may be, shall, as soon as practicable and in no event later than
two Business Days after receipt of the Preferred Stock Certificate(s) and
at its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of Preferred Shares not converted.
(iii) DISPUTE RESOLUTION. In the case of a dispute as
to the determination of the Market Price or the arithmetic calculation of
the Conversion Rate, the Company shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile within one (1) Business Day of receipt of such holder's
Conversion Notice. If such holder and the Company are unable to agree upon
the determination of the Market Price or arithmetic calculation of the
Conversion Rate within one (1) Business Day of such disputed determination
or arithmetic calculation being submitted to the holder, then the Company
shall within one (1) Business Day submit via facsimile (A) the disputed
determination of the Market Price to an independent, reputable investment
bank, or (B) the disputed arithmetic calculation of the Conversion Rate to
its independent, outside accountant. The Company shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the holder of the
results no later than forty-eight (48) hours from the time it receives the
disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be
binding upon all parties absent manifest error.
(iv) RECORD HOLDER. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.
-13-
<PAGE>
(v) COMPANY'S FAILURE TO TIMELY CONVERT. If within five
Business Days after the Company's or the Transfer Agent's receipt of the
Preferred Stock Certificates to be converted and the Conversion Notice the
Company shall fail (I) to issue a certificate for the number of shares of
Common Stock to which a holder is entitled or to credit the holder's
balance account with The Depository Trust Company for such number of shares
of Common Stock to which the holder is entitled upon such holder's
conversion of the Preferred Shares, or (II) to issue a new Preferred Stock
Certificate representing the number of Preferred Shares to which such
holder is entitled, pursuant to Section 2(f)(ii), in addition to all other
available remedies which such holder may pursue hereunder and under the
Securities Purchase Agreement (including indemnification pursuant to
Section 8 thereof), the Company shall pay additional damages to such holder
on each date after such fifth (5th) Business Day that such conversion or
delivery of such Preferred Stock Certificates, as the case may be, is not
timely effected in an amount equal to 0.5% of the product of (A) the sum of
the number of shares of Common Stock not issued to the holder on a timely
basis pursuant to Section 2(f)(ii) and to which such holder is entitled
and, in the event the Company has failed to deliver a Preferred Stock
Certificate to the holder on a timely basis pursuant to Section 2(f)(ii),
the number of shares of Common Stock issuable upon conversion of the
Preferred Shares represented by such Preferred Stock Certificate as of the
last possible date which the Company could have issued such Preferred Stock
Certificate to such holder without violating Section 2(f)(ii); and (B) the
Closing Bid Price of the Common Stock on the last possible date which the
Company could have issued such Common Stock and the Preferred Stock
Certificate, as the case may be, to such holder without violating Section
2(f)(ii).
(g) MANDATORY CONVERSION OR REDEMPTION AT MATURITY. If any
Preferred Shares remain outstanding on the Maturity Date (as defined
below), then all such Preferred Shares, at the Company's option, either
(i) shall be converted as of such date in accordance with this Section 2
as if the holders of such Preferred Shares had given the Conversion
Notice on the Maturity Date (a "MATURITY DATE MANDATORY CONVERSION") or
(ii) shall be redeemed as of such date for an amount in cash per
Preferred Share (the "MATURITY DATE REDEMPTION PRICE") equal to the sum
of (A) $50,000 plus (B) the Additional Amount as of such date (a
"MATURITY DATE MANDATORY REDEMPTION"); provided, however, that if the
Company has elected a Maturity Date Mandatory Conversion and a
Triggering Event has occurred and is continuing on the Maturity Date,
then the Company shall, within five Business Days following the Maturity
Date (unless otherwise notified in writing by the holder of its request
to have the Preferred Shares converted into Common Stock), pay to each
holder of Preferred Shares then outstanding, in immediately available
funds, an amount equal to the Maturity Date Redemption Price. The
Company shall be deemed to have elected a Maturity Date Mandatory
Conversion unless it delivers written notice to each holder of Preferred
Shares at least 30 Business Days prior to the Maturity Date of its
election to effect a Maturity Date Mandatory Redemption. If the Company
elects a Maturity Date Mandatory Redemption, then on the Maturity Date
the Company shall pay to each holder of Preferred Shares outstanding on
-14-
<PAGE>
the Maturity Date, by wire transfer of immediately available funds, an
amount per Preferred Share equal to the Maturity Date Redemption Price.
All holders of Preferred Shares shall thereupon surrender all Preferred
Stock Certificates, duly endorsed for cancellation, to the Company or
the Transfer Agent, provided that the Company has complied with its
obligations under this Section 2(g). Notwithstanding the foregoing, if
the Common Stock is not designated for quotation on The Nasdaq National
Market or listed on The New York Stock Exchange, Inc. but such events do
not constitute a Triggering Event, then the Maturity Date shall be
extended until the Common Stock is so designated or listed. "MATURITY
DATE" means the date which is three years after the applicable Issuance
Date, subject to extension (i) as described in the immediately preceding
sentence, (ii) pursuant to Section 4(l) of the Securities Purchase
Agreement, which extension shall be equal to one and one-half (1 1/2)
days for each number of days in any Underwriting Lock-Up Period (as
defined in Section 4(m) of the Securities Purchase Agreement) and (iii)
pursuant to Section 3(u) of the Registration Rights Agreement, which
extension shall be equal to one and one-half (1 1/2) days for each
number of days in any Allowable Grace Period (as defined in Section 3(u)
of the Registration Rights Agreement).
(h) FRACTIONAL SHARES. The Company shall not issue any fraction
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
(i) TAXES. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of shares of
Common Stock upon the conversion of the Preferred Shares.
(3) REDEMPTION AT OPTION OF HOLDERS.
(a) REDEMPTION OPTION UPON MAJOR TRANSACTION. In addition to
all other rights of the holders of Preferred Shares contained herein,
simultaneous with or after the occurrence of a Major Transaction (as
defined below), each holder of Preferred Shares shall have the right, at
such holder's option, to require the Company to redeem all or a portion of
such holder's Preferred Shares at a price per Preferred Share equal to the
greater of (i) 120% of the Liquidation Value (as defined in Section 11);
and (ii) the product of (A) the Conversion Rate at such time, and (B) the
Closing Bid Price on the date of the public announcement of such Major
Transaction or the next date on which the exchange or market on which the
Common Stock is traded is open if such public announcement is made
(X) after 12:00 p.m. Eastern Time, on such date or (Y) on a date
-15-
<PAGE>
on which the exchange or market on which the Common Stock is traded is
closed (the "MAJOR TRANSACTION REDEMPTION PRICE").
(b) REDEMPTION OPTION UPON TRIGGERING EVENT. In addition to all
other rights of the holders of Preferred Shares contained herein,
simultaneous with or after the occurrence of a Triggering Event (as defined
below), each holder of Preferred Shares shall have the right, at such
holder's option, to require the Company to redeem all or a portion of such
holder's Preferred Shares at a price per Preferred Share equal to the
greater of (i) 120% of the Liquidation Value; and (ii) the product of (A)
the Conversion Rate at such time, and (B) the greater of (I) the Closing
Bid Price on the trading day immediately preceding such Triggering Event or
(II) the Closing Bid Price on the date of the holder's delivery to the
Company of a Notice of Redemption at Option of Buyer Upon Triggering Event
(as defined below) or, if such date of delivery is not a trading day, the
next date on which the exchange or market on which the Common Stock is
traded is open (the "TRIGGERING EVENT REDEMPTION PRICE" and, collectively
with the Major Transaction Redemption Price, the "REDEMPTION PRICE").
(c) "MAJOR TRANSACTION". A "MAJOR TRANSACTION" shall be deemed
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination
of the Company with or into another Person (other than pursuant to a
migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company);
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 40% of the outstanding shares of
Common Stock.
(d) "TRIGGERING EVENT". A "TRIGGERING EVENT" shall be deemed to
have occurred at such time as any of the following events:
(i) the failure of the registration statement (the
REGISTRATION STATEMENT") covering the resale of the shares of Common Stock
issuable upon conversion of the Preferred Shares (as defined in the
Securities Purchase Agreement referred to in Section 2(f)(v) of this
Certificate of Designations) and required to be filed by the Company
pursuant to the Registration Rights Agreement between the Company and the
Buyers referred to therein (the "REGISTRATION RIGHTS AGREEMENT") to be
declared effective by the SEC on or prior to the date that is 180 days
after the Initial Issuance Date;
-16-
<PAGE>
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of ten consecutive trading
days (excluding any days during an Allowable Grace Period (as defined in
Section 3(u) of the Registration Rights Agreement));
(iii) suspension from listing or delisting of the Common
Stock from The Nasdaq National Market or The New York Stock Exchange, Inc.
for a period of five consecutive days;
(iv) the Company's notice to any holder of Preferred Shares,
including by way of public announcement, at any time, of its intention not
to comply with proper requests for conversion of any Preferred Shares into
shares of Common Stock, including due to any of the reasons set forth in
Section 4(a) below; or
(v) the Company breaches any representation, warranty,
covenant or other material term or condition of the Securities Purchase
Agreement, the Registration Rights Agreement, this Certificate of
Designations or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated
thereby or hereby, except to the extent that such breach would not have a
Material Adverse Effect (as defined in Section 3(a) of the Securities
Purchase Agreement) and except, in the case of a breach of a covenant which
is curable, only if such breach continues for a period of at least ten
days.
(e) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON MAJOR
TRANSACTION. No sooner than 15 days nor later than 10 days prior to the
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier (a "NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares. At any time after
receipt of a Notice of Major Transaction (or, in the event a Notice of
Major Transaction is not delivered at least 10 days prior to a Major
Transaction, at any time on or after the date which is 10 days prior to a
Major Transaction), any holder of the Preferred Shares then outstanding may
require the Company to redeem all or a portion of the holder's Preferred
Shares then outstanding by delivering written notice thereof via facsimile
and overnight courier (a "NOTICE OF REDEMPTION AT OPTION OF BUYER UPON
MAJOR TRANSACTION") to the Company, which Notice of Redemption at Option of
Buyer Upon Major Transaction shall indicate (i) the number of Preferred
Shares that such holder is submitting for redemption, and (ii) the
applicable Major Transaction Redemption Price, as calculated pursuant to
Section 3(a).
-17-
<PAGE>
(f) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING
EVENT. Within one (1) day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof via facsimile and overnight
courier (a "NOTICE OF TRIGGERING EVENT") to each holder of Preferred
Shares. At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to
redeem all or a portion of the holder's Preferred Shares then outstanding
by delivering written notice thereof via facsimile and overnight courier (a
"NOTICE OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT") to the
Company, which Notice of Redemption at Option of Buyer Upon Triggering
Event shall indicate (i) the number of Preferred Shares that such holder is
submitting for redemption, and (ii) the applicable Triggering Event
Redemption Price, as calculated pursuant to Section 3(b).
(g) PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt of
a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares, the Company shall immediately notify each
holder of Preferred Shares by facsimile of the Company's receipt of such
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or
Notice(s) of Redemption at Option of Buyer Upon Major Transaction and each
holder which has sent such a notice shall promptly submit to the Company or
its Transfer Agent such holder's Preferred Stock Certificates which such
holder has elected to have redeemed. The Company shall deliver the
applicable Triggering Event Redemption Price, in the case of a redemption
pursuant to Section 3(f), to such holder within five (5) Business Days
after the Company's receipt of a Notice of Redemption at Option of Buyer
Upon Triggering Event and, in the case of a redemption pursuant to Section
3(e), the Company shall deliver the applicable Major Transaction Redemption
Price immediately prior to the consummation of the Major Transaction;
provided that a holder's Preferred Stock Certificates shall have been so
delivered to the Company; provided further that if the Company is unable to
redeem all of the Preferred Shares to be redeemed, the Company shall redeem
an amount from each holder of Preferred Shares being redeemed equal to such
holder's pro-rata amount (based on the number of Preferred Shares held by
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares being redeemed. If the Company shall fail to redeem all
of the Preferred Shares submitted for redemption (other than pursuant to a
dispute as to the arithmetic calculation of the Redemption Price), in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designation, the Securities Purchase Agreement and the
Registration Rights Agreement, the applicable Redemption Price payable in
respect of such unredeemed Preferred Shares shall bear interest at the rate
of 2.0% per month (prorated for partial months) until paid in full. Until
the Company pays such unpaid applicable Redemption Price in full to a
holder of Preferred Shares submitted for redemption, such holder shall have
the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of
redemption, require the Company to promptly return to such holder(s) all of
the Preferred Shares that were submitted for
-18-
<PAGE>
redemption by such holder(s) under this Section 3 and for which the
applicable Redemption Price has not been paid, by sending written notice
thereof to the Company via facsimile (the "VOID OPTIONAL REDEMPTION
NOTICE"). Upon the Company's receipt of such Void Optional Redemption
Notice(s) prior to payment of the full applicable Redemption Price to such
holder, (i) the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event or the Notice(s) of Redemption at Option of Buyer Upon Major
Transaction, as the case may be, shall be null and void with respect to
those Preferred Shares submitted for redemption and for which the
applicable Redemption Price has not been paid, (ii) the Company shall
immediately return any Preferred Shares submitted to the Company by each
holder for redemption under this Section 3(g) and for which the applicable
Redemption Price has not been paid and (iii) the Fixed Conversion Price of
such returned Preferred Shares shall be adjusted to the lesser of (A) the
Fixed Conversion Price as in effect on the date on which the Void Optional
Redemption Notice(s) is delivered to the Company and (B) the lowest Closing
Bid Price during the period beginning on the date on which the Notice(s) of
Redemption of Option of Buyer Upon Major Transaction or the Notice(s) of
Redemption at Option of Buyer Upon Triggering event, as the case may be, is
delivered to the Company and ending on the date on which the Void Optional
Redemption Notice(s) is delivered to the Company; provided that no
adjustment shall be made if such adjustment would result in an increase of
the Fixed Conversion Price then in effect. Notwithstanding the foregoing,
in the event of a dispute as to the determination of the Closing Bid Price
or the arithmetic calculation of the Redemption Price, such dispute shall
be resolved pursuant to Section 2(g)(iii) above with the term "Closing Bid
Price" being substituted for the term "Market Price" and the term
"Redemption Price" being substituted for the term "Conversion Rate". A
holder's delivery of a Void Optional Redemption Notice and exercise of its
rights following such notice shall not effect the Company's obligations to
make any payments which have accrued prior to the date of such notice.
Payments provided for in this Section 3 shall have priority to payments to
other stockholders in connection with a Major Transaction.
(4) INABILITY TO FULLY CONVERT.
(a) HOLDER'S OPTION IF COMPANY CANNOT FULLY CONVERT. If, upon
the Company's receipt of a Conversion Notice or on the Maturity Date, the
Company can not issue shares of Common Stock registered for resale under
the Registration Statement for any reason, including, without limitation,
because the Company (x) does not have a sufficient number of shares of
Common Stock authorized and available, (y) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange,
interdealer quotation system or other self-regulatory organization with
jurisdiction over the Company or its Securities, including without
limitation the Exchange Cap, from issuing all of the Common Stock which is
to be issued to a holder of Preferred Shares pursuant to a Conversion
Notice or (z) fails to have a sufficient number of shares of Common Stock
registered for resale under the Registration Statement, then the Company
-19-
<PAGE>
shall issue as many shares of Common Stock as it is able to issue in
accordance with such holder's Conversion Notice and pursuant to Section
2(f) and, with respect to the unconverted Preferred Shares, the holder,
solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at
a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z), require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f);
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice (provided that
a holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y),
require the Company to issue shares of Common Stock in accordance with such
holder's Conversion Notice and pursuant to Section 2(f) at a Conversion
Price equal to the average of Closing Bid Prices of the Common Stock for
the five consecutive trading days preceding such holder's Notice in
Response to Inability to Convert (as defined below).
(b) MECHANICS OF FULFILLING HOLDER'S ELECTION. The Company
shall immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section 4(a), a notice of the
Company's inability to fully satisfy such holder's Conversion Notice (the
"INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert
Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory
Redemption Price. Such holder shall notify the Company of its election
pursuant to Section 4(a) above by delivering written notice via facsimile
to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT").
(c) PAYMENT OF REDEMPTION PRICE. If such holder shall elect to
have its shares redeemed pursuant to Section 4(a)(i), the Company shall pay
the Mandatory Redemption Price in cash to such holder within ten days of
the Company's receipt of the holder's Notice in Response to Inability to
Convert. If the Company shall fail to pay the
-20-
<PAGE>
applicable Mandatory Redemption Price to such holder on a timely basis as
described in this Section 4(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Redemption Price), in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, such unpaid amount shall bear interest at
the rate of 2.0% per month (prorated for partial months) until paid in
full. Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may void the Mandatory Redemption with respect to those
Preferred Shares for which the full Mandatory Redemption Price has not been
paid and (i) receive back such Preferred Shares and (ii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Fixed Conversion Price in effect on the date on which the
holder voided the Mandatory Redemption and (B) the lowest Closing Bid Price
during the Period beginning on the Conversion Date and ending on the date
the holder voided the Mandatory Redemption. Notwithstanding the foregoing,
if the Company fails to pay the applicable Mandatory Redemption Price
within such ten-day period due to a dispute as to the determination of the
arithmetic calculation of the Redemption Price, such dispute shall be
resolved pursuant to Section 2(f)(iii) with the term "Redemption Price"
being substituted for the term "Conversion Rate".
(d) PRO-RATA CONVERSION AND REDEMPTION. In the event the
Company receives a Conversion Notice, Notice of Redemption at Option of
Buyer Upon Major Transaction or Notice of Redemption at Option of Buyer
Upon Triggering Event from more than one holder of Preferred Shares on the
same day and the Company can convert and/or redeem some, but not all, of
the Preferred Shares pursuant to this Section 4, the Company shall convert
and redeem from each holder of Preferred Shares electing to have Preferred
Shares converted and redeemed at such time an amount equal to such holder's
pro-rata amount (based on the number of Preferred Shares held by such
holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares being converted and redeemed at such time.
(5) CONVERSION AT THE COMPANY'S ELECTION. At any time or times on or
after the date which is one year after the Issuance Date of the applicable
Preferred Shares, the Company shall have the right, in its sole discretion, to
require that any or all of such outstanding Preferred Shares be converted
("CONVERSION AT COMPANY'S ELECTION") at the Conversion Rate; provided that the
Conditions to Conversion at the Company's Election (as set forth below) are
satisfied. The Company shall exercise its right to Conversion at Company's
Election by providing each holder of Preferred Shares written notice ("NOTICE OF
CONVERSION AT COMPANY'S ELECTION") at least five trading days prior to the date
selected by the Company for conversion ("COMPANY'S ELECTION CONVERSION DATE").
If the Company elects to require conversion of some, but not all, of such
Preferred Shares, the Company shall convert an amount from each holder of
Preferred Shares equal to such holder's pro rata amount (based on the number of
such Preferred Shares held by such holder relative to the number of such
Preferred Shares outstanding on date of the Company's delivery of the Notice of
Conversion at Company's Election) of all Preferred Shares
-21-
<PAGE>
the Company is requiring to be converted. The Notice of Conversion at Company's
Election shall indicate (x) the number of Preferred Shares the Company has
selected for conversion, (y) the Company's Election Conversion Date, which date
shall be not less than five or more than 30 trading days after each holder's
receipt of such notice, and (z) each holder's pro rata share of outstanding
Preferred Shares. All Preferred Shares selected for conversion in accordance
with the provision of this Section 5 shall be converted as of the Company's
Election Conversion Date in accordance with Section 2 as if the holders of such
Preferred Shares selected by the Company to be converted had given the
Conversion Notice on the Company's Election Conversion Date. All holders of
Preferred Shares shall thereupon and within two Business Days after the
Company's Election Conversion Date surrender all Preferred Stock Certificates
selected for conversion, duly endorsed for cancellation, to the Company.
"CONDITIONS TO CONVERSION AT THE COMPANY'S ELECTION" means the following
conditions: (i) on each day during the period beginning 30 days prior to the
date of the Company's Notice of Conversion at Company's Election and ending on
and including the Company's Election Conversion Date, no Grace Period (as
defined in Section 3(u) of the Registration Rights Agreement) or Underwriting
Lock-Up Period shall be in effect and the Registration Statement shall be
effective and available for the sale of no less than 125% of the sum of (A) the
number of Conversion Shares then issuable upon the conversion of all outstanding
Preferred Shares (without regard to any limitations on conversion herein or
elsewhere), including the Conversion Shares to be issued pursuant to this
Conversion at the Company's Election, and (B) the number of Conversion Shares
and Dividend Shares that are then held by the holders of the Preferred Shares;
(ii) on each day during the period beginning 30 days prior to the date of the
Company's Notice of Conversion at Company's Election and ending on and including
the Company's Election Conversion Date, the Common Stock is designated for
quotation on The Nasdaq National Market or listed on The New York Stock
Exchange, Inc. and is not suspended from trading; (iii) on each day during the
20 consecutive trading days immediately preceding the date of the receipt by the
Buyers of the Notice of Conversion at Company's Election, the Closing Bid Price
of the Common Stock is at least 150% of the Fixed Conversion Price as of the
Issuance Date of the Preferred Shares being converted; (iv) on each day during
the period beginning on and including the date of the receipt by the Buyers of
the Notice of Conversion at Company's Election and ending on and including the
Company's Election Conversion Date, the Closing Bid Price of the Common Stock is
at least 150% of the Fixed Conversion Price as of the Issuance Date of the
Preferred Shares being converted; (v) during the period beginning on the first
Issuance Date of any Preferred Shares and ending on and including the Company's
Election Conversion Date, the Company shall have delivered Conversion Shares
upon conversion of the Preferred Shares to the Buyers on a timely basis as set
forth in Section 2(e)(ii) of this Certificate of Designations; and (vi) the
Company otherwise has satisfied its obligations and is not in default under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement. Notwithstanding the above, any holder of
Preferred Shares may convert such shares (including Preferred Shares selected
for conversion) into Common Stock pursuant to Section 2(a) on or prior to the
date immediately preceding the Company's Election Conversion Date. No holder of
Preferred Shares shall sell or agree to sell on any day after the date of the
Buyer's receipt of the Notice of Conversion at Company's Election and prior to
the date of the Company's Election Conversion
-22-
<PAGE>
Date (the "COMPANY'S ELECTION NOTICE PERIOD"), a number of shares of Common
Stock which is greater than the result of (a) the sum of (i) the number of
Conversion Shares issuable upon conversion of Preferred Shares held by such
holder as of the date of such holder's receipt of the Notice of Conversion at
Company's Election (without taking into account any limitations on the timing or
amount of conversions), (ii) the number of Conversion Shares held by such holder
on the date of such holder's receipt of the Notice of Conversion at Company's
Election and (iii) the number of Conversion Shares issuable with respect to the
Additional Amount accruing during the Company's Election Notice Period, divided
by (b) the number of trading days during the Company's Election Notice Period.
(6) COMPANY'S RIGHT TO REDEEM IN LIEU OF CONVERSION. (a) Notwithstanding
Section 2 or anything herein to the contrary, but subject to Section 6(e), at
any time after the Issuance Date, the Company may elect to redeem Preferred
Shares submitted for conversion in lieu of converting such Preferred Shares (a
"COMPANY REDEMPTION IN LIEU OF CONVERSION"). If the Company elects to redeem
some, but not all, of the Preferred Shares submitted for conversion, the Company
shall redeem a number of Preferred Shares from each holder of Preferred Shares
submitted for conversion on the applicable date equal to such holder's pro-rata
amount (based on the number of Preferred Shares held by such holder relative to
the number of Preferred Shares outstanding) of all Preferred Shares submitted
for conversion which the Company elects to redeem.
(b) REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION. The "REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION" shall be an amount per Preferred Share equal to the product of
(i) the Conversion Rate of the Preferred Shares on the Conversion Date and
(ii) the last reported sale price of the Common Stock (as reported by
Bloomberg) on the Conversion Date.
(c) MECHANICS OF COMPANY REDEMPTION IN LIEU OF CONVERSION. The
Company shall exercise its right to redeem by delivering written notice by
facsimile and overnight courier ("NOTICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION") no later than three Business Days prior to the first day of a
Calendar Quarter to (i) each holder of the Preferred Shares and (ii) the
Transfer Agent. Such Notice of Company Redemption in Lieu of Conversion
shall (A) indicate the maximum, if any, number of Preferred Shares which
shall be subject to Company Redemption in Lieu of Conversion which maximum
number of Preferred Shares, if less than all of the Preferred Shares
outstanding, shall be allocated pro rata among the holders of Preferred
Shares (based on the number of Preferred Shares held by each holder on the
date of the Company's delivery of Notice of Company Redemption in Lieu of
Conversion relative to the total number of Preferred Shares outstanding on
such date), (B) confirm the Calendar Quarter during which the Company may
effect Company Redemption in Lieu of conversion. The Company's Notice of
Company Redemption in Lieu of Conversion shall be effective for the period
of the applicable Calendar Quarter (the "REDEMPTION IN LIEU OF CONVERSION
PERIOD"). The Company may terminate a Redemption in Lieu of Conversion
Period at
-23-
<PAGE>
any time with respect to Preferred Shares which have not been submitted for
conversion by delivering written notice of such termination to each holder
of Preferred Shares by facsimile and overnight courier at least five
Business Days prior to the date of such termination. Any Preferred Shares
submitted for conversion after the termination of the Redemption in Lieu of
Conversion Period or the number of which is in excess of the maximum number
of Preferred Shares designated in the Notice of Company Redemption in Lieu
of Conversion shall be converted in accordance with Section 2.
(d) PAYMENT OF REDEMPTION PRICE. The Company shall pay the
applicable Redemption Price of Company Redemption in Lieu of Conversion to
the holder of the Preferred Shares being redeemed in cash within five
business days after the Conversion Date, but not prior to such holder's
delivery to the Company of the Preferred Stock Certificates representing
the Preferred Shares being redeemed. If the Company shall fail to pay the
applicable Redemption Price of Company Redemption in Lieu of Conversion to
such holder on a timely basis as described in this Section 6(d), in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, such unpaid amount shall bear interest at
the rate of 2.0% per month (prorated for partial months) until paid in
full. Until the Company pays such unpaid applicable Redemption Price of
Company Redemption in Lieu of Conversion in full to each holder, each
holder of Preferred Shares submitted for redemption pursuant to this
Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid, shall have the option
(the "VOID COMPANY REDEMPTION OPTION") to, in lieu of redemption, require
the Company to promptly return to each holder all of the Preferred Shares
that were submitted for redemption by such holder under this Section 6 and
for which the applicable Redemption Price of Company Redemption in Lieu of
Conversion has not been paid, by sending written notice thereof to the
Company via facsimile (the "VOID COMPANY REDEMPTION NOTICE"). Upon the
Company's receipt of such Void Company Redemption Notice(s) prior to
payment of the full applicable redemption price to each holder, (i) the
Company's Redemption in Lieu of Conversion shall be null and void with
respect to those Preferred Shares submitted for redemption and for which
the applicable Redemption Price has not been paid and (ii) the Company
shall immediately either, at the option of the holder, (A) return any
Preferred Shares submitted to the Company by such holder for redemption
under this Section 6 and for which the applicable Redemption Price of
Company Redemption in Lieu of Conversion has not been paid or (B) deliver
the Conversion Shares to such holder which would have been issuable on the
Conversion Date with respect to Preferred Shares submitted to the Company
by such holder for redemption under this Section 6 and for which the
applicable Redemption Price of Company Redemption in Lieu of Conversion has
not been paid. Notwithstanding the foregoing, if the Company fails to pay
the applicable Redemption Price of Company Redemption in Lieu of Conversion
to a holder within the time period described in this Section 6(d) due to a
dispute as to the arithmetic calculation of the Redemption Price of Company
Redemption in Lieu of Conversion, such dispute
-24-
<PAGE>
shall be resolved pursuant to Section 2(f)(iii) with the term "Redemption
Price of Company Redemption in Lieu of Conversion" being substituted for
the term "Conversion Rate." If the Company fails to timely effect a
Company Redemption in Lieu of Conversion in accordance with this Section 6,
the Company shall not be allowed to submit another Notice of Company
Redemption in Lieu of Conversion without the prior written consent of the
holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding.
(e) COMPANY MUST HAVE IMMEDIATELY AVAILABLE FUNDS OR CREDIT
FACILITIES. The Company shall not be entitled to send any Notice of
Company Redemption in Lieu of Conversion pursuant to Section 6(b) above and
begin the redemption procedure under this Section 6, unless it has:
(i) the full amount of the Redemption Price of Company
Redemption in Lieu of Conversion in cash, available in a demand or other
immediately available account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar financial
institutions that are immediately available and unrestricted for use in
redeeming the Preferred Shares, in the full amount of the Redemption Price
of Company Redemption in Lieu of Conversion;
(iii) a written agreement with a standby underwriter or
qualified buyer ready, willing and able to purchase from the Company a
sufficient number of shares of stock to provide proceeds necessary to
redeem any Preferred Shares that are not converted prior to a Company
Redemption in Lieu of Conversion; or
(iv) a combination of the items set forth in the preceding
clauses (i), (ii) and (iii), aggregating the full amount of the Redemption
Price of Company Redemption in Lieu of Conversion.
(7) REDEMPTION AT THE COMPANY'S ELECTION UPON CHANGE OF CONTROL. At any
time or times on or after the date the Company publicly discloses a Change of
Control Transaction (as defined below), the Company shall have the right, in its
sole discretion, to require that all of the outstanding Preferred Shares be
redeemed ("REDEMPTION AT COMPANY'S ELECTION") at the Major Transaction
Redemption Price ("COMPANY'S ELECTION REDEMPTION PRICE"); provided that the
Conditions to Redemption at the Company's Election (as set forth below) are
satisfied. The Company shall exercise its right to Redemption at Company's
Election by providing each holder of Preferred Shares written notice ("NOTICE OF
REDEMPTION AT COMPANY'S ELECTION") after the public disclosure of a Change of
Control Transaction and at least 20 trading days prior to the date of
consummation of the Change of Control Transaction ("COMPANY'S ELECTION
REDEMPTION DATE"). The Notice of Redemption at Company's Election shall
indicate the anticipated Company's Election Redemption Date. If the Company has
exercised its right of Redemption at Company's Election and the conditions to
such Redemption at Company's Election have been
-25-
<PAGE>
satisfied, then all Preferred Shares outstanding at the time of the consummation
of the Change of Control Transaction shall be redeemed as of the Company's
Election Redemption Date by payment by the Company to each holder of Preferred
Shares of the Company's Election Redemption Price concurrent with the closing of
the Change of Control Transaction. All holders of Preferred Shares shall
thereupon and within two business days after the Company's Election Redemption
Date, or such earlier date as the Company and each holder of Preferred Shares
mutually agree, surrender all outstanding Preferred Stock Certificates, duly
endorsed for cancellation, to the Company. If the Company fails to pay the full
Company's Election Redemption Price with respect to any Preferred Shares
concurrently with the closing of the Change of Control Transaction, then the
Redemption at Company's Election shall be null and void with respect to such
Preferred Shares and the holder of such Preferred Shares shall be entitled to
all the rights of a holder of outstanding Preferred Shares set forth in this
Certificate of Designations. "CONDITIONS TO REDEMPTION AT THE COMPANY'S
ELECTION" means the following conditions: (i) during the period beginning on
the first Issuance Date of any Preferred Shares and ending on and including the
Company's Election Redemption Date, the Company shall have delivered Conversion
Shares upon conversion of the Preferred Shares to the Buyers on a timely basis
as set forth in Section 2(e)(ii) of this Certificate of Designations; and
(ii) the Company otherwise has satisfied its obligations in all material
respects and is not in default in any material respect under this Certificate of
Designations, the Securities Purchase Agreement and the Registration Rights
Agreement. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for redemption) into
Common Stock pursuant to Section 2(a) on or prior to the date immediately
preceding the Company's Election Redemption Date. For purposes of this Section
7, "CHANGE OF CONTROL TRANSACTION" means the consolidation, merger or other
business combination of the Company with or into another Person (other than (A)
a consolidation, merger or other business combination in which holders of the
Company's voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company).
(8) REISSUANCE OF CERTIFICATES. In the event of a conversion or
redemption pursuant to this Certificate of Designations of less than all of the
Preferred Shares represented by a particular Preferred Stock Certificate, the
Company shall promptly cause to be issued and delivered to the holder of such
Preferred Shares a preferred stock certificate representing the remaining
Preferred Shares which have not been so converted or redeemed.
(9) RESERVATION OF SHARES. The Company shall, so long as any of the
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares, such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all of the
Preferred Shares then outstanding (without regard to any limitations on
conversions); provided that the number of shares of Common Stock so reserved
shall at no time
-26-
<PAGE>
be less than 150% of the number of shares of Common Stock for which the
Preferred Shares are at any time convertible. The initial number of shares of
Common Stock reserved for conversions of the Preferred Shares and each increase
in the number of shares so reserved shall be allocated pro rata among the
holders of the Preferred Shares based on the number of Preferred Shares held by
each holder at the time of issuance of the Preferred Shares or increase in the
number of reserved shares, as the case may be. In the event a holder shall sell
or otherwise transfer any of such holder's Preferred Shares, each transferee
shall be allocated a pro rata portion of the number of reserved shares of Common
Stock reserved for such transferor. Any shares of Common Stock reserved and
which remain allocated to any person or entity which does not hold any Preferred
Shares shall be allocated to the remaining holders of Preferred Shares, pro rata
based on the number of Preferred Shares then held by such holder.
(10) VOTING RIGHTS. Holders of Preferred Shares shall have no voting
rights, except as required by law, including but not limited to the General
Corporation Law of the State of Delaware, and as expressly provided in this
Certificate of Designations.
(11) LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Preferred Shares shall be entitled to receive in cash out of
the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "PREFERRED FUNDS"), before any amount
shall be paid to the holders of any of the capital stock of the Company of any
class junior in rank to the Preferred Shares in respect of the preferences as to
the distributions and payments on the liquidation, dissolution and winding up of
the Company, an amount per Preferred Share equal to the sum of (i) $50,000 and
(ii) the Additional Amount (such sum being referred to as the "LIQUIDATION
VALUE"); provided that, if the Preferred Funds are insufficient to pay the full
amount due to the holders of Preferred Shares and holders of shares of other
classes or series of preferred stock of the Company that are of equal rank with
the Preferred Shares as to payments of Preferred Funds (the "PARI PASSU
SHARES"), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to all
holders of Preferred Shares and Pari Passu Shares. The purchase or redemption
by the Company of stock of any class, in any manner permitted by law, shall not,
for the purposes hereof, be regarded as a liquidation, dissolution or winding up
of the Company. Neither the consolidation or merger of the Company with or into
any other Person, nor the sale or transfer by the Company of less than
substantially all of its assets, shall, for the purposes hereof, be deemed to be
a liquidation, dissolution or winding up of the Company. No holder of Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the amounts
provided for herein; provided that a holder of Preferred Shares shall be
entitled to all amounts previously accrued with respect to amounts owed
hereunder.
-27-
<PAGE>
(12) PREFERRED RANK; PARTICIPATION. (i) All shares of Common Stock
shall be of junior rank to all Preferred Shares in respect to the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. The rights of the shares of
Common Stock shall be subject to the preferences and relative rights of the
Preferred Shares. Without the prior express written consent of the holders
of not less than two-thirds (2/3) of the then outstanding Preferred Shares,
the Company shall not hereafter authorize or issue additional or other
capital stock that is of senior or equal rank to the Preferred Shares in
respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. Without the prior
express written consent of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, the Company shall not hereafter
authorize or make any amendment to the Company's Certificate of
Incorporation or bylaws, or file any resolution of the board of directors
of the Company with the Secretary of State of the State of Delaware
containing any provisions, which would adversely affect or otherwise impair
the rights or relative priority of the holders of the Preferred Shares
relative to the holders of the Common Stock or the holders of any other
class of capital stock. In the event of the merger or consolidation of the
Company with or into another corporation, the Preferred Shares shall
maintain their relative powers, designations and preferences provided for
herein and no merger shall result inconsistent therewith.
(ii) Subject to the rights of the holders, if any, of the Pari Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the
holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common
Stock.
(13) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO
OTHER CAPITAL STOCK. Until all of the Preferred Shares have been converted or
redeemed as provided herein, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
(14) LIMITATION ON NUMBER OF CONVERSION SHARES. Notwithstanding any
other provision herein, the Company shall not be obligated to issue any shares
of Common Stock upon conversion of the Preferred Shares if the issuance of such
shares of Common Stock would exceed that number of shares of Common Stock which
the Company may issue upon Conversion of the Preferred Shares (the "EXCHANGE
CAP") without breaching the Company's obligations under the rules or regulations
of The Nasdaq Stock Market, Inc., except that such limitation shall not apply in
the event that the Company (a) obtains the approval of its stockholders as
required by applicable rules and regulations of The Nasdaq Stock Market for
issuances of
-28-
<PAGE>
Common Stock in excess of such amount or (ii) obtains a written opinion from
outside counsel to the Company that such approval is not required, which opinion
shall be reasonably satisfactory to the holders of a majority of the Preferred
Shares then outstanding. Until such approval or written opinion is obtained, no
purchaser of Preferred Shares pursuant to the Securities Purchase Agreement (the
"PURCHASERS") shall be issued, upon conversion of Preferred Shares, shares of
Common Stock in an amount greater than the product of (i) the Exchange Cap
amount multiplied by (ii) a fraction, the numerator of which is the number of
Preferred Shares issued to such Purchaser pursuant to the Securities Purchase
Agreement and the denominator of which is the aggregate amount of all the
Preferred Shares issued to the Purchasers pursuant to the Securities Purchase
Agreement (the "CAP ALLOCATION AMOUNT"). In the event that any Purchaser shall
sell or otherwise transfer any of such Purchaser's Preferred Shares, the
transferee shall be allocated a pro rata portion of such Purchaser's Cap
Allocation Amount. In the event that any holder of Preferred Shares shall
convert all of such holder's Preferred Shares into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Cap Allocation Amount,
then the difference between such holder's Cap Allocation Amount and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares on a pro rata basis in proportion to the number of Preferred Shares then
held by each such holder.
(15) VOTE TO CHANGE THE TERMS OF OR ISSUE PREFERRED SHARES. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
this Certificate of Designations or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares, or (b) any issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement.
(16) LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the holder to the Company and, in the case of mutilation, upon
surrender and cancellation of the Preferred Stock Certificate(s), the Company
shall execute and deliver new preferred stock certificate(s) of like tenor and
date; provided, however, the Company shall not be obligated to re-issue
preferred stock certificates if the holder contemporaneously requests the
Company to convert such Preferred Shares into Common Stock.
(17) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants
-29-
<PAGE>
to each holder of Preferred Shares that there shall be no characterization
concerning this instrument other than as expressly provided herein. Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be received by the holder
thereof and shall not, except as expressly provided herein, be subject to any
other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of the Preferred Shares and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that,
in the event of any such breach or threatened breach, the holders of the
Preferred Shares shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.
(18) SPECIFIC SHALL NOT LIMIT GENERAL; CONSTRUCTION. No specific
provision contained in this Certificate of Designations shall limit or modify
any more general provision contained herein. This Certificate of Designations
shall be deemed to be jointly drafted by the Company and all Buyers and shall
not be construed against any person as the drafter hereof.
(19) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
* * * * * *
-30-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations
to be signed by Dennis J. Carlo, its President, as of April 27th, 1998.
THE IMMUNE RESPONSE CORPORATION
By: /s/ Dennis J. Carlo
-----------------------------
Name: Dennis J. Carlo
---------------------------
Its: President
<PAGE>
EXHIBIT I
THE IMMUNE RESPONSE CORPORATION
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series F Convertible Preferred
Stock, par value $.001 per share (the "PREFERRED SHARES"), of The Immune
Response Corporation, a DELAWARE corporation (the "COMPANY"), indicated below
into shares of Common Stock, par value $.0025 per share (the "COMMON STOCK"), of
the Company, by tendering the stock certificate(s) representing the Preferred
Shares specified below as of the date specified below.
Date of Conversion:
------------------------------------------------------
Number of Preferred Shares to be converted:
------------------------------
Stock certificate no(s). of Preferred Shares to be converted:
------------
Please confirm the following information:
Conversion Price:
---------------------------------------------------------
Number of shares of Common Stock
to be issued:
-------------------------------------------------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
Facsimile Number: --------------------------------------------------
Authorization: --------------------------------------------------
By:
--------------------------------------------
Title:
------------------------------------------
Dated:
--------------------------------------------------
Account Number:
(if electronic book entry transfer):
-----------------------------------
Transaction Code Number
(if electronic book entry transfer):
-----------------------------------
<PAGE>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of April 24,
1998, by and among The Immune Response Corporation, a Delaware corporation, with
headquarters located at 5935 Darwin Court, Carlsbad, California 92008 (the
"COMPANY"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("REGULATION D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 ACT");
B. The Company has authorized the following new series of its Preferred
Stock, par value $.001 per share (the "PREFERRED STOCK"): the Company's Series
F Convertible Preferred Stock (the "PREFERRED SHARES"), which shall be
convertible into shares of the Company's Common Stock, par value $.0025 per
share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of the Preferred Shares, substantially in the form
attached hereto as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially an aggregate of 200 of the Preferred Shares (the
"INITIAL PREFERRED SHARES") in the respective amounts set forth opposite each
Buyer's name on the Schedule of Buyers;
D. Subject to the terms and conditions set forth in this Agreement, the
Company may have the right to cause the Buyers to purchase up to an aggregate of
200 Preferred Shares (pro rata based on the number of Initial Preferred Shares
each Buyer purchased in relation to the total number of Initial Preferred
Shares) (the "PUT PREFERRED SHARES") (the Initial Preferred Shares and the Put
Preferred Shares collectively are referred to in this Agreement as the
"PREFERRED SHARES");
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
<PAGE>
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
a. PURCHASE OF PREFERRED SHARES. Subject to satisfaction (or
waiver) of the conditions set forth in Sections 6(a) and 7(a), the Company shall
issue and sell to the Buyers and the Buyers severally shall purchase from the
Company an aggregate of 200 Initial Preferred Shares, in the respective amounts
set forth opposite each Buyer's name on the Schedule of Buyers (the "INITIAL
CLOSING"). Subject to satisfaction (or waiver) of the conditions set forth in
Sections 1(c), 1(d), 6(b) and 7(b), the Company may require that each Buyer
purchase, at multiple closings, if applicable, that number of additional
Preferred Shares equal to such Buyer's pro rata portion of up to 200 Preferred
Shares (based on the number of Initial Preferred Shares each Buyer purchased in
relation to the total number of Initial Preferred Shares purchased by the
Buyers) (the "PUT CLOSINGS"). The Initial Closing and the Put Closings
collectively are referred to in this Agreement as the "CLOSINGS." The purchase
price (the "PURCHASE PRICE") of each Preferred Share at each of the Closings
shall be $50,000.
b. THE INITIAL CLOSING DATE. The date and time of the Initial
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time, within
three (3) business days following the date hereof, subject to satisfaction (or
waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) (or such later date as is mutually agreed to by the Company and the
Buyers). The Initial Closing shall occur on the Initial Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693.
c. THE PUT CLOSING DATES. The date and time of each of the Put
Closings (the "PUT CLOSING DATES") shall be 10:00 a.m. Central Time, on the date
specified in the Company's Put Share Notice (as defined below), subject to
satisfaction (or waiver) of the conditions to each of the Put Closings set forth
in Sections 6(b) and 7(b) and the conditions set forth in Section 1(d), (or such
later date as is mutually agreed to by the Company and the Buyers). During the
period (the "COMPANY PUT RIGHT PERIOD") beginning on the Initial Closing Date
and ending on the date which is one year after the Initial Closing Date, but
subject to the requirements of Sections 6(b) and 7(b) and satisfaction of the
Put Notice Conditions (as defined in Section 1(d)), the Company may require each
Buyer to purchase Put Preferred Shares by delivering written notice to each of
the Buyers (a "PUT SHARE NOTICE") at least five business days but not more than
ten business days (the "PUT SHARE NOTICE DATE") prior to the Put Closing Date
set forth in the Put Share Notice. The Put Share Notice shall set forth (i)
each Buyer's pro rata portion (based on the number of Initial Preferred Shares
each Buyer purchased in relation to the total number of Initial Preferred Shares
purchased by the Buyers) of the aggregate number of Put Preferred Shares (which
aggregate number shall not exceed 200 Preferred Shares, less any Put Preferred
Shares previously purchased) which the Company is requiring each Buyer to
purchase at such Put Closing, (ii) the aggregate Purchase Price for each such
Buyer's Put Preferred Shares and (iii) the date selected by the Company for the
Put Closing Date, which Put Closing Date shall be not later than the date which
is one year after the Initial Closing Date. The Put Closing shall
-2-
<PAGE>
occur on the Put Closing Date at the offices of Katten Muchin & Zavis, 525 West
Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. The Initial Closing
Date and the Put Closing Dates collectively are referred to in this Agreement as
the "CLOSING DATES."
d. THE PUT NOTICE CONDITIONS. Notwithstanding anything in this
agreement to the contrary, the Company shall not be entitled to deliver a Put
Share Notice and require the Buyers to purchase the Put Preferred Shares unless,
in addition to the satisfaction of the requirements of Sections 6(b) and 7(b),
all of the following conditions (the "PUT NOTICE CONDITIONS") are satisfied:
(i) during the period beginning 60 business days prior to the Put Closing Date
and ending on and including the Put Closing Date, the registration statement
(the "REGISTRATION STATEMENT") covering the resale of the Conversion Shares has
been declared effective by the SEC and at all times has been effective and
available for the sale of no less than 125% of the sum of (A) the number of
Conversion Shares then issuable upon the conversion of all outstanding Preferred
Shares and the Put Preferred Shares to be issued by the Company and (B) the
number of Conversion Shares that are then held by the Buyers and (C) any shares
of Common Stock issued with respect to Preferred Shares as a result of a stock
dividend or otherwise; (ii) during the period beginning on the Initial Closing
Date and ending on and including the Put Closing Date, the Common Stock is
listed on The Nasdaq National Market and has not been suspended from trading at
any time during such period, has not been voluntarily delisted at any time
during such period, nor is there any pending or threatened delisting or
suspension; (iii) no event constituting a Major Transaction (as defined in
Section 3(c) of the Certificate of Designations), including an agreement to
consummate a Major Transaction, or a Triggering Event (as defined in Section
3(d) of the Certificate of Designations) shall have occurred nor shall any
pending event which would constitute a Major Transaction have been publicly
disclosed from the period beginning on and including the Initial Issuance Date
and ending on and including the Put Closing Date; (iv) on each day during the
period beginning 15 business days prior to the Put Shares Notice Date and ending
on the Put Closing Date, the Closing Bid Price (as defined in the Certificate of
Designations) of the Common Stock is not less than $8.00 per share (subject to
appropriate adjustments for any stock dividends, stock splits or other similar
transactions with respect to the Common Stock); (v) during the period beginning
on the Initial Closing Date and ending on and including the Put Closing Date,
the Company shall have delivered Conversion Shares upon conversion of the
Preferred Shares to the Buyers on a timely basis as set forth in Section
2(f)(ii) of the Certificate of Designations; (vi) there shall not have been more
than one prior Put Closing Date; and (vii) the number of Put Preferred Shares to
be sold by the Company at such Put Closing is not less than 50 Preferred Shares.
Each Buyer agrees, so long as the Put Notice Conditions are satisfied and a Put
Closing has not been cancelled or otherwise terminated, that during the period
beginning immediately following its receipt of a Put Share Notice and ending at
the time of the applicable Put Closing, neither such Buyer nor its affiliates
shall sell or agree to sell any shares of Common Stock.
e. FORM OF PAYMENT. On each of the Closing Dates, (i) each Buyer
shall pay the Purchase Price to the Company for the Preferred Shares to be
issued and sold to such Buyer at the respective Closing, by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions, and (ii) the Company shall deliver to each Buyer, stock
-3-
<PAGE>
certificates (in the denominations as such Buyer shall request) (the "STOCK
CERTIFICATES") representing such number of the Preferred Shares which such Buyer
is then purchasing (as indicated opposite such Buyer's name on the Schedule of
Buyers), duly executed on behalf of the Company and registered in the name of
such Buyer or its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself that:
a. INVESTMENT PURPOSE. Such Buyer (i) is acquiring the Preferred
Shares and (ii) upon conversion of the Preferred Shares, will acquire the
Conversion Shares then issuable (the Preferred Shares, the Conversion Shares and
any shares of Common Stock issued by the Company as a dividend on the Preferred
Shares (the "DIVIDEND SHARES") collectively are referred to herein as the
"SECURITIES"), for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption under the 1933 Act.
b. ACCREDITED INVESTOR STATUS. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. RELIANCE ON EXEMPTIONS. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such Securities.
d. INFORMATION. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer's right to rely on the Company's representations and
warranties contained in Section 3 below. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
e. NO GOVERNMENTAL REVIEW. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made
-4-
<PAGE>
any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.
f. TRANSFER OR RESALE. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act (or a successor rule thereto)("RULE 144"); (ii) any sale of the Securities
made in reliance on Rule 144 may be made only in accordance with the terms of
Rule 144 and further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
g. LEGENDS. Such Buyer understands that the certificates or other
instruments representing the Preferred Shares and, until such time as the sale
of the Conversion Shares and the Dividend Shares, have been registered under the
1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares and the Dividend Shares, except
as set forth below, shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144
UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if (i) such Securities are
-5-
<PAGE>
registered for sale under the 1933 Act, (ii) in connection with a sale
transaction, such holder provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of such Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that such
Securities can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold. Each Buyer acknowledges, covenants and agrees to sell the
Securities represented by a certificate(s) from which the legend has been
removed, only pursuant to (i) a registration statement effective under the 1933
Act, or (ii) advice of counsel that such sale is exempt from registration
required by Section 5 of the 1933 Act.
h. AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable against such Buyer in
accordance with its terms, subject as to enforceability to general principles
of equity and to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors' rights and remedies.
i. RESIDENCY. Such Buyer is a resident of that country specified on
the Schedule of Buyers.
j. SHORT SALE LIMITATION. During the 30 days immediately preceding
the Initial Closing Date, neither such Buyer nor its affiliates has engaged,
directly or indirectly, in any transaction constituting a "short sale" (as
defined in Rule 3b-3 of the Securities Exchange Act of 1934, as amended (the
"1934 ACT")) or similar hedge of the Common Stock.
k. SECTION 9 OF THE SECURITIES EXCHANGE ACT. So long as a Buyer
holds any Preferred Shares, such Buyer will comply with the provisions of
Section 9 of the 1934 Act, and the rules promulgated thereunder with respect to
transactions involving the securities of the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
a. ORGANIZATION AND QUALIFICATION. The Company and its
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in SCHEDULE 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted. 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 its ownership of property or the nature of the
business conducted by it makes such qualification necessary,
-6-
<PAGE>
except to the extent that the failure to be so qualified or be in good standing
would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL
ADVERSE EFFECT" means any material adverse effect on the business, properties,
assets, operations, results of operations, financial condition or prospects of
the Company and its Subsidiaries, if any, taken as a whole, or on the
transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined
below) or the Certificate of Designations.
b. AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement, and the
Irrevocable Transfer Agent Instructions (as defined in Section 5) and each of
the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents and the
Certificate of Designations by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including without limitation the
issuance of the Preferred Shares and the reservation for issuance and the
issuance of the Conversion Shares issuable upon conversion thereof, any Dividend
Shares with respect thereto and any shares of Common Stock issued as payment of
Registration Delay Payments (as defined in the Registration Rights Agreement),
have been duly authorized by the Company's Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders, (iii) the Transaction Documents have been duly executed and
delivered by the Company, (iv) the Transaction Documents constitute the valid
and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies, and (v)
prior to each of the Closing Dates, the Certificate of Designations will have
been filed with the Secretary of State of the State of Delaware and will be in
full force and effect, enforceable against the Company in accordance with its
terms.
c. CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (i) 40,000,000 shares of Common Stock, of which
as of April 20, 1998, 22,851,553 shares were issued and outstanding and of which
as of the date hereof not more than 22,901,553 shares were issued and
outstanding, as of April 20, 1998, 4,514,262 shares were issuable and reserved
for issuance pursuant to the Company's stock option and purchase plans and
2,051,281 shares are issuable and reserved for issuance pursuant to securities
(other than the Preferred Shares) exercisable or exchangeable for, or
convertible into, shares of Common Stock and (ii) 5,000,000 shares of Preferred
Stock, of which as of the date hereof, no shares were issued and outstanding.
All of such outstanding shares have been, or upon issuance will be, validly
issued and are fully paid and nonassessable. Except as disclosed in SCHEDULE
3(c), (i) no shares of the Company's capital stock are subject to preemptive
rights or any other similar rights or any liens or encumbrances suffered or
permitted by the Company; (ii) there are no
-7-
<PAGE>
outstanding debt securities; (iii) there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries; (iv) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the 1933 Act (except the Registration
Rights Agreement); (v) there are no outstanding securities of the Company or any
of its Subsidiaries which contain any redemption or similar provisions, and
there are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (vi) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities as described in this Agreement; and
(vii) the Company does not have any stock appreciation rights or "phantom stock"
plans or agreements or any similar plan or agreement. The Company has furnished
to the Buyers true and correct copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE
OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof
(the "BY-LAWS"), and the terms of all securities convertible into or exercisable
for Common Stock and the material rights of the holders thereof in respect
thereto.
d. ISSUANCE OF SECURITIES. The Preferred Shares are duly authorized
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the Certificate of Designations. At least 1,700,000
shares of Common Stock (subject to adjustment pursuant to the Company's covenant
set forth in Section 4(f) below) have been duly authorized and reserved for
issuance upon conversion of the Preferred Shares. Upon conversion in accordance
with the Certificate of Designations, the Conversion Shares will be, and upon
payment thereof, the Dividend Shares and any shares of Common Stock issued as
payment of Registration Delay Payments will be, validly issued, duly listed,
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, with the holders being entitled to all rights
accorded to a holder of Common Stock. The issuance by the Company of the
Securities is exempt from registration under the 1933 Act.
e. NO CONFLICTS. Except as disclosed in SCHEDULE 3(e), the
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares and the Dividend Shares) will
not (i) result in a violation of the Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
Preferred Stock of the Company or the By-
-8-
<PAGE>
laws; (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 material
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party; or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the principal market or
exchange on which the Common Stock is traded or listed) 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 as disclosed in
SCHEDULE 3(e), neither the Company nor its Subsidiaries is in violation of any
term of or in default under (i) its Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
Preferred Stock or By-laws or their organizational charter or by-laws,
respectively, or (ii) any material contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to the Company or its Subsidiaries. The business of the
Company and its Subsidiaries is not being conducted, and shall not be conducted,
in violation of any law, ordinance or regulation of any governmental entity,
except where such violation would not result in a Material Adverse Effect.
Except as specifically contemplated by this Agreement and as required under the
1933 Act, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self-regulatory agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by the
Transaction Documents or the Certificate of Designations in accordance with the
terms hereof or thereof. Except as disclosed in SCHEDULE 3(e), all consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. The Company and its Subsidiaries are unaware of
any facts or circumstances which might give rise to any of the foregoing. The
Company is not in violation of the listing requirements of The Nasdaq National
Market as in effect on the date hereof and on each of the Closing Dates and is
not aware of any facts which would reasonably lead to delisting or suspension of
the Common Stock by The Nasdaq National Market in the foreseeable future.
f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31, 1996,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act, (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the "SEC DOCUMENTS"). The Company has delivered to the Buyers or
their respective representatives true and complete copies of the SEC Documents.
As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with
-9-
<PAGE>
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
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 exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading. Neither the Company nor any of its Subsidiaries or
any of their officers, directors, employees or agents have provided the Buyers
with any material, nonpublic information.
g. ABSENCE OF CERTAIN CHANGES. Except as disclosed in SCHEDULE
3(g), since December 31, 1997 there has been no material adverse change and no
material adverse development in the business, properties, operations, financial
condition, liabilities, results of operations or prospects of the Company or its
Subsidiaries. The Company has not taken any steps, and does not currently
expect to take any steps, to seek protection pursuant to any bankruptcy law nor
does the Company or any of its Subsidiaries have any knowledge or reason to
believe that its creditors intend to initiate involuntary bankruptcy
proceedings.
h. ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its Subsidiaries, threatened against or affecting the Company,
the Common Stock or any of the Company's Subsidiaries or any of the Company's or
the Company's Subsidiaries' officers or directors in their capacities as such,
except as expressly set forth in SCHEDULE 3(h).
i. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF PREFERRED SHARES.
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby. The Company further acknowledges
that each Buyer is not acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
Certificate of Designations and the transactions contemplated thereby and any
advice given by any of the Buyers or any of their respective representatives or
agents in connection with the Transaction Documents and the Certificate of
Designations and the transactions contemplated thereby is merely incidental to
such Buyer's purchase of the Securities. The Company further represents to each
Buyer that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.
-10-
<PAGE>
j. NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES. No event, liability, development or circumstance has occurred or
exists, or is contemplated to occur, with respect to the Company or its
Subsidiaries or their respective business, properties, prospects, operations or
financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement filed with the SEC
relating to the issuance and sale by the Company of its Common Stock and which
has not been publicly disclosed.
k. NO GENERAL SOLICITATION. Neither the Company, nor any of its
affiliates, nor 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 under the 1933 Act) in connection with the offer or sale of the
Securities.
l. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of The Nasdaq Stock Market, Inc., nor will the
Company or any of its Subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
m. EMPLOYEE RELATIONS. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. Neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that relations with
their employees are good. No executive officer (as defined in Rule 501(f) of
the 1933 Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer's employment with the Company.
n. INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on SCHEDULE 3(n), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate within two years from the date of this Agreement, except where such
expiration or termination would not result in a Material Adverse Effect. The
Company and its Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademarks, trade name rights, patents,
patent rights, copyrights, inventions, licenses, service names, service marks,
service mark registrations, trade secrets or other similar rights of others,
-11-
<PAGE>
or of any such development of similar or identical trade secrets or technical
information by others and, except as set forth on SCHEDULE 3(n), there is no
claim, action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its Subsidiaries regarding
trademarks, trade name rights, patents, patent rights, inventions, copyrights,
licenses, service names, service marks, service mark registrations, trade
secrets or other infringement; and the Company and its Subsidiaries are unaware
of any facts or circumstances which might give rise to any of the foregoing,
except where any of the foregoing would not have a Material Adverse Effect. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties.
o. ENVIRONMENTAL LAWS. The Company and its Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance or failure to receive such permits, licenses or other approvals
would not result in a Material Adverse Effect.
p. TITLE. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in SCHEDULE 3(p) or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company or any of its
Subsidiaries. Any real property and facilities held under lease by the Company
or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.
q. 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 Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and 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 at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole.
r. REGULATORY PERMITS. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign
-12-
<PAGE>
regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such certificates, authorizations or permits would
not result in a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
s. INTERNAL ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient 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.
t. Intentionally omitted.
u. TAX STATUS. Except as set forth on SCHEDULE 3(u), the Company
and each of its Subsidiaries has made or filed all federal and state income and
all other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its Subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
v. CERTAIN TRANSACTIONS. Except as set forth on SCHEDULE 3(v) and
in the SEC Documents filed at least ten days prior to the date hereof and except
for arm's length transactions pursuant to which the Company makes payments in
the ordinary course of business upon terms no less favorable than the Company
could obtain from third parties and other than the grant of stock options
disclosed on SCHEDULE 3(c), none of the officers, directors, or 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.
w. DILUTIVE EFFECT. The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred Shares
will increase in certain circumstances. The Company further acknowledges that
its obligation to issue
-13-
<PAGE>
Conversion Shares upon conversion of the Preferred Shares in accordance with
this Agreement and the Certificate of Designations is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
4. COVENANTS.
a. BEST EFFORTS. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before each of the
Closing Dates, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date. The Company shall make all filings and reports relating to
the offer and sale of the Securities required under applicable securities or
"Blue Sky" laws of the states of the United States following each of the Closing
Dates.
c. REPORTING STATUS. Until the earlier of (i) the date which is one
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto), or (ii) the date on which (A) the Investors shall have sold all the
Conversion Shares and the Dividend Shares, if any, and (B) none of the Preferred
Shares is outstanding (the "REGISTRATION PERIOD"), the Company shall file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.
d. USE OF PROCEEDS. The Company will use the proceeds from the sale
of the Preferred Shares for substantially the same purposes and in substantially
the same amounts as indicated in SCHEDULE 4(d).
e. FINANCIAL INFORMATION. The Company agrees to send the following
to each Investor (as that term is defined in the Registration Rights Agreement)
during the Registration Period: (i) within two (2) days after the filing thereof
with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports
on Form 10-Q, any Current Reports on Form 8-K and any registration statements or
amendments (other than on Form S-8) filed pursuant to the 1933 Act; (ii) on the
same day as the release thereof, facsimile copies of all press releases issued
by the Company or any of its Subsidiaries and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
-14-
<PAGE>
f. RESERVATION OF SHARES. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 150% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares (without regard to any
limitations on conversions).
g. RIGHT OF FIRST REFUSAL. Subject to the exceptions described
below, the Company agrees that during the period beginning on the date hereof
and ending on the date which is two years after the Initial Closing Date, while
at least 50% of the Preferred Shares issued remain outstanding, neither the
Company nor its Subsidiaries will, without the prior written consent of the
holders of the Preferred Shares representing at least two-thirds (2/3) of the
Preferred Shares then outstanding, negotiate or contract with any party for any
equity financing (including any debt financing with an equity component) or
issue any equity securities of the Company or any Subsidiary or securities
convertible or exchangeable into or for equity securities of the Company or any
Subsidiary (including debt securities with an equity component) in any form
("FUTURE OFFERINGS"), unless it shall have first delivered to each Buyer or a
designee appointed by such Buyer written notice (the "FUTURE OFFERING NOTICE")
describing the proposed Future Offering, including the terms and conditions
thereof, and providing each Buyer an option to purchase up to its Aggregate
Percentage (as defined below), as of the date of delivery of the Future Offering
Notice, in the Future Offering (the limitations referred to in this and the
preceding sentence are collectively referred to as the "CAPITAL RAISING
LIMITATION"). For purposes of this Section 4(g), "AGGREGATE PERCENTAGE" at any
time with respect to any Buyer shall mean the percentage obtained by dividing
(i) the aggregate number of Preferred Shares purchased by such Buyer at the
Closings by (ii) the aggregate number of Preferred Shares purchased by all
Buyers at the Closings. A Buyer can exercise its option to participate in a
Future Offering by delivering written notice thereof to participate to the
Company within ten (10) business days of receipt of a Future Offering Notice,
which notice shall state the quantity of securities being offered in the Future
Offering that such Buyer will purchase, up to its Aggregate Percentage, and that
number of securities it is willing to purchase in excess of its Aggregate
Percentage. In the event that one or more Buyers fail to elect to purchase up
to each such Buyer's Aggregate Percentage then each Buyer which has indicated
that it is willing to purchase a number of securities in excess of its Aggregate
Percentage shall be entitled to purchase its pro rata portion (determined in the
same manner as described in the preceding sentence) of the securities in the
Future Offering which one or more Buyers have not elected to purchase. In the
event the Buyers fail to elect to fully participate in the Future Offering
within the periods described in this Section 4(g), the Company shall not be
obligated to sell any of the securities of the Future Offering to any of the
Buyers and the Company shall have 45 days thereafter to sell the securities of
the Future Offering, upon terms and conditions (including the amount thereof),
no more favorable to the purchasers thereof than specified in the Future
Offering Notice. In the event the Company has not sold such securities of the
Future Offering within such 45 day period, the Company shall not thereafter
issue or sell such securities without first offering such securities to the
Buyers in the manner provided in this Section 4(g). The Capital Raising
Limitation shall not apply to (i) a loan from a commercial bank, (ii) any
transaction involving the Company's issuances of securities (A) as consideration
in a merger or consolidation, (B) in connection with any strategic partnership
or joint venture (the primary
-15-
<PAGE>
purpose of which is not to raise equity capital), or (C) as consideration for
the acquisition of a business, product or license or other assets by the
Company, (iii) the issuance of Common Stock in a firm commitment, underwritten
public offering with net proceeds of at least $15,000,000, (iv) the issuance of
securities upon exercise or conversion of the Company's options, warrants or
other convertible securities outstanding as of the date hereof, (v) the grant of
additional options or warrants, or the issuance of additional securities, under
any Company stock option plan, restricted stock plan, stock purchase plan or
other plan or written compensation contract for the benefit of the Company's
employees or directors, (vi) the issuance of Common Stock for consideration per
share (which shall exclude the value of any other securities issued to the
purchaser of such Common Stock to the extent that such other securities,
including without limitation warrants, have not been assigned or otherwise
allocated a specific purchase price) which is not and can not be (including by
way of any adjustment to the purchase price) less than 90% of the current market
price of the Common Stock on the date of such issuance, or (vii) the issuance of
any security convertible into or exercisable or exchangeable for Common Stock,
provided that the sum of the consideration paid by the purchaser for such
convertible security (which shall exclude the value of any other securities
issued to the purchaser of such Common Stock to the extent that such other
securities, including without limitation warrants, have not been assigned or
otherwise allocated a specific purchase price) and the consideration payable by
such purchaser at the time of conversion, exercise or exchange is not and can
not be (including by way of any floating conversion, exercise or exchange price
or adjustment to the conversion, exercise or exchange price) less than, on a per
share of Common Stock received basis, the current market price of the Common
Stock on the date of issuance of such convertible security. The Buyers shall
not be required to participate or exercise their right of first refusal with
respect to a particular Future Offering in order to exercise their right of
first refusal with respect to later Future Offerings.
h. LISTING. The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
The Nasdaq National Market), if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents and the Certificate of Designations. The Company shall
maintain the Common Stock's authorization for listing on The Nasdaq National
Market or The New York Stock Exchange, Inc. ("NYSE"). Neither the Company nor
any of its Subsidiaries shall take any action which may result in the delisting
or suspension of the Common Stock on The Nasdaq National Market or NYSE (other
than to switch listings from The National Nasdaq Market to NYSE). The Company
shall promptly provide to each Buyer copies of any notices it receives from The
Nasdaq National Market or NYSE regarding the continued eligibility of the Common
Stock for listing on such automated quotation system or securities exchange.
The Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(h).
i. EXPENSES. Subject to Section 9(l) below, following the Initial
Closing, the Company shall reimburse the Buyers for the Buyers' expenses
(including attorneys fees and
-16-
<PAGE>
expenses) in connection with negotiating and preparing the Transaction Documents
and consummating the Transactions contemplated thereby up to an aggregate of
$50,000.
j. Intentionally omitted.
k. FILING OF FORM 8-K. On or before the fifth (5th) business day
following each of the Closing Dates, the Company shall file a Form 8-K with the
SEC describing the terms of the transaction contemplated by the Transaction
Documents and consummated at such Closing, in each case in the form required by
the 1934 Act.
l. UNDERWRITING LOCK-UP AGREEMENT. At any time during the period
beginning on the Initial Closing Date and ending on the date which is two years
after the Initial Closing Date, while at least 50 Preferred Shares remain
outstanding the Company may require that all, but not less than all, of the
holders of the Preferred Shares enter into a "lock-up" agreement with the
underwriters of a public offering of the Common Stock pursuant to which the
holders would agree not to sell any Conversion Shares issued with respect to
Preferred Shares converted on Conversion Dates (as defined in the Certificate of
Designations) during the period beginning on the date designated by the Company,
which date shall be not less than 10 business days after the holders' receipt of
such notice, and ending on the date which is up to 90 days after the beginning
of the lock-up period as designated by the Company (the "UNDERWRITING LOCK-UP
PERIOD"). The Company shall exercise this right by delivering written notice
(the "LOCK-UP REQUEST NOTICE") of such request to all of the holders of the
Preferred Shares then outstanding at least 10 business days prior to the date on
which the Underwriting Lock-Up Period will begin, but in no event prior to the
filing of the registration statement for such proposed offering. The Lock-Up
Request Notice shall state (i) that the underwriters of such offering have
requested that the holders of the Preferred Shares enter into a "lock-up"
agreement, (ii) the date on which the Underwriting Lock-Up Period will begin,
and (iii) the name of the managing underwriters of the proposed offering.
Notwithstanding the foregoing, the Company shall not be entitled to require the
holders to enter into a "lock-up" agreement unless (A) the Underwriting Lock-Up
Period is not more than 90 days, (B) the Underwriting Lock-Up Period shall
terminate immediately upon (I) the termination or abandonment or indefinite
delay of the underwritten offering, (II) the announcement of a pending or
consummated Major Transaction or (III) the occurrence of a Triggering Event, (C)
all officers and directors of the Company enter into substantially similar
"lock-up" agreements, (D) such underwritten public offering is completed at a
price per share to the public of not less than $7.50 per share (subject to
adjustment as a result of any stock split, stock dividend, recapitalization,
reverse stock split, consolidation, exchange or similar event) and generates
aggregate gross proceeds to the Company of at least $15,000,000, (E) there has
been no other Underwriting Lock-Up Period during the 365-day period immediately
preceding the first day of the Underwriting Lock-Up Period being requested, (F)
during the period beginning on and including the date which is 20 business days
prior to the filing of the registration statement for the proposed offering and
ending on and including the first day of the Underwriting Lock-Up Period, the
Registration Statement has been effective and there has been no stop order or
other regulatory prohibition on trading of the Common Stock, (G) the offering
shall be underwritten
-17-
<PAGE>
by one or more of the underwriters included on the Schedule of Underwriters
attached to this Agreement and (H) on the date of the Company's delivery of
the Lock-Up Request Notice there are at least 50 Preferred Shares
outstanding. In the event the Company requires an Underwriting Lock-Up
Period, the Maturity Date (as defined in the Certificate of Designations)
shall be extended one and one-half (1 1/2) days for each day in the
Underwriting Lock-Up Period as provided in Section 2(g) of the Certificate of
Designations.
M. RIGHT TO EXCHANGE PREFERRED SHARES. If at any time while any
Preferred Shares are outstanding and any Preferred Shares are subject to a
Minimum Adjustment Price (as defined in Section 2(b)(viii) of the Certificate of
Designations) the Company issues securities convertible into or exercisable or
exchangeable for Common Stock ("CONVERTIBLE SECURITIES") at a conversion,
exercise or exchange price which varies or may vary with the market price of the
Common Stock, the Company shall provide written notice thereof via facsimile and
overnight courier to each holder of Preferred Shares ("VARIABLE SECURITY
NOTICE") on the date of issuance of such Convertible Securities. Each holder of
Preferred Shares shall have the right to exchange all of such holder's Preferred
Shares for a like amount (based on principal, stated or liquidation amount, as
the case may be) of the Convertible Securities by delivering written notice of
such election to the Company within 15 business days of the holder's receipt of
the Variable Security Notice.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
in such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Preferred Shares and upon payment by the Company of dividends
on the Preferred Shares in Dividend Shares (the "IRREVOCABLE TRANSFER AGENT
INSTRUCTIONS"). Prior to registration of the Conversion Shares and the Dividend
Shares under the 1933 Act, all such certificates shall bear the restrictive
legend specified in Section 2(g) of this Agreement. The Company warrants that
no instruction other than the Irrevocable Transfer Agent Instructions referred
to in this Section 5, and stop transfer instructions to give effect to Section
2(f) hereof (in the case of the Conversion Shares and the Dividend Shares, prior
to registration of the Conversion Shares and the Dividend Shares under the 1933
Act) will be given by the Company to its transfer agent and that the Securities
shall otherwise be freely transferable on the books and records of the Company
as and to the extent provided in this Agreement and the Registration Rights
Agreement. Nothing in this Section 5 shall affect in any way each Buyer's
obligations and agreements set forth in Section 2(g) to comply with all
applicable prospectus delivery requirements, if any, upon resale of the
Securities. If a Buyer provides the Company with an opinion of counsel, in
generally acceptable form, that registration of a resale by such Buyer of any of
such Securities is not required under the 1933 Act, the Company shall permit the
transfer, and, in the case of the Conversion Shares and the Dividend Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by such Buyer and without any
restrictive legends. The Company acknowledges that a breach by it of its
obligations hereunder will cause
-18-
<PAGE>
irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
a. INITIAL CLOSING DATE. The obligation of the Company hereunder to
issue and sell the Initial Preferred Shares to each Buyer at the Initial Closing
is subject to the satisfaction, at or before the Initial Closing Date, of each
of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of this Agreement and
the Registration Rights Agreement and delivered the same to the Company.
(ii) The Certificate of Designations shall have been filed with
the Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares being purchased by such Buyer at the
Initial Closing by wire transfer of immediately available funds pursuant
to the wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer shall be
true and correct as of the date when made and as of the Initial Closing
Date as though made at that time (except for representations and
warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied with the covenants, agreements and
conditions required by the Transaction Documents to be performed,
satisfied or complied with by such Buyer at or prior to the Initial
Closing Date.
b. PUT CLOSING DATE. The obligation of the Company hereunder to
issue and sell the Put Preferred Shares to each Buyer at each of the Put
Closings is subject to the satisfaction, at or before the Put Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase Price
for the Put Preferred Shares being purchased by such Buyer at the Put
Closing by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company.
-19-
<PAGE>
(ii) The representations and warranties of such Buyer set forth in
paragraphs (a), (b), (c), (e), (f), (g) and (h) of Section 2 shall be true
and correct in all material respects as of the date when made and as of the
Put Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by such Buyer at or prior to
the Put Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
a. INITIAL CLOSING DATE. The obligation of each Buyer hereunder to
purchase the Initial Preferred Shares at the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Certificate of Designations, shall have been filed with
the Secretary of State of the State of Delaware, and a copy thereof
certified by such Secretary of State shall have been delivered to such
Buyer.
(iii) The Common Stock shall be authorized for quotation on The
Nasdaq National Market or listing on NYSE, trading in the Common Stock
issuable upon conversion of the Initial Preferred Shares to be traded on
The Nasdaq National Market or NYSE shall not have been suspended by the
SEC, The Nasdaq Stock Market, Inc. or NYSE and all of the Conversion
Shares issuable upon conversion of the Initial Preferred Shares to be
sold at the Initial Closing and the Dividend Shares issuable with
respect thereto shall be listed upon The Nasdaq National Market or NYSE.
(iv) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Initial Closing
Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied with the covenants, agreements and
conditions required by the Transaction Documents or Certificate of
Designations to be performed, satisfied or complied with by the Company
at or prior to the Initial Closing Date. Such Buyer shall have received
a certificate, executed by the Chief Executive Officer of the Company,
dated as of the Initial Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer
including, without limitation, an update as of the Initial Closing Date
regarding the representation contained in Section 3(c) above.
-20-
<PAGE>
(v) Such Buyer shall have received the opinion of Pillsbury
Madison & Sutro LLP dated as of the Initial Closing Date, in form, scope
and substance reasonably satisfactory to such Buyer and in substantially
the form of EXHIBIT C attached hereto.
(vi) The Company shall have executed and delivered to such Buyer
the Stock Certificates (in such denominations as such Buyer shall
request) for the Initial Preferred Shares being purchased by such Buyer
at the Initial Closing.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form
reasonably acceptable to such Buyer (the "RESOLUTIONS").
(viii) As of the Initial Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares, at least
1,700,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT D attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 10
days of the Initial Closing.
(xi) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) certified copies
of its Certificate of Incorporation and (C) By-laws, each as in effect
at the Initial Closing.
(xii) The Company shall have delivered to such Buyer a certified
copy of its Certificate of Incorporation as certified by the Secretary
of State of the State of Delaware within ten days of the Initial Closing
Date.
(xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by the Transaction
Documents as such Buyer or its counsel may reasonably request.
b. PUT CLOSING DATES. The obligation of each Buyer hereunder to
purchase the Put Preferred Shares at each of the Put Closings is subject to
the satisfaction, at or before each of the Put Closing Dates, of each of the
following conditions, provided that these conditions
-21-
<PAGE>
are for each Buyer's sole benefit and may be waived by such Buyer at any time in
its sole discretion:
(i) The Company shall have complied with the requirements of
Section 1(c) and all of the Put Notice Conditions set forth in Section
1(d) shall have been satisfied.
(ii) The Certificate of Designations, shall be in full force and
effect and shall not have been amended since the Initial Closing Date,
and a copy thereof certified by the Secretary of State of the State of
Delaware shall have been delivered to such Buyer.
(iii) The Common Stock shall be authorized for quotation on The
Nasdaq National Market or listing on NYSE, trading in the Common Stock
issuable upon conversion of the Put Preferred Shares to be traded on The
Nasdaq National Market or NYSE shall not have been suspended by the SEC,
The Nasdaq Stock Market, Inc. or NYSE and all of the Conversion Shares
issuable upon conversion of the Put Preferred Shares to be sold at the
Put Closing and the Dividend Shares issuable with respect thereto shall
be listed upon The Nasdaq National Market or NYSE.
(iv) The representations and warranties of the Company set forth
in Section 3 (other than those set forth in paragraphs (g), (h) and (m)
through (r) of Section 3) shall be true and correct as of the date when
made and as of the Put Closing Date as though made at that time (except
for representations and warranties that speak as of a specific date) and
the Company shall have performed, satisfied and complied with the
covenants, agreements and conditions required by the Transaction
Documents or the Certificate of Designations to be performed, satisfied
or complied with by the Company at or prior to the Put Closing Date.
Such Buyer shall have received a certificate, executed by the Chief
Executive Officer of the Company, dated as of the Put Closing Date, to
the foregoing effect and as to such other matters as may be reasonably
requested by such Buyer including, without limitation, as to Section
7(b)(v) below and an update as of the Put Closing Date regarding the
representation contained in Section 3(c) above.
(v) The representations of the Company set forth in paragraphs
(g), (h) and (m) through (r) of Section 3 shall be true and correct as
of the date of this Agreement and the Initial Closing Date and the
following representation shall be true and correct as of the Put Closing
Date: The Company has not taken any steps, and does not currently
expect to take any steps, to seek protection pursuant to any bankruptcy
law nor does the Company or any of its Subsidiaries have any knowledge
or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings.
(vi) Such Buyer shall have received the opinion of Pillsbury
Madison & Sutro LLP dated as of the Put Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the
form of EXHIBIT C attached hereto.
-22-
<PAGE>
(vii) The Company shall have executed and delivered to such Buyer
the Stock Certificates (in such denominations as such Buyer shall
request) for the Put Preferred Shares being purchased by such Buyer at
the Put Closing.
(viii) The Board of Directors of the Company shall have adopted,
and shall not have amended, the Resolutions.
(ix) As of the Put Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Preferred Shares, a number of shares
of Common Stock equal to at least 150% of the number of shares of Common
Stock which would be issuable upon conversion in full of the then
outstanding Preferred Shares (without regard to any limitations on
conversions), including for such purposes the Put Preferred Shares to be
issued at such Put Closing.
(x) The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT D attached hereto, shall have been delivered to and acknowledged
in writing by the Company's transfer agent.
(xi) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in the state of such corporation's state of incorporation
issued by the Secretary of State of such state of incorporation as of a
date within 10 days of the Put Closing Date.
(xii) The Company shall have delivered to such Buyer a certified
copy of its Certificate of Incorporation as certified by the Secretary
of State of the State of Delaware within ten days of the Put Closing
Date.
(xiii) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) certified copies
of its Certificate of Incorporation and (C) By-laws, each as in effect
at the Put Closing.
(xiv) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
delivery of this Agreement and the Registration Rights Agreement and acquiring
the Securities thereunder and in addition to all of the Company's other
obligations under the Transaction Documents and the Certificate of Designations,
the Company shall defend, protect, indemnify and hold harmless each Buyer and
each other holder of the Securities and all of their stockholders, officers,
directors, employees and direct or indirect investors and any of the forgoing
person's agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "INDEMNITEES") from and against
-23-
<PAGE>
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 the Certificate of Designations or any other certificate,
instrument or document contemplated hereby or thereby, (b) any breach of any
covenant, agreement or obligation of the Company contained in the Transaction
Documents or the Certificate of Designations or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Indemnitee and arising out of
or resulting from the execution, delivery, performance or enforcement of the
Transaction Documents or the Certificate of Designations (d) 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 (e) the status of such Buyer or
holder of the Securities as an investor in the Company. 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.
9. GOVERNING LAW; MISCELLANEOUS.
a. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York without regard
to the principles of conflict of laws. Each party hereby irrevocably submits to
the non-exclusive jurisdiction of the state and federal courts sitting in the
City of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
b. COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon
-24-
<PAGE>
the signatory thereto with the same force and effect as if the signature were an
original, not a facsimile signature.
c. HEADINGS. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
No such amendment shall be effective to the extent that it applies to less than
all of the holders of the Preferred Shares then outstanding. No consideration
shall be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents or the
Certificate of Designations unless the same consideration also is offered to all
of the parties to the Transaction Documents or holders of the Preferred Shares,
as the case may be.
f. NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically generated and kept on file by the
sending party); or (iii) one (1) business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
The Immune Response Corporation
5935 Darwin Court
Carlsbad, California 92008
Telephone: 760-431-7080
Facsimile: 760-431-8636
Attention: President
-25-
<PAGE>
With a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Telephone: 415-983-1000
Facsimile: 415-983-7396
Attention: Thomas E. Sparks, Jr., Esq.
If to the Transfer Agent:
Harris Trust Company of California
601 S. Figueroa Street, Suite 4900
Los Angeles, California 90019
Telephone: 213-239-0678
Facsimile: 213-239-0631
Attention: Neil Rosso
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of two-thirds (2/3) of the Preferred Shares then
outstanding including by merger or consolidation. A Buyer may assign some or
all of its rights hereunder without the consent of the Company; provided,
however, that any such assignment shall not release such Buyer from its
obligations hereunder unless such obligations are assumed by such assignee and
the Company has consented to such assignment and assumption. Notwithstanding
anything to the contrary contained in the Transaction Documents, Buyer shall be
entitled to pledge the Securities in connection with a bona fide margin account.
h. 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.
i. SURVIVAL. Unless this Agreement is terminated under Section
9(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions
-26-
<PAGE>
set forth in Section 8, shall survive each of the Closings. Each Buyer shall be
responsible only for its own representations, warranties, agreements and
covenants hereunder.
j. PUBLICITY. The Company and a majority of the Buyers shall have
the right to approve before issuance any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to such
transactions as is required by applicable law and regulations (although each
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof).
k. FURTHER ASSURANCES. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. TERMINATION. In the event that the Initial Closing shall not
have occurred with respect to a Buyer on or before three (3) business days from
the date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the
non-breaching Buyers for expenses up to the amount described in Section 4(i)
above.
m. PLACEMENT AGENT. The Company acknowledges that it has engaged
Prudential Securities Incorporated as placement agent in connection with the
sale of the Preferred Shares. The Company shall be responsible for the payment
of any placement agent's fees or brokers commissions relating to or arising out
of the transactions contemplated hereby. The Company shall pay, and hold each
Buyer harmless against, any liability, loss or expense (including, without
limitation, attorneys' fees and out of pocket expenses) arising in connection
with any such claim.
n. 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.
o. REMEDIES. Each Buyer and each holder of Preferred Shares or
Conversion Shares shall have all rights and remedies set forth in the
Transaction Documents and the Certificate of Designation and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any person having any rights under any provision of this Agreement shall
be
-27-
<PAGE>
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
p. PAYMENT SET ASIDE. To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to the Registration
Rights Agreement or the Certificate of Designations or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
* * * * * *
-28-
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
THE IMMUNE RESPONSE CORPORATION THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.
Its: General Partner
By: /s/ Dennis J. Carlo
----------------------------
Name: Dennis J. Carlo
-----------------------
Its: President and Chief
Executive Officer By: /s/ James F. O'Brien, Jr.
------------------------ ------------------------------------
Name: James F. O'Brien, Jr.
Its: President
HERACLES FUND
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
------------------------------------
Name: James F. O'Brien, Jr.
Its: President
BROWN SIMPSON STRATEGIC
GROWTH FUND, LTD.
By: /s/ Mitchell D. Kaye
------------------------------------
Name: Mitchell D. Kaye
Its: Member
BROWN SIMPSON STRATEGIC
GROWTH FUND, L.P.
By: /s/ Mitchell D. Kaye
------------------------------------
Name: Mitchell D. Kaye
Its: Member
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
NUMBER OF
INITIAL
INVESTOR ADDRESS PREFERRED INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER SHARES AND FACSIMILE NUMBER
- ------------------------- ----------------------------------- --------- -----------------------------------
<S> <C> <C> <C>
Themis Partners L.P. Promethean Investment Group, L.L.C. 47 Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Thomas Lumsden
Residence: New York Facsimile: 212-698-0505
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Heracles Fund Bank of Bermuda (Cayman) Limited 143 Promethean Investment Group, L.L.C.
P.O. Box 513 40 West 57th Street, Suite 1520
3rd Floor British American Center New York, New York 10019
Dr. Roy's Drive Attn: James F. O'Brien, Jr.
Georgetown, Grand Cayman Thomas Lumsden
Cayman Island, BWI Facsimile: 212-698-0505
Attn: Allen J. Bernardo
Facsimile: 809-949-7802
Residence: Cayman Islands Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Brown Simpson Strategic 152 West 57th Street, 40th Floor 8
Growth Fund, Ltd. New York, New York 10019
Attn: Mitchell Kaye
Facsimile: 212-247-1329
Residence: Cayman Islands
Brown Simpson Strategic 152 West 57th Street, 40th Floor 2
Growth Fund, L.P. New York, New York 10019
Attn: Mitchell Kaye
Facsimile: 212-247-1329
Residence: New York
</TABLE>
<PAGE>
SCHEDULE OF UNDERWRITERS
BancAmerica Robertson Stephens
Bear, Stearns & Co. Inc.
BT Alex Brown
Cowen & Co.
Cruttendon Roth Incorporated
CS First Boston
Deutsche Morgan Grenfell
Donaldson Lufkin & Jenrette
Furman Selz Incorporated
Gruntal & Co.
Goldman Sachs & Co.
Hambrecht & Quist
Hanifen, Imhoff
Jeffries & Company, Inc.
J.P. Morgan & Company
Lehman Brothers
Merrill Lynch
Montgomery Securities
Morgan Stanley & Co. Incorporated
Needham & Company, Inc.
CIBC Oppenheimer & Co.
Paine Webber
Prudential Securities Incorprated
Salomon Smith Barney
SBC Warburg/Dillon Read
Sutro & Co. Incorporated
UBS Securities, Inc.
Vector Securities
Volpe, Welty & Company
or any successor to any of the above
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of April 24,
1998, by and among The Immune Response Corporation, a Delaware corporation, with
headquarters located at 5935 Darwin Court, Carlsbad, California 92008 (the
"COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively, the
"BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to issue and sell to the Buyers shares of the Company's
Series F Convertible Preferred Stock (the "PREFERRED SHARES"), which will be
convertible into shares of the Company's common stock, par value $.0025 per
share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of Series F Convertible Preferred Stock (the "CERTIFICATE
OF DESIGNATIONS"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer and any transferee or assignee thereof
to whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
<PAGE>
d. "REGISTRABLE SECURITIES" means the Conversion Shares issued or
issuable upon conversion of the Preferred Shares, any Dividend Shares (as
defined in the Certificate of Designations), any shares of Common Stock issued
as payment of Registration Delay Payments (as defined in Section 2(h)) and any
shares of capital stock issued or issuable with respect to the Conversion Shares
or the Preferred Shares as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, regardless of any
limitation on conversions of Preferred Shares.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. MANDATORY REGISTRATION. The Company shall prepare, and, as soon
as practicable but in no event later than 60 days after the date of issuance of
the relevant Preferred Shares, file with the SEC a Registration Statement or
Registration Statements (as is necessary) on Form S-3 (or, if such form is
unavailable for such a registration, on such other form as is available for such
a registration, subject to the consent of the Investors holding a majority of
the Registrable Securities and the provisions of Section 2(c), which consent
will not be unreasonably withheld), covering the resale of all of the
Registrable Securities, which Registration Statement(s) shall state that, in
accordance with Rule 416 promulgated under the 1933 Act, such Registration
Statement(s) also covers such indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Preferred Shares (i)
to prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of changes in the Conversion Price or Conversion
Rate of the Preferred Shares in accordance with the terms thereof. Such
Registration Statement shall initially register for resale at least 1,700,000
shares of Common Stock, subject to adjustment as provided in Section 3(b). Such
registered shares of Common Stock shall be allocated among the Investors pro
rata based on the total number of Registrable Securities issued or issuable as
of each date that a Registration Statement, as amended, relating to the resale
of the Registrable Securities is declared effective by the SEC. The Company
shall use its best efforts to have the Registration Statement(s) declared
effective by the SEC as soon as practicable, but in no event later than 120 days
after the issuance of the relevant Preferred Shares.
b. ALLOCATION OF REGISTRABLE SECURITIES. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time of such establishment or increase, as the case may be.
In the event an Investor shall sell or otherwise transfer any of such holder's
Registrable Securities, each transferee shall be allocated a pro rata portion of
the then remaining number of Registrable Securities included in such
Registration Statement for such transferor.
-2-
<PAGE>
Any shares of Common Stock included in a Registration Statement and which remain
allocated to any person or entity which does not hold any Registrable Securities
shall be allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors. For the avoidance of doubt,
the number of Registrable Securities held by any Investor shall be determined as
if all Preferred Shares then outstanding were converted into or exercised for
Registrable Securities.
c. COUNSEL AND INVESTMENT BANKERS. Subject to Section 5 hereof, in
connection with any offering pursuant to this Section 2, the Investors shall
have the right to select one legal counsel and an investment banker or bankers
and manager or managers to administer their interest in the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company. The Company shall reasonably cooperate with any
such counsel and investment bankers.
d. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration
of the Registration Period (as hereinafter defined), the number of shares of
Common Stock available for sale under the Registration Statement is insufficient
to cover all of the Registrable Securities (as described in Section 3(b)) and
the Company proposes to file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the 1933 Act of
any of its securities (other than on Form S-4 or Form S-8 or their then
equivalents relating to securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans) the Company shall
promptly send to each Investor who is entitled to registration rights under this
Section 2(d) written notice of the Company's intention to file a Registration
Statement and of such Investor's rights under this Section 2(d) and, if within
twenty (20) days after receipt of such notice, such Investor shall so request in
writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities such Investor requests to be registered,
subject to the priorities set forth in Section 2(e). No right to registration
of Registrable Securities under this Section 2(d) shall be construed to limit
any registration required under Section 2(a). The obligations of the Company
under this Section 2(d) may be waived by Investors holding a majority of the
Registrable Securities. If an offering in connection with which an Investor is
entitled to registration under this Section 2(d) is an underwritten offering,
then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.
e. PRIORITY IN PIGGY-BACK REGISTRATION RIGHTS IN CONNECTION WITH
REGISTRATIONS FOR COMPANY ACCOUNT. If the registration referred to in Section
2(d) is to be an underwritten public offering and the managing underwriter(s)
advise the Company in writing, that in their reasonable good faith opinion,
marketing or other factors dictate that a limitation on the number of shares of
Common Stock which may be included in the Registration Statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in
-3-
<PAGE>
such registration: (1) first, all securities the Company proposes to sell for
its own account, (2) second, up to the full number of securities proposed to be
registered for the account of the holders of securities entitled to inclusion of
their securities in the Registration Statement by reason of demand registration
rights, and (3) third, the securities requested to be registered by the
Investors and other holders of securities entitled to participate in the
registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration.
f. ELIGIBILITY FOR FORM S-3. The Company represents, warrants and
covenants that on and after the date hereof it meets and will meet the
requirements for the use of Form S-3 for registration of the sale by the
Investors of the Registrable Securities and the Company has filed and shall file
all reports required to be filed by the Company with the SEC in a timely manner
so as to obtain and maintain such eligibility for the use of Form S-3. In the
event that Form S-3 is not available for sale by the Investors of the
Registrable Securities, then the Company (i) with the consent of the Investors
holding a majority of the Registrable Securities pursuant to Section 2(a), shall
register the sale of the Registrable Securities on another appropriate form and
(ii) the Company shall undertake to register the Registrable Securities on Form
S-3 as soon as such form is available, provided that the Company shall maintain
the effectiveness of the Registration Statement then in effect until such time
as a Registration Statement on Form S-3 covering the Registrable Securities has
been declared effective by the SEC.
g. RULE 416. The Company and the Investors each acknowledge that an
indeterminate number of Registrable Securities shall be registered pursuant to
Rule 416 under the 1933 Act so as to include in such Registration Statement any
and all Registrable Securities which may become issuable (i) to prevent dilution
resulting from stock splits, stock dividends or similar transactions and (ii) if
permitted by law, by reason of reductions in the Conversion Price (as defined in
the Certificate of Designations) of the Preferred Shares in accordance with the
terms thereof, including, without limitation, the terms which may cause the
Conversion Price to decrease as the price of the Common Stock decreases
(collectively, the "RULE 416 SECURITIES"). In this regard, the Company agrees
to use all reasonable efforts to ensure that the maximum number of Registrable
Securities which may be registered pursuant to Rule 416 under the 1933 Act are
covered by the Registration Statement and, absent guidance from the SEC or other
definitive authority to the contrary, the Company shall use all reasonable
efforts to affirmatively support and to not take any position adverse to the
position that the Registration Statement filed hereunder covers all of the Rule
416 Securities. If the Company determines that the Registration Statement filed
hereunder does not cover all of the Rule 416 Securities, the Company shall
immediately provide to each Investor written notice setting forth the basis for
the Company's position and the authority therefor.
h. EFFECT OF FAILURE TO OBTAIN AND MAINTAIN EFFECTIVENESS OF
REGISTRATION STATEMENT. If the Registration Statement is not (i) filed within
60 days of the Initial Issuance Date (as defined in the Certificate of
Designations) of any Preferred Shares (the "SCHEDULED FILING DATE"), (ii)
declared effective by the SEC on or before 120 days after the Initial Issuance
-4-
<PAGE>
Date for any Preferred Shares (the "SCHEDULED EFFECTIVE DATE"), or (iii) if
after the Registration Statement has been declared effective by the SEC, sales
cannot be made pursuant to the Registration Statement (whether because of a
failure to keep the Registration Statement effective, to disclose such
information as is necessary for sales to be made pursuant to the Registration
Statement, to register sufficient shares of Common Stock or otherwise), then, as
partial relief for the damages to any holder by reason of any such delay in or
reduction of its ability to sell any of the Registrable Securities (which remedy
shall not be exclusive of any other remedies available at law or in equity), the
Company shall pay to each holder of Preferred Shares an amount in cash per
Preferred Share held equal to the product of (i) $50,000 multiplied by (ii) the
sum of (A) .02, if the Registration Statement is not filed by the Scheduled
Filing Date, plus (B) .02, if the Registration Statement is not declared
effective by the SEC by the Scheduled Effective Date, plus (C) the product of
(I) .00067 multiplied by (II) the sum of (x) the number of days after the
Scheduled Filing Date that the relevant Registration Statement has not been
filed with the SEC, (y) the number of days after the Scheduled Effective Date
and prior to the date that the relevant Registration Statement has not been
declared effective by the SEC, and (z) the number of days (excluding days during
an Allowable Grace Period (as defined in Section 3(u)) that sales cannot be made
pursuant to the Registration Statement after the Registration Statement has been
declared effective. The payments to which a holder shall be entitled pursuant
to this Section 2(h) are referred to herein as "REGISTRATION DELAY PAYMENTS."
Registration Delay Payments shall be paid within five business days of the
earlier of (A) the first day of the month following the occurrence of the event
resulting in the requirement to make Registration Delay Payments, or (B) the
date on which the event resulting in the requirement to make Registration Delay
Payments is cured. In the event the Company fails to make Registration Delay
Payments in a timely manner, such Registration Delay Payments shall bear
interest at the rate of 2.0% per month (prorated for partial months) until paid
in full. If the Company fails to pay the Registration Delay Payments, including
any interest thereon, within 15 business days of the applicable payment date,
then the holder entitled to such payments shall have the right at any time, so
long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of the Registration
Delay Payments, including any interest thereon, the number of shares of Common
Stock equal to the quotient of (X) the sum of the Registration Delay Payments
and all interest accrued thereon divided by (Y) the lowest Closing Bid Price on
any day during the period beginning on and including the date the Registration
Delay Payments were due and payable and ending on and including the date the
holder delivers written notice to the Company of its election to receive shares
of Common Stock in lieu of the Registration Delay Payments.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(d) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
-5-
<PAGE>
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the sixtieth (60th) day after the date of issuance of the relevant Preferred
Shares for the registration of Registrable Securities pursuant to Section 2(a))
and use its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than 120 days after the issuance of the relevant
Preferred Shares for the registration of Registrable Securities), and keep such
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities without restriction pursuant to Rule 144(k) promulgated
under the 1933 Act (or successor thereto) or (ii) the date on which (A) the
Investors shall have sold all the Registrable Securities and (B) none of the
Preferred Shares is outstanding (the "REGISTRATION PERIOD"), which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the event the
number of shares available under a Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the Registrable Securities, the
Company shall amend such Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as
to cover all of the Registrable Securities, in each case, as soon as
practicable, but in any event within fifteen (15) days after the necessity
therefor arises (based on the market price of the Common Stock and other
relevant factors on which the Company reasonably elects to rely). The Company
shall use it best efforts to cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if at any time the number of Registrable
Securities issued or issuable upon conversion of the Preferred Shares is greater
than the quotient determined by dividing (i) the number of shares of Common
Stock available for resale under such Registration Statement by (ii) 1.5. For
purposes of the calculation set forth in the foregoing sentence, any
restrictions on the convertibility of the Preferred Shares or the Conversion
Price shall be disregarded and such calculation shall assume that the Preferred
Shares are then convertible into shares of Common Stock at the then prevailing
Conversion Rate (as defined in the Company's Certificate of Designations).
-6-
<PAGE>
c. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel
without charge (i) promptly after the same is prepared and filed with the SEC at
least one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regards to such
Registration Statement(s), any correspondence by or on behalf of the Company to
the SEC or the staff of the SEC and any correspondence from the SEC or the staff
of the SEC to the Company or its representatives, (ii) upon the effectiveness of
any Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents, including copies of any preliminary or final prospectus, as such
Investor may reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.
d. The Company shall use its best efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as any Investor reasonably requests, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threatening of any proceeding for such
purpose.
e. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters for the offering,
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations (only with respect to violations
which occur in reliance upon and in conformity with information furnished in
writing to the Company by such Investor expressly for use in the Registration
Statement for such underwritten public offering), with the underwriters of such
offering.
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor in writing of the happening of any event
as a result of which the prospectus included in a Registration Statement, as
then in effect, includes an untrue
-7-
<PAGE>
statement of a material fact or omission to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and promptly prepare a
supplement or amendment to such Registration Statement to correct such untrue
statement or omission, and deliver ten (10) copies of such supplement or
amendment to each Investor (or such other number of copies as such Investor may
reasonably request). The Company shall also promptly notify each Investor in
writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a Registration Statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to each Investor by facsimile on the same day
of such effectiveness and by overnight mail), (ii) of any request by the SEC for
amendments or supplements to a Registration Statement or related prospectus or
related information, and (iii) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify each Investor who holds Registrable Securities being sold
(and, in the event of an underwritten offering, the managing underwriters) of
the issuance of such order and the resolution thereof or its receipt of actual
notice of the initiation or threat of any proceeding for such purpose.
h. The Company shall permit each Investor and a single firm of
counsel, initially Katten Muchin & Zavis or such other counsel as thereafter
designated as selling stockholders' counsel by the Investors who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement and all amendments and supplements thereto at least seven
(7) business days prior to their filing with the SEC, and not file any document
in a form to which such counsel reasonably objects. The Company shall not
submit a request for acceleration of the effectiveness of a Registration
Statement or any amendment or supplement thereto without the prior approval of
such counsel, which consent shall not be unreasonably withheld.
i. At the request of any Investor, the Company shall use its best
efforts to furnish to such Investor, on the date of the effectiveness of the
Registration Statement and thereafter from time to time on such dates as an
Investor may reasonably request (i) if required by an underwriter, a letter,
dated such date, from the Company's independent certified public accountants in
form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, and (ii) an opinion, dated as of such date, of counsel
representing the Company for purposes of such Registration Statement, in form,
scope and substance as is customarily given in an underwritten public offering,
addressed to the underwriters and the Investors.
-8-
<PAGE>
j. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to a
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall hold in strict confidence and shall
not make any disclosure (except to an Investor) or use of any Record or other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors are so notified, unless (a) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
any Registration Statement or is otherwise required under the 1933 Act, (b) the
release of such Records is ordered pursuant to a final, non-appealable subpoena
or order from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement of which
the Inspector has knowledge. Each Investor agrees that it shall, upon learning
that disclosure of such Records is sought in or by a court or governmental body
of competent jurisdiction or through other means, give prompt notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the Records
deemed confidential.
k. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
l. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on The Nasdaq National Market and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(l).
-9-
<PAGE>
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
n. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
o. The Company shall provide a transfer agent and registrar for all
such Registrable Securities not later than the effective date of such
Registration Statement.
p. If requested by the managing underwriters or an Investor, the
Company shall (i) immediately incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
or the related prospectus if requested by a shareholder or any underwriter of
such Registrable Securities.
q. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
r. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
s. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
-10-
<PAGE>
t. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as EXHIBIT A.
u. Notwithstanding anything to the contrary in Section 3(f), at any
time after the Registration Statement has been declared effective, the Company
may delay the disclosure of material non-public information concerning the
Company the disclosure of which at the time is not, in the good faith opinion of
the Board of Directors of the Company and its counsel, in the best interest of
the Company and, in the opinion of counsel to the Company, otherwise required (a
"GRACE PERIOD"); provided, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to a Grace Period and the date on which the Grace Period will begin, and
(ii) notify the Investors in writing of the date on which the Grace Period ends;
and, provided further, that during any consecutive 365 day period, there shall
be only one Grace Period, such Grace Period not to exceed 30 days (an "ALLOWABLE
GRACE PERIOD"). For purposes of determining the length of a Grace Period above,
the Grace Period shall begin on and include the date the Investors receive the
notice referred to in clause (i) above and shall end on and include the date the
Investors receive the notice referred to in clause (ii) above. The provisions
of Sections 2(h) and 3(g) hereof shall not be applicable during the period of
any Allowable Grace Period. Upon expiration of the Allowable Grace Period, the
Company shall again be bound by the first sentence of Section 3(f) with respect
to the information giving rise thereto. In the event of any Grace Period, the
Maturity Date (as defined in the Certificate of Designations) shall be delayed
one and one-half (1 1/2) days for each day in the Grace Period as provided in
Section 2(g) of the Certificate of Designations.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) business days prior to the first anticipated
filing date of a Registration Statement, the Company shall notify each Investor
in writing of the information the Company requires from each such Investor if
such Investor elects to have any of such Investor's Registrable Securities
included in such Registration Statement. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has
-11-
<PAGE>
notified the Company in writing of such Investor's election to exclude all of
such Investor's Registrable Securities from such Registration Statement.
c. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such Investor agrees to
enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations (only with respect to violations
which occur in reliance upon and in conformity with information furnished in
writing to the Company by such Investor expressly for use in the Registration
Statement for such underwritten public offering), with the managing underwriter
of such offering and take such other actions as are reasonably required in order
to expedite or facilitate the disposition of the Registrable Securities, unless
such Investor notifies the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from such Registration
Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f).
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and fees and disbursements of
one counsel for the Investors, shall be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the
-12-
<PAGE>
directors, officers, partners, employees, agents of, and each Person, if any,
who controls, any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 ACT"), and any underwriter (as
defined in the 1933 Act) for the Investors, and the directors and officers of,
and each Person, if any, who controls, any such underwriter within the meaning
of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PERSON"), against any
losses, claims, damages, liabilities, judgments, fines, penalties, charges,
costs, attorneys' fees, amounts paid in settlement or expenses, joint or
several, (collectively, "CLAIMS") incurred in investigating, preparing or
defending any action, claim, suit, inquiry, proceeding, investigation or appeal
taken from the foregoing by or before any court or governmental, administrative
or other regulatory agency, body or the SEC, whether pending or threatened,
whether or not an indemnified party is or may be a party thereto ("INDEMNIFIED
DAMAGES"), to which any of them may become subject insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement of a material fact in a Registration Statement or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under the securities or other "blue sky" laws of any jurisdiction
in which Registrable Securities are offered ("BLUE SKY FILING"), or the omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement (the matters in the foregoing
clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject to the
restrictions set forth in Section 6(d) with respect to the number of legal
counsel, the Company shall reimburse each Indemnified Person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(c);
(ii) with respect to any preliminary prospectus, shall not inure to the benefit
of any such person from whom the person asserting any such Claim purchased the
Registrable Securities that are the subject thereof (or to the benefit of any
person controlling such person) if the untrue statement or omission of a
material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented, if such prospectus was timely made
available by the Company pursuant to Section 3(c), and the Indemnified Person
was promptly advised in writing not to use
-13-
<PAGE>
the incorrect prospectus prior to the use giving rise to a violation and such
Indemnified Person, notwithstanding such advice, used it; (iii) shall not be
available to the extent such Claim is based on a failure of the Investor to
deliver or to cause to be delivered the prospectus made available by the
Company; and (iv) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer or disposition of the
Registrable Securities by the Investors.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim or Indemnified Damages to which any of them may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or
Indemnified Damages arise out of or are based upon any Violation, in each case
to the extent, and only to the extent, that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by such
Investor expressly for use in connection with such Registration Statement; and,
subject to Section 6(d), such Investor will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any
-14-
<PAGE>
governmental action or proceeding) involving a Claim, such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The indemnifying party shall pay for only one
separate legal counsel for the Indemnified Persons or the Indemnified Parties,
as applicable, and such counsel shall be selected by Investors holding a
majority-in-interest of the Registrable Securities included in the Registration
Statement to which the Claim relates, if the Investors are entitled to
indemnification hereunder, or the Company, if the Company is entitled to
indemnification hereunder, as applicable. The Indemnified Party or Indemnified
Person shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the Indemnified Party or Indemnified Person which relates to such action or
claim. The indemnifying party shall keep the Indemnified Party or Indemnified
Person fully apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without
its written consent, provided, however, that the indemnifying party shall not
unreasonably withhold, delay or condition its consent. No indemnifying party
shall, without the consent of the Indemnified Party or Indemnified Person,
consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such claim or litigation. Following
indemnification as provided for hereunder, the indemnifying party shall be
subrogated to all rights of the Indemnified Party or Indemnified Person with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the
-15-
<PAGE>
indemnifying party or others, and (ii) any liabilities the indemnifying party
may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of fraudulent misrepresentation; and (iii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the investors to sell such securities pursuant to Rule 144 without
registration.
-16-
<PAGE>
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold two-thirds (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any person to amend or
consent to a waiver or modification of any provision of this Agreement unless
the same consideration also is offered to all of the parties to this Agreement.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically generated and kept on file by the sending
party); (iii) one (1) business day after deposit with a nationally recognized
-17-
<PAGE>
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
The Immune Response Corporation
5935 Darwin Court
Carlsbad, California 92008
Telephone: 760-431-7080
Facsimile: 760-431-8636
Attention: President
With a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Telephone: 415-983-1000
Facsimile: 415-983-7396
Attention: Thomas E. Sparks, Jr.
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers attached hereto, with copies to such Buyer's counsel as set forth on
the Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York without regard to the principles of
conflict of laws. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner
-18-
<PAGE>
permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement and the Securities Purchase Agreement constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein.
This Agreement and the Securities Purchase Agreement supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a
party, may be delivered to the other party hereto by facsimile transmission of a
copy of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Preferred Shares then outstanding have been
converted into Registrable Securities (without regard to any limitations on
conversions).
k. 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.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
THE IMMUNE RESPONSE CORPORATION THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.
Its: General Partner
By: /s/ Dennis J. Carlo
-------------------------
Name: Dennis J. Carlo
-------------------------
Its: President and Chief
Executive Officer By: /s/ James F. O'Brien, Jr.
------------------------- ----------------------------
Name: James F. O'Brien, Jr.
Its: President
HERACLES FUND
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
----------------------------
Name: James F. O'Brien, Jr.
Its: President
BROWN SIMPSON STRATEGIC
GROWTH FUND, LTD.
By: /s/ Mitchell D. Kaye
----------------------------
Name: Mitchell D. Kaye
Its: Member
BROWN SIMPSON STRATEGIC
GROWTH FUND, L.P.
By: /s/ Mitchell D. Kaye
----------------------------
Name: Mitchell D. Kaye
Its: Member
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER
- ------------------------- ------------------------------------ -----------------------------------
<S> <C> <C>
Themis Partners L.P. Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Thomas Lumsden
Facsimile: 212-698-0505
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Heracles Fund Bank of Bermuda (Cayman) Limited Promethean Investment Group, L.L.C.
P.O. Box 513 40 West 57th Street, Suite 1520
3rd Floor British American Center New York, New York 10019
Dr. Roy's Drive Attn: James F. O'Brien, Jr.
Georgetown, Grand Cayman Thomas Lumsden
Cayman Island, BWI Facsimile: 212-698-0505
Attn: Allen J. Bernardo
Facsimile: 809-949-7802 Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Brown Simpson Strategic 152 West 57th Street, 40th Floor
Growth Fund, Ltd. New York, New York 10019
Attn: Mitchell Kaye
Facsimile: 212-247-1329
Brown Simpson Strategic 152 West 57th Street, 40th Floor
Growth Fund, L.P. New York, New York 10019
Attn: Mitchell Kaye
Facsimile: 212-247-1329
</TABLE>
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Harris Trust Company of California
601 S. Figuera Street, Suite 4900
Los Angeles, California 90019
Attn: Neil Rosso
RE: THE IMMUNE RESPONSE CORPORATION
Ladies and Gentlemen:
We are counsel to THE IMMUNE RESPONSE CORPORATION, a Delaware corporation
(the "COMPANY"), and have represented the Company in connection with that
certain Securities Purchase Agreement (the "PURCHASE AGREEMENT") entered into by
and among the Company and the Buyers named therein (collectively, the "HOLDERS")
pursuant to which the Company issued to the Holders shares of its Series F
Convertible Preferred Stock, par value $.001 per share, (the "PREFERRED
SHARES"). Pursuant to the Purchase Agreement, the Company also has entered into
a Registration Rights Agreement with the Holders (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of the Common Stock of the Company, par value
$________ per share (the "COMMON STOCK") issuable upon conversion of the
Preferred Shares, under the Securities Act of 1933, as amended (the "1933 ACT").
In connection with the Company's obligations under the Registration Rights
Agreement, on ____________ ___, 1998, the Company filed a Registration Statement
on Form _____ (File No. 333-_____________) (the "REGISTRATION STATEMENT") with
the Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
----------------------------------------
cc: [LIST NAMES OF INVESTORS]
