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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. ----
For the transition period from ________________ to ______________
Commission file number 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0255679
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(Zip Code)
TELEPHONE (760) 431-7080
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
As of AUGUST 4, 1999, 24,884,341 shares of common stock were outstanding.
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THE IMMUNE RESPONSE CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------- ---------------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,552 $ 1,519
Marketable securities-available-for-sale 21,437 23,343
Other current assets 370 1,983
---------------------- ---------------------
Total current assets 23,359 26,845
Property and equipment, net 9,647 7,825
Deposits and other assets 2,663 956
---------------------- ---------------------
$ 35,669 $ 35,626
====================== =====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,367 $ 2,755
Other accrued expenses 2,539 1,464
---------------------- ---------------------
Total current liabilities 7,906 4,219
Convertible preferred stock 9,487 9,347
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized; none issued --- ---
Common stock, $.0025 par value, 65,000,000 shares authorized,
24,591,837 and 23,795,292 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 61 59
Warrants 2,144 2,144
Additional paid-in capital 195,703 191,317
Unrealized gain (loss) on marketable securities (52) 102
Accumulated deficit (179,580) (171,562)
---------------------- ---------------------
Total stockholders' equity 18,276 22,060
---------------------- ---------------------
$ 35,669 $ 35,626
====================== =====================
See accompanying notes.
</TABLE>
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------------------------- -------------------------------------------
1999 1998 1999 1998
-------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
Contract research revenue $ 3,494 $ --- $ 7,238 $ 1,000
Licensed research revenue 400 10,667 5,862 10,667
-------------------- ------------------- ------------------- -------------------
3,894 10,667 13,100 11,667
Expenses:
Research and development 8,887 8,429 18,437 16,689
General and administrative 1,402 1,105 2,764 2,104
Restructuring costs 650 --- 650 ---
-------------------- ------------------- ------------------- -------------------
10,939 9,534 21,851 18,793
Other revenue:
Investment income 353 402 733 713
-------------------- ------------------- ------------------- -------------------
Net income (loss) $ (6,692) $ 1,535 $ (8,018) $ (6,413)
==================== =================== =================== ===================
Basic earnings (loss) per
share $ (0.28) $ 0.07 $ (0.33) $ (0.28)
==================== =================== =================== ===================
Weighted average common shares
outstanding 24,200,679 22,918,007 24,138,629 22,871,460
==================== =================== =================== ===================
Diluted earnings (loss) per
share $ (0.28) $ 0.06 $ (0.33) $ (0.28)
==================== =================== =================== ===================
Weighted average common and common
equivalent shares outstanding 24,200,679 25,357,655 24,138,629 22,871,460
==================== =================== =================== ===================
See accompanying notes.
</TABLE>
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Operating activities:
Net loss $ (8,018) $ (6,413)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 775 744
Deferred rent expense (59) (44)
Changes in operating assets and liabilities:
Other current assets 1,613 384
Accounts payable 2,612 1,445
Accrued expenses 1,134 594
-------------------- --------------------
Net cash used in operating activities (1,943) (3,290)
Investing activities:
Sale (purchase) of marketable securities, net 1,752 (8,857)
Purchase of property and equipment (2,597) (680)
Deposits and other assets (1,707) (602)
-------------------- --------------------
Net cash used in investing activities (2,552) (10,139)
Financing activities:
Net proceeds from sale of common stock 3,138 1,333
Net proceeds from the sale of convertible preferred stock --- 9,160
Net proceeds from exercise of stock options 1,390 728
-------------------- --------------------
Net cash provided by financing activities 4,528 11,221
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 33 (2,208)
Cash and cash equivalents at beginning of period 1,519 4,872
-------------------- --------------------
Cash and cash equivalents at end of period $ 1,552 $ 2,664
==================== ====================
Supplemental disclosure of noncash investing and financing activities:
Unrealized (loss) on marketable securities $ (154) $ (50)
==================== ====================
Accretion of convertible preferred stock $ 140 $ 47
==================== ====================
Payment of dividend on convertible preferred stock $ 374 $ ---
==================== ====================
Declared dividend on convertible preferred stock $ 187 $ ---
==================== ====================
See accompanying notes.
</TABLE>
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THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Immune Response
Corporation ("Immune Response" or the "Company") for the three and six
month periods ended June 30, 1999 and 1998 are unaudited. These
financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary
to fairly present the consolidated financial position as of June 30,
1999, and the consolidated results of operations for the three and six
month periods ended June 30, 1999 and 1998. The results of operations
for the six months ended June 30, 1999 are not necessarily indicative of
the results to be expected for the year ended December 31, 1999. For
more complete financial information, these financial statements, and the
notes thereto, should be read in conjunction with the consolidated
audited financial statements for the year ended December 31, 1998
included in the Company's Form 10-K filed with the Securities and
Exchange Commission.
2. EARNINGS PER SHARE
For the three months ended June 30, 1999 and the six months ended June
30, 1999 and 1998, net loss per share is computed using the weighted
average number of common shares outstanding during those periods.
Outstanding stock options and warrants and the effect of conversion of
the Series F Convertible Preferred Stock are not included in the
calculation of net loss per share because their effect would be
antidilutive. Therefore, there is no difference between basic and
diluted net loss per share for those periods. Weighted average number of
shares outstanding for the three months ended June 30, 1999, and the six
months ended June 30, 1999 and 1998 were 24,200,679, 24,138,629 and,
22,871,460, respectively.
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended June 30, 1998:
<TABLE>
<S> <C>
Numerator:
Net income $ 1,535,364
Preferred stock dividends (139,726)
------------
Numerator for basic earnings per share - income available
to common stockholders 1,395,638
Effect of dilutive securities: ---
------------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversions $ 1,395,638
============
Denominator:
Denominator for basic earnings per share - weighted
average shares 22,918,007
Effective of dilutive securities:
Stock option plans 2,439,648
------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 25,357,655
============
Basic earnings per share $0.07
============
Diluted earnings per share $0.06
============
</TABLE>
Options and warrants to purchase 2,244,811 shares of common stock, and
Preferred Stock convertible into 710,732 shares of common stock were
outstanding at June 30, 1998, but were not included in the computation
of diluted earnings per share because the options' and warrant's
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exercise price, along with the Preferred Stock's conversion price, were
greater than the average market price of the common shares for the three
months ended June 30,1998; and therefore, the effect would be
antidilutive.
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(6,692) $1,535 $(8,018) $(6,413)
Net unrealized gain (loss)
on marketable securities (113) (60) (154) (50)
-------- ------- -------- --------
Comprehensive income (loss) $(6,805) $1,475 $(8,172) $(6,463)
======== ======= ======== ========
</TABLE>
4. EQUITY TRANSACTION
In February 1999, the initial conversion price of the Series F
Convertible Preferred Stock of $14.07 per share of common stock was
adjusted downward to $9.77 per share of common stock. The conversion
price may be further adjusted downward at the end of August and at the
end of each subsequent three-month period if the Company's common stock
does not trade at prices higher than the conversion price over a period
of time during the applicable three-month period. The Series F Stock
bears a dividend of 7.5% per annum. The dividend is payable in shares of
common stock or cash at the Company's option.
5. COLLABORATIONS
In April 1999 and January 1999, the Company received a $5 million
payment in each month from Agouron Pharmaceuticals, Inc. ("Agouron")
consisting of a $3 million payment for research and development and a
$2 million payment for the purchase of 189,350 and 149,911 shares of
unregistered common stock, respectively, priced at a premium to the
market. These were the second and third in a series of six quarterly
payments that the Company expects Agouron to make to fund research and
development and to purchase unregistered common stock under an agreement
entered into in June 1998. Also in conjunction with this agreement, the
Company received a $5 million milestone payment in February 1999. Under
the agreement, the Company agreed to exclusively license REMUNE, its
immune-based therapy under development for the treatment of HIV
infection, to Agouron. Under the terms of the agreement, the Company
will manufacture commercial supplies of REMUNE and Agouron will have
exclusive rights to market REMUNE in North America, Europe and certain
other countries, if regulatory approvals are received. In June 1998, the
Company initially received a $10 million license fee and Agouron
purchased 118,256 shares of newly issued Immune Response common stock,
priced at a premium to market, for $2 million. Through June 1999, the
Company had received a total of $32 million from Agouron from license
fees, milestone and research and development payments and stock
purchases.
In March 1999, the Company received a $988,000 payment from
Schering-Plough Corporation ("Schering-Plough") to fund research under a
research collaboration and option agreement entered into in July 1998.
Under the research collaboration and option agreement, the Company
agreed to develop gene therapy products for the treatment of hepatitis
B and C; and as part of the agreement, Schering-Plough has the option to
license the Company's gene delivery system for additional proprietary
genes for other diseases for a royalty on future product sales, if any.
Through June 1999, the Company had received approximately $3 million in
payments from Schering-Plough.
6. RESTRUCTURING COSTS
In May 1999, the Company announced the conclusion of the Phase III
clinical endpoint trial for the immune-based therapy REMUNE based on
the recommendation of an independent Data Safety Monitoring Board. As a
result of this, in June 1999, the Company implemented a restructuring
plan primarily aimed at reducing expenses while focusing the majority
of the Company's resources on its late-stage programs of immune-based
therapeutics for HIV (REMUNE) and rheumatoid arthritis.
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The restructuring plan included a reduction in the workforce of
approximately 30%. The Company took a one-time restructuring charge
against earnings of $650,000.
7. SUBSEQUENT EVENT
In July 1999, the Company received a $5 million payment from Agouron
consisting of a $3 million payment for research and development and a $2
million payment for the purchase of 292,078 shares of unregistered
common stock priced at a premium to the market. This was the fourth in a
series of six quarterly payments that the Company expects Agouron to
make to fund research and development and to purchase unregistered
common stock under the June 1998 agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
The Immune Response Corporation (the "Company") is a biopharmaceutical
company developing immune-based therapies to induce specific T cell responses
for the treatment of HIV and autoimmune diseases. In addition, the Company is
working on cancer vaccines and gene therapy.
This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to
such differences include those discussed under "Risk Factors". The following
should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-Q. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
In May 1999, the Company announced the conclusion of the Phase III clinical
endpoint trial for the immune-based therapy REMUNE based on the
recommendation of an independent Data Safety Monitoring Board. As a result of
this, in June 1999, the Company implemented a restructuring plan primarily
aimed at reducing expenses while focusing the majority of the Company's
resources on its late-stage programs of immune-based therapeutics for HIV
(REMUNE) and rheumatoid arthritis. The restructuring plan included a
reduction in the workforce of approximately 30%. The Company took a one-time
restructuring charge against earnings of $650,000. The total projected
decrease in expenses as a result from restructuring will phase in over
several quarters.
In April 1999 and January 1999, the Company received a $5 million payment in
each month from Agouron consisting of a $3 million payment for research and
development and a $2 million payment for the purchase of 189,350 and 149,911
shares of unregistered common stock, respectively, priced at a premium to the
market. This was the second and third in a series of six quarterly payments
that the Company expects Agouron to make to fund research and development and
to purchase unregistered common stock under an agreement entered into in June
1998. Also in conjunction with this agreement, the Company received a $5
million milestone payment in February 1999. Under the agreement, the Company
agreed to exclusively license REMUNE, its immune-based therapy under
development for the treatment of HIV infection, to Agouron. Under the terms
of the agreement, the Company will manufacture commercial supplies of REMUNE
and Agouron will have exclusive rights to market REMUNE in North America,
Europe and certain other countries, if regulatory approvals are received.
Through June 1999, the Company had received a total of $32 million from
Agouron from license fees, milestone and research and development payments
and stock purchases.
In March 1999, the Company received a $988,000 payment from Schering-Plough
to fund research under a research collaboration and option agreement entered
into in July 1998. Under the research collaboration and option agreement, the
Company agreed to develop gene therapy products for the treatment of
hepatitis B and C; and as part of the agreement, Schering-Plough has the
option to license the Company's gene delivery system for additional
proprietary genes for other diseases for a royalty on future product sales,
if any. Through June 1999, the Company had received approximately $3 million
in payments from Schering-Plough.
In July 1999, the Company received a $5 million payment from Agouron
consisting of a $3 million payment for research and development and a $2
million payment for the purchase of 292,078 shares of unregistered common
stock priced at a premium to the market. This was the fourth in a series of
six quarterly payments that the Company expects Agouron to make to fund
research and development and to purchase unregistered common stock under the
June 1998 agreement.
The Company has not been profitable since inception and had an accumulated
deficit of $179.6 million as of June 30, 1999. To date, the Company has not
recorded any revenues from the sale of products. Revenues recorded through
June 30, 1999 were earned in connection with contract research, licensing
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of technology, milestone achievement and investment income. The Company
expects its operating losses to continue, as well as to have
quarter-to-quarter fluctuations, some of which could be significant, due to
research, development and clinical trial activities. There can be no
assurance that the Company will be able to generate sufficient product
revenue to become profitable at all or on a sustained basis.
RESULTS OF OPERATIONS
Revenue for the quarter ended June 1999 was $3.9 million as compared to $10.7
million for the same period in 1998. The decrease in revenue was primarily
attributable to the Agouron collaboration entered into in 1998 which provided
the Company with a $10.0 million up-front license payment in 1998 versus a
$3.0 million research and development payment received in 1999. Both payments
under the collaboration were for the clinical development and scale-up of the
manufacturing process for REMUNE.
Revenue for the six months ended June 1999 was $13.1 million as compared to
$11.7 million for the same period in 1998. The increase in revenue was
primarily attributable to an increase in combined research and development
and milestone payments received in 1999 from Agouron which were greater than
the Agouron up-front license payment received during the same period in 1998.
None of the revenue received was from the commercial sale of products and the
Company does not expect to derive revenue from the sale of products for the
foreseeable future.
The Company incurred research and development expenses of $8.9 million and
$8.4 million for the three months ending June 1999 and 1998, respectively.
For the six months ended June 1999 and 1998, research and development
expenses were $18.4 million and $16.7 million, respectively. The increased
spending in research and development during the first quarter and six months
ended June 1999 resulted primarily from expenses associated with clinical
trials and scale-up of the manufacturing process for REMUNE. Future spending
associated with the HIV clinical trials is expected to level off and then
decrease as future pivotal studies will be conducted by Agouron under the
1998 collaboration agreement. However, spending associated with the Company's
scale-up of the manufacturing process for REMUNE and the cost of producing
clinical supplies for ongoing and future REMUNE studies will continue to
increase in the foreseeable future. Research and development expenses for
gene therapy are expected to decrease as a result of the June 1999
restructuring while spending for the rheumatoid arthritis and cancer programs
will remain somewhat constant. Overall future research and development
expenditures are expected to decline for the next two to three quarters.
Future spending for research and development may increase if additional
collaborations are completed, but there can be no assurance that any will be
completed.
General and administrative expenses for the three and six months ended June
1999 were $1.4 million and $2.8 million, respectively, as compared to $1.1
million and $2.1 million for the same periods in 1998. The increase in
spending was attributable to higher support costs associated with its
research and development activities. General and administrative expenses for
the remainder of 1999 are expected to remain consistent with first quarter
levels.
Restructuring costs of $650,000 for the second quarter ended June 1999 were
associated with the Company's restructuring plan, which reduced the work
force by approximately 30%. Employee severance, health benefits, placement
services and other implementation costs were included in the restructuring
costs.
Investment income decreased to $353,000 for the quarter ended June 1999 from
$402,000 for the same period of 1998. This decrease was due primarily to a
decrease in the Company's average cash position in the second quarter of 1999
compared to the second quarter of 1998, which included the proceeds of a $10
million private placement of convertible preferred stock. For the six month
period ended June 1999, investment income was $733,000 compared to $713,000
for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had working capital of $15.5 million,
including $23.0 million of cash, cash equivalents and marketable securities.
This compares with working capital as of December 31, 1998 of $22.6 million,
including $24.9 million of cash, cash equivalents and marketable securities.
Working capital decreased as a result of the cost of operations, in particular,
due to the cost of the REMUNE
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HIV clinical trials, clinical trial materials and manufacturing supplies,
and the capital improvements incurred to increase the capacity of the
manufacturing facility producing REMUNE.
The Company will need to raise additional funds to conduct research and
development, preclinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company anticipates that in 1999, the REMUNE clinical
trials and manufacturing costs will continue to represent a significant
portion of the Company's overall expenditures. The Company also anticipates
that costs related to the clinical trials of REMUNE will level off and then
decrease as future pivotal studies will be conducted by Agouron. However,
spending associated with the Company's scale- up of the manufacturing process
for REMUNE and the cost of producing clinical supplies for ongoing and future
REMUNE studies will continue to increase in the foreseeable future. Research
and development expenses for gene therapy are expected to decrease as a
result of the June 1999 restructuring while spending for the rheumatoid
arthritis and cancer programs will remain somewhat constant. Overall future
research and development expenditures are expected to decline for the next
two to three quarters. Future spending for research and development may
increase if additional collaborations are completed, but there can be no
assurance that any will be completed. The Company anticipates additional
capital improvements of approximately $2.5 million for the remainder of 1999
related to increasing the capacity of its manufacturing facility, some of
which the Company anticipates it will fund with lease financing. Other
anticipated costs with respect to REMUNE, including investment in inventory,
will depend on many factors, including the results of clinical trials, the
continuation of the Company's collaboration with Agouron and other factors
which will influence the Company's determination of the appropriate continued
investment of the Company's financial resources in this program.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of preclinical studies and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the cost of manufacturing scale-up and
inventories, effective commercialization activities and arrangements and
other factors not within the Company's control. The Company intends to seek
additional funding through additional research and development agreements
with suitable corporate collaborators, extensions of existing corporate
collaborations, and through public or private financings if available. There
can be no assurances, however, that such collaboration arrangements, or any
public or private financings, will be available on acceptable terms, if at
all. If funds are raised through equity arrangements, further dilution to
stockholders may result. If adequate funds are not available, the Company may
be required to delay, reduce the scope of, or eliminate one or more of its
research or development programs or take other measures to cut costs, which
could have a material adverse effect on the Company. The Company estimates
that its existing capital resources, funding under existing research and
development collaborations and the commitment for equity funding from an
existing collaborative partner will be sufficient to fund its current and
planned operations into early 2000. There can be no assurances, however, that
changes in the Company's research and development plans or other changes
affecting the Company's operating expenses may result in the expenditure of
such resources before such time. In any event, the Company will need to raise
substantial additional capital to fund its operations in future periods.
IMPACT OF YEAR 2000
The Company has performed a review of its computer applications and equipment
related to their continuing functionality for the year 2000 and beyond. The
Company does not believe that it has material exposure with respect to the
year 2000 issue concerning its computer applications and equipment. The
Company is communicating with third parties with whom it has a material
relationship to assess its risk with respect to year 2000 issues. This
assessment is not complete, in particular, because the Company has not
completed inquiries of such outside third parties. However, the Company is
not aware, at this time, of any material year 2000 issues with respect to its
dealings with such third parties. The Company anticipates that its assessment
will be completed by September 30, 1999. In the event that year 2000 issues
were to disrupt the Company, such disruption may have a material impact on
the Company and its results of operations. Since no significant issues have
arisen, the Company does not have a contingency plan to address any material
year 2000 issues. A contingency plan, if required, will be developed
immediately upon completion of the Company's assessment of our third-party
exposure.
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The Company has not yet formulated a reasonably likely worst case scenario
with respect to year 2000 failures.
CERTAIN RISK FACTORS (For a discussion of additional Risk Factors applicable
to the Company, see the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.)
THE FAILURE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS MAY CAUSE US
TO CEASE OPERATIONS. We have not completed the development of any products. A
failure to successfully develop and commercialize products may cause us to
cease operations. Our potential therapies under development will require
significant additional research and development efforts and regulatory
approvals prior to potential commercialization.
The conclusion of the Phase III trial of REMUNE due to lack of efficacy has
had a material adverse effect on us. If Agouron fails to initiate or
successfully complete additional pivotal trials with REMUNE we may have to
abandon REMUNE or seek additional funding.
Our other therapies and technologies are at earlier stages of development
than REMUNE. Some of our technologies have not yet been tested in humans.
Human testing of potential products based on these technologies may not be
permitted by regulatory authorities. Even if human testing is permitted, the
products based on these technologies may not be successfully developed or be
shown to be safe and efficacious. Potential immune-based therapies based on
some of our technologies are at an early stage of clinical testing and may
not be shown to be safe or efficacious or ever receive regulatory approval.
The results of our preclinical studies and clinical trials may not be
indicative of future clinical trial results. A commitment of substantial
resources to conduct time-consuming research, preclinical studies and
clinical trials will be required if we are to develop any products. Delays in
planned patient enrollment in our clinical trials may result in increased
costs, program delays or both. None of our potential products may prove to be
safe and effective in clinical trials. FDA or other regulatory approvals may
not be obtained and even if successfully developed and approved, our products
may not achieve market acceptance. Any products resulting from our programs
are not expected to be successfully developed or commercially available for a
number of years, if at all.
Unacceptable toxicities or side effects may occur at any time in the course
of human clinical trials or, if any products are successfully developed and
approved for marketing, during commercial use of our products. The appearance
of any unacceptable toxicities or side effects could interrupt, limit, delay
or abort the development of any of our products or, if previously approved,
necessitate their withdrawal from the market.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY
ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS. We will need to raise
additional funds to conduct research and development, preclinical studies and
clinical trials necessary to bring our potential products to market and
establish manufacturing and marketing capabilities. A failure to raise
additional funds would require us to scale back or eliminate some or all of
our research and development programs or license to third parties products or
technologies that we would otherwise seek to develop ourselves. We believe
that our existing resources will enable us to maintain our current and
planned operations only into early 2000.
We anticipate that in 1999, the REMUNE clinical trials will continue to
represent a significant portion of our overall expenditures. We also
anticipate that costs related to the development of REMUNE will decrease in
2000. In particular, we anticipate additional capital improvements of
approximately $2.5 million to be made during 1999 related to increasing the
capacity of our manufacturing facility. Other anticipated costs with respect
to REMUNE will depend on many factors, in particular the continuation of our
collaboration with Agouron.
Our future capital requirements will depend on many factors, including:
- continued scientific progress in our research and development
programs,
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- the scope and results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory
approvals,
- the costs involved in filing, prosecuting and enforcing patent
claims,
- competing technological and market developments,
- the cost of manufacturing scale-up,
- effective commercialization activities and arrangements, and
- other factors not within our control.
We intend to seek additional funding through public or private financings,
arrangements with corporate collaborators or other sources. If funds are
acquired through additional collaborations, we will likely be required to
relinquish some or all of the rights to products that we may have otherwise
developed ourselves. If adequate funds are not available when needed or on
terms acceptable to us, we may be required to scale back some or all of our
research and development programs or license to third parties products or
technologies that we would otherwise seek to develop ourselves.
IF AGOURON TERMINATES ITS COLLABORATION WITH US WE MAY HAVE TO ABANDON
REMUNE. Our binding Letter of Intent with Agouron is the primary
collaborative agreement that provides us with contract revenue. The
termination of our agreement with Agouron might require us to abandon REMUNE.
Agouron has been acquired by Warner Lambert Company. We do not know which
Agouron research products Warner Lambert Company will continue to fund in the
future.
WE MAY NOT BE ABLE TO ENTER INTO ADDITIONAL COLLABORATIONS. We intend to seek
additional collaborative arrangements to develop and commercialize our
products. We may not be able to negotiate collaborative arrangements on
favorable terms, or at all, in the future and our current or future
collaborative arrangements may not be successful. This may cause us to
abandon some of our products under development.
OUR PATENTS AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT
AND THE PATENTS AND PROPRIETARY TECHNOLOGY OF OTHERS MAY PREVENT US FROM
COMMERCIALIZING PRODUCTS. A failure to obtain meaningful patent protection
for our potential products and processes would greatly diminish the value of
our potential products and processes.
In addition, whether or not our patents are issued, or issued with limited
coverage, others may receive patents which contain claims applicable to our
products. We are aware that a group working with Connetics Corporation has
received a United States patent related to autoimmune disease research that
covers technology similar to that used by us. We are also aware that
AstraZeneca PLC has acquired the rights to a patent, which has been issued in
Europe and other countries, that may interfere with our ability to develop
some of our technologies related to autoimmune disease if the patent is
upheld after current opposition proceedings. These patents, and others that
we are not aware of, may adversely affect our ability to develop and
commercialize products.
The patent positions of biotechnology and pharmaceutical companies can be
highly uncertain, and involve complex legal and factual questions. Therefore,
the breadth of claims allowed in biotechnology and pharmaceutical patents
cannot be predicted. We also rely upon unpatented trade secrets and know how,
and others may independently develop substantially equivalent trade secrets
or know how.
We also rely on protecting our proprietary technology in part through
confidentiality agreements with our corporate collaborators, employees,
consultants and certain contractors. These agreements may be breached and we
may not have adequate remedies for any breach. In addition, our trade secrets
may otherwise become known or independently discovered by our competitors.
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Our products and processes may infringe, or be found to infringe, patents not
owned or controlled by us, such as the patent rights owned by Connetics
Corporation and AstraZeneca PLC. If relevant claims of third-party patents
are upheld as valid and enforceable, we could be prevented from practicing
the subject matter claimed in the patents, or would be required to obtain
licenses to redesign our products or processes to avoid infringement.
Licenses may not be available at all or on terms commercially reasonable to
us and we may not be able to redesign our products or processes to avoid
infringement.
Litigation may be necessary to defend against claims of infringement, to
enforce patents issued to us or to protect trade secrets. Litigation could
result in substantial costs and diversion of management efforts regardless of
the results of the litigation. An adverse result in litigation could subject
us to significant liabilities to third parties, require disputed rights to be
licensed or require us to cease using some technology.
OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS. As of June 30, 1999, we had a
consolidated accumulated deficit of $179.6 million. We have not generated
revenues from the commercialization of any product. We expect to incur
substantial net operating losses over the next several years which may
imperil our ability to continue operations. We may not be able to generate
sufficient product revenue to become profitable at all or on a sustained
basis.
THE LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS. Clinical
testing, manufacture, promotion and sale of our products are subject to
extensive regulation by numerous governmental authorities in the United
States, principally the FDA, and corresponding state and foreign regulatory
agencies. This regulation may delay or prevent us from commercializing
products. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, seizure of products, total or partial
suspension of product marketing, failure of the government to grant premarket
approval, withdrawal of marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive.
We may not receive necessary FDA clearances for any of our potential products
in a timely manner, or at all. The length of the clinical trial process and
the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety and efficacy of our products is
uncertain.
Even if additional pivotal surrogate marker trials of REMUNE are successfully
completed, the FDA may not approve REMUNE for commercial sale. We may
encounter significant delays or excessive costs in our efforts to secure
necessary approvals. Regulatory requirements are evolving and uncertain.
Future United States or foreign legislative or administrative acts could also
prevent or delay regulatory approval of our products. We may not be able to
obtain the necessary approvals for clinical trials, manufacturing or
marketing of any of our products under development. Even if commercial
regulatory approvals are obtained, they may include significant limitations
on the indicated uses for which a product may be marketed.
In addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well
as possible civil or criminal sanctions.
Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices
("GMP") requirements specifically for biological drugs, as well as for other
drugs. In complying with the FDA's GMP requirements, manufacturers must
continue to expend time, money and effort in production, recordkeeping and
quality control to assure that the product meets applicable specifications
and other requirements. Failure to comply with the FDA's GMP requirements
subjects the manufacturer to possible FDA regulatory action. We or our
contract manufacturers, if any, may not be able to maintain compliance with
the FDA's GMP requirements on a continuing basis. Failure to maintain
compliance could have a material adverse effect on us.
The FDA has not designated expanded access protocols for REMUNE as "treatment"
protocols. The FDA may not determine that REMUNE meets all of the FDA's criteria
for use of an investigational drug for
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treatment use. Even if REMUNE is allowed for treatment use, third party
payers may not provide reimbursement for the costs of treatment with REMUNE.
The FDA may not consider REMUNE or any other of the Company's products under
development to be an appropriate candidate for accelerated approval,
expedited review or fast track designation.
To market any drug products outside of the United States, we are also subject
to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing the design and conduct of human
clinical trials and marketing approval. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated with
obtaining FDA approval set forth above, and approval by the FDA does not
ensure approval by the health authorities of any other country.
TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS
OBSOLETE. The biotechnology industry continues to undergo rapid change, and
competition is intense and is expected to increase. Competitors may succeed
in developing technologies and products that are more effective or affordable
than any which are being developed by us or which would render our technology
and products obsolete and noncompetitive. Many of our competitors have
substantially greater experience, financial and technical resources and
production, marketing and development capabilities than us. Accordingly, some
of our competitors may succeed in obtaining regulatory approval for products
more rapidly or effectively than us.
OUR LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE MAY PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS. We have not manufactured our
product candidates in commercial quantities. We may not successfully make the
transition from manufacturing clinical trial quantities to commercial
production quantities or be able to arrange for contract manufacturing and
this could prevent us from commercializing products. Even if REMUNE is
successfully developed and receives FDA approval, we have not demonstrated
the capability to manufacture REMUNE in commercial quantities. Except for
REMUNE, we have not demonstrated the ability to manufacture our treatments in
large-scale clinical or commercial quantities.
We have no experience in the sales, marketing and distribution of
pharmaceutical products. Thus, our products may not be successfully
commercialized even if they are developed and approved for commercialization.
The manufacturing of our products involves a number of steps and requires
compliance with stringent quality control specifications imposed by us and by
the FDA. Moreover, our products can only be manufactured in a facility that
has undergone a satisfactory inspection by the FDA. For these reasons, we
would not be able quickly to replace our manufacturing capacity if we were
unable to use our manufacturing facilities as a result of a fire, natural
disaster (including an earthquake), equipment failure or other difficulty, or
if such facilities are deemed not in compliance with the FDA's GMP
requirements and the non-compliance could not be rapidly rectified. Our
inability or reduced capacity to manufacture our products would prevent us
from successfully commercializing products.
We may enter into arrangements with contract manufacturing companies to
expand our own production capacity in order to meet requirements for our
products, or to attempt to improve manufacturing efficiency. If we choose to
contract for manufacturing services and encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and
distribute our finished products, clinical trials, market introduction and
subsequent sales of the products would be delayed. Further, contract
manufacturers must also operate in compliance with the FDA's GMP
requirements; failure to do so could result in, among other things, the
disruption of product supplies. Our potential dependence upon third parties
for the manufacture of our products may adversely affect our profit margins
and our ability to develop and deliver products on a timely and competitive
basis.
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ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS. Our
ability to earn sufficient returns on our products will depend in part on the
extent to which reimbursement for the costs of the products and related
treatments will be available from government health administration
authorities, private health coverage insurers, managed care organizations and
other organizations. Failure to obtain appropriate reimbursement could
prevent us from successfully commercializing products. Third party payors are
increasingly challenging the price of medical products and services. If
purchasers or users of our products are not able to obtain adequate
reimbursement for the cost of using the products, they may forego or reduce
their use. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and whether adequate third-party
coverage will be available.
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY. We face an
inherent business risk of exposure to product liability and other claims in
the event that the development or use of our technology or prospective
products is alleged to have resulted in adverse effects. We may not avoid
significant liability exposure. We may not have sufficient insurance coverage
and we may not be able to obtain sufficient coverage, at a reasonable cost.
An inability to obtain product liability insurance at acceptable cost or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of products developed by us. A product
liability claim could hurt our financial performance.
HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS COULD EXPOSE US TO SIGNIFICANT
COSTS. Although we do not currently manufacture commercial quantities of our
product candidates, we produce limited quantities of these products for our
clinical trials. We may be required to incur significant costs to comply with
current or future environmental laws and regulations. Our research and
development processes involve the controlled storage, use and disposal of
hazardous materials, biological hazardous materials and radioactive
compounds. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of these
materials and some waste products. Although we believe that our safety
procedures for handling and disposing of these materials comply with the
standards prescribed by these laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of an accident, we could be held liable for any damages that
result, and any liability could exceed our resources. Our operations,
business or assets may be materially and adversely affected by current or
future environmental laws or regulations.
SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK COULD HURT COMMON
STOCKHOLDERS. Our common stock is expressly subordinate to our Series F
Convertible Preferred Stock in the event of our liquidation, dissolution or
winding up. If we were to cease operations and liquidate our assets, there
may not be any remaining value available for distribution to the holders of
common stock after providing for the Series F Convertible Preferred Stock
liquidation preference.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS MAY HURT COMMON
STOCKHOLDERS. The market price of our common stock, like that of the common
stock of many other biopharmaceutical companies, has been and is likely to be
highly volatile. Factors such as:
- the results of preclinical studies and clinical trials by us, our
collaborators or our competitors,
- other evidence of the safety or efficacy of our products or our
competitors,
- announcements of technological innovations or new products by us
or our competitors,
- governmental regulatory actions,
- changes or announcements in reimbursement policies,
- developments with our collaborators,
- developments concerning patent or other proprietary rights of
ours or our competitors (including litigation),
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- concern as to the safety of our products,
- period-to-period fluctuations in our operating results,
- changes in estimates of our performance by securities analysts,
- market conditions for biopharmaceutical stocks in general, and
- other factors not within our control
could have a significant adverse impact on the market price of our common
stock. We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future.
EFFECT OF ANTI-TAKEOVER PROVISIONS COULD ADVERSELY AFFECT OUR COMMON
STOCKHOLDERS. Our Certificate of Incorporation and Bylaws include provisions
that could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. The approval of 66-2/3
percent of our voting stock is required to approve certain transactions and
to take certain stockholder actions, including the calling of special
meetings of stockholders and the amendment of any of the anti-takeover
provisions contained in our Certificate of Incorporation. Further, pursuant
to the terms of our stockholder rights plan, we have distributed a dividend
of one right for each outstanding share of common stock. These rights will
cause substantial dilution to the ownership of a person or group that
attempts to acquire us on terms not approved by the Board of Directors and
may have the effect of deterring hostile takeover attempts.
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PART II. OTHER INFORMATION
ITEM 2. -- CHANGES IN SECURITIES
During the second quarter of 1999, the Company sold 189,350 shares of newly
issued Immune Response common stock to Agouron, priced at a premium to
market, for $2 million. The common stock was sold under the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 1999 the Company held its Annual Meeting of Stockholders. The
following actions were taken at the annual meeting. As of March 31, 1999, the
record date, 24,276,137 shares were entitled to vote at the Annual Meeting.
1. The following Class I Directors were elected:
a. James B. Glavin. 22,119,213 shares voted in favor of the nominee,
335,273 shares withheld their vote;
b. Philip M. Young 22,155,763 shares voted in favor of the nominee,
298,723 shares withheld their vote;
e. The following directors continue in office for their existing terms:
Dennis J. Carlo
Kevin B. Kimberlin
Melvin Perelman
John Simon
William M. Sullivan
2. The amendment of the Company's Restated Certificate of Incorporation was
ratified. 21,575,447 shares were voted in favor of the proposal, 768,192
shares were voted against the proposal and 110,847 shares abstained.
3. The amendment and restatement of the Company's 1989 Stock Plan was
ratified. 8,759,674 shares were voted in favor of the proposal, 2,749,317
shares were voted against the proposal and 209,487 shares abstained.
4. The selection of Arthur Andersen LLP as the Company's independent auditor
was ratified. 22,221,731 shares were voted in favor of the proposal,
131,936 shares were voted against the proposal and 100,819 shares
abstained.
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ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3(i) Restated Certificate of Incorporation of the Company, as
amended.
27 Financial Data Schedule
b) Reports on Form 8-K
A report on Form 8-K dated May 17, 1999, was filed by The Immune Response
Corporation reporting under Item 5., Other Events, that an independent
Data Safety Monitoring Board completed a second interim analysis of the
Phase III clinical endpoint trial evaluating REMUNE and recommended that
the trial be concluded because differences in clinical endpoints were not
observed, and were not likely to be observed, between treatment groups.
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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 thereunto duly authorized.
THE IMMUNE RESPONSE CORPORATION
Date: August 12, 1999 /s/ Howard Sampson
--------------- -----------------------------------------------
Howard Sampson
Vice President Finance, Chief Financial Officer
and Treasurer
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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
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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
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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
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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
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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.
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(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,
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(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
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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
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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
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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
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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
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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
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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
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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
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<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).
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(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
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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
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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
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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
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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
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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.
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(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.
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(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
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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.
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(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.
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(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.
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(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
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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
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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;
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(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).
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(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
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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
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<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
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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
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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
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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
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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
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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
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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>
CERTIFICATE OF AMENDMENT OF
AMENDED AND 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 date of filing of its original Certificate of Incorporation
with the Secretary of State of Delaware was October 1, 1986.
THIRD: At a meeting of the Board of Directors of The Immune Response
Corporation, resolutions were duly adopted providing that:
The first paragraph of Section A of Article IV of the Restated
Certificate of Incorporation of The Immune Response Corporation, as amended,
shall be hereby amended and restated to read as follows:
"ARTICLE IV
"A. The total number of shares of all classes of capital stock
which the corporation shall have authority to issue is seventy million
(70,000,000) of which sixty-five million (65,000,000) shares of the par
value of One-Fourth of One Cent ($.0025) each shall be Common Stock (the
"Common Stock") and 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")."
FOURTH: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
<PAGE>
FIFTH: This Certificate of Amendment of Amended and Restated Certificate
of Incorporation was duly adopted at said annual meeting of the stockholders
in accordance with the provisions of section 242 of the General Corporation
Law of the State of Delaware.
IN WITNESS WHEREOF, said The Immune Response Corporation has caused this
certificate to be signed by its President and Chief Executive Officer, Dennis
J. Carlo, this 26th day of May, 1999.
By /s/ Dennis J. Carlo
-------------------------------------
Dennis J. Carlo
President and Chief Executive Officer
-2-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
EXTRACTED FROM ITEM 1 OF FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999, FOR
THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 21,437
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<CURRENT-ASSETS> 23,359
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9,487
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<OTHER-SE> 18,267
<TOTAL-LIABILITY-AND-EQUITY> 35,669
<SALES> 0
<TOTAL-REVENUES> 13,833
<CGS> 0
<TOTAL-COSTS> 21,851
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<INCOME-PRETAX> (8,018)
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