<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-26534
VION PHARMACEUTICALS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3671221
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4 Science Park, New Haven, CT 06511
(Address of Principal Executive Offices)
(203) 498-4210
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
The number of shares outstanding of the issuer's sole class of common
equity, as of June 30, 1998 is: 12,697,984 shares of common stock, $.01 par
value.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE> 2
Part 1 - Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,711,050 $ 3,890,621
Short-term investments 3,963,815 7,088,540
Accounts receivable 190,697 728,899
Other current assets 52,104 118,752
------------ ------------
Total current assets 11,917,666 11,826,812
Property and equipment, net 1,110,552 1,301,680
Security deposits 39,094 34,894
Research contract prepayment 416,945 416,945
------------ ------------
Total assets $ 13,484,257 $ 13,580,331
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Obligation under capital lease - current 274,853 274,853
Accounts payable and accrued expenses 1,098,442 1,008,210
------------ ------------
Total current liabilities 1,373,295 1,283,063
Obligation under capital lease - long term 322,439 472,578
------------ ------------
Total Liabilities 1,695,734 1,755,641
------------ ------------
Shareholders' equity
Preferred stock, $0.01 par value - 5,000,000 shares authorized consisting of:
Class A convertible preferred stock, $0.01 par value, authorized:
3,500,000 shares; issued and outstanding: 1998 - 614,761 and
1997 - 757,632 shares 6,148 7,576
Class B convertible preferred stock, $0.01 par value, authorized:
100,000 shares; issued and outstanding: 1998 - 2,932 shares 1997
4,592 shares 29 46
Class C convertible preferred stock, $0.01 par value, authorized:
25,000 shares; issued and outstanding: 0 shares 0 0
5% convertible preferred stock Series 1998, $0.01 par value, authorized:
15,000 shares; issued and outstanding: 5,000 shares 50 0
Common stock, $0.01 par value, authorized: 35,000,000 shares;
issued and outstanding: 1998 - 12,697,984 shares 1997 - 9,833,934 shares 126,980 98,339
Additional paid-in-capital 39,606,098 34,903,191
Deferred compensation (54,812) (72,128)
Accumulated deficit (27,895,970) (23,112,334)
------------ ------------
11,788,523 11,824,690
------------ ------------
Total liabilities and shareholders' equity $ 13,484,257 $ 13,580,331
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE> 3
CONSOLIDATED STATEMENT OF OPERATIONS
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
For The
Period
From
May 1, 1994
(Inception)
Three Months Ended Six Months Ended through
June 30, June 30, June 30, June 30, June 30,
---------------------------- ---------------------------- ------------
1998 1997 1998 1997 1998
(Unaudited) (Unaudited) (Unaudited)
---------------------------- ---------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research grants $ 109,199 $ 8,481 $ 109,199 $ 48,221 $ 209,199
Research support 147,599 0 422,441 0 1,645,353
Technology license revenues 0 0 0 0 4,000,000
------------ ------------ ------------ ------------ ------------
Total revenues 256,798 8,481 531,640 48,221 5,854,552
Operating expenses:
Research and development 2,097,510 2,872,857 4,371,032 4,394,636 21,154,807
General and administrative 459,067 491,058 1,090,776 982,592 7,928,658
Nonrecurring collaboration restructuring fee 0 0 0 0 600,000
Purchased research and development 0 0 0 0 4,481,405
Amortization of finance charges 0 0 0 0 345,439
Interest Income (106,191) (78,795) (249,065) (178,029) (1,115,013)
Interest Expense 15,712 10,744 34,417 21,802 133,530
------------ ------------ ------------ ------------ ------------
Net Loss $ (2,209,300) $ (3,287,383) $ (4,715,520) $ (5,172,780) $(27,674,274)
------------ ------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.21) $ (0.39) $ (0.46) $ (0.62)
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE> 4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Vion Pharmaceuticals, Inc.
( A Development Stage Company)
<TABLE>
<CAPTION>
Class A Class B 5% Convertible
Convertible Convertible Preferred Stock
Preferred Stock Preferred Stock Series 1998
------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 0 0 0 0
--------- ------- ------ ---- ----- ---
Issuance of Class A convertible preferred stock 1,250,000 12,500
Conversion of Class A convertible preferred stock (164,970) (1,650)
Class A convertible preferred stock dividend 21,998 220
Issuance of common stock
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
--------- ------- ------ ---- ----- ---
Balance at December 31, 1996 1,107,028 $11,070 0 $ 0 0 $ 0
--------- ------- ------ ---- ----- ---
Conversion of Class A convertible preferred stock (396,988) (3,970)
Class A convertible preferred stock dividend 47,592 476
Issuance of Class B convertible preferred stock 4,850 49
Conversion of Class B convertible preferred stock (258) (3)
Accretion of dividend payable on Class B convertible
preferred stock
Extension/reissuance of underwriter warrants
Exercise of warrants
Issuance of common stock
Exercise of stock options
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
--------- ------- ------ ---- ----- ---
Balance at December 31, 1997 757,632 $7,576 4,592 $ 46 0 $ 0
--------- ------- ------ ---- ----- ---
Conversion of Class B convertible preferred stock (1,660) (17)
Accretion of dividend payable on Class B convertible
preferred stock
Conversion of Class A convertible preferred stock (161,824) (1,618)
Class A convertible preferred stock dividend 18,953 190
Issuance of Series 1998 convertible preferred stock 5,000 50
Issuance of common stock
Exercise of stock options
Exercise of warrants
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
--------- ------- ------ ---- ----- ---
Balance at June 30, 1998 614,761 $ 6,148 2,932 $ 29 5,000 $50
--------- ------- ------ ---- ----- ---
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Deferred
Shares Amount Capital Compensation
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 7,530,288 75,302 14,913,435 0
----------- -------- ----------- ---------
Issuance of Class A convertible preferred stock 11,518,552
Conversion of Class A convertible preferred stock 458,255 4,582 (2,932)
Class A convertible preferred stock dividend
Issuance of common stock 29,418 294 102,426
Compensation associated with stock option grants 190,407 (190,407)
Amortization of deferred compensation 83,647
Net loss
----------- -------- ----------- ---------
Balance at December 31, 1996 8,017,961 $ 80,178 $26,721,888 $(106,760)
----------- -------- ----------- ---------
Conversion of Class A convertible preferred stock 1,102,757 11,028 (7,058)
Class A convertible preferred stock dividend
Issuance of Class B convertible preferred stock 4,481,801
Conversion of Class B convertible preferred stock 64,642 647 (644)
Accretion of dividend payable on Class B convertible
preferred stock
Extension/reissuance of underwriter warrants 168,249
Exercise of warrants 238 3 (6)
Issuance of common stock 598,336 5,983 3,463,818
Exercise of stock options 50,000 500 19,500
Compensation associated with stock option grants 55,643
Amortization of deferred compensation 34,632
Net loss
----------- -------- ----------- ---------
Balance at December 31, 1997 9,833,934 $ 98,339 $34,903,191 $ (72,128)
----------- -------- ----------- ---------
Conversion of Class B convertible preferred stock 605,413 6,054 (6,037)
Accretion of dividend payable on Class B convertible
preferred stock
Conversion of Class A convertible preferred stock 449,515 4,495 (2,877)
Class A convertible preferred stock dividend
Issuance of Series 1998 convertible preferred stock 4,738,746
Issuance of common stock 1,792,952 17,930 (107,519)
Exercise of stock options 13,500 135 50,265
Exercise of warrants 2,670 27 4,703
Compensation associated with stock option grants 25,626
Amortization of deferred compensation 17,316
Net loss
----------- -------- ----------- ---------
Balance at June 30, 1998 12,697,984 $126,980 $39,606,098 $ (54,812)
----------- -------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
-----------------------------
<S> <C> <C>
Balance at December 31, 1995 (10,025,505) 4,963,232
------------ -----------
Issuance of Class A convertible preferred stock 11,531,052
Conversion of Class A convertible preferred stock 0
Class A convertible preferred stock dividend (220) 0
Issuance of common stock 102,720
Compensation associated with stock option grants 0
Amortization of deferred compensation 83,647
Net loss (7,608,679) (7,608,679)
------------ -----------
Balance at December 31, 1996 ($17,634,404) $ 9,071,972
------------ -----------
Conversion of Class A convertible preferred stock 0
Class A convertible preferred stock dividend (476) 0
Issuance of Class B convertible preferred stock 4,481,850
Conversion of Class B convertible preferred stock 0
Accretion of dividend payable on Class B convertible
preferred stock (133,860) (133,860)
Extension/reissuance of underwriter warrants 168,249
Exercise of warrants (3)
Issuance of common stock 3,469,801
Exercise of stock options 20,000
Compensation associated with stock option grants 55,643
Amortization of deferred compensation 34,632
Net loss (5,343,594) (5,343,594)
------------ -----------
Balance at December 31, 1997 $(23,112,334) $11,824,690
------------ -----------
Conversion of Class B convertible preferred stock 0
Accretion of dividend payable on Class B convertible
preferred stock (67,926) (67,926)
Conversion of Class A convertible preferred stock 0
Class A convertible preferred stock dividend (190) 0
Issuance of Series 1998 convertible preferred stock 4,738,796
Issuance of common stock (89,589)
Exercise of stock options 50,400
Exercise of warrants 4,730
Compensation associated with stock option grants 25,626
Amortization of deferred compensation 17,316
Net loss (4,715,520) (4,715,520)
------------ -----------
Balance at June 30, 1998 $(27,895,970) $11,788,523
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
For the period
from
May 1, 1994
(inception)
For the Six Months through
Ended June 30, June 30,
----------------------------- --------------
1998 1997 1998
(Unaudited) (Unaudited)
----------------------------- --------------
<S> <C> <C> <C>
Cash Flows from operating activities:
Net loss $ (4,715,520) $ (5,172,780) $(27,674,274)
Adjustments to reconcile net loss to
cash flows used in operating activities
Purchased research and development 0 0 4,481,405
Amortization of financing costs 0 0 345,439
Depreciation and amortization 245,936 132,297 701,142
(Increase) in other current assets 604,850 15,890 (241,815)
(Increase) in other assets (4,200) 192,670 (454,324)
Increase in accounts payable and
accrued expense 90,232 1,228,027 1,063,910
Accretion on Class B preferred stock (67,926) 0 (201,786)
Extension/reissuance of placement agent warrants 0 0 168,249
Stock issued for services 0 0 600,417
Stock options issued for compensation 42,942 47,333 756,864
------------ ------------ ------------
Net cash (used in) operating activities (3,803,686) (3,556,563) (20,454,773)
------------ ------------ ------------
Cash flows used for investing activities:
Purchase of marketable securities 0 (1,139,610) (22,209,166)
Maturities of marketable securities 3,124,725 5,438,856 18,245,351
Cash portion of MelaRx acquisition 0 0 4,061
Acquisition of fixed assets (54,808) (119,747) (867,261)
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,069,917 4,179,499 (4,827,015)
------------ ------------ ------------
Cash flows provided by financing activities:
Initial public offering 0 0 9,696,210
Net proceeds from issuance of common stock (39,189) 20,000 3,166,888
Net proceeds from issuance of preferred stock 4,738,796 0 20,751,698
Repurchase of common stock 0 0 (720)
Net proceeds from bridge financing 0 0 1,704,269
Repayments of bridge financing 0 0 (2,000,000)
Advances from stockholders 0 0 250,000
Repayments to stockholders 0 0 (250,000)
Exercise of warrants 4,730 (3) 4,727
Receipts from sale of unit purchase option 0 0 250
Repayment of equipment capital lease (150,139) (78,425) (330,484)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,554,198 (58,428) 32,992,838
------------ ------------ ------------
Net increase in cash 3,820,429 564,508 7,711,050
Cash and cash equivalents at beginning of period 3,890,621 3,788,369 0
------------ ------------ ------------
Cash and cash equivalents at end of period $ 7,711,050 $ 4,352,877 $ 7,711,050
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5
<PAGE> 6
VION PHARMACEUTICALS, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note A) - The Company:
Vion Pharmaceuticals, Inc., formerly OncoRx, Inc., (the "Company") was
incorporated in May 1993 and began operations on May 1, 1994. The Company is in
the development stage and is principally devoted to the research and development
of therapeutic products for the treatment of cancer and cancer related
disorders.
In April 1995, the Company merged into OncoRx Research Corp., a previously
unaffiliated company ("Research"). The stockholders of the Company were issued
shares of common and preferred stock of MelaRx Pharmaceuticals Inc. ("MelaRx"),
the 100% owner of Research, in exchange for all of the outstanding shares of the
Company. The stockholders of the Company were issued 2,654,038 common and 23,859
preferred shares of MelaRx in exchange for 2,000,000 shares of common stock of
the Company valued at $2.16 per share (fair value). As the shareholders of the
Company, which was renamed OncoRx, Inc. after the merger, obtained a majority
interest in the merged company, for accounting purposes the Company is treated
as the acquirer. Therefore, the transaction is recorded as a purchase in the
Company's financial statements which include the results of operations of the
Company from inception and MelaRx from the date of acquisition. The excess of
cost over the fair value of MelaRx's net tangible assets, $4,481,405, was
treated as purchased research and development and expensed immediately. In
August 1995, the Company completed an initial public offering resulting in net
proceeds to the Company of approximately $9,696,000. In April 1996, the name of
the Company was changed from OncoRx, Inc. to Vion Pharmaceuticals, Inc.
(Note B) - Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month and six month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report for the fiscal year ended
December 31, 1997 on Form 10-KSB (File No. 0-26534).
Page 6
<PAGE> 7
(Note C) - Private Placement of Class B Convertible Preferred Stock:
On August 20, 1997, the Company completed a private placement of 4,850
shares of non-voting Class B Convertible Preferred Stock, at $1,000 per share,
resulting in net proceeds to the Company of $4,481,450. Shares of Class B
Preferred Stock are convertible into shares of common stock including an
accretion of 8% per annum. Shares of the Class B Preferred Stock are eligible,
under certain circumstances, to receive dividends paid in Class C Preferred
Stock. The Class C Preferred Stock is convertible into shares of common stock at
the average closing bid price of the Company's common stock for thirty
consecutive business days ending on the private placement closing date and is
not entitled to dividends.
(Note D) - Private Placement of 5% Convertible Preferred Stock Series 1998
On June 30, 1998, the Company completed a private placement of 5,000
shares of non-voting 5% Convertible Preferred Stock Series 1998 ("Series 1998
Preferred Stock") at $1,000 per share, resulting in net proceeds to the Company
of $4,738,796. Each share of Series 1998 Preferred Stock is convertible into
277.777 shares of the Company's common stock. The shares of Series 1998
Preferred Stock pay quarterly dividends in kind of 5% per annum. The issuance of
the Series 1998 Preferred Stock at closing also triggered certain antidilution
adjustment provisions of the Company's outstanding warrants, resulting in the
issuance of additional warrants. (See Note E)
(Note E) - Antidilution Adjustment
As a result of the sale on June 30, 1998 of 5,000 shares of Series 1998
Preferred Stock, and pursuant the Warrant Agreement governing the rights of the
Company's Class A Warrants and the Class B Warrants, an adjustment will be made
to the exercise price of the Class A Warrants and the Class B Warrants and
there will be a corresponding distribution of additional Class A Warrants and
Class B Warrants. Specifically, on September 8, 1998 (the "Payment Date") each
holder of a Class A Warrant at the close of business on August 26,1998 (the
"Record Date") will receive an additional 0.02 (2 per 100 outstanding) Class A
Warrants and the exercise price of the Class A Warrants shall be reduced from
$4.73 to $4.63. In addition, on the Payment Date each holder of a Class B
Warrant on the close of business on the Record Date will receive an additional
0.02 (2 per 100 outstanding) Class B Warrants and the exercise price of the
Class B Warrants shall be reduced from $6.37 to $6.23.
(Note F) - Warrant Exchange Offer
On May 19, 1998, the Company commenced an offer to exchange each
outstanding Class A Warrant, at the option of the holder, for either (A) 0.438
shares of the Company's Common Stock or (B) 0.254 shares of Common Stock and
$0.66 in cash. The Company simultaneously offered to exchange each outstanding
Class B Warrant, at the holder's option, for either (A) 0.212 shares of Common
Stock or (B) 0.123 shares of Common Stock and $0.32 in cash. The Exchange Offer
was not conditioned upon the exchange of a minimum number of Class A Warrants or
Class B Warrants. As a result of the Exchange Offer 3,209,806 Class A Warrants
and 1,881,835 Class B Warrants were exchanged for
Page 7
<PAGE> 8
1,395,027 and 397,925 shares of the Company's Common Stock and $39,007 and
$3,686 in cash, respectively.
(Note G) - Boehringer Ingelheim Agreement
On November 24, 1997, the Company and Boehringer Ingelheim International
GmbH of Germany ("BI") entered into an exclusive worldwide licensing agreement
for the development and marketing of Promycin(R) (porfiromycin), Vion's most
advanced anticancer agent. The agreement provides the Company with exclusive
co-promotion rights to Promycin in the United States and Canada. BI will have
exclusive worldwide rights to market and sell Promycin outside the United States
and Canada. The Company is responsible for the manufacturing and supply of
Promycin for all territories.
In exchange for these rights, the Company received $4,000,000 in
technology access fees and net proceeds of $2,869,801 from the sale of 448,336
shares of common stock at a premium to the then current market price. BI has
also reimbursed the Company for certain initial development costs to date and
will share in future worldwide development costs.
The Company has cash equivalents and short-term investments of $11,674,865
at June 30, 1998. This balance includes $2,451,278 of restricted investments for
future Promycin development expenses from the original $4,000,000 received in
1997 from BI. The Company recorded $422,441 of reimbursed Promycin development
expenses as revenue during the first six months of 1998.
(Note H) - Covance Agreement:
During the quarter ended June 30, 1997, the Company entered into a
Clinical Development Agreement (the "Agreement") with Covance Clinical Research
Unit Ltd. and Covance Inc. ("Covance"). Pursuant to the Agreement the Company is
contracting to Covance the selection and management of clinical sites and the
preparation of clinical trial reports arising from clinical trials performed by
Covance regarding the Company's product candidate Promycin for the inclusion in
a regulatory submission. During the twelve months ending December 31, 1998, the
Company estimates it will make payments of $5,500,000 to Covance under the
Agreement. For the six months ended June 30, 1998, the Company has incurred
$802,489 under this agreement which has been expensed as incurred.
Page 8
<PAGE> 9
(Note J) - Per Share Data
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
- -----------------------------------------------------------------------------------------------------------------------------
Net loss ($ 2,245,630) ($3,287,383) ($ 4,751,850) ($5,172,780)
Numerator for basic and
diluted net loss per share ($ 2,245,630) ($3,287,383) ($ 4,751,850) ($5,172,780)
- -----------------------------------------------------------------------------------------------------------------------------
Denominator:
- -----------------------------------------------------------------------------------------------------------------------------
Denominator for basic and
diluted net loss per share 10,612,282 8,468,051 10,251,896 8,338,645
- -----------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss ($ 0.21) ($ 0.39) ($ 0.46) ($ 0.62)
per share
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
For additional disclosures regarding warrants and Class A, B and Series 1998
Convertible Preferred Stock see Note C, D, E and F. These potentially dilutive
securities were not included in diluted net loss per share as the effect would
be antidilutive. Under the Financial Accounting Standards Board Statement No.
128, which the Company has adopted, the dilutive effect of stock options has
been excluded.
(Note K) - Small Business Innovation Research Grants
On February 27, 1998 and April 22, 1998 the Company was awarded a Small
Business Innovation Research ("SBIR") grant from the National Cancer Institute
for the Reduced Toxicity of Tumor-Targeted Salmonella and the Inhibitors of
Ribonucleotide Reductase programs, respectively. The awards were for
reimbursable direct costs of up to $100,000 and $373,565, respectively and
expire on August 31, 1998 and April 30, 1999, respectively. As of June 30, 1998
the Company recognized $72,869 and $36,330 of revenue, respectively, from the
SBIR grants for reimbursement of expenses incurred for the duration of the
grants through June 30, 1998.
Page 9
<PAGE> 10
ITEM 2. PLAN OF OPERATION.
General
The Company is a development stage biopharmaceutical company. Its
activities to date have consisted primarily of research and development
sponsored by it pursuant to two separate license agreements with Yale
University, negotiating and obtaining other collaborative agreements, recruiting
management and other personnel, securing its facilities and raising equity and
debt financing. The Company's revenues consist of research grants, technology
license fees and reimbursements for research expenses. The Company has not
generated any revenues from product sales and has incurred substantial operating
losses from its activities.
The Company intends to use a substantial portion of the net proceeds of
its June, 1998 private financing, along with the equity investment, initial
payments and reimbursed cost sharing from the November 24, 1997 exclusive
worldwide licensing agreement with BI to fund its plan of operations, which
includes the following elements for the next 12 months:
- Continue to develop internal research and development capabilities and
conduct research and development with respect to the Company's core
technologies and other product candidates which may be identified by
the Company. The Company expects to incur substantial expenditures for
research and development expenses. During the next twelve months, the
Company plans to hire four additional employees.
- Conduct Phase III clinical studies in the U.S. and Europe of
Promycin for treatment of cancer of the head and neck.
- Conduct Phase I clinical studies in the U.S. of the Company's
anticancer agent Triapine(TM) for safety and pharmocokinectics.
- File Investigational New Drug application(s) with the FDA and conduct
Phase I clinical studies in the U.S. for the safety, tumor targeting
and pharmacokinectics of several bacterial constructs using the
Company's TAPET(TM) cancer therapy delivery technology.
- Continue to support research and development being performed at Yale
University and by other collaborators and seek additional
collaborative agreements.
The Company currently estimates that anticipated revenues, the remaining
net proceeds of its private placement in June, 1998, the equity investment,
initial payments and reimbursed cost sharing from the agreement with BI and its
existing cash and equivalents will be sufficient to fund its planned operations
for approximately the next 10 months. In the event of delays or unexpected
problems in product development, cost overruns, or other unanticipated expenses
commonly associated with a company in an early stage of development, the Company
will sooner require additional funds. In addition,
Page 10
<PAGE> 11
the Company will need substantial additional financing, beyond this period to
fund further research and development and the Company's working capital
requirements. As of June 30, 1998 the Company estimates that the amount required
to fund operations for the next twelve months will be approximately $19,600,000,
of which approximately $9,400,000 is subject to reimbursement under the terms of
the BI collaboration agreement. However, the Company's cash requirements may
vary materially from those now planned because of results of research and
development, results of product testing, relationships with strategic partners,
changes in focus and direction of the Company's research and development
programs, competitive and technological advances, the regulatory process in the
United States and abroad and other factors.
The Company has not made an assessment of its Year 2000 issues, although
the Company believes that there will not be a material impact on its operations.
The Company received an opinion from its auditors for the fiscal year
ended December 31, 1997, expressing substantial doubt as to its ability to
continue as a going concern. The Company has addressed the immediate need for
additional capital by raising funds through a private placement of its
securities, although the Company expects to require additional financing to fund
its longer-term activities and may require additional capital to fund its
operations, acquisitions and new development projects.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $10,508,041. The
Company's most recent principal sources of funds through June 30, 1998 have been
$4,738,796 net proceeds from private financing through issuance of 5,000 shares
of Series 1998 Convertible Preferred Stock, $4,000,000 from upfront technology
access fees and net proceeds of $2,869,801 from the sale of 448,336 shares of
common stock at a premium to the then current market price related to the BI
agreement.
The Company has used and continues to use the proceeds of its financing
activities to implement its business plan, which includes hiring of additional
personnel; capital expenditures for the purchase of equipment, principally for
laboratory facilities; costs of research and development; payment of license
fees due under sponsored research agreements; and grants to Yale University to
fund certain research. During the twelve months ending December 31, 1998, the
Company will be required to make payments of an aggregate of $1,706,776 to Yale
University under sponsored research and license agreements. The Company requires
substantial new revenues and other sources of capital in order to meet such
budgeted expenditures and to continue its operations beyond the next 10 months.
The Company is seeking to enter into one or more significant strategic
partnerships with pharmaceutical companies for the development of its core
technologies, through which it would anticipate receiving some of the
substantial revenues and financing. The Company has entered into discussions
with several major pharmaceutical companies concerning such strategic alliances,
but there can be no assurance that the Company will be successful in achieving
such alliances, nor can the Company predict what funds might be available to it
if it can achieve such an alliance. The Company may be required to seek to raise
funds through additional means, including (1) public
Page 11
<PAGE> 12
offerings or private placements and recapitalization of its securities; (2)
spin-off, refinancing, or partial sale or disposition of its rights to certain
of its non-core technologies; and (3) equipment lease financing. No assurance
can be given that the Company will be successful in arranging financing through
any of these alternatives.
Failure to obtain such financing will require the Company to delay,
renegotiate, or omit payment on its outside research funding commitments causing
it to substantially curtail its operations, resulting in a material adverse
effect on the Company.
As described in Notes D and F to the Company's financial statements
contained herein, the Company consummated an exchange offer for its Class A and
Class B Warrants and a private placement of 5% Convertible Preferred Stock
Series 1998 in June 1998. The effect of these transactions on the Company's
capital structure is summarized below:
<TABLE>
<CAPTION>
VION PHARMACEUTICALS, INC. CAPITALIZATION Pre Exchange Post Exchange
(Expressed in Fully-Diluted Common Shares) Offer Offer
5/18/98 6/30/98
------------ ------------
<S> <C> <C>
Issued and outstanding Common Stock
Common stock (excluding exchange offer) 10,720,740 10,905,032
Common Issued in Exchange for Class A Warrants 1,395,027
Common Issued in Exchange for Class B Warrants 397,925
----------- -----------
Total issued and outstanding common stock 10,720,740 12,697,984
Additional shares of common stock if all
warrants, convertible preferred stock and
options were exercised:
Class A convertible preferred stock 1,817,300 1,707,669
Class B convertible preferred stock 826,937 893,356
Class A Warrants 4,262,383 1,052,577
Class B Warrants 3,162,605 1,280,770
Class B Warrants Underlying Class A Warrants 4,262,383 1,052,577
Underwriter Unit Purchase Option 1,075,000 1,075,000
Private Placement Warrants 748,213 748,213
Qualified and Non-qualified options 1,480,274 1,468,274
----------- -----------
Subtotal Fully Diluted Shares 28,355,835 21,976,420
5% Convertible Preferred Stock Series 1998
(Note F) 1,388,889
---------- -----------
Total Fully Diluted Shares 28,355,835 23,365,309
</TABLE>
Page 12
<PAGE> 13
Forward-Looking Statements - Cautionary Factors
Statements included in this Form 10-QSB which are not historical in nature
are forward-looking statements made pursuant to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
regarding the Company's future business prospects, plans, objectives,
expectations and intentions are subject to certain risks, uncertainties and
other factors that could cause actual results to differ materially from those
projected or suggested in the forward-looking statements, including, but not
limited to: the inability to raise additional capital, the possibility that any
or all of the Company's products or procedures are found to be ineffective or
unsafe, the possibility that third parties hold proprietary rights that preclude
the Company from marketing its products, and the possibility that third parties
will market a product equivalent or superior to the Company's product
candidates.
Page 13
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on May 19, 1998,
two proposals were voted upon by the Company's stockholders. A brief description
of each proposal voted upon at the Annual Meeting and the number of votes cast
for, against and the number of abstentions to each proposal are set forth below.
A vote was taken at the Annual Meeting for the election of nine Directors
of the Company to hold office until the next annual Meeting of Stockholders of
the Company and until their respective successors shall have been duly elected.
The aggregate number of votes cast by holders of Common Stock and Class A
Convertible Preferred Stock voted in person or by proxy for each nominee were as
follows:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
William R. Miller 8,332,387 14,289
John A. Spears 8,359,937 14,289
Alan C. Sartorelli Ph.D. 8,359,937 14,289
Michel C. Bergerac 8,366,437 7,789
Frank T. Cary 8,366,437 7,789
James L. Ferguson 8,366,437 7,789
Michael C. Kent 8,366,437 7,789
E. Donald Shapiro 8,366,437 7,789
Walter Wriston 8,366,437 7,789
</TABLE>
A vote was taken at the Annual Meeting on the proposal to ratify the
appointment of Ernst & Young LLP as auditors for the Company for the fiscal year
ending December 31, 1998. The aggregate number of votes cast by holders of
Common Stock and Class A Convertible Preferred Stock in person or by proxy
which: (a) voted for, (b) voted against or (c) abstained on such proposal were
as follows:
<TABLE>
<CAPTION>
For Against Abstained
--- ------- ---------
<S> <C> <C>
8,295,429 59,310 25,200
</TABLE>
The foregoing proposals are described more fully in the Company's
definitive proxy statement dated April 9, 1998, filed with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
At the Special Meeting of Stockholders of the Company held on June 26,
1998, two proposals were voted upon by the Company's stockholders. A brief
description of each proposal voted upon at the Special Meeting and the number
Page 14
<PAGE> 15
of votes cast for, against and the number of abstentions to each proposal are
set forth below.
A vote was taken at the Special Meeting for the approval of the issuance
of up to an aggregate of 2,717,274 shares of common stock in connection with an
exchange offer from the Company to the holders of its Class A Warrants and Class
B Warrants. The aggregate number of votes cast by holders of Common Stock and
Class A Convertible Preferred Stock in person or by proxy which: (a) voted for,
(b) voted against or (c) abstained on such proposal were as follows:
<TABLE>
<CAPTION>
For Against Abstained
--- ------- ---------
<S> <C> <C>
6,021,306 81,490 636,974
</TABLE>
A vote was taken at the Special Meeting for the approval of the issuance
of up to an aggregate of 2,200,000 shares of common stock in connection with a
contemplated exchange offer to the holders of the Company's Class A Convertible
Preferred Stock. The aggregate number of votes cast by holders of Common Stock
and Class A Convertible Preferred Stock in person or by proxy which: (a) voted
for, (b) voted against or (c) abstained on such proposal were as follows:
<TABLE>
<CAPTION>
For Against Abstained
--- ------- ---------
<S> <C> <C>
5,987,096 105,950 646,724
</TABLE>
The foregoing proposals are described more fully in the Company's
definitive proxy statement dated May 29, 1998, filed with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation of Vion
Pharmaceuticals, Inc.
10.01 Employment Agreement dated January 16, 1998 between Vion
Pharmaceuticals, Inc. and John A. Spears.
27. Article 5 Financial Data Schedule for second quarter 1998.
(b) Reports on Form 8-K.
None
Page 15
<PAGE> 16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VION PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Thomas E. Klein
--------------------------------------
Thomas E. Klein
Vice President - Finance
(Duly authorized signatory and
Chief Financial Officer)
Date: August 3, 1998
Page 16
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VION PHARMACEUTICALS, INC.
FIRST: The name of the Corporation is VION PHARMACEUTICALS,
INC.
SECOND: The address, including street, number, city, and
country, of the registered office of the Corporation in the State of Delaware is
32 Loockerman Square, Suite L-100, City of Dover, County of Kent; and the name
of the registered agent of the Corporation in the State of Delaware is The
Prentice-Hall Corporation System, Inc.
THIRD: 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.
FOURTH: Authorization, Designation and Amount. The total
number of shares of all classes of stock which the Corporation shall have
authority to issue is 40,000,000 shares, consisting of (a) 35,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), of which 2,307,550
shares are designated as Series A Common Stock (the "Series A Common Stock") and
(b) 5,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). The powers, terms, conditions, designations, preferences and
privileges, relative, participating, optional and other special rights, and
qualifications, limitations and restrictions, of the Series A Common Stock and
the Preferred Stock shall be set forth in this Article FOURTH.
PART A. PREFERRED STOCK
(a) Designation of Preferred Stock. The Board of Directors of
the Corporation (the "Board of Directors") is hereby expressly authorized to
provide for, designate and issue, out of the authorized but unissued shares of
Preferred Stock, one or more series of Preferred Stock subject to the terms and
conditions set forth herein. Before any shares of any such series are issued,
the Board of Directors shall fix, and hereby is expressly empowered to fix, by
resolution or resolutions, the following provisions of the shares of any such
series:
<PAGE> 2
(1) the designation of such series, the number of
shares to constitute such series and the stated value thereof, if different from
the par value thereof;
(2) whether the shares of such series shall have
voting rights or powers in addition to any voting rights required by law and, if
so, the terms of such voting rights or powers, which may be full or limited;
(3) the dividends, if any, payable on such series,
whether any such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, the preference
or relation which such dividends shall bear to the dividends payable on any
shares of stock of any other class or series;
(4) whether the shares of such class or series shall
be subject to redemption by the Corporation, and, if so, the times, prices and
other conditions of such redemption;
(5) the amount or amounts payable with respect to
shares of such class or series upon, and the rights of the holders of such class
or series in, the voluntary or involuntary liquidation, dissolution or winding
up, or upon any distribution of the assets, of the Corporation;
(6) whether the shares of such class or series shall
be subject to the operation of a retirement or sinking fund and, if so, the
extent to and manner in which any such retirement or sinking fund shall be
applied to the purchase or redemption of the shares of such class or series for
retirement or other corporate purposes and the terms and provisions relative to
the operation thereof;
(7) whether the shares or series shall be convertible
into, or exchangeable for, shares of stock of any other class or series of any
other securities and, if so, the price or prices or the rate or rates of
conversion or exchange and the method, if any, of adjusting the same, and any
other terms and conditions of exchange;
(8) the limitations and restrictions, if any, to be
effective while any shares of such class or series are outstanding upon the
payment of dividends or the making of other distributions on, and upon the
purchase, redemption or other acquisition by the Corporation of the Common Stock
or shares of stock of any other class or series;
(9) the conditions or restrictions, if any, to be
effective while any shares of such class or series are outstanding upon the
creation of indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such class or series or of any other class
or series; and
-2-
<PAGE> 3
(10) any other powers, designations, preferences and
relative, participating, optional or other special rights, and any
qualifications, limitations or restrictions thereof.
The powers, designations, preferences and relative,
participating, optional or other special rights of each series of Preferred
Stock, and the qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding. The Board
of Directors is hereby expressly authorized from time to time to increase (but
not above the total number of authorized shares of Preferred Stock) or decrease
(but not below the number of shares thereof then outstanding) the number of
shares of stock of any series of Preferred Stock so designated pursuant to this
Part A.
PART B. COMMON STOCK AND SERIES A COMMON STOCK
1. Common Stock.
(a) Voting. Each holder of Common Stock shall be
entitled to one vote for each share of Common Stock held of record on all
matters as to which holders of Common Stock shall be entitled to vote, which
voting rights shall not be cumulative. In any election of directors, no holder
of Common Stock shall be entitled to more than one vote per share.
(b) Other Rights. Except as described in paragraph 2
below with respect to Series A Common Stock, each share of Common Stock issued
and outstanding shall be identical in all respects with each other such share
and each share of Common Stock shall be entitled to all of the rights and
privileges, and subject to the limitations and qualifications, of shares of
Common Stock provided by the Delaware General Corporation Law.
2. Series A Common Stock.
(a) Same Rights as Common Stock. Except as set forth
in subparagraph (b) below, each share of Series A Common Stock issued and
outstanding shall have all of the powers and privileges, and shall be subject to
all of the qualifications and limitations of Common Stock, and shall be
identical in all respects to each share of Common Stock.
(b) Conversion.
(i) Each share of issued and outstanding Series A
Common Stock shall be automatically converted, without notice and without any
action on the part of the holder thereof, into:
(A) 1.55158 shares of
Common Stock upon the closing of an "Initial Public Offering" (as defined below)
if such Initial Public Offering closes prior to the
-3-
<PAGE> 4
"Deadline" (as defined below), after giving effect to the cancellation of shares
of Series A Common Stock pursuant to the Agreement dated as of February 17, 1995
among the holders thereof and the Corporation, a copy of which may be obtained
from the Secretary of the Corporation; or
(B) one share of Common
Stock if there is no closing of an Initial Public Offering prior to the Deadline
and the cancellation of the shares of Series A Common Stock required to be
deposited in escrow pursuant to the Agreement dated as of February 17, 1995 is
not effective at such time;
(ii) Upon and after the conversion provided for in
subparagraph (b)(i), all rights of holders of shares of Series A Common Stock
with respect to Series A Common Stock, except the right to receive shares of
Common Stock in accordance with this Section, shall cease and the certificates
representing the Series A Common Stock will be deemed for all corporate purposes
to evidence the shares of Common Stock into which such Series A Common Stock is
converted, whether or not the Corporation has received the certificates
representing such shares. The authorized shares of Series A Common Stock shall
thereafter resume the status of authorized but unissued shares of Common Stock
and may be reissued as shares of Common Stock (but not as Series A Common
Stock).
(iii) Upon such conversion the Corporation shall
issue to each holder of record of Series A Common Stock the number of shares of
Common Stock issuable on conversion of the shares of Series A Common Stock held
by such holder. However, such conversion shall be effective whether or not
certificates representing the Common Stock have been issued to any such holder.
(c) Definitions.
(i) An "Initial Public Offering" shall mean an
underwritten public offering of the Corporation's Common Stock pursuant to a
Registration Statement declared effective under the Securities Act of 1933, as
amended (the "Securities Act").
(ii) The "Deadline" shall mean September 1, 1995,
provided that if the Corporation has filed a Registration Statement under the
Securities Act with respect to a public offering under the Securities Act prior
to September 1, 1995, but such Registration Statement has not yet been declared
effective on September 1, 1995, the Corporation may extend the Deadline for a
period of up to 60 days. The Corporation shall give prompt notice of such
extension by certified mail, return receipt requested to each holder of Series A
Common Stock.
FIFTH: The Corporation is to have perpetual existence.
-4-
<PAGE> 5
SIXTH: Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class of them and/or between
this 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 this corporation or of any creditor or stockholder thereof or on
the application of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this 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 this 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 this 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 this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
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 this Corporation, as the case may be, and also on this
Corporation.
SEVENTH: The Board of Directors is expressly authorized to
adopt, amend or repeal by-laws of the Corporation.
EIGHTH: Elections of the directors need not be by written
ballot except and to the extent provided by the by-laws of the Corporation.
NINTH: The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted by the
provisions of paragraph (7) of subsection (b) of Section 102 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented.
TENTH: The Corporation shall, to the fullest extent permitted
by the provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
directors and officers of the Corporation from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director or officer and shall insure to the benefit of
the heirs, executors and administrators
-5-
<PAGE> 6
of such a person.
ELEVENTH: From time to time any of the provisions of this
certificate of incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws,
and all rights at any time conferred upon the stockholders of the Corporation by
this certificate of incorporation are granted subject to the provisions of this
Article ELEVENTH.
-6-
<PAGE> 7
VION PHARMACEUTICALS, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
CLASS A CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
VION PHARMACEUTICALS, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify that, pursuant to the authority conferred on the Board of
Directors of the Corporation by the Certificate of Incorporation of the
Corporation and in accordance with Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation adopted the
following resolution establishing a series of 3,500,000 shares of Preferred
Stock of the Corporation designated as "Class A Convertible Preferred Stock":
RESOLVED, that pursuant to the authority conferred on the
Board of Directors of this Corporation by the Certificate of
Incorporation, as amended, a series of Preferred Stock, par value $.01
per share, of the Corporation is hereby established and created, and
that the designation and number of shares thereof and the voting and
other powers, preferences and relative, participating, optional or
other rights of the shares of such series and the qualifications,
limitations and restrictions thereof are as follows:
Class A Convertible Preferred Stock
Section 1. Designation and Amount. The shares of such series
shall be designated as "Class A Convertible Preferred Stock" and the number of
shares constituting such series shall be 3,500,000.
Section 2. Issuance of Additional Shares. The number of
authorized shares of the Class A Preferred Stock may be reduced or eliminated by
the Board of Directors of the Corporation or a duly-authorized committee thereof
in compliance with the General Corporation Law of the State of Delaware stating
that such reduction has been authorized, but the number of authorized shares of
Class A Preferred Stock shall not, except as contemplated in Section 10(c) be
increased nor shall it be decreased to be less than the then outstanding shares
of Class A Preferred Stock.
Section 3. Certain Definitions. For purposes hereof the
following definitions shall apply:
-7-
<PAGE> 8
"Board" shall mean the Board of Directors of the Corporation.
"Business Day" shall mean any day excluding Saturday, Sunday
and any day which shall be in the State of New York a legal holiday or a day on
which banking institutions in the State of New York are authorized by law to
close.
"Common Stock" shall mean the Common Stock, par value $.01 per
share, of the Corporation.
"Corporation" shall mean Vion Pharmaceuticals, Inc., a
Delaware corporation.
"Dividend Payment Date" shall have the meaning assigned to
such term in Section 4(a)(i) hereof.
"Fair Value" shall have the meaning assigned to such term in
Section 9(j) hereof.
"Issuance Date" shall mean the date of original issuance of
the Class A Preferred Stock.
"Junior Stock" shall mean the Common Stock and any shares of
Preferred Stock of any series or class of the Corporation, whether presently
outstanding or hereafter issued, which are by their terms expressly made junior
to the shares of Class A Preferred Stock at the time outstanding as to the
distribution of assets on any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation and are not subject to mandatory redemption or
repurchase prior to the date on which no shares of Class A Preferred Stock are
outstanding.
"Majority of the Class A Preferred Stock" shall mean more than
50% of the outstanding shares of Class A Preferred Stock.
"Preferred Stock" shall mean the unclassified Preferred Stock,
par value $.01 per share, of the Corporation.
"Record Date" shall have the meaning assigned to such term in
Section (4)(a)(i) hereof.
"Redemption Date" shall have the meaning assigned to such term
in Section 7(b) hereof.
"Redemption Price" shall have the meaning assigned to such
term in Section 7(c) hereof.
"Redemption Notice" shall have the meaning assigned to such
term in Section 7(d) hereof.
"Class A Conversion Ratio" shall have the meaning
-8-
<PAGE> 9
assigned to such term in Section 9(b) hereof.
"Class A Preferred Stock" shall mean the Class A Preferred
Stock, par value $.01 per share, of the Corporation.
"Special Dividend Date" shall have the meaning assigned to
such term in Section 4(a)(ii) hereof.
"Subsidiary" shall mean any corporation, limited liability
company or other entity, a majority of the voting stock or interest of which is,
at the time as of which any determination is being made, owned by the
Corporation either directly or through one or more Subsidiaries.
"Voting Stock" shall mean any shares having general voting
power in electing the Board (irrespective of whether or not at the time stock of
any other class or classes has or might have voting power by reason of the
occurrence of any contingency). The Common Stock and the Class A Preferred Stock
are Voting Stock.
Section 4. Dividends.
(a) Dividends and Distributions. (i) The holders of the
outstanding Class A Preferred Stock shall be entitled to receive semi-annual
dividends, on a cumulative basis, equal to five percent (5%) (on a per annum
basis) of the Class A Preferred Stock held by such holder, payable, in arrears,
in additional shares of Class A Preferred Stock. Upon the Dividend Payment Date,
to the extent permitted by applicable law, the holder shall be deemed to be the
holder of record of the shares of Class A Preferred Stock issuable upon each
such semi-annual dividend, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Class A Preferred
Stock shall not then have been actually delivered to the holder. Each such
dividend described above shall be payable on or about the first day of April and
October in each year as fixed by the Board, or such other dates as are fixed by
the Board (each a "Dividend Payment Date"), to the holders of record of Class A
Preferred Stock at the close of business on or about the 15th day of the month
next preceding such first day of April or October, as the case may be, as fixed
by the Board (each a "Record Date"). Such dividends shall become payable
beginning on the first Dividend Payment Date for which the Record Date is
subsequent to the Issuance Date. Dividends payable for any partial dividend
period shall be computed on the basis of the actual days elapsed in such period.
(ii) In the event that on the date that is
twenty-four (24) months after the Issuance Date (the "Special Dividend Date"),
the average closing bid price of the Common Stock for the thirty (30)
consecutive trading days immediately preceding the Special Dividend Date (the
"Subsequent Trading Price") is less than 100% of the then applicable Conversion
Price, then the
-9-
<PAGE> 10
Company shall pay a one time dividend of Class A Preferred Stock for each share
of Class A Preferred Stock outstanding equal to the lesser of (a) one share of
Class A Preferred Stock or (b)(x) one share of Class A Preferred Stock
multiplied by (y) the then applicable Conversion Price divided by the Subsequent
Trading Price, minus one; provided, however, that the Company shall have the
option of delaying the Special Dividend Date for up to 60 days at its sole
discretion and the dividend calculation shall be made as if such date were the
Special Dividend Date.
(iii) If the Corporation calls the Class A Preferred
Stock for redemption at any time prior to three (3) years from the Issuance
Date, the Corporation will pay a one time dividend payable in shares of Class A
Preferred Stock equal to fifteen percent (15%) of the Class A Preferred Stock
held by such holder which shall be in addition to any cumulative dividends
described in subparagraph (i) hereof and any Special Dividend described in
subparagraph (ii) hereof. Prior to the Redemption Date, the holder will be
entitled to convert such shares of Class A Preferred Stock issuable pursuant to
this Section 4(a)(iii).
(b) To the extent the amount of any dividend payable to any
holder of Class A Preferred Stock does not equal an integral multiple of one
share of Class A Preferred Stock, such fractional share shall be rounded up to
the next whole integral number of shares.
(c) Subject to the prior and superior rights of the holders of
any shares of any series or class of capital stock ranking prior and superior to
the shares of Class A Preferred Stock with respect to dividends, the holders of
shares of Class A Preferred Stock shall be entitled to receive, as, when and if
declared by the Board of the Corporation, out of assets legally available for
that purpose, dividends or distributions in cash, stock or otherwise.
(d) If and when the Corporation shall declare any dividend or
distribution on the Common Stock (other than a stock dividend), the Corporation
shall, concurrently with the declaration of such dividend or distribution on the
Common Stock, declare a like dividend or distribution, as the case may be, on
the Class A Preferred Stock in an amount per share equal to (x) the amount of
the dividend or distribution per share of Common Stock multiplied by (y) the
number of shares of Common Stock into which one share of Class A Preferred Stock
is then convertible.
(e) Any dividend or distribution payable to the holders of the
Class A Preferred Stock pursuant to this Section 4(d) shall be paid to such
holders at the same time as the dividend or distribution on the Common Stock by
which it is measured is paid.
(f) All dividends or distributions declared upon the Class A
Preferred Stock shall be declared pro rata per share.
-10-
<PAGE> 11
Section 5. Liquidation Rights of Class A Preferred Stock. In
the event of a liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary (a "Liquidation Event"), after payment or
provision for payment of debts and other liabilities of the Corporation, the
holders of the Class A Preferred Stock then outstanding shall first be entitled
to be paid out of the assets of the Corporation available for distribution to
its shareholders, whether such assets are capital, surplus, or earnings, before
any payment or declaration and setting apart for payment of any amount shall be
made in respect of Junior Stock, an amount equal to $10.00 per share of Class A
Preferred Stock plus an amount equal to all declared and unpaid dividends
thereon (subject to appropriate adjustment to reflect any stock split,
combination, reclassification or reorganization of the Class A Preferred Stock).
Following payment in full of the full preferential amounts set forth in the
immediately preceding sentence, the holders of the Class A Preferred Stock shall
not be entitled to any further distribution in the event of a Liquidation Event.
If upon any Liquidation Event, whether voluntary or involuntary, the assets to
be distributed to the holders of the Class A Preferred Stock shall be
insufficient to permit the payment to such shareholders of the full preferential
amounts aforesaid, then all of the assets of the Corporation to be distributed
shall be so distributed ratably to the holders of the Class A Preferred Stock on
the basis of the number of shares of Class A Preferred Stock held. All shares of
Class A Preferred Stock shall rank as to payment upon the occurrence of any
Liquidation Event above senior to the Common Stock as provided herein and,
unless the terms of such series shall provide otherwise, senior to all other
series of the Corporation's preferred stock.
Section 6. Merger, Consolidation.
(a) At any time, in the event of:
(1) any consolidation or merger of the Corporation
with or into any other corporation or other entity, or any other corporate
reorganization or transaction or series of related transactions by the
Corporation in which in excess of 50% of the Corporation's voting power is
transferred, or
(2) a sale or other disposition of all or
substantially all of the assets of the Corporation (any such event in (1) or (2)
a "Merger Event"), then:
in the case of a Merger Event, the holders of the
Class A Preferred Stock shall receive for each share of Class A Preferred Stock
in cash or in securities (including, without limitation, debt securities)
received from the acquiring corporation or other entity or person, or a
combination thereof, at the closing of any such transaction, an amount equal to
$10.00 (subject to appropriate adjustment to reflect any stock split,
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combination, reclassification or reorganization of Class A Preferred Stock) plus
an amount equal to all declared and unpaid dividends on such shares; and
Such payments shall be made with respect to the Class A
Preferred Stock by (i) redemption or purchase of such shares by the Corporation
or (ii) purchase or acquisition of such shares by the surviving or acquiring
corporation, entity or person immediately upon consummation of the Merger Event.
Before any payment or distribution is made to the holders of the Junior Stock,
the full preferential amounts stated in this subsection 6(a)(2) shall first be
paid to the holders of the Class A Preferred Stock. In the event the full amount
of such payment is not paid to the holders of the Class A Preferred Stock upon
or immediately prior to such transaction in accordance herewith, then all cash
and securities (including, without limitation, debt securities) to be
distributed in respect of the proposed transaction shall be distributed ratably
among the holders of the Class A Preferred Stock.
(b) Any securities or other property to be delivered to the
holders of the Class A Preferred Stock or Common Stock pursuant to Section 6(a)
hereof above shall be valued as follows:
(1) (A) If traded on a securities exchange or quoted
on the Nasdaq National Market System, the value shall be deemed to be the
average of the closing prices of the securities on such exchange or market over
the 30-day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid prices over the
30-day period ending three (3) days prior to the closing; and
(C) If there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by the
Corporation's Board.
(2) All other securities or other property shall be
valued at the fair market value thereof, as determined in good faith by the
Corporation's Board.
(c) In the event the requirements of Section 6(a) hereof are
not complied with, the Corporation shall forthwith either:
(1) Cause such Merger Event to be postponed until
such time as the requirements of this Section 6 have been complied with; or
(2) Cancel such Merger Event, in which event the
rights, preferences and privileges of the holders of the Class A Preferred Stock
shall revert to and be the same as such rights,
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preferences and privileges existing immediately prior to the date of the first
notice referred to in Section 6(d) hereof.
(d) The Corporation shall give each holder of record of Class
A Preferred Stock written notice of such impending transaction not later than
thirty (30) days prior to the shareholders' meeting called to approve such
transaction, or thirty (30) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 6, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than thirty (30) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of a Majority
of the Class A Preferred Stock.
(e) The provisions of this Section 6 are in addition to the
protective provisions of Section 10 hereof.
(f) A consolidation or merger of the Corporation with or into
another corporation, other than in a transaction described in this Section 6,
shall not be considered a Merger Event and accordingly the Corporation shall
make appropriate provision to ensure that the terms of this Certificate of
Designations survive such transaction.
Section 7. Redemption.
(a) Restriction on Redemption and Purchase. Except as
expressly provided in this Section 7, the Corporation shall not have the right
to purchase, call, redeem or otherwise acquire for value any or all of the Class
A Preferred Stock.
(b) Optional Redemption. At any time, beginning six (6) months
after the Issuance Date, the Corporation may, at its option, redeem for cash the
Class A Preferred Stock in whole, but not in part, at the Redemption Price
hereinafter specified, in the event that the closing bid price of the
Corporation's Common Stock for twenty (20) trading days in any thirty trading
(30) day period, exceeds [insert price which is 150% of the closing bid price on
the Issuance Date]. The Corporation shall not redeem Class A Preferred Stock or
give notice of any redemption unless the Corporation has sufficient and lawful
funds to redeem all of the then outstanding Class A Preferred Stock. The date on
which the Class A Preferred Stock is to be redeemed pursuant to this Section
7(b) is herein called the "Redemption Date." If the Corporation redeems the
Class A Preferred Stock at any time prior to three (3) years from the Issuance
Date, the Corporation will pay an additional dividend pursuant to Section
4(a)(iii).
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The "closing bid price" for each trading day shall be the
reported closing bid price on the NASDAQ Small-Cap Market or the NASDAQ National
Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is
not quoted on NASDAQ, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading (based on the aggregate dollar
value of all securities listed or admitted to trading) or, if not listed or
admitted to trading on any national securities exchange or quoted on NASDAQ, the
closing bid price in the over-the-counter market as furnished by any NASD member
firm selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of the Corporation in good faith. "Trading day" shall
mean a day on which the national securities exchange or NASDAQ used to determine
the closing bid price is open for the transaction of business or the reporting
of trades or, if the closing bid price is not so determined, a day on which
NASDAQ is open for the transaction of business.
(c) Redemption Price. The Redemption Price of the Class A
Preferred Stock (the "Redemption Price") shall be an amount per share equal to
$10.00 (subject to appropriate adjustment to reflect any stock split,
combination, reclassification or reorganization of the Class A Preferred Stock)
plus all declared and unpaid dividends thereon, to and including the Redemption
Date.
(d) Redemption Notice. The Corporation shall, not less than
thirty (30) days nor more than sixty (60) days prior to the Redemption Date,
give written notice ("Redemption Notice") to each holder of record of Class A
Preferred Stock to be redeemed. The Redemption Notice shall state:
(1) that all of the outstanding shares of Class A
Preferred Stock are to be redeemed and the total number of
shares being redeemed;
(2) the number of shares of Class A Preferred Stock
held by the holder which the Corporation intends to redeem;
(3) the Redemption Date and Redemption Price;
(4) that the holder's right to convert the Class A
Preferred Stock into shares of the Common Stock as provided in
Section 9 hereof will terminate on the Redemption Date; and
(5) the time, place and manner in which the holder is
to surrender to the Corporation
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<PAGE> 15
the certificate or certificates representing the shares of
Class A Preferred Stock to be redeemed.
(e) Payment of Redemption Price and Surrender of Stock. On the
Redemption Date, the Redemption Price of the Class A Preferred Stock scheduled
to be redeemed or called for redemption shall be payable to the holders of the
Class A Preferred Stock. On or before 5:00 p.m. New York City time on the
Redemption Date, each holder of Class A Preferred Stock to be redeemed, unless
the holder has exercised his right to convert the shares as provided in Section
9 hereof, shall surrender the certificate or certificates representing such
shares to the Corporation, in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price for such shares shall be
payable to the order of the person or entity whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be cancelled and retired.
(f) Termination of Rights. If the Redemption Notice is duly
given, and, if at least ten (10) days prior to the Redemption Date, the
Redemption Price is either paid or made available for payment through the
arrangement specified in subsection (g) below, then notwithstanding that the
certificates evidencing any of the shares of Class A Preferred Stock so called
or scheduled for redemption have not been surrendered, all rights with respect
to such shares shall forthwith after the Redemption Date cease and terminate,
except only (i) the right of the holders to receive the Redemption Price without
interest upon surrender of their certificates therefor or (ii) the right to
receive shares of Common Stock upon exercise of the conversion rights provided
in Section 9 hereof on or before the Redemption Date.
(g) Deposit of Funds. At least ten (10) days prior to the
Redemption Date, the Corporation shall deposit with any bank or trust company in
New York, New York, a sum equal to the aggregate Redemption Price of all shares
of the Class A Preferred Stock scheduled to be redeemed or called for redemption
and not yet redeemed, with irrevocable instructions and authority to the bank or
trust company to pay, on or after the Redemption Date, the Redemption Price to
the respective holders upon the surrender of their share certificates. The
deposit shall constitute full payment for the shares of Class A Preferred Stock
to the holders thereof, and from and after the date of such deposit (even if
prior to the Redemption Date), the shares of Class A Preferred Stock shall be
deemed to be redeemed and no longer outstanding, and the holders thereof shall
cease to be shareholders with respect to such shares of Class A Preferred Stock
and shall have no rights with respect thereto, except the right to receive from
the bank or trust company payment of the Redemption Price of the shares of Class
A Preferred Stock, without interest, upon surrender of their certificates
therefor or the right to convert
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<PAGE> 16
such shares of Class A Preferred Stock into shares of Common Stock as provided
in Section 9 hereof. Any monies so deposited and unclaimed at the end of one
year from the Redemption Date shall be released or repaid to the Corporation,
after which time the holders of shares of Class A Preferred Stock called for
redemption shall be entitled to receive payment of the Redemption Price only
from the Corporation.
Section 8. Voting Rights.
(a) Class A Preferred Stock. Each holder of shares of Class A
Preferred Stock shall be entitled to vote on all matters and, except as
otherwise expressly provided herein, shall be entitled to the number of votes
equal to the largest number of full shares of Common Stock into which the shares
of Class A Preferred Stock of such holder could be converted, pursuant to the
provisions of Section 9 hereof, at the record date for the determination of the
shareholders entitled to vote on such matters.
(b) Voting Together. Except as otherwise expressly provided
herein or as required by law, the holders of Class A Preferred Stock and Common
Stock shall vote together and not as separate classes.
(c) Amendment of Conversion Terms of Class A Preferred Stock.
Without the approval by the holders of a Majority of the Class A Preferred
Stock, the Corporation will not (i) change by amendment the Restated Certificate
of Incorporation of the Corporation or the terms and provisions of the Class A
Preferred Stock which adversely affects the rights and preferences of the
holders of the Class A Preferred Stock nor (ii) authorize the issuance of
capital stock ranking senior to the Class A Preferred Stock.
Section 9. Conversion. The holders of Class A Preferred Stock
shall have the following conversion rights:
(a) Right to Convert. The shares of Class A Convertible
Preferred Stock shall be convertible, in whole or in part, at the option of the
holder thereof and upon notice to the Corporation at any time prior to the
Redemption Date, into fully paid and nonassessable shares of Common Stock and
such other securities and property as hereinafter provided.
(b) Class A Conversion Price. The shares of Class A
Convertible Preferred Stock shall be convertible initially at the ratio of
2.777777 shares of Common Stock for each full share of Class A Convertible
Preferred Stock and shall be subject to adjustment as provided herein (the
"Class A Conversion Ratio"). The initial conversion price per share of Common
Stock is $3.60 and shall be subject to adjustment as provided herein (the
"Conversion Price"). For purposes of this resolution, the "Class A Conversion
Ratio" applicable to a share of Class A Convertible
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<PAGE> 17
Preferred Stock shall be the number of shares of Common Stock and number or
amount of any other securities and property as hereinafter provided into which a
share of Class A Preferred Stock is then convertible and shall be determined by
dividing the then existing Conversion Price into $10.00.
(c) Mechanics of Conversion. Each holder of Class A Preferred
Stock that desires to convert its shares of Class A Preferred Stock into shares
of Common Stock shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the
Class A Preferred Stock or Common Stock, and shall give written notice to the
Corporation at such office that such holder elects to convert the same and shall
state therein the number of shares of Class A Preferred Stock being converted.
Thereupon the Corporation shall promptly issue and deliver to such holder a
certificate or certificates for the number of shares of Common Stock to which
such holder is entitled. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
certificate or certificates representing the shares of Class A Preferred Stock
to be converted, and the person or entity entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of Common Stock on such date. In the event that
a notice to convert is given following a notice of a Merger Transaction,
Liquidation Event or a Redemption but prior to the consummation of one of the
foregoing events and such event is not consummated, the conversion shall, at the
option of the holder of the Class A Preferred Stock who tendered for conversion,
be voidable and such holder shall have the right to maintain ownership of the
shares of Class A Preferred Stock tendered for conversion, provided that the
holder shall have notified the Corporation accordingly within sixty (60) days
after such failure to consummate the event.
(d) Adjustment for Stock Splits and Combinations. If the
Corporation at any time or from time to time after the Issuance Date effects a
subdivision of the outstanding Common Stock, the Class A Conversion Ratio then
in effect immediately before that subdivision shall be proportionately
increased, and conversely, if the Corporation at any time or from time to time
after the Issuance Date combines the outstanding shares of Common Stock into a
smaller number of shares, the Class A Conversion Ratio then in effect
immediately before the combination shall be proportionately decreased. Any
adjustment under this subsection (d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(e) Adjustment for Certain Dividends and Distributions. If the
Corporation at any time or from time to time after the Issuance Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Class A Conversion
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<PAGE> 18
Ratio then in effect shall be increased as of the time of such issuance or, in
the event such record date is fixed, as of the close of business on such record
date, by multiplying the Class A Conversion Ratio then in effect by a fraction
(1) the numerator of which shall be the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution, and (2) the denominator of
which shall be the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date; provided, however, that, if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Class A Conversion Ratio shall be recomputed accordingly as
of the close of business on such record date and thereafter the Class A
Conversion Ratio shall be adjusted pursuant to this subsection (e) as of the
time of actual payment of such dividends or distributions.
(f) Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time to time after the Issuance Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, then and in each such event
provision shall be made so that the holders of Class A Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Corporation which
they would have received had their shares of Class A Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during such
period subject to all other adjustments called for during such period under this
Section 9.
(g) Adjustment for Reclassification, Exchange and
Substitution. In the event that at any time or from time to time after the
Issuance Date, the Common Stock issuable upon the conversion of the Class A
Preferred Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
or a reorganization, merger, consolidation or sale of assets, provided for
elsewhere in this Section 9), then and in any such event each holder of Class A
Preferred Stock shall have the right thereafter to convert such Class A
Preferred Stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or other
change, by holders of the maximum number of shares of Common Stock into which
such shares of Class A Preferred Stock could have been converted immediately
prior to such recapitalization,
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reclassification or change, all subject to further adjustment as provided
herein.
(h) Reorganizations, Mergers, Consolidations or Sales of
Assets. If at any time or from time to time after the Issuance Date there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Section 9) or a merger or consolidation of the Corporation
with or into another corporation, or the sale of all or substantially all of the
Corporation's properties and assets to any other person (other than as provided
for in Section 6), then, as part of such reorganization, merger, consolidation
or sale, provision shall be made so that the holders of the Class A Preferred
Stock shall thereafter be entitled to receive upon conversion of the Class A
Preferred Stock the number of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 9 with respect to the rights
of the holders of the Class A Preferred Stock after the reorganization, merger,
consolidation or sale to the end that the provisions of this Section 9
(including adjustment of the Class A Conversion Ratio then in effect and the
number of shares purchasable upon conversion of the Class A Preferred Stock)
shall be applicable after that event and be as nearly equivalent as may be
practicable.
(i) Adjustment for Issuances. If at any time or from time to
time after the Issuance Date, the Corporation shall issue or sell Common Stock
or rights, options, warrants or other securities convertible into Common Stock,
excluding those rights, options, warrants or other securities convertible into
Common Stock outstanding as of the Issuance Date, at a price per share which is
lower than both (A) the then effective Conversion Price and (B) the average
closing bid price (as defined in Section 7(b)) for the thirty (30) consecutive
trading days immediately prior to such issuance, then the conversion ratio shall
be increased by multiplying the conversion ratio theretofore in effect by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such shares, rights, options,
warrants or convertible securities plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the denominator
shall be the number of shares of Common Stock outstanding immediately prior to
the issuance of such rights, options, warrants or convertible securities plus
the number of shares which the aggregate offering price of the total number of
shares offered would purchase at the then effective Conversion Price, provided,
however, that no such adjustment shall be made which results in a decrease in
the conversion ratio. Such adjustment shall be made whenever such rights,
options, warrants or convertible securities are issued, and shall become
effective
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immediately and retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or convertible
securities. Notwithstanding the foregoing, no adjustment will be required on
account of (i) the exercise of any of the options presently outstanding under
the Company's Amended and Restated 1993 Stock Option Plan (the "Plan") for
officers, directors and certain other key personnel of the Company or (ii) the
issuance or exercise of any other securities which may hereafter be granted or
exercised under the Plan or under any other employee benefit plan of the
Company.
(j) Adjustment for Distributions. If at any time or from time
to time after the Issuance Date, the Corporation shall distribute to all or
substantially all holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in subparagraphs (f)
and (i) above), then in each case the conversion ratio shall be increased by
multiplying the conversion ratio theretofore in effect by a fraction, of which
the numerator shall be the then Fair Value on the date of such distribution, and
of which the denominator shall be such Fair Value on such date minus the then
Fair Value (as so determined) of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights, options, warrants or
convertible securities applicable to one share, provided, however, that no such
adjustment shall be made which results in a decrease in the conversion ratio.
Such adjustment shall be made whenever any such distribution is made and shall
become effective on the date of distribution retroactive to the record date for
the determination of stockholders entitled to receive such distribution. "Fair
Value" shall equal the average closing bid price for the thirty (30) consecutive
trading days immediately prior to the date of distribution multiplied by the
then current conversion ratio.
(k) Adjustment for Expirations. Upon the expiration of any
rights, options, warrants or conversion privileges, the issuance of which
necessitated an adjustment to the conversion ratio as set forth herein, if such
shall not have been exercised, then the conversion ratio shall, upon such
expiration, be readjusted and shall thereafter be such as it would have been had
it been originally adjusted (or had the original adjustment not been required,
as the case may be) on the basis of (A) the fact that Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion privileges, and (B) the fact that such shares of Common Stock, if
any, were issued or sold for the consideration actually received by the
Corporation upon such exercise plus the consideration, if any, actually received
by the Corporation for the issuance, sale or grant of all such rights, options,
warrants or conversion privileges whether or not exercised.
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(l) Certificate of Adjustment. In each case of an adjustment
or readjustment of the Class A Conversion Ratio, the Corporation, at its
expense, shall cause its Chief Financial Officer or Chief Accounting Officer to
compute such adjustment or readjustment in accordance with the provisions hereof
and prepare a certificate showing such adjustment or readjustment, and shall
mail such certificate, by certified mail, return receipt requested, postage
prepaid, to each registered holder of the Class A Preferred Stock at the
holder's address as shown in the Corporation's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (1) the Class
A Conversion Ratio at the time in effect and (2) the type and amount, if any, of
other property which at the time would be received upon conversion of the Class
A Preferred Stock.
(m) Notices of Record Date. In the event (i) that the
Corporation fixes a date for determination of stockholders of record of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or (ii) of any capital
reorganization of the Corporation, any reclassification or recapitalization of
the capital stock of the Corporation, any merger or consolidation of the
Corporation with or into any other corporation or other entity, or any transfer
of all or substantially all of the assets of the Corporation to any other person
or entity or any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, the Corporation shall mail to each holder of Class A
Preferred Stock at least thirty (30) days prior to the record date specified
therein, or, if applicable, the effective date of such transaction or event
specified therein, a notice specifying (1) the record date for the purpose of
determining the stockholders who are entitled to receive such dividend or
distribution and a description of such dividend or distribution, (2) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
or (3) the date, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
(n) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Class A Preferred Stock. To the extent
the amount of any share of Common Stock payable to any holder of Class A
Preferred Stock does not equal an integral multiple of one share of Common
Stock, such fractional share shall be rounded up to the next whole integral
number of shares.
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(o) Reservation of Common Stock Issuable Upon Conversion. The
Corporation shall at all times following the date which is ninety (90) days
after the Issuance Date, reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Class A Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Class A Preferred Stock.
(p) Notices. Any notice required or permitted by this Section
9 or any other provision hereof to be given shall be in writing and be deemed
given upon the earlier of actual receipt or three (3) days after the same has
been deposited in the United States mail, by certified or registered mail,
return receipt requested, postage prepaid, and addressed (i) to each holder of
record of Class A Preferred Stock at the address of such holder appearing on the
books of the Corporation, or (ii) to the Corporation at 4 Science Park, New
Haven, CT, 06511 or (iii) to the Corporation or any such holder, at any other
address for the giving of notice specified in a written notice given to the
other.
(q) Payment of Taxes. The Corporation will pay all taxes
(other than taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Class A Preferred Stock, including, without limitation,
any tax or other charge imposed in connection with any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that in which
the shares of Class A Preferred Stock so converted were registered.
(r) No Amendment or Impairment. The Corporation shall not
amend its Restated Certificate of Incorporation or participate in any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, for the purpose of avoiding or
seeking to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in carrying out all such action as may be reasonably necessary
or appropriate in order to protect the conversion rights of the holders of the
Class A Preferred Stock against impairment.
Section 10. Restrictions and Limitations. So long as any
shares of Class A Preferred Stock remain outstanding, the Corporation shall not,
and shall not permit any Subsidiary to, without the vote or written consent by
the holders of a Majority of the Class A Preferred Stock:
(a) Redeem, purchase or otherwise acquire for value, any share
or shares of Class A Preferred Stock, otherwise than by redemption in accordance
with Section 7 hereof, or any warrant,
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option or right to purchase any Class A Preferred Stock;
(b) Declare or pay any dividends on or declare or make any
other distribution, direct or indirect (other than a dividend payable solely in
shares of Common Stock), on account of the Junior Stock or set apart any sum for
any such purpose;
(c) Increase (other than by redemption or conversion) the
total number of authorized shares of Class A Preferred Stock; or
(d) Take any action which would result in taxation of the
holders of Class A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986 (or any comparable provision of the Internal Revenue Code of 1986
as hereafter from time to time amended).
Section 11. No Reissuance of Class A Preferred Stock. No share
or shares of Class A Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued.
Section 12. Outstanding Shares. For purposes of this
Certificate of Designations, all shares of Class A Preferred Stock shall be
deemed outstanding except (i) from the date, or the deemed date, of surrender of
certificates evidencing shares of Class A Preferred Stock, all shares of Class A
Preferred Stock converted into Common Stock, (ii) from the date of registration
of transfer, all shares of Class A Preferred Stock held of record by the
Corporation or any subsidiary of the Corporation and (iii) any and all shares of
Class A Preferred Stock held in escrow prior to delivery of such stock by the
Corporation to the initial beneficial owners thereof.
Section 13. Status of Acquired Shares. Shares of Class A
Preferred Stock received upon conversion pursuant to Section 9 or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Class A Preferred Stock.
Section 14. Preemptive Rights. The Class A Preferred Stock is
not entitled to any preemptive or subscription rights in respect of any
securities of the Corporation.
Section 15. Severability of Provisions. Whenever possible,
each provision hereof shall be interpreted in a manner as to be effective and
valid under applicable law, but if any provision hereof is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a
-23-
<PAGE> 24
provision hereof would be valid or enforceable if a period of time were extended
or shortened or a particular percentage were increased or decreased, then such
court may make such change as shall be necessary to render the provision in
question effective and valid under applicable law.
-24-
<PAGE> 25
CERTIFICATE OF DESIGNATION OF
CLASS B CONVERTIBLE PREFERRED STOCK
OF
VION PHARMACEUTICALS, INC.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is Vion
Pharmaceuticals, Inc., a Delaware corporation.
2. The certificate of incorporation of the Company authorizes the
issuance of Five million (5,000,000) shares of preferred stock, $.01 par value
per share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
series and by resolution or resolutions to establish the designation and number
and to fix the relative rights and preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating a Class B issue of Preferred Stock:
RESOLVED, that five thousand (5,000) of the five million (5,000,000)
authorized shares of Preferred Stock of the Company shall be designated Class B
Convertible Preferred Stock, $.01 par value per share, and shall possess the
rights and preferences set forth below:
Section 1. Designation and Amount. The shares of such series shall have
a par value of $.01 per share and shall be designated as Class B Convertible
Preferred Stock (the "Class B Preferred Stock") and the number of shares
constituting the Class B Preferred Stock shall be five thousand (5,000). The
Class B Preferred Stock shall be offered at a purchase price of One Thousand
Dollars ($1,000) per share (the "Original Class B Issue Price"), with an eight
percent (8%) per annum accretion rate as set forth herein.
Section 2. Rank. The Class B Preferred Stock shall rank: (i) junior to
any other class or series of capital stock of the Company hereafter created
specifically ranking by its terms senior to the Class B Preferred Stock
(collectively, the "Senior Securities"); (ii) prior to all of the Company's
Common Stock, $.01 par value per share ("Common Stock"); (iii) prior to any
class or series of capital stock of the Company hereafter created not
specifically ranking by its terms senior to or on parity with any Class B
Preferred Stock of whatever subdivision (collectively, with the Common Stock,
"Junior Securities"); and (iv) on parity with the Company's Class A Preferred
Stock and any class or series of capital stock of the Company hereafter created
specifically
-25-
<PAGE> 26
ranking by its terms on parity with the Class B Preferred Stock ("Parity
Securities") in each case as to distributions of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary (all
such distributions being referred to collectively as "Distributions").
Section 3. Dividends. The Class B Preferred Stock will bear no cash
dividends, and the holders of the Class B Preferred Stock ("Holders") shall not
be entitled to receive cash dividends on the Class B Preferred Stock. The Class
B Preferred Stock shall bear Special Dividends, if applicable, upon conversion
in accordance with the terms of Section 5 herein below.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company ("Liquidation Event"), either voluntary or involuntary, the then
Holders of shares of Class B Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Certificate of Incorporation or any certificate of designation, and
prior in preference to any distribution to Junior Securities but in parity with
any distribution to Parity Securities, an amount per share equal to the sum of
(i) the Original Class B Issue Price for each outstanding share of Class B
Preferred Stock and (ii) an amount equal to eight percent (8%) of the Original
Class B Issue Price, per annum, accruing daily, for the period that has passed
since the date of the Closing (as defined in the Regulation D Subscription
Agreement by and between the Holders and the Company dated on or about August
20, 1997) (the "Closing") of the purchase of such Holder's shares of Class B
Preferred Stock from the Company (such amount being referred to herein as the
"Premium"). If upon the occurrence of such event, and after payment in full of
the preferential amounts with respect to the Senior Securities, the assets and
funds available to be distributed among the Holders of the Class B Preferred
Stock and Parity Securities shall be insufficient to permit the payment to such
Holders of the full preferential amounts due to the Holders of the Class B
Preferred Stock and the Parity Securities, respectively, then the entire assets
and funds of the Company legally available for distribution shall be distributed
among the Holders of the Class B Preferred Stock and the Parity Securities, pro
rata, based on the respective liquidation amounts to which each such series of
stock is entitled by the Company's Certificate of Incorporation and any
certificate(s) of designation relating thereto.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in the Company, they shall be distributed to
holders of Junior Securities in accordance with the Company's Certificate of
Incorporation including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or
<PAGE> 27
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than fifty percent (50%) of the voting power of the Company is
disposed of shall be deemed to be a Liquidation Event as defined in Section
4(a); provided further that (i) a consolidation, merger, acquisition, or other
business combination of the Company with or into any other publicly traded
company or companies (or in which the Company is the surviving entity and
remains a publicly traded Company) shall not be treated as a Liquidation Event
as defined in Section 4(a) but instead shall be treated pursuant to Section 5(d)
hereof, and (ii) a consolidation, merger, acquisition, or other business
combination of the Company with or into any other non-publicly traded company or
companies shall be treated as a Liquidation Event as defined in Section 4(a).
The Company shall not effect any transaction described in this subsection 4(c)
unless it first gives thirty (30) days prior notice of such transaction (during
which time the Holder shall be entitled to immediately convert any or all of its
shares of Class B Preferred Stock into Common Stock ("Conversion Shares") and
Special Dividend Stock (as defined below), notwithstanding the Special Dividend
Quota (as defined below); provided however, that, for purposes of calculating
the Conversion Trading Price (as defined in Section 5(a)) with respect to
conversions occurring after the Company gives such notice, AX@ shall equal
eighty percent (80%)).
(d) In the event that, immediately prior to the closing of a
transaction described in Section 4(c) which would constitute a Liquidation
Event, the cash distributions required by Section 4(a) or Section 6 have not
been made, the Company shall either: (i) cause such closing to be postponed
until such cash distributions have been made, or (ii) cancel such transaction,
in which event the rights of the Holders of Class B Preferred Stock shall be the
same as existing immediately prior to such proposed transaction.
Section 5. Conversion. The record Holder(s) of this Class B Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. The record Holder(s) of the Class B
Preferred Stock shall be entitled to convert, subject to the Company's right of
Redemption Upon Receipt of Notice of Conversion set forth in Section 6(a) herein
below, any or all the shares of the Class B Preferred Stock on or after the Last
Closing Date at any time and from time to time, as defined below, at the office
of the Company into that number of fully-paid and non-assessable shares of
Common Stock calculated in accordance with the following formula (the
"Conversion Rate"):
Number of shares of Common Stock issued upon conversion of one (1)
share of Class B Preferred Stock =
<PAGE> 28
[(.08) (N/365) (1,000)] + 1,000
-------------------------------
Fixed Conversion Price
where,
! N= the number of days between (i) the date of the Closing of the sale
of the shares of Class B Preferred Stock for which conversion is being
elected, and (ii) the applicable Date of Conversion (as defined in
Section 5(b)(iv) below) for the shares of Class B Preferred Stock for
which conversion is being elected,
! Fixed Conversion Price = 100% of the average Closing Bid Price, as
defined below, for the thirty (30) trading days ending on the Last
Closing Date, which is $4.065,
!"Last Closing Date" shall mean the date of the last Closing of a
purchase and sale of the Class B Preferred Stock that occurs pursuant
to the offering of the Class B Preferred Stock by the Company,
and
! "Closing Bid Price" shall mean the closing bid price of the Company's
Common Stock on the Nasdaq Small Cap Market, or if no longer traded on
the Nasdaq Small Cap Market, the closing bid price on the principal
national securities exchange or the over-the-counter market on which
the Common Stock is so traded and if not available, the mean of the
high and low prices on the principal national securities exchange or
the National Market System on which the Common Stock is so traded.
In the event that on any Date of Conversion (as defined in Section
5(b)(iv) below), the Conversion Trading Price (as defined below) is less than
the Fixed Conversion Price (each a "Special Dividend Date"), then the Company
shall pay to the Holder consummating a conversion of Class B Convertible Stock a
special dividend ("Special Dividend") of a number of shares of Class C Preferred
Stock ("Special Dividend Stock") equal to (the "Special Dividend Rate"):
[A/B - 1] x C;
where,
A = the Fixed Conversion Price
B = the Conversion Trading Price,
C = the number of shares of Class B Preferred Stock converted, and
"Conversion Trading Price" shall mean X% multiplied by the average
Closing Bid Price, as that term is defined above, of the Company's
Common Stock for the ten (10) trading days immediately preceding the
Date of Conversion, as defined below, where X is determined as follows:
<PAGE> 29
<TABLE>
<CAPTION>
No. Months Between Last
Closing Date and Date of Conversion "X"
----------------------------------- ---
<S> <C> <C>
4 months - 6 months 90%
6 months and 1 day - 9 months 85%
more than 9 months 80%
</TABLE>
The Class C Preferred Stock shall be convertible at the Fixed Conversion Price
(either simultaneously with the shares of Class B Convertible Stock, the
conversion of which caused the issuance of such Class C Preferred Stock, or
thereafter) and shall not be entitled to Special Dividends.
Notwithstanding the above, unless otherwise indicated herein, the Holder shall
not receive a Special Dividend with respect to shares of Class B Preferred Stock
to the extent that an amount of Class B Preferred Stock in excess of the Special
Dividend Quota (as defined below) has been previously converted in conversions
resulting in the issuance of Special Dividends. For purposes hereof, the
"Special Dividend Quota" is the maximum aggregate amount of Class B Preferred
Stock which will receive Special Dividends upon conversion through a given date,
stated as a percentage of the aggregate principal amount of the Class B
Preferred Stock issued to such Holder, as follows:
<TABLE>
<CAPTION>
No. Months Between Last Aggregate "Special
Closing Date and Date of Conversion Dividend Quota"
----------------------------------- ---------------
<S> <C> <C>
Last Closing Date - 4 months 0%
4 months and 1 day - 5 months 15%
5 months and 1 day - 6 months 30%
6 months and 1 day - 7 months 45%
7 months and 1 day - 8 months 60%
8 months and 1 day - 9 months 75%
9 months and 1 day - 10 months 90%
10 months and 1 day + 100%
</TABLE>
Conversions that do not result in the issuance of Special Dividends are not
counted toward the Special Dividend Quota. Notwithstanding the Special Dividend
Quota, a Holder is entitled to convert up to one hundred percent (100%) of the
Class B Preferred Stock, or any portion thereof, into Common Stock any time (i)
on or after the Last Closing Date, although the amount converted (to the extent
that such aggregate amounts converted receive Special Dividends) in excess of
the Special Dividend Quota shall not be entitled to Special Dividends, or (ii)
after any voluntary or involuntary bankruptcy or similar filing is commenced
with respect to the Company, or any appointment of a receiver or custodian with
respect to the Company or (iii) any merger or consolidation of the Company or
any sale of all or substantially all of the Company's assets or any change of
majority voting control of the Company in one or any series of transactions.
For purposes hereof, any Holder which acquires shares of Class B
Preferred Stock from another Holder (the "Transferor") and not upon original
issuance from the Company shall be entitled to exercise its conversion right as
to the percentages of such shares specified under Section 5(a) in such
<PAGE> 30
amounts and at such times such that the number of shares eligible for Special
Dividends upon conversion by such Holder at any time shall be in the same
proportion to the Special Dividend Quota that the number of shares of Class B
Preferred Stock acquired by such Holder from its Transferor bears to the total
number of shares of Class B Preferred Stock originally issued by the Company to
such Transferor (or its predecessor Transferor).
(b) Mechanics of Conversion. In order to convert Class B
Preferred Stock into full shares of Common Stock, the Holder shall (i) send via
facsimile, on or prior to 11:59 p.m., New York City time (the "Conversion Notice
Deadline") on the Date of Conversion, a copy of the fully executed notice of
conversion ("Notice of Conversion") to the Company at the office of the Company
stating that the Holder elects to convert, which notice shall specify the Date
of Conversion, the number of shares of Class B Preferred Stock and Special
Dividend Stock (if any) to be converted, the applicable Conversion Trading Price
and a calculation of the number of shares of Common Stock and Special Dividend
Stock (if any) issuable upon such conversions (together with a copy of the front
page of each certificate to be converted) and (ii) surrender to a common courier
for delivery to the office of the Company, the original certificates
representing the Class B Preferred Stock being converted (the "Preferred Stock
Certificates"), duly endorsed for transfer; provided, however, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock and Special Dividend Stock (if applicable) issuable upon such conversion
unless either the Preferred Stock Certificates are delivered to the Company as
provided above, or the Holder notifies the Company that such certificates have
been lost, stolen or destroyed (subject to the requirements of subparagraph (i)
below). Unless otherwise noted in writing by the Holder, any Notice of
Conversion tendered to the Company for conversion of Class B Preferred Stock
shall be deemed to be a validly tendered Notice of Conversion for conversion of
the Class C Preferred Stock issued or issuable upon conversion of such Class B
Preferred Stock. Upon receipt by the Company of a facsimile copy of a Notice of
Conversion, the Company shall immediately send, via facsimile, a confirmation of
receipt of the Notice of Conversion to Holder which shall specify that the
Notice of Conversion has been received and the name and telephone number of a
contact person at the Company whom the Holder should contact regarding
information related to the Conversion. In the case of a dispute as to the
calculation of the Conversion Rate or the Special Dividend Rate (if applicable),
the Company shall, within the time period required under Section 5(b)(ii) below,
issue to the Holder the number of Shares that are not disputed and shall submit
the disputed calculations to its outside accountant via facsimile within three
(3) days of receipt of Holder's Notice of Conversion. The Company shall cause
the accountant to perform the calculations and notify the Company and Holder of
the results no later than two business days from the time it receives the
disputed calculations. Accountant's calculation shall be deemed conclusive
absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Class B Preferred Stock, and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Company, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Company shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However, the
Company shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests the Company to convert such
Class B Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The
Company shall, no later than the close of business on the second (2nd) business
day (the "Deadline") after receipt by the Company of a facsimile copy of a
Notice of Conversion and receipt by Company of all necessary
<PAGE> 31
documentation duly executed and in proper form required for conversion,
including the original Preferred Stock Certificates to be converted (or after
provision for security or indemnification in the case of lost or destroyed
certificates, if required), and/or shall cause the transfer agent for its Common
Stock (the "Transfer Agent") to issue and surrender to a common courier for
either overnight or (if delivery is outside the United States) two (2) day
delivery to the Holder at the address of the Holder as shown on the stock
records of the Company a certificate for the number of shares of Common Stock
and the Company shall issue Special Dividend Stock (if any) to which the Holder
shall be entitled as aforesaid.
(iii) No Fractional Shares. If any conversion of the
Class B Preferred Stock would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares of Common Stock issuable upon
conversion, in the aggregate, shall be the next higher number of shares.
(iv) Date of Conversion. The date on which conversion
occurs (the "Date of Conversion") shall be deemed to be the date set forth in
such Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is sent via facsimile to the Company before 11:59 p.m., New York City
time, on the Date of Conversion, and (ii) that the original Preferred Stock
Certificates representing the shares of Class B Preferred Stock to be converted
are surrendered by depositing such certificates with a common courier, for
delivery to the Company as provided above, as soon as practicable after the Date
of Conversion. The person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record Holder or Holders of such shares of Common Stock on the Date of
Conversion.
(c) Automatic Conversion or Redemption. Each share of Class B
Preferred Stock outstanding on the date which is two (2) years after the Last
Closing Date or, if not a business day, the first business day thereafter
("Termination Date") automatically shall, at the option of the Company, either
(i) provided that there has been no uncured Event of Default, be converted
("Automatic Conversion") into Common Stock on such date at the Conversion Rate
then in effect (calculated in accordance with the formula in Section 5(a)
above), and shall receive a Special Dividend (if any) based upon the Special
Dividend Rate then in effect, which Special Dividend Stock shall also be
simultaneously converted into Common Stock, where the Termination Date shall be
deemed the Date of Conversion with respect to such conversion for purposes of
this Certificate of Designation; or (ii) be redeemed ("Automatic Redemption") by
the Company for cash in an amount equal to the 125% times the Total Value (as
defined in Section 6(a)(i) below) of the shares of Class B Preferred Stock being
redeemed. If the Company elects to redeem, on the Termination Date under this
subsection, the Company shall send to the Holders of outstanding Class B
Preferred Stock notice (the "Automatic Redemption Notice"), via facsimile, no
later than the business day preceding the Termination Date, of its intent to
effect an Automatic Redemption of the outstanding Class B Preferred Stock on the
Termination Date. If the Company does not send such notice to Holder by such
date, an Automatic Conversion shall be deemed to have occurred. If an Automatic
Conversion occurs, the Company and the Holders shall follow the applicable
conversion procedures set forth in this Certificate of Designation; provided,
however, that the Holders are not required to send the Notice of Conversion
contemplated by Section 5(b). If the Company elects to redeem under this
subsection, each Holder of Class B Preferred Stock which has not been converted
and remains outstanding as of the Termination Date shall send their certificates
representing the Class B Preferred Stock to the Company within five (5) business
days of the Termination Date, and the Company shall pay the applicable
redemption price to each respective Holder within five (5) days of the receipt
of such certificates. The Company shall
<PAGE> 32
not be obligated to deliver the redemption price unless the certificates
representing the Class B Preferred Stock are delivered to the Company, or, in
the event one or more certificates have been lost, stolen, mutilated or
destroyed, unless the Holder has complied with Section 5(b)(i). If the Company
elects to redeem under this Section 5(c) and the Company fails to pay the
Holders the redemption price within five (5) business days of its receipt of the
certificates representing the shares of Class B Preferred Stock to be redeemed
as required by this Section 5(c), then an Automatic Conversion shall be deemed
to have occurred and, upon receipt of the Preferred Stock certificates, the
Company shall immediately deliver to the Holders the certificates representing
the number of shares of Common Stock and Special Dividend Stock (if any) to
which the Holders would have been entitled upon Automatic Conversion of the
Class B Preferred Stock, where the number of shares of Special Dividend Stock
issuable is calculated using the lowest Conversion Trading Price (as defined in
Section 5 hereof) in effect during the period beginning on the Termination Date
and ending on the date the Company or its Transfer Agent issues Common Stock and
Special Dividend Stock (if any) pursuant to this Section 5(c). Nothing in this
Section 5(c) shall be construed to limit Holder's ability to pursue Holder's
rights under Section 13 hereof. At each Holder's option, upon written notice
from the investor no later than five (5) business days prior to the original
Termination Date, the Termination Date shall be delayed for the aggregate number
of days during which there is continuing one or more Events of Default or a
Conversion Failure anytime during the term of the Class B Preferred Stock.
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock
Split, Stock Dividend, Etc. If, prior to the conversion of all of the Class B
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Fixed Conversion Price shall be proportionately
increased.
(ii) Adjustment to Conversion Trading Price. If, at
any time when any shares of the Class B Preferred Stock are issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, or other similar event, which event
shall have taken place during the reference period for determination of the
Conversion Trading Price for any conversion of the Class B Preferred Stock, then
the Conversion Trading Price shall be calculated giving appropriate effect to
the stock split, stock dividend, combination, reclassification or other similar
event for all ten (10) trading days immediately preceding the Date of
Conversion.
(iii) Adjustments.
(A) Adjustment Due to Merger, Consolidation,
Etc. If, prior to the conversion of all Class B Preferred Stock, there shall be
any merger, consolidation, exchange of shares, recapitalization, reorganization,
or other similar event, as a result of which shares of Common Stock of the
Company shall be changed into (or the shares of Common Stock become entitled to
receive) the same or a different number of shares of the same or another class
or classes of stock or securities of the Company or another entity or there is a
sale of all or substantially all the Company's assets or there is a change of
control transaction not deemed to be a liquidation pursuant to Section 4(c),
then the Holders of Class B Preferred Stock shall thereafter have the right to
receive upon conversion of Class B Preferred Stock, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities
<PAGE> 33
and/or other assets which the Holder would have been entitled to receive in such
transaction had the Class B Preferred Stock been converted immediately prior to
such transaction, and in any such case appropriate provisions shall be made with
respect to the rights and interests of the Holders of the Class B Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for the adjustment of the Conversion Trading Price and of the number
of shares issuable upon conversion of the Class B Preferred Stock) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities thereafter deliverable upon the exercise hereof. The Company shall
not effect any transaction described in this subsection 5(d)(iii) unless (a) it
first gives at least thirty (30) days prior notice of such merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event (during which time the Holder shall be entitled to convert its
shares of Class B Preferred Stock into Common Stock and Special Dividend Stock
(notwithstanding the Special Dividend Quota), and (b) the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligations of the Company under this Certificate of Designation including this
subsection 5(d)(iii).
(B) Adjustment Due to Distribution. If at
any time after the Last Closing Date, the Company shall declare or make any
distribution of its assets (or rights to acquire its assets) to Holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's shareholders
in cash or shares (or rights to acquire shares) of capital stock of any other
public or private company, including but not limited to a subsidiary or spin-off
of the Company (a "Distribution"), then the Holders of Class B Preferred Stock
shall be entitled, upon any conversion of shares of Class B Preferred Stock or
conversion of Special Dividend Stock (if any) issuable upon a subsequent
conversion of Class B Preferred Stock, in each case after the date of record for
determining shareholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion of Class B Preferred Stock
and upon conversion of Special Dividend Stock (if any), issuable upon such
conversion of Class B Preferred Stock, had such Holder been the holder of such
shares of Common Stock on the record date for determination of shareholders
entitled to such Distribution.
(iv) (A) Adjustment Due to Issuances of Other
Securities. If at any time or from time to time after the Last Closing Date, the
Company shall issue or sell Common Stock or rights, options, warrants or other
securities convertible into Common Stock (excluding those rights, options,
warrants or other securities convertible into no more than 18,000,000 shares of
Common Stock outstanding as of the Last Closing Date or underlying such
securities and future ordinary 5% annual dividends on its Class A Convertible
Preferred Stock), at a price per share which is lower than the then effective
Fixed Conversion Price, then the Conversion Rate and the Special Dividend Rate
shall each be increased by multiplying the Conversion Rate and Special Dividend
Rate theretofore in effect by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such shares, rights, options, warrants or convertible securities plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of shares which the aggregate
offering price of the total number of shares offered would purchase at the then
effective Fixed Conversion Price, provided, however, that no such adjustment
shall be made which results in a decrease in the Conversion Rate or Special
Dividend Rate. Such adjustment shall be made whenever such rights, options,
warrants or convertible securities are issued, and shall become effective
immediately and retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or convertible
securities. Notwithstanding the
<PAGE> 34
foregoing, no adjustment will be required on account of (i) the exercise of any
of the options presently outstanding under the Company's Amended and Restated
1993 Stock Option Plan (the "Plan") for officers, directors and certain other
key personnel of the Company, or (ii) the issuance or exercise of any other
securities which may hereafter be granted or exercised under the Plan or under
any other employee benefit plan of the Company, but only to the extent that all
shares of Common Stock issued or issuable pursuant to such plan or plans do not
exceed 4,000,000 shares, as such number may be appropriately adjusted for
dilutive events; or (iii) shares issued in an underwritten public offering.
(B) Adjustment Due to Expired and
Unexercised Convertible Securities. If, in any case, the total number of shares
of Common Stock issuable upon exercise, conversion or exchange of any rights,
options, warrants or convertible securities (collectively, "Convertible
Securities") is not, in fact, issued and the rights to exercise, convert or
exchange such Convertible Securities shall have expired or terminated, the
Conversion Rate and Special Dividend Rate then in effect will be readjusted to
the Conversion Rate and Special Dividend Rate which would have been in effect at
the time of such expiration or termination had such Convertible Securities, to
the extent outstanding immediately prior to such expiration or termination
(other than in respect of the actual number of shares of Common Stock issued
upon exercise or conversion thereof), never been issued.
(v) No Fractional Shares. If any adjustment under
this Section 5(d) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.
(e) No Five Percent Holders. Notwithstanding anything to the
contrary contained herein, the Class B Preferred Stock shall not be convertible
by a Holder or at the Termination Date to the extent (but only to the extent)
that, if converted by such Holder or at the Termination Date, the Holder would
beneficially own in excess of 4.9% of the then outstanding shares of Common
Stock of the Company (the "4.9% Limitation"), provided, however, that such
limitation shall not apply to conversions tendered in anticipation of or
following a merger, acquisition, or other business combination involving the
Company or pursuant to bankruptcy or insolvency proceedings. To the extent this
limitation applies, the determination of whether Class B Preferred Stock shall
be convertible (vis-a vis other securities owned by such Holder) and of which
Class B Preferred Stock shall be converted shall be in the sole discretion of
the Holder and submission of the Class B Preferred Stock for conversion shall be
deemed to be the Holder's determination of whether such Class B Preferred Stock
is convertible, subject to such aggregate percentage limitations. For the
purposes of this subparagraph, beneficial ownership and all calculations,
including without limitation, with respect to calculations of percentage
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the Regulations thereunder.
Notwithstanding the foregoing, each Holder shall have the right to waive such
restriction or increase such percentage upon sixty one (61) days' prior notice
to the Company and to decrease any such percentage immediately upon written
notice to the Company. No transferee of Class B Preferred Stock shall be bound
by such restriction unless the transferee expressly so agrees.
Section 6. Redemption by Company.
(a) Company's Right to Redeem Upon Receipt of Notice of
Conversion. If the Conversion Trading Price of the Company's Common Stock is
less than the Fixed Conversion Price (as
<PAGE> 35
defined in Section 5(a)), at the time of receipt of a Notice of Conversion
pursuant to Section 5(b), the Company shall have the right, in its sole
discretion, to redeem in whole or in part any Class B Preferred Stock submitted
for conversion at the Redemption Rate (as defined below), immediately prior to
and in lieu of conversion ("Redemption Upon Receipt of Notice of Conversion").
If the Company elects to redeem some, but not all, of the Class B Preferred
Stock submitted for conversion, the Company shall redeem from among the Class B
Preferred Stock submitted by the various shareholders for conversion on the
applicable date, a pro-rata amount from each such Holder so submitting Class B
Preferred Stock for conversion.
(i) Redemption Price Upon Receipt of a Notice of
Conversion. The redemption rate of Class B Preferred Stock under this Section
6(a) shall be calculated as follows ("Redemption Rate"):
<TABLE>
<CAPTION>
No. Months Between Last
Closing and Date of Conversion Redemption Rate
------------------------------ ---------------
<S> <C> <C>
4 months - 6 months Total Value x 1.110
6 months and 1 day - 9 months Total Value x 1.176
more than 9 months Total Value x 1.250
</TABLE>
where,
"Total Value" shall mean the Stated Value of the Class B Preferred
Stock being redeemed, plus liquidated damages, Conversion Failure Payments, Late
Registration Payments and any other cash payments then due from the Company and
then unpaid, where "Stated Value" shall mean the Original Class B Issue Price
(as defined in Section 1) of each share of Class B Preferred Stock, together
with the accreted but unpaid Premium (as defined in Section 4(a)).
(ii) Mechanics of Redemption Upon Receipt of Notice
of Conversion. The Company shall effect each such redemption by giving notice of
its election to redeem, by facsimile, by 5:00 p.m. New York City time the next
business day following receipt of a Notice of Conversion from a Holder, and the
Company shall provide a copy of such redemption notice by overnight or two (2)
day courier, to the Holder of the Class B Preferred Stock submitted for
conversion at the address and facsimile number of such Holder appearing in the
Company's register for the Class B Preferred Stock. Such redemption notice shall
indicate whether the Company will redeem all or part of the Class B Preferred
Stock submitted for conversion and the applicable redemption price.
(iii) Redemption Buy-In. If (i) on the same date as
or subsequent to the tender of a Notice of Conversion, but prior to its receipt
of a Notice of Redemption Upon Notice of Conversion, the Holder sells shares of
Common Stock which such Holder anticipated receiving upon such conversion and
upon conversion of the Special Dividend Stock which Holder expected to receive
upon such conversion (collectively, the "Redemption Sold Shares"), (ii) the
Company effects a Redemption Upon Receipt of Notice of Conversion with respect
to such conversion, and (iii) the Holder purchases (in an open market
transaction), no later than the close of trading on the trading day following
its receipt of the Notice of Redemption Upon Notice of Conversion (or as soon as
trading volume of the Common Stock reasonably permits), shares of Common Stock
to make delivery upon the sale of the Redemption Sold Shares (a "Redemption
Buy-In"), the Company shall pay such Holder (in
<PAGE> 36
addition to the applicable Redemption Rate) (within two (2) business days
following receipt of written notice of a claim pursuant to this Section
6(a)(iii)) the amount by which (x) such Holder's total purchase price (including
brokerage commission, if any) for the shares of Common Stock purchased in the
Redemption Buy-In exceeds (y) the net proceeds received by such Holder from the
sale of the Redemption Sold Shares. For example, if a Holder purchases shares of
Common Stock having a total purchase price of $11,000 to cover a Redemption
Buy-In with respect to shares of Common Stock sold for $10,000, the Company will
be required to pay (within two (2) business days following receipt of written
notice of a claim pursuant to this Section 6(a)(iii)) such Holder $1,000. A
Holder shall provide the Company written notification (and trading records, if
reasonably requested by the Company) indicating any amounts payable to Holder
pursuant to this Section.
(b) Company's Right to Redeem at its Election. At any time,
commencing twelve (12) months and one (1) day after the Last Closing Date
provided that such date shall be extended for each day during which there is
continuing an Event of Default, the Company shall have the right, in its sole
discretion, to redeem ("Redemption at Company's Election"), from time to time,
any or all of the Class B Preferred Stock; provided that (i) the Company shall
first provide thirty (30) days advance written notice as provided in
subparagraph 6(b)(ii) below (which can be given beginning thirty (30) days prior
to the date which is twelve (12) months and one (1) day after the Last Closing
Date), and (ii) that the Company shall only be entitled to redeem Class B
Preferred Stock having an aggregate Total Value of at least Two Hundred Fifty
Thousand Dollars ($250,000). If the Company elects to redeem some, but not all,
of the Class B Preferred Stock, the Company shall redeem a pro-rata amount from
each Holder of the Class B Preferred Stock and a proportionate amount of any
Class C Preferred Stock held by each such Holder.
(i) Redemption Price At Company's Election. The
"Redemption Price At Company's Election" shall be calculated as a percentage of
Total Value, as that term is defined below, of the Class B Preferred Stock
redeemed pursuant to this Section 6(b), which percentage shall vary depending on
the date of Redemption at Company's Election (as defined below), and shall be
determined as follows:
<PAGE> 37
<TABLE>
<CAPTION>
Date of Notice of Redemption at Company's Election % of Total Value
-------------------------------------------------- ----------------
<S> <C> <C>
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
</TABLE>
(ii) Mechanics of Redemption at Company's Election.
The Company shall effect each such redemption by giving at least thirty (30)
days prior written notice ("Notice of Redemption At Company's Election") to the
Holders of the Class B Preferred Stock selected for redemption, at the address
and facsimile number of such Holder appearing in the Company's Class B Preferred
Stock register, which Notice of Redemption At Company's Election shall be deemed
to have been delivered two (2) business days after the Company's mailing (by
overnight or two (2) day courier, with a copy by facsimile) of such Notice of
Redemption At Company's Election. Such Notice of Redemption At Company's
Election shall indicate (i) the number of shares of Class B Preferred Stock that
have been selected for redemption, (ii) the date which such redemption is to
become effective (the "Date of Redemption At Company's Election") and (iii) the
applicable Redemption Price At Company's Election, as defined in subsection
(b)(i) above. Notwithstanding the above, Holder may convert into Common Stock
and Special Dividend Stock (notwithstanding the Special Dividend Quota) pursuant
to Section 5, prior to the close of business on the Date of Redemption at
Company's Election, any or all Class B Preferred Stock which it is otherwise
entitled to convert, including Class B Preferred Stock that has been selected
for redemption at the Company's election pursuant to this subsection 6(b);
provided, however, that the Company shall still be entitled to exercise its
right, if applicable, to redeem upon receipt of a Notice of Conversion pursuant
to Section 6(a).
(c) Company Must Have Immediately Available Funds or Credit
Facilities. The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure under Sections 6(a) and 6(b) unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account in a bank or
similar financial institution; or
(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar financial
institution; or
(iii) an agreement with a standby underwriter willing
to purchase from the Company a sufficient number of shares of stock to provide
proceeds necessary to redeem any stock that is not converted prior to
redemption; or
(iv) a combination of the items set forth in (i),
(ii) and (iii) above, aggregating the full amount of the redemption price.
If the foregoing conditions of this Section 6(c) are satisfied and the
Company complies with Section 6(d) hereof, then any shares of Class B Preferred
Stock called for by a Redemption at Company's Election shall cease to be
outstanding for all purposes hereunder (including the right to convert or to
accrete additional Premium or to exercise any other right or privilege
hereunder) on the Date of Redemption at Company's Election and shall instead
represent the right to receive the Redemption Price at Company's Election
without interest from and after the Date of Redemption at
<PAGE> 38
Company's Election.
(d) Payment of Redemption Price.
(i) Each Holder submitting Preferred Stock being
redeemed under this Section 6 shall send their Class B Preferred Stock
Certificates so redeemed to the Company, and the Company shall pay the
applicable redemption price to that Holder within five (5) business days of the
Date of Redemption at Company's Election. The Company shall not be obligated to
deliver the redemption price unless the Preferred Stock Certificates so redeemed
are delivered to the Company, or, in the event one (1) or more certificates have
been lost, stolen, mutilated or destroyed, unless the Holder has complied with
Section 5(b)(i).
(ii) If the Company elects to redeem pursuant to
Section 6(a) hereof, and the Company fails to pay Holder the redemption price
within the time frame as required by this Section 6(d), then the Company shall
issue shares of Common Stock and Special Dividend Stock to any such Holder who
has submitted a Notice of Conversion in compliance with Section 5(b) hereof. The
number of shares of Special Dividend Stock to be issued to Holder pursuant to
this provision shall be determined using the lowest Conversion Trading Price (as
defined in Section 5 hereof) in effect during the period beginning on the date
Holder sends its Notice of Conversion to Company via facsimile and ending on the
date the Company or the Transfer Agent issues Common Stock pursuant to this
Section 6(d)(ii). Nothing in this Section 6(d) shall be construed to limit
Holder's ability to pursue Holder's rights under Section 13 hereof.
(e) Blackout Period. Notwithstanding the foregoing, the
Company may not either send out a redemption notice or effect a redemption
pursuant to Section 6(b) above during a Blackout Period (defined as a period
during which the Company's officers or directors would be prohibited from buying
or selling stock pursuant to the Securities Exchange Act of 1934, as amended,
because of their holding of material non-public information), unless the Company
shall first publicly disclose the non-public information that resulted in the
Blackout Period; provided, however, that no redemption shall be effected until
at least ten (10) days after the Company shall have given the Holder written
notice that the Blackout Period has been lifted.
Section 7. Voting Rights. The Holders of the Class B Preferred Stock
shall have no voting power whatsoever, except as otherwise provided by the
General Corporation Law of the State of Delaware ("Delaware Law"), and no Holder
of Class B Preferred Stock shall vote or otherwise participate in any proceeding
in which actions shall be taken by the Company or the shareholders thereof or be
entitled to notification as to any meeting of the shareholders.
Notwithstanding the above, the Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Company, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall send (by certified mail or overnight courier) a
notice to Holder, in such form as given to the other shareholders, at least ten
(10) days prior
<PAGE> 39
to the record date specified therein, of the date on which any such record is to
be taken for the purpose of such dividend, distribution, right or other event,
and a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under Delaware Law the vote of the Holders of the
Class B Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least two thirds (2/3) of the shares of the Class B Preferred Stock
represented at a duly held meeting at which a quorum is present or by written
consent of a majority of the shares of Class B Preferred Stock (except as
otherwise may be required under Delaware Law) shall constitute the approval of
such action by the class, subject to Section 8 below. To the extent that under
Delaware Law the Holders of the Class B Preferred Stock are entitled to vote on
a matter with holders of Common Stock, voting together as one (1) class, each
share of Class B Preferred Stock shall be entitled to a number of votes equal to
the number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Trading Price is calculated. Holders of the Class B Preferred
Stock also shall be entitled to notice of all shareholder meetings or written
consents with respect to which they would be entitled to vote, which notice
would be provided pursuant to the Company's by-laws and applicable statutes.
Section 8. Protective Provision. So long as shares of Class B Preferred
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by Delaware Law) of the
Holders of at least seventy-five percent (75%) of the then outstanding shares of
Class B Preferred Stock, and at least seventy-five percent (75%) of the then
outstanding Holders:
(a) alter or change the rights, preferences or privileges of
the Class B Preferred Stock or any securities so as to affect adversely the
Class B Preferred Stock;
(b) create any new class or series of stock having a
preference over or on parity with the Class B Preferred Stock with respect to
Distributions (as defined in Section 2 above) or increase the size of the
authorized number of Class B Preferred; or
(c) do any act or thing not authorized or contemplated by this
Designation which would result in taxation of the Holders of shares of the Class
B Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended).
In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Class B Preferred Stock and at least seventy-five percent
(75%) of the then outstanding Holders agree to allow the Company to alter or
change the rights, preferences or privileges of the shares of Class B Preferred
Stock, pursuant to subsection (a) above, so as to affect the Class B Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Class B Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change
(provided that, for purposes of calculating the Conversion Trading Price, as
defined in Section 5(a), "X" shall equal eighty percent (80%), and provided
further that the Special Dividend Quota set forth in Section 5(a) hereof shall
not apply), or continue to hold their shares of Class B Preferred Stock, as
amended.
<PAGE> 40
Section 9. Status of Converted or Redeemed Stock. In the event any
shares of Class B Preferred Stock shall be converted or redeemed pursuant to
Section 5 or Section 6 hereof, the shares so converted or redeemed shall be
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be issuable by the Company as Class B
Preferred Stock.
Section 10. Preference Rights. Nothing contained herein shall be
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Class B Preferred
Stock.
Section 11. Authorization and Reservation of Shares of Common Stock.
(a) Authorized and Reserved Amount. The Company shall have
authorized and reserved and keep available for issuance three million five
hundred thousand (3,500,000) shares of Common Stock (the "Authorized and
Reserved Amount") solely for the purpose of effecting the conversion of the
Class B Preferred Stock and conversion of any Special Dividend Stock issuable
upon conversion of the Class B Preferred Stock, which number shall not be
reduced. The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock a sufficient number of shares of
Common Stock to provide for (i) the full conversion of all outstanding Class B
Preferred Stock and (ii) the full conversion of all Special Dividend Stock to
which Holders would be entitled upon the full conversion of all outstanding
Class B Preferred Stock, and, in each case, the issuance of the shares of Common
Stock in connection therewith (collectively, the "Required Number of Shares").
(b) Increases to Authorized and Reserved Amount. Without
limiting any other provision of this Section 11, if the Authorized and Reserved
Amount for any ten (10) consecutive trading days (the last of such ten (10)
trading days being the "Authorization and Reservation Trigger Date") shall be
less than one hundred twenty percent (120%) of the Required Number of Shares on
such trading days (a "Share Authorization and Reservation Failure"), the Company
shall immediately notify all Holders of such occurrence and shall take action as
soon as practicable, (including, if necessary, commencing action to seek
shareholder approval to authorize the issuance of additional shares of Common
Stock) to increase the Authorized and Reserved Amount to one hundred fifty
percent (150%) of the Required Number of Shares.
(c) Reduction of Authorized and Reserved Amount Under Certain
Circumstances. Prior to complete conversion of all Class B Preferred Stock and
all Special Dividend Stock, the Company shall not reduce the number of shares
required to be reserved for issuance under this Section 11 without the written
consent of all Holders except for a reduction proportionate to a reverse stock
split effected for a business purpose other than affecting the obligations of
Company under this Section 11, which reverse stock split affects all shares of
Common Stock equally.
(d) [Intentionally Left Blank].
(e) Cap Amount. If prohibited by applicable Nasdaq rules, in
no event shall the total number of shares of Common Stock issued upon conversion
of the Class B Preferred Stock and the Special Dividend Stock (if any) issuable
upon conversion of the Class B Preferred Stock exceed the maximum number of
shares of Common Stock (the "Cap Amount") that the Company can, without
shareholder approval, so issue pursuant to Nasdaq Rule 4460(i)(1)(d)(ii) (or any
other applicable
<PAGE> 41
Nasdaq Rules or any successor rule) (the "Nasdaq 20% Rule"). The Cap Amount
shall be allocated pro-rata to the Holders of Class B Preferred Stock as
provided in subsection (f) below. In the event the Company is prohibited from
issuing shares of Common Stock as a result of the operation of this subsection
(e), the Company shall comply with subsection (g) below.
(f) Allocations of Cap Amount and Authorized and Reserved
Amount. The initial Cap Amount and Authorized and Reserved Amount shall be
allocated pro rata (the "Pro Rata Amount" among the Holders of Class B Preferred
Stock based on the number of the shares of Class B Preferred Stock initially
issued to each Holder. Each increase to the Cap Amount and Authorized and
Reserved Amount shall be allocated pro rata among the Holders of Class B
Preferred Stock based on the number of the shares of Class B Preferred Stock
held by each Holder at the time of the increase in the Cap Amount or Authorized
and Reserved Amount, as the case may be. In the event a Holder shall sell or
otherwise transfer any of such Holder's shares of Class B Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Cap Amount
and Authorized and Reserved Amount. Any portion of the Cap Amount or Authorized
and Reserved Amount which remains allocated to any person or entity which does
not hold any Class B Preferred Stock shall be allocated to the remaining Holders
of shares of Class B Preferred Stock, pro rata based on the number of shares of
Class B Preferred Stock then held by such Holders. Each Holder's Pro Rata Amount
remains allocated to such Holder until issuance upon conversion of Class B
Preferred Stock or Class C Preferred Stock. The Company shall not issue shares
of Common Stock to one Holder upon a conversion which are part of another
Holder's Pro Rata Amount, except to the extent that such other Holder's Pro Rata
Amount exceeds two (2) times such other Holder's Required Number of Shares (as
defined in Section 11(a)).
(g) Adjustments to Cap Amount and Remedies Upon Failure to
Convert due to Cap Amount.
(i) Obligation to Cure. If at any time for a period
of five (5) consecutive trading days the then unissued portion of any Holder's
Cap Amount is less than 120% of the number of shares of Common Stock then
issuable upon conversion of such Holder's shares of Class B Preferred Stock and
upon conversion of all Special Dividend Stock (if any) issuable upon conversion
of the Class B Preferred Stock (a "Trading Market Trigger Event"), the Company
shall immediately notify the Holders of Class B Preferred Stock of such
occurrence and shall immediately take all necessary action (including, if
necessary, approval of its shareholders to authorize the issuance of the full
number of shares of Common Stock which would be issuable upon the conversion of
Class B Preferred Stock and upon conversion of all Special Dividend Stock (if
any) issuable upon conversion of the Class B Preferred Stock, but for the Cap
Amount) to eliminate any prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Company or any of its
securities on the Company's ability to issue shares of Common Stock in excess of
the Cap Amount. In the event the Company fails to eliminate all such
prohibitions within ninety (90) days after the Trading Market Trigger Event
(provided, however, that the Company must file preliminary proxy materials with
the SEC within thirty (30) days of the Trading Market Trigger Event), each
Holder of Class B Preferred Stock shall thereafter have the option, exercisable
in whole or in part at any time and from time to time by delivery of written
notice ("Cap Redemption Notice") to the Company, to require the Company, to
purchase for cash, at an amount per share equal to 130% of the Total Value, a
portion of the Holder's Class B Preferred Stock such that, after giving effect
to such purchase, the Holder's allocated portion of the Cap Amount exceeds 120%
of the total number of shares of Common Stock issuable to such Holder upon
conversion of its Class B Preferred Stock and its Special Dividend Stock to be
received upon conversion of the
<PAGE> 42
Class B Preferred Stock on the date of such Cap Redemption Notice. If the
Company fails to redeem any of such shares within five (5) business days after
its receipt of a Cap Redemption Notice, then such Holder shall be entitled to
the remedies provided in Section 11(g)(ii) below.
(ii) Remedies. If the Company fails to eliminate the
applicable prohibitions within the ninety (90) day cure period referred to in
Section 11(g)(i) above and thereafter the Company is prohibited, at any time,
from issuing shares of Common Stock upon conversion of Class B Preferred Stock
or Special Dividend Stock (if any) to any Holder because such issuance would
exceed such Holder's allocated portion of the Cap Amount because of applicable
law or the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the Company
or its securities, any Holder who is prohibited from converting its Class B
Preferred Stock or Special Dividend Stock (if any) may:
(A) require, with the consent of Holders of
at least fifty percent (50%) of the outstanding shares of Class B Preferred
Stock (including any shares of Class B Preferred Stock held by the requesting
Holder), the Company to terminate the listing of its Common Stock and to cause
its Common Stock to be eligible for trading on the American Stock Exchange, the
Nasdaq National Market System, the Nasdaq Small Cap Market or on the over-the
counter electronic bulletin board, at the option of the requesting Holder; and
as a result thereof
(B) require the Company to issue shares of
Common Stock, resaleable on such other exchange, in accordance with such
Holder's Notice of Conversion and issue Special Dividend Stock (if any) at the
Conversion Trading Price (without regard to the Special Dividend Quota) in
effect on the date of the Holder's written notice to the Company of its election
to receive shares of Common Stock pursuant to this subparagraph (B).
Section 12. Failure to Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a Holder
submits a Notice of Conversion (or is deemed to submit such notice pursuant to
Section 5(c) hereof), and the Company fails for any reason to surrender to a
Common Courier for overnight (or 2 day, if overseas) delivery to the Holder, on
or prior to the date that is one (1) trading day after the Deadline ("Delivery
Period") for such conversion, such number of shares of Common Stock to which
such Converting Holder is entitled upon such conversion (which shares shall be
listed, authorized, reserved, registered, and freely tradable, each to the
extent required in this Class B Certificate of Designation, the Registration
Rights Agreement between the Company and the Holder(s) and the Subscription
Agreement between the Company and the Holder(s), collectively referred to as the
"Governing Agreements"), or (y) the Company provides notice to Holder at any
time of its intention not to issue shares of Common Stock upon exercise by
Holder of its conversion rights in accordance with the terms of this Certificate
of Designation (each of (x) and (y) being a "Conversion Failure"), then the
Company shall pay to such Holder cash damages in an amount equal to the lower
of:
(i) "Damages Amount" X "D" X .010, and
(ii) the highest interest rate permitted by
applicable law, where:
"D" means the number of days beginning the date of the Conversion
Failure through and including the Cure Date with respect to such Conversion
Failure;
<PAGE> 43
"Damages Amount" means the Original Class B Issue Price for each share
of Class B Preferred Stock subject to Conversion Failure plus all accrued and
unpaid Premium thereon as of the first day of the Conversion Failure, plus all
damage payments previously owed and unpaid.
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
shares of Class B Preferred Stock submitted for conversion and (ii) with respect
to a Conversion Failure described in clause (y) of its definition, the date the
Company undertakes in writing to timely issue Common Stock in satisfaction of
all conversions of Class B Preferred Stock in accordance with the terms of this
Certificate of Designation.
The payments to which a Holder shall be entitled pursuant to this
Section are referred to herein as "Conversion Failure Payments." The parties
agree that the damages caused by a breach hereof would be difficult or
impossible to estimate accurately. Any accrued Conversion Failure Payments shall
be payable in cash by a cashiers check, no later than ten (10) days after the
end of any month(s) for which such amounts accrue. In the event that the Company
has failed to pay any Conversion Failure Payment within five (5) days of the
date it is required to be paid, the Holder, at its option, may elect to convert
all or any portion of such accrued Conversion Failure Payments, at any time
prior to receipt of cash payment of such Conversion Failure Payment, into Common
Stock at a conversion price equal to the lesser of (i) the Fixed Conversion
Price or (ii) the lowest Conversion Trading Price in effect during the period
beginning on the date of the Conversion Failure through the Cure Date for such
Conversion Failure. In the event a Holder elects to convert all or any portion
of the Conversion Failure Payments, such Holder shall indicate on a Notice of
Conversion such portion of the Conversion Failure Payments which such Holder
elects to so convert and such conversion shall otherwise be effected in
accordance with provisions of Section 5.
(b) Buy-In Cure. Unless a Conversion Failure described in
clause (y) of Section 12(a) hereof has occurred with respect to such a Holder,
if (i) the Company fails for any reason to deliver during the Delivery Period
shares of Common Stock to a Holder upon a conversion of the Class B Preferred
Stock and (ii) on the same date or subsequent to the end of the applicable
Delivery Period with respect to such conversion, a Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to make delivery upon a
sale by a Holder of the shares of Common Stock (the "Sold Shares") which such
Holder anticipated receiving upon such conversion (a "Buy-In"), the Company
shall pay such Holder within two (2) business days following receipt of written
notice of a claim pursuant to this Section 12(b) (in addition to any other
remedies available to Holder) the amount by which (x) such Holder's total
purchase price (including brokerage commission, if any) for the shares of Common
Stock so purchased exceeds (y) the net proceeds received by such Holder from the
sale of the Sold Shares. For example, if a Holder purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock sold for $10,000, the Company will be required to pay
such Holder $1,000. A Holder shall provide the Company written notification (and
trading records, if reasonably requested by the Company), indicating any amounts
payable to Holder pursuant to this Section 12.
(c) Adjustment to Conversion Price. If a Holder has not
received certificates for all shares of Common Stock and Special Dividend Stock
(if any) within two (2) business days or (if overseas delivery) three (3)
business days following the expiration of the Delivery Period with respect to a
conversion of any portion of any of such Holder's Class B Preferred Stock for
any reason, then (upon Holder's written request) (I) the Fixed Conversion Price
applicable for calculating the number of
<PAGE> 44
Common Shares to which Holder is entitled upon conversion of such portion of the
Class B Preferred Stock shall be reduced by the amount by which the Conversion
Trading Price in effect on the Conversion Date exceeds the lowest Conversion
Trading Price in effect during the period beginning on, and including, such
Conversion Date through and including the Cure Date, and (II) the Conversion
Trading Price applicable for calculating the number of shares of Special
Dividend Stock to which Holder is entitled (if any) upon conversion of such
portion of the Class B Preferred Stock shall thereafter be the lowest Conversion
Trading Price in effect during the period beginning on, and including, such
Conversion Date through and including the Cure Date. In addition, if there shall
occur a Conversion Failure of the type described in clause (y) of Section 12(a),
then the Fixed Conversion Price with respect to any conversion of Class B
Preferred Stock thereafter shall be the lowest Conversion Trading Price in
effect at any time during the period beginning on, and including, the date of
the occurrence of such Conversion Failure through and including the Cure Date.
The Conversion Trading Price and the Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Section 5(d).
Section 13. Events of Default.
(a) Holder's Option to Demand Prepayment. Upon the occurrence
of an Event of Default (as herein defined), the Company shall, unless a specific
cash payment is already specified in the Governing Agreements with respect to
such default, pay the Holders (beginning after the specified cure period) an
amount equal to three percent (3%) per month of the aggregate amount of
outstanding Class B Preferred Stock held by Holder, accruing daily until the
Event of Default is cured or until the Class B Preferred Stock is prepaid under
this Section, payable in cash by a cashiers check, no later than five (5) days
after the end of any month(s) for which such amounts accrue ("Default
Payments"). In addition, each Holder shall have the right to elect at any time
and from time to time prior to the cure by the Company of such Event of Default
to have all or any portion of such Holder's then outstanding Class B Preferred
Stock prepaid by the Company for an amount equal to the Holder Demand Prepayment
Amount (as herein defined):
(i) The right of a Holder to elect prepayment shall
be exercisable upon the occurrence of an Event of Default by such Holder in its
sole discretion by delivery of a Demand Prepayment Notice (as herein defined) in
accordance with the procedures set forth in this Section 13. Notwithstanding the
exercise of such right, the Holder shall be entitled to exercise all other
rights and remedies available under the provisions of this Certificate of
Designation and at law or in equity.
(ii) A Holder shall effect each demand for prepayment
under this Section 13 by giving at least five (5) business days prior written
notice (the "Demand Prepayment Notice") of the date which the Holder shall
specify and upon which such prepayment is to become effective (the "Effective
Date of Demand of Prepayment"), the Class B Preferred Stock selected for
prepayment and the Holder Demand Prepayment Amount to the Company at the address
and facsimile number provided in the stock records of the Company, which Demand
Prepayment Notice shall be deemed to have been delivered on the business day
after the date of transmission of Holder's facsimile (with a copy sent by
overnight courier to the Company) of such notice.
(iii) The Holder Demand Prepayment Amount shall be
paid to a Holder whose Class B Preferred Stock is being prepaid within three (3)
business days following the Effective Date of Demand of Prepayment; provided,
however, that the Company shall not be obligated to deliver any portion of the
Holder Demand Prepayment Amount until one (1) business day following either the
<PAGE> 45
date on which the Class B Preferred Stock being prepaid are delivered to the
office of the Company, or the date on which the Holder notifies the Company that
such Class B Preferred Stock have been lost, stolen or destroyed and delivers
the documentation required in accordance with Section 5(b)(i) hereof.
(b) Holder Demand Prepayment Amount. The "Holder Demand
Prepayment Amount" means the greater of: (a) 1.3 times the Total Value of the
Class B Preferred Stock for which demand is being made, through the date of
prepayment or (b) the product of (1) the highest price at which the Common Stock
is traded on the date of the Event of Default (or on the most recent trading
date for the Common Stock if the Common Stock is not traded on such date)
divided by the Fixed Conversion Price (or the Conversion Trading Price in effect
as of the date of the Event of Default, whichever is less), and (2) the Total
Value through the date of prepayment.
(c) Events of Default. An "Event of Default" means any one of
the following:
(i) a material failure by the Company to comply with
the Conversion Failure remedies described in Section 12 hereof;
(ii) a Share Authorization and Reservation Failure
described in Section 11(b) hereof, if such Share Authorization and Reservation
Failure continues uncured for ninety (90) days after the Authorization and
Reservation Trigger Date (for purposes of this subsection (ii), a prepayment
demand may be made by a Holder only to the extent that there is an insufficient
number of shares of Common Stock authorized and reserved to effect conversion of
(a) all of such Holder's outstanding Class B Preferred Stock, and (b) all
Special Dividend Stock issuable upon conversion of such shares of Class B
Preferred Stock, provided, however, that Holder need not actually convert any
shares of Class B Preferred Stock and use up its available authorized and
reserved shares of Common Stock in order to demand such prepayment);
(iii) (a) the Company has less than the Required
Number of Shares reserved for issuance to any Holder or Holders upon
conversions, (b) the Company has shares of Common Stock authorized for issuance
upon conversion of the Preferred Stock which have not yet been reserved for such
issuance ("Authorized But Not Yet Reserved Shares"), and (c) the Company fails
to reserve for issuance to the Holders the Authorized But Not Yet Reserved
Shares within five (5) business days of the date they are authorized;
(iv) the Company fails to pay any cash payments due
to Holder under the terms of this Class B Certificate of Designation within five
(5) days after Holder has notified the Company, in writing, that such payment is
past due and that the Holder intends to declare an "Event of Default" under this
Section 13 if such payment is not made;
(v) the Company fails to maintain an effective
registration statement as required by the Registration Rights Agreement between
the Company and the Holder(s) (the "Registration Rights Agreement") except where
(A) such failure lasts no longer than seven (7) consecutive trading days or
twenty one (21) days in any twelve (12) month period, or (B) the Conversion
Shares may be sold immediately, without volume limitation, without registration
under the Act, by virtue of Rule 144 or similar provisions.;
(vi) for three (3) consecutive trading days or for an
aggregate of ten (10) trading days in any nine (9) month period, the Common
Stock (including any of the shares of Common
<PAGE> 46
Stock issuable upon conversion of the Class B Preferred Stock or Class C
Preferred Stock) is (i) suspended from trading on any of Nasdaq Small-Cap, NMS,
NYSE, AMEX or the OTC Bulletin Board, or (ii) is not listed and qualified for
trading on at least one of Nasdaq Small-Cap, NMS, NYSE, AMEX or the OTC Bulletin
Board;
(vii) the Company fails, and such failure continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, to remove any restrictive legend on any certificate for
any shares of Common Stock issued to a Holder upon conversion of any Class B
Preferred Stock, as and when required by this Certificate of Designation, the
Subscription Agreement, between the Company and the Holder(s) (the "Subscription
Agreement") or the Registration Rights Agreement, unless such legend removal is
prohibited by applicable law;
(viii) the Company breaches, and such breach
continues uncured for three (3) business days (after any cure period
specifically set forth in the Governing Agreements, if applicable) after the
Company has been notified thereof in writing by a Holder, any significant
covenant in or other material term or condition of any of the Governing
Agreements (including, without limitation, the failure to make any required
liquidated damage or other cash payment hereunder or under the Registration
Rights Agreement), provided that if any such breach expressly provides a cure
period, then such cure period shall apply and if such breach provides for money
damages in the applicable Governing Agreement, and such money damages are being
timely paid, then such breach shall not constitute a default under this
subsection unless such breach continues for sixty (60) days;
(ix) any representation or warranty of the Company
made herein or in any agreement, statement or certificate given in writing
pursuant hereto or in connection herewith (including, without limitation, the
Subscription Agreement and Registration Rights Agreement), shall be knowingly
false or intentionally misleading in any material respect when made;
(x) the Company or any subsidiary of the Company
shall make an assignment for the benefit of its creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such receiver or trustee shall otherwise be
appointed; or
(xi) bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Company or any subsidiary of the Company (and such proceedings shall continue
unstayed for thirty (30) days).
(d) Failure to Pay Damages Amount. If the Company fails to pay
the Holder Demand Prepayment Amount within five (5) business days of its receipt
of a Demand Prepayment Notice, then such Holder shall have the right, at any
time and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 5) all or any portion of the Holder Demand
Prepayment Amount, into shares of Common Stock at the lower of (i) the Fixed
Conversion Price or (ii) the then current Conversion Trading Price, provided
that if the Company has not delivered the full number of shares of Common Stock
issuable upon such conversion, which shares shall be listed, registered, and
freely tradable, each to the extent required by the Governing Agreements, within
three (3) business days after the Company receives written notice of such
conversion, the Conversion Trading Price with respect to such Holder Demand
Prepayment Amount shall thereafter be deemed to
<PAGE> 47
be the lowest Conversion Trading Price in effect during the period beginning on
the date of the Event of Default through the date on which the Company delivers
to the Holder the full number of shares of Common Stock issuable upon such
conversion, which shares shall be listed, registered, and freely tradable, each
to the extent required by the Governing Agreements. In the event the Company is
not able to pay all amounts due and payable with respect to all Class B
Preferred Stock subject to Holder Demand Prepayment Notices, the Company shall
pay the Holders such amounts pro rata, based on the total amounts payable to
such Holder relative to the total amounts payable to all Holders.
Section 14. Remedies, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under the Certificate
of Designation at law or in equity (including a decree of specific performance
and/or other injunctive relief), no remedy contained herein shall be deemed a
waiver of compliance with the provision 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 Designation. Amounts
set forth or provided for herein with respect to payments, conversion and the
like (and the computation thereof) shall be the amounts to be received by the
holder hereof and shall not, except as expressly provided herein, be subject to
any other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holders of Class B Preferred Stock and that the remedy
at law for any such breach may be inadequate. The Company therefore agrees, in
the event of any such breach or threatened breach, the Holders of Class B
Preferred Stock 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.
Section 15. Assignability. The Class B Preferred Stock shall be freely
assignable by a Holder subject to applicable securities laws and any agreement
to the contrary signed by such Holder.
<PAGE> 48
CERTIFICATE OF DESIGNATION OF
CLASS C CONVERTIBLE PREFERRED STOCK
OF
VION PHARMACEUTICALS, INC.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is Vion
Pharmaceuticals, Inc., a Delaware corporation.
2. The certificate of incorporation of the Company authorizes the
issuance of Five million (5,000,000) shares of preferred stock, $.01 par value
per share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
series and by resolution or resolutions to establish the designation and number
and to fix the relative rights and preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating a Class C issue of Preferred Stock:
RESOLVED, that twenty-five thousand (25,000) of the five million
(5,000,000) authorized shares of Preferred Stock of the Company shall be
designated Class C Convertible Preferred Stock, $.01 par value per share, and
shall possess the rights and preferences set forth below:
Section 1. Designation and Amount. The shares of such series shall have
a par value of $.01 per share and shall be designated as Class C Convertible
Preferred Stock (the "Class C Preferred Stock") and the number of shares
constituting the Class C Preferred Stock shall be twenty-five thousand (25,000).
The Class C Preferred Stock shall have a stated value per share (the "Original
Class C Issue Price"), calculated as follows:
Original Class C Issue Price = Conversion Rate X Market Price,
where,
! "Conversion Rate" shall have the meaning ascribed to it in Section
5(a) below, and
! "Market Price" shall equal the average Closing Bid Price (as defined
in Section 5 below), of the Company's Common Stock for the ten (10) trading days
immediately preceding the Date of Conversion, as defined below.
Section 2. Rank. The Class C Preferred Stock shall rank: (i) junior to
any other class or series of capital stock of the Company hereafter created
specifically ranking by its terms senior to the Class C Preferred Stock
(collectively, the "Senior Securities"); (ii) prior to all of the Company's
Common Stock, $.01 par value per share ("Common Stock"); (iii) prior to any
class or series of capital stock of the Company hereafter created not
specifically ranking by its terms senior to or on parity with any Class C
Preferred Stock of whatever subdivision (collectively, with the Common Stock,
"Junior Securities"); and (iv) on parity with the Company's Class A Preferred
Stock, the Company's Class B Preferred Stock, and any class or series of capital
stock of the Company hereafter created specifically ranking by its terms on
parity with the Class C Preferred Stock ("Parity Securities") in each case as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").
<PAGE> 49
Section 3. Dividends. The Class C Preferred Stock will bear no
dividends, and the holders of the Class C Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Class C Preferred Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company ("Liquidation Event"), either voluntary or involuntary, the then
Holders of shares of Class C Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Certificate of Incorporation or any certificate of designation, and
prior in preference to any distribution to Junior Securities but in parity with
any distribution to Parity Securities, an amount per share equal to the Original
Class C Issue Price for each outstanding share of Class C Preferred Stock. If
upon the occurrence of such event, and after payment in full of the preferential
amounts with respect to the Senior Securities, the assets and funds available to
be distributed among the Holders of the Class C Preferred Stock and Parity
Securities shall be insufficient to permit the payment to such Holders of the
full preferential amounts due to the Holders of the Class C Preferred Stock and
the Parity Securities, respectively, then the entire assets and funds of the
Company legally available for distribution shall be distributed among the
Holders of the Class C Preferred Stock and the Parity Securities, pro rata,
based on the respective liquidation amounts to which each such series of stock
is entitled by the Company's Certificate of Incorporation and any certificate(s)
of designation relating thereto.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in this Company, they shall be distributed to
holders of Junior Securities in accordance with the Company's Certificate of
Incorporation including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of shall
be deemed to be a Liquidation Event as defined in Section 4(a); provided further
that (i) a consolidation, merger, acquisition, or other business combination of
the Company with or into any other publicly traded company or companies (or in
which the Company is the surviving entity and remains a publicly traded Company)
shall not be treated as a Liquidation Event as defined in Section 4(a) but
instead shall be treated pursuant to Section 5(d) hereof, and (ii) a
consolidation, merger, acquisition, or other business combination of the Company
with or into any other non-publicly traded company or companies shall be treated
as a Liquidation Event as defined in Section 4(a). The Company shall not effect
any transaction described in this subsection 4(c) unless it first gives thirty
(30) days prior notice of such transaction (during which time the Holder shall
be entitled to immediately convert any or all of its shares of Class C Preferred
Stock into Common Stock ("Conversion Shares")).
(d) In the event that, immediately prior to the closing of a
transaction described in Section 4(c) which would constitute a Liquidation
Event, the cash distributions required by Section 4(a) or Section 6 have not
been made, the Company shall either: (i) cause such closing to be postponed
until such cash distributions have been made, or (ii) cancel such transaction,
in which event the rights of the Holders of Class C Preferred Stock shall be the
same as existing immediately prior to such proposed transaction.
Section 5. Conversion. The record Holder(s) of this Class C Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. The record Holder(s) of the Class C
Preferred Stock shall be entitled to convert, any or all the shares of the Class
C Preferred Stock anytime on or after the date upon which Holder
2
<PAGE> 50
acquires the right to have such shares issued (which right is acquired upon
conversion of the applicable Class B Preferred Stock) (the "Issue Date"), as
defined below, at the office of the Company into that number of fully-paid and
non-assessable shares of Common Stock calculated in accordance with the
following formula (the "Conversion Rate"):
Number of shares of Common Stock issued upon conversion of one (1) share of
Class C Preferred Stock =
1,000
----------------------
Fixed Conversion Price
where,
! Fixed Conversion Price = 100% of the average Closing Bid Price, as defined
below, for the thirty (30) trading days ending on the Last Closing Date (as
defined in the Certificate of Designation for the Class B Preferred Stock),
which is $4.065,
and
! "Closing Bid Price" shall mean the closing bid price of the Company's Common
Stock on the Nasdaq Small Cap Market, or if no longer traded on the Nasdaq Small
Cap Market, the closing bid price on the principal national securities exchange
or the over-the-counter market on which the Common Stock is so traded and if not
available, the mean of the high and low prices on the principal national
securities exchange or the National Market System on which the Common Stock is
so traded.
(b) Mechanics of Conversion. In order to convert Class C
Preferred Stock into full shares of Common Stock, the Holder shall (i) send via
facsimile, on or prior to 11:59 p.m., New York City time (the "Conversion Notice
Deadline") on the Date of Conversion, a copy of the fully executed notice of
conversion ("Notice of Conversion") to the Company at the office of the Company
stating that the Holder elects to convert, which notice shall specify the Date
of Conversion, the number of shares of Class C Preferred Stock to be converted,
and a calculation of the number of shares of Common Stock issuable upon such
conversion (together with a copy of the front page of each certificate to be
converted if issued prior thereto) and (ii) surrender to a common courier for
delivery to the office of the Company, the original certificates representing
the Class C Preferred Stock being converted if issued prior thereto (the
"Preferred Stock Certificates"), duly endorsed for transfer; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Company as provided above, or the Holder
notifies the Company that such certificates have been lost, stolen, destroyed,
or not yet issued (subject to the requirements of subparagraph (i) below).
Unless otherwise noted in writing by the Holder, any Notice of Conversion
tendered to the Company for conversion of Class B Preferred Stock in accordance
with the Class B Certificate of Designation shall be deemed to be a validly
tendered Notice of Conversion for conversion of the Class C Preferred Stock
issued or issuable upon conversion of such Class B Preferred Stock. Upon receipt
by the Company of a facsimile copy of a Notice of Conversion, the Company shall
immediately send, via facsimile, a confirmation of receipt of the Notice of
Conversion to Holder which shall specify that the Notice of Conversion has been
received and the name and telephone number of a contact person at the Company
whom the Holder should contact regarding information related to the Conversion.
In the case of a dispute as to the calculation of the Conversion Rate, the
Company shall, within the time period required under Section 5(b)(ii) below,
issue to the Holder the number of Shares that are not disputed
3
<PAGE> 51
and shall submit the disputed calculations to its outside accountant via
facsimile within three (3) days of receipt of Holder's Notice of Conversion. The
Company shall cause the accountant to perform the calculations and notify the
Company and Holder of the results no later than two business days from the time
it receives the disputed calculations. Accountant's calculation shall be deemed
conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Class C Preferred Stock, and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Company, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Company shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However, the
Company shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests the Company to convert such
Class C Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The
Company shall, no later than the close of business on the third (3rd) business
day (the "Deadline") after receipt by the Company of a facsimile copy of a
Notice of Conversion and receipt by Company of all necessary documentation duly
executed and in proper form required for conversion, including the original
Preferred Stock Certificates to be converted, if issued (or after provision for
security or indemnification in the case of lost or destroyed certificates, if
required), and/or shall cause the transfer agent for its Common Stock (the
"Transfer Agent") to issue and surrender to a common courier for either
overnight or (if delivery is outside the United States) two (2) day delivery to
the Holder at the address of the Holder as shown on the stock records of the
Company a certificate for the number of shares of Common Stock to which the
Holder shall be entitled as aforesaid. If the Holder converts Class B Preferred
Stock and in the Notice of Conversion, the Holder elects to convert the shares
of Class C Preferred Stock to be issued as a Special Dividend upon the
conversion of the Class B Preferred Stock, the Class C Preferred Stock
certificates shall be deemed delivered to the Company on the date of such Notice
of Conversion. Notwithstanding the foregoing, if the Holder converts Class B
Preferred Stock and in the Notice of Conversion, the Holder elects to convert
the shares of Class C Preferred Stock to be issued as a Special Dividend upon
conversion of the Class B Preferred Stock, the Company shall not be obligated to
deliver certificates representing Common Stock underlying such Class C Preferred
Stock prior to the date on which it is obligated to deliver Common Stock
underlying such Class B Preferred Stock, and provided further that damages or
penalties shall not accrue with regard to such conversion of Class C Preferred
Stock prior to the time at which such damages or penalties would accrue with
regard to the conversion of such Class B Preferred Stock.
(iii) No Fractional Shares. If any conversion of the
Class C Preferred Stock would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares of Common Stock issuable upon
conversion, in the aggregate, shall be the next higher number of shares.
(iv) Date of Conversion. The date on which conversion
occurs (the "Date of Conversion") shall be deemed to be the date set forth in
such Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is sent via facsimile to the Company before 11:59 p.m., New York City
time, on the Date of Conversion, and (ii) that the original Preferred Stock
Certificates representing the shares of Class C Preferred Stock to be converted,
if issued, are surrendered by depositing such certificates with a common
courier, for delivery to the Company as provided above, as soon as practicable
after the Date of Conversion. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record Holder or Holders of such shares of Common Stock on the
Date of Conversion.
(c) Automatic Conversion or Redemption. Each share of Class C
Preferred Stock
4
<PAGE> 52
outstanding on the date which is two (2) years after the Last Closing Date (as
defined in the Certificate of Designation of the Class B Preferred Stock) or, if
not a business day, the first business day thereafter ("Termination Date")
automatically shall, provided that there has been no uncured Event of Default,
be converted ("Automatic Conversion") into Common Stock on such date at the
Conversion Rate then in effect (calculated in accordance with the formula in
Section 5(a) above), where the Termination Date shall be deemed the Date of
Conversion with respect to such conversion for purposes of this Certificate of
Designation. In the case of an Automatic Conversion, the Company and the Holders
shall follow the applicable conversion procedures set forth in this Certificate
of Designation; provided, however, that the Holders are not required to send the
Notice of Conversion contemplated by Section 5(b). Nothing in this Section 5(c)
shall be construed to limit Holder's ability to pursue Holder's rights under
Sections 12 and 13 hereof. At each Holder's option, upon written notice from the
investor no later than five (5) business days prior to the original Termination
Date, the Termination Date shall be delayed for the aggregate number of days
during which there is continuing one or more Events of Default or a Conversion
Failure anytime during the term of the Class C Preferred Stock.
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock
Split, Stock Dividend, Etc. If, prior to the conversion of all of the Class C
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Fixed Conversion Price shall be proportionately
increased.
(ii) No Fractional Shares. If any adjustment under
this Section 5(d) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.
(iii) Adjustments.
(A) Adjustment Due to Merger, Consolidation,
Etc. If, prior to the conversion of all Class C Preferred Stock, there shall be
any merger, consolidation, exchange of shares, recapitalization, reorganization,
or other similar event, as a result of which shares of Common Stock of the
Company shall be changed into (or the shares of Common Stock become entitled to
receive) the same or a different number of shares of the same or another class
or classes of stock or securities of the Company or another entity or there is a
sale of all or substantially all the Company's assets or there is a change of
control transaction not deemed to be a liquidation pursuant to Section 4(c),
then the Holders of Class C Preferred Stock shall thereafter have the right to
receive upon conversion of Class C Preferred Stock, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities and/or
other assets which the Holder would have been entitled to receive in such
transaction had the Class C Preferred Stock been converted immediately prior to
such transaction, and in any such case appropriate provisions shall be made with
respect to the rights and interests of the Holders of the Class C Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for the adjustment of the number of shares issuable upon conversion
of the Class C Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities thereafter deliverable upon the
exercise hereof. The Company shall not effect any transaction described in this
subsection 5(d)(iii) unless (a) it first gives at least thirty (30) days prior
notice of such merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event (during which time the Holder shall be
entitled to convert its shares of Class C Preferred Stock into Common Stock and
(b) the resulting successor or acquiring
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<PAGE> 53
entity (if not the Company) assumes by written instrument the obligations of the
Company under this Certificate of Designation including this subsection
5(d)(iii).
(B) Adjustment Due to Distribution. If at
any time after the Issue Date of any Class C Preferred Stock, the Company shall
declare or make any distribution of its assets (or rights to acquire its assets)
to Holders of Common Stock as a partial liquidating dividend, by way of return
of capital or otherwise (including any dividend or distribution to the Company's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
any other public or private company, including but not limited to a subsidiary
or spin-off of the Company (a "Distribution"), then the Holders of Class C
Preferred Stock shall be entitled, upon any conversion of shares of Class C
Preferred Stock or conversion of Special Dividend Stock (if any) issuable upon a
subsequent conversion of Class B Preferred Stock, in each case after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the Holder with
respect to the shares of Common Stock issuable upon such conversion of Class C
Preferred Stock, had such Holder been the holder of such shares of Common Stock
on the record date for determination of shareholders entitled to such
Distribution.
(iv) (A) Adjustment Due to Issuances of Other
Securities. If at any time or from time to time after the Issue Date of any
Class C Preferred Stock, the Company shall issue or sell Common Stock or rights,
options, warrants or other securities convertible into Common Stock, (excluding
those rights, options, warrants or other securities convertible into no more
than 18,000,000 shares of Common Stock outstanding as of the Last Closing Date
or underlying such securities and future ordinary 5% annual dividends on its
Class A Convertible Preferred Stock), at a price per share which is lower than
the then effective Fixed Conversion Price, then the Conversion Rate shall be
increased by multiplying the Conversion Rate theretofore in effect by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such shares, rights, options,
warrants or convertible securities plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the denominator
shall be the number of shares of Common Stock outstanding immediately prior to
the issuance of such rights, options, warrants or convertible securities plus
the number of shares which the aggregate offering price of the total number of
shares offered would purchase at the then effective Fixed Conversion Price,
provided, however, that no such adjustment shall be made which results in a
decrease in the Conversion Rate. Such adjustment shall be made whenever such
rights, options, warrants or convertible securities are issued, and shall become
effective immediately and retroactive to the record date for the determination
of stockholders entitled to receive such rights, options, warrants or
convertible securities. Notwithstanding the foregoing, no adjustment will be
required on account of (i) the exercise of any of the options presently
outstanding under the Company's Amended and Restated 1993 Stock Option Plan (the
"Plan") for officers, directors and certain other key personnel of the Company,
or (ii) the issuance or exercise of any other securities which may hereafter be
granted or exercised under the Plan or under any other employee benefit plan of
the Company, but only to the extent that all shares of Common Stock issued or
issuable pursuant to such plan or plans do not exceed 4,000,000 shares, as such
number may be appropriately adjusted for dilutive events, or (iii) shares issued
in an underwritten public offering.
(B) Adjustment Due to Expired and
Unexercised Convertible Securities. If, in any case, the total number of shares
of Common Stock issuable upon exercise, conversion or exchange of any rights,
options, warrants or convertible securities (collectively, "Convertible
Securities") is not, in fact, issued and the rights to exercise, convert or
exchange such Convertible Securities shall have expired or terminated, the
Conversion Rate then in effect will be readjusted to the Conversion Rate which
would have been in effect at the time of such expiration or termination had such
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination (other than in respect of the actual number of shares
of Common Stock issued upon exercise or conversion thereof), never been issued.
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<PAGE> 54
(e) No Five Percent Holders. Notwithstanding anything to the
contrary contained herein, the Class C Preferred Stock shall not be convertible
by a Holder or at the Termination Date to the extent (but only to the extent)
that, if converted by such Holder or at the Termination Date, the Holder would
beneficially own in excess of 4.9% of the then outstanding shares of Common
Stock of the Company (the "4.9% Limitation"), provided, however, that such
limitation shall not apply to conversions tendered in anticipation of or
following a merger, acquisition, or other business combination involving the
Company or pursuant to bankruptcy or insolvency proceedings. To the extent this
limitation applies, the determination of whether Class C Preferred Stock shall
be convertible (vis-a vis other securities owned by such Holder) and of which
Class C Preferred Stock shall be converted shall be in the sole discretion of
the Holder and submission of the Class C Preferred Stock for conversion shall be
deemed to be the Holder's determination of whether such Class C Preferred Stock
is convertible, subject to such aggregate percentage limitations. For the
purposes of this subparagraph, beneficial ownership and all calculations,
including without limitation, with respect to calculations of percentage
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the Regulations thereunder.
Notwithstanding the foregoing, each Holder shall have the right to waive such
restriction or increase such percentage upon sixty one (61) days' prior notice
to the Company and to decrease any such percentage immediately upon written
notice to the Company. No transferee of Class C Preferred Stock shall be bound
by such restriction unless the transferee expressly so agrees.
Section 6. [Intentionally Left Blank]
Section 7. Voting Rights. The Holders of the Class C Preferred Stock
shall have no voting power whatsoever, except as otherwise provided by the
General Corporation Law of the State of Delaware ("Delaware Law"), and no Holder
of Class C Preferred Stock shall vote or otherwise participate in any proceeding
in which actions shall be taken by the Company or the shareholders thereof or be
entitled to notification as to any meeting of the shareholders.
Notwithstanding the above, the Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Company, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall send (by certified mail or overnight courier) a
notice to Holder, in such form as given to the other shareholders, at least ten
(10) days prior to the record date specified therein, of the date on which any
such record is to be taken for the purpose of such dividend, distribution, right
or other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under Delaware Law the vote of the Holders of the
Class C Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least two thirds (2/3) of the shares of the Class C Preferred Stock
represented at a duly held meeting at which a quorum is present or by written
consent of a majority of the shares of Class C Preferred Stock (except as
otherwise may be required under Delaware Law) shall constitute the approval of
such action by the class, subject to Section 8 below. To the extent that under
Delaware Law the Holders of the Class C Preferred Stock are entitled to vote on
a matter with holders of Common Stock, voting together as one (1) class, each
share of Class C Preferred Stock shall be entitled to a number of votes equal to
the number of shares of
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<PAGE> 55
Common Stock into which it is then convertible on the record date for the taking
of such vote of stockholders. Holders of the Class C Preferred Stock also shall
be entitled to notice of all shareholder meetings or written consents with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Company's by-laws and applicable statutes.
Section 8. Protective Provision. So long as shares of Class C Preferred
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by Delaware Law) of the
Holders of at least seventy-five percent (75%) of the then outstanding shares of
Class C Preferred Stock, and at least seventy-five percent (75%) of the then
outstanding Holders:
(a) alter or change the rights, preferences or privileges of
the Class C Preferred Stock or any securities so as to affect adversely the
Class C Preferred Stock;
(b) create any new class or series of stock having a
preference over or on parity with the Class C Preferred Stock with respect to
Distributions (as defined in Section 2 above) or increase the size of the
authorized number of Class C Preferred; or
(c) do any act or thing not authorized or contemplated by this
Designation which would result in taxation of the holders of shares of the Class
C Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended).
In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Class C Preferred Stock and at least seventy-five percent
(75%) of the then outstanding Holders agree to allow the Company to alter or
change the rights, preferences or privileges of the shares of Class C Preferred
Stock, pursuant to subsection (a) above, so as to affect the Class C Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Class C Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change, or
continue to hold their shares of Class C Preferred Stock, as amended.
Section 9. Status of Converted Stock. In the event any shares of Class
C Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so
converted shall be canceled, shall return to the status of authorized but
unissued Preferred Stock of no designated series, and shall not be issuable by
the Company as Class C Preferred Stock.
Section 10. Preference Rights. Nothing contained herein shall be
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Class C Preferred
Stock.
Section 11. [Intentionally Left Blank]
Section 12. Failure to Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a Holder
submits a Notice of Conversion (or is deemed to submit such notice pursuant to
Section 5(c) hereof), and the Company fails for any reason to surrender to a
Common Courier for overnight (or 2 day, if overseas) delivery to the Holder, on
or prior to the date that is one (1) trading day after the Deadline ("Delivery
Period") for such conversion, such number of shares of Common Stock to which
such Converting Holder is entitled upon such conversion (which
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<PAGE> 56
shares shall be listed, authorized, reserved, registered, and freely tradeable,
each to the extent required in this Class C Certificate of Designation, the
Certificate of Designation of the Class B Preferred Stock, the Registration
Rights Agreement between the Company and the Holder(s) and the Subscription
Agreement between the Company and the Holder(s), collectively referred to as the
"Governing Agreements"), or (y) the Company provides notice to Holder at any
time of its intention not to issue shares of Common Stock upon exercise by
Holder of its conversion rights in accordance with the terms of this Certificate
of Designation (each of (x) and (y) being a "Conversion Failure"), then the
Company shall pay to such Holder cash damages in an amount equal to the lower
of:
(i) "Damages Amount" X "D" X .010, and
(ii) the highest interest rate permitted by
applicable law, where:
"D" means the number of days beginning the date of the Conversion
Failure through and including the Cure Date with respect to such Conversion
Failure;
"Damages Amount" means the Original Class C Issue Price for each share
of Class C Preferred Stock subject to Conversion Failure plus all accrued and
unpaid Premium thereon as of the first day of the Conversion Failure, plus all
damage payments previously owed and unpaid.
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
shares of Class C Preferred Stock submitted for conversion and (ii) with respect
to a Conversion Failure described in clause (y) of its definition, the date the
Company undertakes in writing to timely issue Common Stock in satisfaction of
all conversions of Class C Preferred Stock in accordance with the terms of this
Certificate of Designation.
The payments to which a Holder shall be entitled pursuant to this
Section are referred to herein as "Conversion Failure Payments." The parties
agree that the damages caused by a breach hereof would be difficult or
impossible to estimate accurately. Any accrued Conversion Failure Payments shall
be payable in cash by a cashiers check, no later than ten (10) days after the
end of any month(s) for which such amounts accrue. In the event that the Company
has failed to pay any Conversion Failure Payment within five (5) days of the
date it is required to be paid, the Holder, at its option, may elect to convert
all or any portion of such accrued Conversion Failure Payments, at any time
prior to receipt of cash payment of such Conversion Failure Payment, into Common
Stock at a conversion price equal to the lesser of (i) the Fixed Conversion
Price or (ii) the lowest Conversion Trading Price (as defined in the Company's
Class B Preferred Stock Certificate of Designation) in effect during the period
beginning on the date of the Conversion Failure through the Cure Date for such
Conversion Failure. In the event a Holder elects to convert all or any portion
of the Conversion Failure Payments, such Holder shall indicate on a Notice of
Conversion such portion of the Conversion Failure Payments which such Holder
elects to so convert and such conversion shall otherwise be effected in
accordance with provisions of Section 5.
(b) Buy-In Cure. Unless a Conversion Failure described in
clause (y) of Section 12(a) hereof has occurred with respect to such a Holder,
if (i) the Company fails for any reason to deliver during the Delivery Period
shares of Common Stock to a Holder upon a conversion of the Class C Preferred
Stock and (ii) on the same date or subsequent to the end of the applicable
Delivery Period with respect to such conversion, a Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to make delivery upon a
sale by a Holder of the shares of Common Stock (the "Sold Shares") which such
Holder anticipated receiving upon such conversion (a "Buy-In"), the Company
shall pay such Holder within two (2) business days following receipt of written
notice of a claim pursuant to this Section 12(b) (in addition to any other
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<PAGE> 57
remedies available to Holder) the amount by which (x) such Holder's total
purchase price (including brokerage commission, if any) for the shares of Common
Stock so purchased exceeds (y) the net proceeds received by such Holder from the
sale of the Sold Shares. For example, if a Holder purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock sold for $10,000, the Company will be required to pay
such Holder $1,000. A Holder shall provide the Company written notification (and
trading records, if reasonably requested by the Company), indicating any amounts
payable to Holder pursuant to this Section 12.
(c) Adjustment to Conversion Price. If a Holder has not
received certificates for all shares of Common Stock within three (3) business
days following the expiration of the Delivery Period with respect to a
conversion of any portion of any of such Holder's Class C Preferred Stock for
any reason, then the Fixed Conversion Price applicable for calculating the
number of Common Shares to which Holder is entitled upon conversion of such
portion of the Class C Preferred Stock shall be reduced by the amount by which
the Conversion Trading Price in effect on the Conversion Date exceeds the lowest
Conversion Trading Price in effect during the period beginning on, and
including, such Conversion Date through and including the Cure Date. In
addition, if there shall occur a Conversion Failure of the type described in
clause (y) of Section 12(a), then the Fixed Conversion Price with respect to any
conversion of Class C Preferred Stock thereafter shall be the lowest Conversion
Trading Price in effect at any time during the period beginning on, and
including, the date of the occurrence of such Conversion Failure through and
including the Cure Date. The Conversion Trading Price and the Fixed Conversion
Price shall thereafter be subject to further adjustment for any events described
in Section 5(d).
Section 13. Events of Default.
(a) Holder's Option to Demand Prepayment. Upon the occurrence
of an Event of Default (as herein defined), the Company shall, unless a specific
cash payment is already specified in the Governing Agreements with respect to
such default, pay the Holders (beginning after the specified cure period) an
amount equal to three percent (3%) per month of the aggregate amount of
outstanding Class C Preferred Stock held by the Holder, accruing daily until the
Event of Default is cured or until the Class C Preferred Stock is prepaid under
this Section, payable in cash by a cashiers check, no later than five (5) days
after the end of any month(s) for which such amounts accrue ("Default
Payments"). In addition, each Holder shall have the right to elect at any time
and from time to time prior to the cure by the Company of such Event of Default
to have all or any portion of such Holder's then outstanding Class C Preferred
Stock prepaid by the Company for an amount equal to the Holder Demand Prepayment
Amount (as herein defined):
(i) The right of a Holder to elect prepayment shall
be exercisable upon the occurrence of an Event of Default by such Holder in its
sole discretion by delivery of a Demand Prepayment Notice (as herein defined) in
accordance with the procedures set forth in this Section 13. Notwithstanding the
exercise of such right, the Holder shall be entitled to exercise all other
rights and remedies available under the provisions of this Certificate of
Designation and at law or in equity.
(ii) A Holder shall effect each demand for prepayment
under this Section 13 by giving at least five (5) business days prior written
notice (the "Demand Prepayment Notice") of the date which the Holder shall
specify and upon which such prepayment is to become effective (the "Effective
Date of Demand of Prepayment"), the Class C Preferred Stock selected for
prepayment and the Holder Demand Prepayment Amount to the Company at the address
and facsimile number provided in the stock records of the Company, which Demand
Prepayment Notice shall be deemed to have been delivered on the business day
after the date of transmission of Holder's facsimile (with a copy sent by
overnight courier to the Company) of such notice.
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(iii) The Holder Demand Prepayment Amount shall be
paid to a Holder whose Class C Preferred Stock is being prepaid within three (3)
business days following the Effective Date of Demand of Prepayment; provided,
however, that the Company shall not be obligated to deliver any portion of the
Holder Demand Prepayment Amount until one (1) business day following either the
date on which the Class C Preferred Stock being prepaid are delivered to the
office of the Company, or the date on which the Holder notifies the Company that
such Class C Preferred Stock have been lost, stolen or destroyed and delivers
the documentation required in accordance with Section 5(b)(i) hereof.
(b) Holder Demand Prepayment Amount. The "Holder Demand
Prepayment Amount" means the greater of: (a) 1.3 times the Total Value of the
Class C Preferred Stock for which demand is being made, through the date of
prepayment or (b) the product of (1) the highest price at which the Common Stock
is traded on the date of the Event of Default (or on the most recent trading
date for the Common Stock if the Common Stock is not traded on such date)
divided by the Fixed Conversion Price (or the Conversion Trading Price) in
effect as of the date of the Event of Default, whichever is less), and (2) the
Total Value through the date of prepayment, where, "Total Value" shall mean the
Stated Value of the Class C Preferred Stock being redeemed, plus liquidated
damages, Conversion Failure Payments, Late Registration Payments and any other
cash payments then due from the Company and then unpaid, where "Stated Value"
shall mean the Original Class C Issue Price (as defined in Section 1) of each
share of Class C Preferred Stock.
(c) Events of Default. An "Event of Default" means any one of
the following:
(i) a material failure by the Company to comply with
the Conversion Failure remedies described in Section 12 hereof;
(ii) a Share Authorization and Reservation Failure
described in Section 11(b) of the Class B Certificate of Designation, if such
Share Authorization and Reservation Failure continues uncured for ninety (90)
days after the Authorization and Reservation Trigger Date (for purposes of this
subsection (ii), a prepayment demand may be made by a Holder only to the extent
that there is an insufficient number of shares of Common Stock authorized and
reserved to effect conversion of (a) all of such Holder's outstanding Class B
Preferred Stock, and (b) all Class C Preferred Stock issuable upon conversion of
such shares of Class B Preferred Stock, provided, however, that Holder need not
actually convert any shares of Class C Preferred Stock and use up its available
authorized and reserved shares of Common Stock in order to demand such
prepayment);
(iii) (a) the Company has less than the required
number of shares reserved for issuance to any Holder or Holders upon
conversions, (b) the Company has shares of Common Stock authorized for issuance
upon conversion of the Preferred Stock which have not yet been reserved for such
issuance ("Authorized But Not Yet Reserved Shares"), and (c) the Company fails
to reserve for issuance to the Holders the Authorized But Not Yet Reserved
Shares within five (5) business days of the date they are authorized;
(iv) the Company fails to pay any cash payments due
to Holder under the terms of this Class C Certificate of Designation within five
(5) days after Holder has notified the Company, in writing, that such payment is
past due and that the Holder intends to declare an "Event of Default" under this
Section 13 if such payment is not made;
(v) the Company fails to maintain an effective
registration statement as required by the Registration Rights Agreement between
the Company and the Holder(s) (the "Registration Rights
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<PAGE> 59
Agreement") except where (A) such failure lasts no longer than seven (7)
consecutive trading days or twenty one (21) days in any twelve (12) month
period, or (B) the Conversion Shares may be sold immediately, without volume
limitation, without registration under the Act, by virtue of Rule 144 or similar
provisions;
(vi) for three (3) consecutive trading days or for an
aggregate of ten (10) trading days in any nine (9) month period, the Common
Stock (including any of the shares of Common Stock issuable upon conversion of
the Class C Preferred Stock) is (i) suspended from trading on any of Nasdaq
SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board, or (ii) is not listed and
qualified for trading on at least one of Nasdaq SmallCap, NMS, NYSE, AMEX or the
OTC Bulletin Board;
(vii) the Company fails, and such failure continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, to remove any restrictive legend on any certificate for
any shares of Common Stock issued to a Holder upon conversion of any Class C
Preferred Stock, as and when required by this Certificate of Designation, the
Subscription Agreement, between the Company and the Holder(s) (the "Subscription
Agreement") or the Registration Rights Agreement, unless such legend removal is
prohibited by applicable law;
(viii) the Company breaches, and such breach
continues uncured for three (3) business days (after any cure period
specifically set forth in the Governing Agreements, if applicable) after the
Company has been notified thereof in writing by a Holder, any significant
covenant in or other material term or condition of any of the Governing
Agreements (including, without limitation, the failure to make any required
liquidated damage or other cash payment hereunder or under the Registration
Rights Agreement), provided that if any such breach expressly provides a cure
period, then such cure period shall apply and if such breach provides for money
damages in the applicable Governing Agreement, and such money damages are being
timely paid, then such breach shall not constitute a default under this
subsection unless such breach continues for sixty (60) days;
(ix) any representation or warranty of the Company
made herein or in any agreement, statement or certificate given in writing
pursuant hereto or in connection herewith (including, without limitation, the
Subscription Agreement and Registration Rights Agreement), shall be knowingly
false or intentionally misleading in any material respect when made;
(x) the Company or any subsidiary of the Company
shall make an assignment for the benefit of its creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such receiver or trustee shall otherwise be
appointed; or
(xi) bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Company or any subsidiary of the Company (and such proceedings shall continue
unstayed for thirty (30) days).
(d) Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Prepayment Amount within five (5) business days of its receipt of
a Demand Prepayment Notice, then such Holder shall have the right, at any time
and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 5) all or any portion of the Holder Demand
Prepayment Amount, into shares of Common Stock at the lower of (i) the Fixed
Conversion Price or (ii) the then current Conversion Trading Price, provided
that if the Company has not delivered the full number of shares of Common Stock
issuable upon such conversion which shares shall be listed, registered, and
freely tradeable, each to the extent required by the Governing
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Agreements, within three (3) business days after the Company receives written
notice of such conversion, the Conversion Trading Price with respect to such
Holder Demand Prepayment Amount shall thereafter be deemed to be the lowest
Conversion Trading Price in effect during the period beginning on the date of
the Event of Default through the date on which the Company delivers to the
Holder the full number of shares of Common Stock issuable upon such conversion,
which shares shall be listed, registered, and freely tradeable, each to the
extent required by the Governing Agreements. In the event the Company is not
able to pay all amounts due and payable with respect to all Class C Preferred
Stock subject to Holder Demand Prepayment Notices, the Company shall pay the
Holders such amounts pro rata, based on the total amounts payable to such Holder
relative to the total amounts payable to all Holders.
Section 14. Remedies, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under the Certificate
of Designation at law or in equity (including a decree of specific performance
and/or other injunctive relief), no remedy contained herein shall be deemed a
waiver of compliance with the provision 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 Designation. Amounts
set forth or provided for herein with respect to payments, conversion and the
like (and the computation thereof) shall be the amounts to be received by the
holder hereof and shall not, except as expressly provided herein, be subject to
any other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holders of Class C Preferred Stock and that the remedy
at law for any such breach may be inadequate. The Company therefore agrees, in
the event of any such breach or threatened breach, the Holders of Class C
Preferred Stock 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.
Section 15. Assignability. The Class C Preferred Stock shall be freely
assignable by a Holder subject to applicable securities laws and any agreement
to the contrary signed by such Holder.
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VION PHARMACEUTICALS, INC.
CERTIFICATE OF DESIGNATION
OF
5% CONVERTIBLE PREFERRED STOCK SERIES 1998
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
VION PHARMACEUTICALS, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), does hereby certify
that, pursuant to the authority conferred on the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation adopted the following
resolution establishing a series of 15,000 shares of Preferred Stock of the
Corporation designated as "5% Convertible Preferred Stock Series 1998":
RESOLVED, that pursuant to the authority conferred on the
Board of Directors of this corporation by the Certificate of
Incorporation, as amended, a series of Preferred Stock, par value
$.01 per share, of the Corporation is hereby established and created,
and that the designation and number of shares thereof and the voting
and other powers, preferences and relative, participating, optional
or other rights of the shares of such series and the qualifications,
limitations and restrictions thereof are as follows:
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "5% Convertible Preferred Stock Series 1998" ("Preferred Shares")
and the number of shares constituting such series shall be 15,000.
SECTION 2. RANK. The Preferred Shares shall rank (i) on parity with
the Corporation's Class A Convertible Preferred Stock and Class B Convertible
Preferred Stock and (ii) senior to any other security of the Corporation; in
each case with respect to distributions of assets upon liquidation, dissolution
or winding up of the Corporation.
SECTION 3. DIVIDENDS. The holders of the Preferred Shares shall be
entitled to receive out of any assets legally available therefor cumulative
dividends at the per share rate of five percent (5%) of the Liquidation
Preference of each Preferred Share, per annum, payable quarterly on March 31,
June 30, September 30 and December 31 of each year, commencing September 30,
1998 (each a "Dividend Payment Date"), payable "in kind" by adding the amount
thereof to the Liquidation Preference, in preference and priority to any payment
of any dividend on any class or series of stock of the Corporation ranking
junior to the Preferred Shares. Such dividends shall accrue on any given share
from the most recent date on which a dividend has been paid with respect to such
share, or if no dividends have been paid, from the date of the original issuance
of such share, and such dividends shall accrue from day to day whether or not
declared, based on the actual number of days elapsed. If at any time dividends
on the outstanding Preferred Shares at the rate set forth above shall not have
been paid or declared and set apart for payment with respect to all preceding
periods, the amount of the deficiency shall be fully paid or declared and set
apart for payment, but without interest, before any distribution, whether by way
of dividend or otherwise, shall be declared or paid upon or set apart for the
shares of any other class or series of stock of the Corporation ranking junior
to the Preferred Shares. For so long as any Preferred Shares are outstanding,
the Corporation shall not pay any dividends on any Shares of Common Stock or any
shares of any other capital stock, excluding non-cash dividends paid "in kind"
with respect to other classes or series of preferred stock, without having
received the consent of a two-thirds (2/3) majority-in-interest of the holders
of Preferred Shares.
SECTION 4. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Preferred Shares shall be entitled to receive, prior and in
preference to any distribution of any assets of the Corporation to the holders
of any other class or series of shares ranking junior to the Preferred Shares,
the amount of $1,000 per share plus (x) dividends added to the Liquidation
Preference in accordance with Section 3 above, (y) default payments or
liquidated damages owing to such holder with respect to such share pursuant to
the Registration Rights Agreement (defined below) and (z) any accrued but unpaid
dividends (with dividends deemed accrued on a per diem basis through the date of
such event and thereafter even if such event or any distribution is not on a
Dividend Payment Date) (the "Liquidation Preference").
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SECTION 5. ISSUANCE OF PREFERRED SHARES. Initially, the Preferred
Shares shall be issued by the Corporation pursuant to a Preferred Stock
Investment Agreement ("Investment Agreement") to be entered into between the
Corporation and the initial subscribers for the Preferred Shares, and the
initial holders of Preferred Shares shall enjoy the benefits of the Registration
Rights Agreement ("Registration Rights Agreement") to be entered into between
such parties in connection with the Investment Agreement.
SECTION 6. CONVERSION.
(a) Each holder of the Preferred Shares shall have the right at any
time and from time to time, at the option of such holder, to convert any or all
Preferred Shares for such number of fully paid, validly issued and nonassessable
shares ("Common Shares") of common stock, par value $0.01, of the Corporation
("Common Stock"), free and clear of any liens, claims or encumbrances, as is
determined by dividing (i) the Liquidation Preference times the number of
Preferred Shares being converted (the "Conversion Amount"), by (ii) $3.60 (as
may be adjusted, the "Conversion Price").
(b) To convert Preferred Shares into Common Shares, the holder shall
give written notice ("Conversion Notice") to the Corporation in the form of
Exhibit A hereto (which Conversion Notice may be given by facsimile
transmission) stating that such holder elects to convert the same and shall
state therein the number of Preferred Shares to be converted and the name or
names in which such holder wishes the certificate or certificates for Common
Shares to be issued (the date of such Conversion Notice shall be referred to
herein as the "Conversion Date"). As soon as practicable after delivery of the
Conversion Notice, such holder shall surrender the certificate or certificates
representing the Preferred Shares being converted, duly endorsed, at the office
of the Corporation or of any transfer agent for such shares, provided that the
Corporation shall at all times maintain an office or agency in New York City or
Connecticut (or within 50 miles thereof) for such purposes. The Corporation
shall, immediately upon receipt of such Conversion Notice, issue and deliver to
or upon the order of such holder, against delivery of the certificates
representing the Preferred Shares which have been converted, a certificate or
certificates for the number of Common Shares to which such holder shall be
entitled (with the number of and denomination of such certificates designated by
such holder), and the Corporation shall immediately issue and deliver to such
holder a certificate or certificates for the number of Preferred Shares which
such holder has not yet elected to convert hereunder but which are evidenced in
part by the certificate(s) delivered to the Corporation in connection with such
Conversion Notice; the Corporation shall effect such issuance within three (3)
trading days of the Conversion Date and shall transmit the certificates by
messenger or overnight delivery service to reach the address designated by such
holder within three (3) trading days after the receipt of such Conversion Notice
("T+3"). In the alternative to physical delivery of certificates for Common
Shares, if delivery of the Common Shares pursuant to any conversion hereunder
may be effectuated by electronic book-entry through Depository Trust Company
("DTC"), then delivery of Common Shares pursuant to such conversion shall, if
requested by such holder, be closed and settled on T+3 by book-entry transfer
through DTC, and the Common Shares in connection with such conversion shall be
deemed delivered by such book-entry transfer. The parties agree to coordinate
with DTC to accomplish this objective. The conversion pursuant to this Section 6
shall be deemed to have been made immediately prior to the close of business on
the Conversion Date. The person or persons entitled to receive the Common Shares
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Common Shares at the close of business on the
Conversion Date. As used herein, "trading day" shall mean any day on which
trading is reported on the Nasdaq Stock Market.
SECTION 7.ANTI-DILUTION.
(a) The Conversion Price at which the Preferred Shares are
convertible into Common Stock shall each be subject to adjustment from time to
time as provided in this Section 7.
(i) In case the Corporation shall (A) declare a dividend or
make a distribution on the outstanding Common Shares in capital stock of the
Corporation, (B) subdivide or reclassify the outstanding Common Shares into a
greater number of shares (or into other securities or property), or (C) combine
or reclassify the outstanding Common Shares into a smaller number of shares (or
into other securities or property), the Conversion Price in effect at the close
of business on the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution, or to be affected by such
subdivision, combination or other reclassification, shall be adjusted by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the total number of outstanding Common Shares immediately prior to such event,
and the denominator of which shall be the total number of outstanding Common
Shares immediately after such event. An adjustment made pursuant to this
subparagraph (i) shall become effective immediately after the record date for
such event, or, if there is no
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record date, upon the effective date for such event. Any Common Shares issuable
in payment of a dividend shall be deemed to have been issued immediately prior
to the time of the record date for such dividend for purposes of calculating the
number of outstanding Common Shares under subparagraph (ii) below. Adjustments
pursuant to this subparagraph shall be made successively whenever any event
specified above shall occur.
(ii) In case the Corporation shall fix a record date for the
issuance of rights or warrants to all holders of Common Shares entitling them to
subscribe for or purchase Common Shares (or securities convertible into or
exchangeable for Common Shares) at a price per share (or having a conversion
price or exchange price per share, subject to normal anti-dilution adjustments)
less than the Conversion Price then in effect, such Conversion Price shall be
reduced, as of the close of business on such record date. The new Conversion
Price shall be determined by multiplying such Conversion Price by a fraction,
the numerator of which shall be the number of Common Shares outstanding on the
date of issuance of such rights, options or warrants plus the number of Common
Shares which the aggregate offering price of the total number of Common Shares
so offered would purchase at the Conversion Price in effect prior to the
adjustment required hereby, and the denominator of which shall be the number of
Common Shares outstanding on the date of issuance of such rights, options or
warrants plus the number of additional Common Shares offered for subscription or
purchase in connection with such rights, options or warrants. Such adjustment
shall be made whenever such rights, options or warrants are issued, and shall
become effective immediately after the record date for the determination of
stockholders or entitled to receive such rights, options or warrants. In case
any rights or warrants referred to in this subparagraph (ii) in respect of which
an adjustment shall have been made shall expire unexercised within one hundred
eighty (180) days after the same shall have been distributed or issued by the
Corporation, the Conversion Price shall be readjusted at the time of such
expiration to the Conversion Price that would have been in effect if no
adjustments had been made on account of the distribution or issuance of such
expired rights or warrants.
(iii) (A) In case the Corporation shall issue or agree to
issue Common Shares (other than pursuant to a bona fide public offering
registered under the Securities Act of 1933, as amended) for a consideration per
share less than the Conversion Price per share on the date the Corporation fixes
the offering price of such additional shares, the Conversion Price shall be
adjusted immediately thereafter. The new Conversion Price shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
thereto by a fraction, of which the numerator shall be the number of Common
Shares outstanding immediately after the issuance of such additional shares, and
the denominator shall be the total number of shares of Common Shares outstanding
immediately prior to the issuance of such additional shares plus the number of
shares of Common Shares which the aggregate consideration received for the
issuance of such additional shares would purchase at the Conversion Price per
share (prior to adjustment). Such adjustment shall be made successively whenever
such an issuance is made; provided, however, that no such adjustment shall be
made as the result of the conversion of the Class A Convertible Preferred Stock
or the Class B Convertible Preferred Stock or the exercise of any warrants
outstanding as of the date hereof or the issuance of options to acquire up to
300,838 shares pursuant to a currently-existing employee option plan previously
approved by the Company's shareholders.
(B) With respect to any contemplated bona fide
public offering of Common Shares (a "Public Offering") for a consideration less
than the then-effective Conversion Price per share, the holders of Preferred
Shares shall have a right of first refusal as follows. The Company shall provide
to each holder of Preferred Shares written notice of any such contemplated
Public Offering at least thirty (30) days prior to the proposed consummation
thereof setting forth in reasonable detail the terms of the Public Offering and
the proposed offering price. Such holders may elect to purchase all or some of
such Common Shares on such terms by delivery to the Company during such thirty
(30) day period written notice of exercise stating the number of Common Shares
which each such electing holder wishes to purchase. In the event of an
oversubscription, such electing holders shall purchase on a pro rata basis based
upon the number of Preferred Shares held by each. If following the expiration of
such thirty (30) days period, not all of such Public Offering shares have been
purchased by the holders of Preferred Shares and the Company wishes to proceed
with the Public Offering, but at a lower price, the Company must again give the
holders at least five (5) business days in which to elect to purchase such
shares as aforesaid.
(iv) In case the Corporation shall after the date hereof
issue or agree to issue any securities convertible into or exchangeable for
Common Shares for a consideration per Common Share deliverable upon conversion
or exchange of such securities (subject to normal anti-dilution adjustments)
less than the Conversion Price per share in effect immediately prior to the
issuance of such securities, the Conversion Price shall be adjusted immediately
thereafter. The new Conversion Price shall equal the price determined by
multiplying the Conversion Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of Common Shares
outstanding immediately prior to such issuance plus the maximum number of Common
Shares deliverable upon conversion of or in exchange for such securities at the
initial conversion or exchange price or
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<PAGE> 64
rate, and the denominator shall be the number of Common Shares outstanding
immediately prior to the issuance of such securities plus the number of Common
Shares which the aggregate consideration received for such securities would
purchase at the Conversion Price per share (prior to adjustment). Such
adjustment shall be made successively whenever such an issuance is made.
Upon the termination of the right to convert or
exchange such securities, the Conversion Price shall forthwith be readjusted to
such Conversion Price as would have been obtained had the adjustments made upon
the issuance of such convertible or exchangeable securities been made upon the
basis of the delivery of only the number of Common Shares actually delivered
upon conversion or exchange of such securities and upon the basis of the
consideration actually received by the Corporation for such securities.
(b) Conversion Price Adjustment Deferred. Notwithstanding the
foregoing provisions of this Section 7, (i) no adjustment in the number of
Common Shares into which any Preferred Shares are convertible shall be required
unless such adjustment would require an increase or decrease in such number of
shares of at least 1% and (ii) no adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or decrease in the
Conversion Price of at least $.01 per share; provided, however, that any
adjustments which by reason of this paragraph are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 7 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be.
(c) Adjustment Report. Whenever any adjustment is required in the
shares into which any Preferred Shares are convertible, the Corporation shall
forthwith cause a notice of such adjustment, setting forth the adjusted
Conversion Price and the calculation thereof to be mailed to the holders at
their respective addresses as shown on the stock books of the Corporation.
SECTION 8. ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes, excluding any income, franchise or similar taxes, that may be
payable in respect of any issue or delivery of Common Shares on conversion of
Preferred Shares pursuant hereto.
SECTION 9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued Common Shares, solely for the purpose of effecting the conversion
of the Preferred Shares, such number of its Common Shares as shall from time to
time be sufficient to effect the conversion of all outstanding Preferred Shares,
and if at any time the number of authorized but unissued Common Shares shall not
be sufficient to effect the conversion of all the then outstanding Preferred
Shares, the Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued Common
Shares to such number of shares as shall be sufficient for such purpose,
including without limitation engaging in best efforts to obtain the requisite
shareholder approval. Without in any way limiting the foregoing, so long as any
Preferred Shares remain outstanding the Corporation agrees to reserve and at all
times keep available solely for purposes of conversion of Preferred Shares at
least such number of authorized but unissued Common Shares that is set forth in
the Investment Agreement.
SECTION 10. FRACTIONAL SHARES. No fractional shares shall be issued
upon the conversion of any Preferred Shares. All Common Shares (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 any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the Conversion Date
(as determined in good faith by the Board of Directors of the Corporation).
SECTION 11. REORGANIZATION OR MERGER; GOING PRIVATE. In case of any
reorganization or any reclassification of the capital stock of the Corporation
or any consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Corporation to any other person, then, as part of such reorganization,
consolidation, merger or sale, if the holders of Common Shares receive any
publicly traded securities as part or all of the consideration for such
reorganization, consolidation, merger or sale, then provision shall be made such
that each Preferred Share shall thereafter be convertible into such new
securities at a conversion price which places the holders of Preferred Shares in
an economically equivalent position as they would have been if not for such
event. In addition to the foregoing, if the holders of Common Shares receive any
non-publicly traded securities or other property or cash as part or all of the
consideration for such reorganization, consolidation, merger or sale, then such
distribution shall be treated as a distribution
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<PAGE> 65
under Section 7 above and such Section shall govern such distribution. So long
as any Preferred Shares are outstanding, the Corporation agrees that there shall
be no such reorganization, consolidation, merger or sale unless an appropriate
adjustment of the conversion price and other provisions contained herein related
to the conversion of such Preferred Shares is agreed to in writing in advance by
the Board of Directors of the Corporation and a two-thirds majority-in-interest
of the holders of outstanding Preferred Shares. The Corporation further agrees
that it shall not agree or consent to or enter into any transaction or series of
transactions as a result of which the Common Shares would cease to be publicly
traded unless agreed to in writing in advance by the Board of Directors of the
Corporation and a two-thirds majority-in-interest of the holders of Preferred
Shares.
SECTION 12. MANDATORY CONVERSION. If at any time while any Preferred
Shares remain outstanding (i) the closing price of a Common Share on the Nasdaq
SmallCap Market (or other major national securities exchange) exceeds $7.20
(subject to appropriate adjustment for any stock split, reverse stock split,
reclassification or recapitalization in the same manner as provided in Section 7
above) for twenty (20) consecutive trading days; and (ii) the Common Shares have
been continuously listed for trading on such market since the date hereof; and
(iii) all of the Common Shares underlying the outstanding Preferred Shares have
been duly registered for resale under the Securities Act of 1933, as amended, or
are otherwise freely tradeable pursuant to Rule 144(k) or any successor rule,
then the Company shall give the holders notice thereof within three (3) business
days of such event and effective on the tenth (10) business day following such
event, all of the outstanding Preferred Shares shall be automatically converted
into Common Shares at the Conversion Price.
SECTION 13. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT. Subject to
Section 12 above, but notwithstanding anything else to the contrary contained
herein, no Preferred Share may be converted by a holder to the extent that,
after giving effect to Common Shares to be issued pursuant to a Conversion
Notice, the total number of Common Shares deemed beneficially owned by such
holder (other than by virtue of the ownership of Preferred Shares or ownership
of other securities that have limitations on a holder's rights to convert or
exercise similar to those limitations set forth herein), together with all
Common Shares deemed beneficially owned by the holder's "affiliates" (as defined
in Rule 144 of the Act) that would be aggregated for purposes of determining
whether a group under Section 13(d) of the Securities Exchange Act of 1934
exists, would exceed 9.9% of the total issued and outstanding shares of the
Corporation's Common Stock, provided that each holder shall have the right to
waive this restriction, in whole or in part, immediately in the case of a
pending change of control transaction or bankruptcy or similar filing involving
the Corporation and in any other case upon 61 days prior notice to the
Corporation. The delivery of a Conversion Notice by any holder shall be deemed a
representation by such holder that it is in compliance with this paragraph. A
transferee of the Preferred Shares shall not be bound by this provision unless
it expressly agrees to be so bound. The term "deemed beneficially owned" as used
in this Certificate of Designation shall exclude shares that might otherwise be
deemed beneficially owned by reason of the convertibility of the Preferred
Shares. The term "change of control" means any transaction or series of
transactions which results in a change of majority ownership or control of the
Corporation or its business, including, without limitation, the acquisition by
any person or "group" (as that term is used in Rule 13d-5 under the Securities
Exchange Act of 1934, as amended) of a majority of the Common Shares or a sale
of all or substantially all of the Corporation's assets.
SECTION 14. MATURITY. On the fifth (5th) anniversary of the initial
issuance of Preferred Shares (the "Maturity Date"), the Corporation shall redeem
each outstanding Preferred Share for a price equal to such share's Liquidation
Preference. Such redemption price shall be paid to the holders, in cash, within
five (5) days after the Maturity Date.
SECTION 15. VOTING RIGHTS. The Preferred Shares shall have the
following voting rights:
(a) While any of the Preferred Shares remain outstanding, the holders
of Preferred Shares voting (or acting by written consent) together as a single
class shall be entitled to nominate one of the members of the Board of Directors
of the Corporation but shall otherwise not vote on any matters submitted to the
holders of the Common Shares for a vote, except as may be required by law. The
Company shall use its reasonable efforts to effectuate the election of any such
nominee by the holders of Common Shares.
(b) In addition, the affirmative vote of a two-thirds (2/3)
majority-in-interest of the Corporation's outstanding Preferred Shares shall be
necessary for (i) any amendment of this Certificate of Designations, (ii) any
amendment to the Certificate of Incorporation or by-laws of the Corporation that
may amend or change or adversely affect any of the rights, preferences, or
privileges of the Preferred Shares, (iii) any waiver of a default in payment of
dividends on the Preferred Shares, and (iv) any reorganization or
reclassification of the capital stock of the Corporation that would have an
adverse effect on any of the rights, preferences or privileges of the Preferred
Shares (including, without limitation, any "change of control" transaction to
which the Company is a party), any consolidation or merger of the Corporation
with or into any other corporation or
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<PAGE> 66
corporations (unless the Company is the surviving corporation and the Preferred
Shares and this Certificate of Designation are unaffected in any respect which
might reasonably be deemed detrimental to the holders of the Preferred Shares,
or any sale of all or substantially all of the assets of the Corporation;
provided, however, that any holders of Preferred Shares who are affiliates of
the Corporation (and the Corporation itself) shall not participate in such vote
and the Preferred Shares of such holders shall be disregarded and deemed not to
be outstanding for purposes of such vote.
SECTION 16. NOTICES. The Corporation shall distribute to the holders
of Preferred Shares copies of all notices, materials, annual and quarterly
reports, proxy statements, information statements and any other documents
distributed generally to the holders of shares of Common Stock of the
Corporation, at such times and by such method as such documents are distributed
to such holders of such Common Stock.
SECTION 17. REPLACEMENT CERTIFICATES. The certificate(s) representing
the Preferred Shares held by any holder of Preferred Shares may be exchanged by
such holder at any time and from time to time for certificates with different
denominations representing an equal aggregate number of Preferred Shares, as
reasonably requested by such holder, upon surrendering the same. No service
charge will be made for such registration or transfer or exchange, other than a
$30 service charge for lost certificates.
SECTION 18. ATTORNEYS' FEES. Any holder of Preferred Shares shall be
entitled to recover from the Corporation the reasonable attorneys' fees and
expenses incurred by such holder in connection with enforcement by such holder
of any obligation of the Corporation hereunder.
SECTION 19. NO REISSUANCE. No Preferred Shares acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued.
Signed on June 30, 1998
VION PHARMACEUTICALS, INC.
By:/s/ Thomas E. Klein
Name:Thomas E. Klein
Title: Vice President, Finance and CFO
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EXHIBIT A
(To be Executed by Holder
in order to Convert Preferred Shares)
CONVERSION NOTICE
FOR
5% CUMULATIVE CONVERTIBLE PREFERRED STOCK SERIES 1998
The undersigned, as a holder ("Holder") of shares of 5% Convertible Preferred
Stock Series 1998 ("Preferred Shares") of Vion Pharmaceuticals, Inc. (the
"Corporation"), hereby irrevocably elects to convert _______ Preferred Shares
into ___________ shares of common stock, par value $0.01 per share ("Common
Shares"), of the Corporation according to the terms and conditions of the
Certificate of Designation for the Preferred Shares as of the date written
below. The undersigned hereby requests that share certificates for the Common
Shares to be issued to the undersigned pursuant to this Conversion Notice be
issued in the name of, and delivered to, the undersigned or its designee as
indicated below. No fee will be charged to the holder of Preferred Shares for
any conversion. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed thereto in the Certificate of Designation.
Conversion Date: __________________________
Conversion Information: NAME OF HOLDER:________________________________
By:____________________________________________
Print Name:
Print Title:
Print Address of Holder:
_______________________________________________
_______________________________________________
Issue Common Shares to:________________________
at:____________________________________________
_______________________________________________
If Common Shares are to be issued to a person other than Holder, Holder's
signature must be guaranteed below:
SIGNATURE GUARANTEED BY:
_____________________________________
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<PAGE> 1
Exhibit 10.01
EMPLOYMENT AGREEMENT
Agreement, dated as of January 16, 1998 (the "Effective Date") by and
between Vion Pharmaceuticals, Inc., a Delaware corporation offices at 4 Science
Park, New Haven, Connecticut 06511 (the "Corporation"), and John A. Spears, an
individual residing at 5 White Pine Lane, Guilford, Connecticut 06437 (the
"CEO").
WITNESSETH:
WHEREAS, the Corporation desires to employ the CEO as President, Chief
Executive Officer and Director, and the CEO desires to be employed by the
Corporation as President, Chief Executive Officer and Director, all pursuant to
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants herein contained, it is agreed as follows:
1. EMPLOYMENT: DUTIES
(a) The Corporation engages and employs the Executive, and the CEO hereby
accepts engagement and employment, as President, Chief Executive Officer and
Director of the Corporation, to direct, supervise and have responsibility for
the daily operations of the Corporation, subject to the direction of the Board
of Directors of the Corporation (the "Board"), including, but not limited to:
(i) preparing a complete business plan setting forth the strategic objectives
for the Corporation, the means proposed to accomplish such objectives and the
financial projections and assumptions for the Corporation, to be reviewed and
revised on at least an annual basis (the "Business Plan"), (ii) supervising the
business and research and development efforts of the Corporation; (iii) managing
the other executives and personnel of the Corporation; (iv) evaluating,
negotiating, structuring and implementing business transactions with the
Corporation's customer and suppliers; (v) attending meetings of the Board; and
(vi) performing such other customary and usual services and duties as the Board
shall determine. In addition, upon the request of the Board, the CEO shall
without further compensation, serve as a director and/or officer of subsidiaries
and affiliates of the Corporation and as the Corporation's representative to
joint ventures and similar projects.
(b) The CEO shall perform his duties hereunder from the State of
Connecticut, provided, however, that the CEO acknowledges and agrees that the
performance by the CEO of his duties hereunder may require significant and
international travel by the CEO.
<PAGE> 2
(c) The CEO shall devote his full business time, efforts and energies to
the proper discharge of his duties and responsibilities under this Agreement,
and shall serve the Corporation faithfully, diligently and to the best of his
abilities.
2. TERM
The CEO's employment hereunder shall be for a term of three (3) years
commencing of the Effective Date and continuing until the third anniversary of
the Effective Date, unless earlier terminated as provided herein or unless
extended by mutual written consent.
3. COMPENSATION
(a) In consideration for the performance of his duties on behalf of the
Corporation, the CEO shall be compensated as follows:
(i) The Corporation shall pay the CEO an annual base salary ("Base
Salary") of Two Hundred and Forty Six Thousand Seven Hundred Fifty
($246,750) dollars, payable in accordance with the usual payroll
practices of the Corporation. The Board may, in its discretion,
increase the CEO's annual Base Salary after the first year
anniversary of the Effective Date of this Agreement and annually
thereafter for the duration of this Agreement.
(ii) The stock option grant made by the Corporation pursuant to the
January 16, 1995 Employment Agreement between Vion (formerly OncoRx)
and the CEO will continue to "vest" in accordance with the schedule
described in the Agreement.
(iii) In the event the CEO's employment with the Company is
terminated by the Corporation for cause pursuant to Section 7(a)
(ii), any Stock Options granted shall be immediately terminated and
no longer exercisable, and, further provided, that in the event the
CEO's employment is terminated due to the death of the CEO, the
Options may be exercised to the extent vested on the date of death,
by his estate or legal representative within one year of the date of
death, and, further provided, that in the event the CEO's employment
is terminated for any other reason, then the Options shall be
exercisable, to the extent vested on the date of termination, within
the ninety (90) days following the date of termination.
The Corporation shall withhold all applicable federal, state and local taxes,
social security and worker's compensation contributions, and such other amounts
as may be required by law or agreed upon by the parties, with respect to the
compensation payable to the CEO pursuant to this Section 3(a).
(b) The Corporation shall reimburse the CEO for all normal, usual and
necessary expenses incurred by the CEO in furtherance of the business and
affairs of the Corporation, including reasonable travel and entertainment
against receipt by the Corporation of appropriate vouchers or other proof of the
CEO's expenditures and otherwise in accordance with such Expense Reimbursement
Policy as may from time to time be adopted by the Board.
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<PAGE> 3
(c) The CEO shall, during the term of this Agreement, be entitled to
vacations of four (4) weeks per annum in accordance with such Vacation Policy as
may from time to time be adopted by the Board.
(d) The Corporation shall make available to the CEO such medical, life
insurance and other health benefits as are reasonable in view of the
Corporation's status and as are usual and customary for senior executives at
similarly situated companies.
4. REPRESENTATIONS AND WARRANTIES BY
THE CEO AND CORPORATION
The CEO hereby represents and warrants to the Corporation as follows:
(a) Neither the execution and delivery of this Agreement nor the
performance by the CEO of his duties and other obligations hereunder violate or
will violate, as of the Effective Date, any statute, law, determination or
award, or conflict with or constitute a default under (whether immediately, upon
the giving of notice or lapse of time or both) any prior employment agreement,
contract, or other instrument to which the CEO is a party or by which he is
bound.
(b) The CEO has the full right, power and legal capacity to enter and
deliver this Agreement and to perform his duties and other obligations
hereunder. This Agreement constitutes the legal, valid and binding obligation of
the CEO enforceable against him in accordance with its terms. No approvals and
consents of any person or entities are required for the CEO to execute and
deliver this Agreement or perform his duties and other obligations hereunder.
(c) The CEO understands that the stock that may be acquired by the CEO
pursuant to Section 3(a) hereof will not be registered under the Securities Act
of 1933, and acknowledges that he will be obligated to agree, as a condition of
the issuance thereof, that he will acquire such stock for his own account for
investment and not with a view to, or for resale in connection with a
distribution thereof, and will bear the economic risk of his investment in such
stock for an indefinite period of time.
The Corporation hereby represents and warrants to the CEO as follows:
(a) The Corporation is duly organized, validly existing and in good
standing under the laws of the State of Delaware, with all requisite corporate
power and authority to own its properties and conduct its business in the manner
presently contemplated.
(b) The Corporation has full power and authority to enter into this
Agreement and to incur and perform its obligations hereunder.
(c) The execution, delivery and performance by the Corporation of this
Agreement does not conflict with or result in a breach or violation of or
constitute a default under (whether immediately, upon the giving of notice or
lapse of time or both) the certificate of incorporation or
3
<PAGE> 4
by-laws of the Corporation, or any agreement or instrument to which the
Corporation is a party of by which the Corporation or any of its properties may
be bound or affected.
5. NON-COMPETITION
(a) The CEO understands and recognizes that his services to the
Corporation are special and unique and agrees that, during the term of this
Agreement and for a period of one (1) year after the date of termination or
expiration of his employment hereunder, except termination by the Corporation
without cause, he shall not in any manner, directly or indirectly, on behalf of
himself or any person, firm, partnership, joint venture, corporation or other
business entity ("Person") enter into or engage in any business directly
competitive with the business or research activities of the Corporation as of
the date of such termination or within six months prior thereto.
(b) During the term of this Agreement and for a period of one (1) year
after the date of termination or expiration of his employment hereunder, except
termination by the Corporation without cause, the CEO shall not, directly or
indirectly, without the prior written consent of the Corporation:
(i) solicit or induce any employee of the Corporation or any
affiliate to leave the employ of the Corporation or any affiliate or
hire for any purpose any employee of the Corporation or any
affiliate or any employee who has left the employment of the
Corporation or any affiliate within six months following the
termination of said employee's employment with the Corporation or
such affiliates.
(ii) solicit or accept employment or be retained by any party who,
at any time during the term of this Agreement, was a customer or
supplier of the Corporation or any affiliate where his position will
be related to the business of the Corporation; or
(iii) solicit or accept the business of any customer or supplier of
the Corporation or any affiliate with respect to products similar to
those supplied by the Corporation.
(c) In the event that the CEO breaches any provisions of this Section 5 or
there is a threatened breach, then, in addition to any other rights which the
Corporation may have, the Corporation shall be entitled, without the posting of
a bond or other security, to injunctive relief to enforce the restrictions
contained herein. In the event that an actual proceeding is brought in equity to
enforce the provisions of this Section 5, the CEO shall not urge as a defense
that there is an adequate remedy at law nor shall the Corporation be prevented
from seeking any other remedies which may be available.
6. CONFIDENTIAL INFORMATION
The CEO agrees that during the course of his employment or at any time
after termination, he will not disclose or make accessible to any other Person,
the Corporation's
4
<PAGE> 5
products, services and technology, both current and under development, promotion
and marketing programs, lists, trade secrets and other confidential and
proprietary business information of the Corporation or any of its customers or
suppliers.
The CEO agrees: (i) not to use any such information for himself or others; and
(ii) not to take any such material or reproductions thereof from the
Corporation's facilities at any time during or after his employment by the
Corporation, except as required in the CEO's duties to the Corporation. The CEO
agrees immediately to return all such materials and reproductions thereof in his
possession to the Corporation upon request and in any event upon termination of
employment.
(a) Except with prior written authorization by the Corporation, the CEO
agrees not to disclose or publish any of the confidential, technical or business
information or material of the Corporation, its customers, suppliers or any
other party to whom the Corporation owes an obligation of confidence, at any
time during or after his employment with the Corporation.
(b) CEO hereby assigns to the Corporation all right, title and interest he
may have or acquire in all inventions (including patent rights) developed by the
CEO during the term of this Agreement ("Inventions") and agrees that all
Inventions shall be the sole property of the Corporation and its assigns, and
the Corporation and its assigns shall be the sole owner of all patents,
copyrights and other rights in connection therewith. CEO further agrees to
assist the Corporation in every proper way (but at the Corporation's expense) to
obtain and from time to time enforce patents, copyrights or other rights on said
Inventions in any and all countries.
7. TERMINATION
(a) CEO's employment hereunder shall begin on the Effective Date and shall
continue for the period set forth in Section 2 hereof unless sooner terminated
upon the first to occur of the following events:
(i) The death of the CEO;
(ii) Termination by the Board of Directors of the Corporation for
just cause. Any of the following actions by the CEO shall constitute
just cause:
(A) Material breach by the CEO of Section 5 or Section 6 of
this Agreement;
(B) Material breach by the CEO of any provision of this
Agreement other than Section 5 or Section 6 which is not cured
by the CEO within fifteen (15) days of notice thereof from the
Corporation; or
(C) Any action by the CEO to intentionally harm the
Corporation.
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<PAGE> 6
(iii) Termination by the CEO for just cause. Any of the following
actions by the Corporation shall constitute just cause:
(A) Material breach by the Corporation of any provision of
this Agreement which is not cured by the Corporation within
fifteen (15) days of notice thereof from the CEO; or
(B) Any action by the Corporation to intentionally harm the
CEO.
(iv) Termination as a result of a "change in control" of the
Corporation.
(b) Upon termination pursuant to subparagraph (i) of paragraph (a) above,
the estate or legal representative of the CEO shall be entitle to receive the
Base Salary accrued but unpaid as of the date of termination, plus the right to
exercise Vested Stock Options.
(c) Upon termination pursuant to subparagraph (ii) of paragraph (a) above,
the CEO shall be entitled only to receive the Base Salary accrued but unpaid as
of the date of termination, and any Stock Option shall immediately terminate and
no longer be exercisable.
(d) Upon termination as set forth in subparagraph (iv) of paragraph (a)
above, or upon termination by the Corporation for any reason other than the
reason set forth in subparagraph (i) and (ii) of paragraph (a) above, or upon
termination by the CEO for any reason set forth in subparagraph (iii) of
paragraph (a) above, then the Corporation shall continue to pay the CEO, as the
CEO's sole damage for such termination, the Base Salary which the CEO would have
received during the balance of the term of this Agreement had his employment not
been so terminated, subject to the obligation on the part of the CEO to mitigate
such damages, provided however, that, without limiting the generality of the
foregoing, the corporation shall also have the right, at any time after the
first anniversary of the commencement of this Agreement, to terminate this
Agreement without cause upon ten (10) days notice to the CEO upon payment by the
Corporation to the Executive, in single lump sum on the termination date of an
amount equal to one year's Base Salary, plus an amount equal to the average
annual cash bonus paid to the CEO; the average based upon the prior two bonus
years. In addition, in connection with any termination pursuant to this Section
7(d), the CEO shall be entitled to exercise any Stock Options, to the extent
vested on the date of termination, within ninety (90) days of the date of
termination.
8. NOTICE
Any notice or other communication under this Agreement shall be in writing
and shall be deemed to have been given: when delivered personally against
receipt therefor; one (1) day after being sent by Federal Express or similar
overnight delivery; or three (3) days after being mailed registered or certified
mail, postage prepaid, return receipt requested, to either party at the
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<PAGE> 7
address set forth above, or to such other address as such party shall give by
notice hereunder to the other party.
9. RENEWAL OF AGREEMENT
Upon expiration of the term of this Agreement, this Agreement may be
renewed for successive periods of one (1) year each by mutual written agreement
of the parties.
10. SEVERABILITY OF PROVISION
If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced in
whole or in part, such provision shall be interpreted so as to remain
enforceable to the maximum extent permissible consistent with applicable law and
the remaining conditions and provisions or portions thereof shall nevertheless
remain in full force and effect and enforceable to the extent they are valid,
legal and enforceable, and no provision shall be deemed dependent upon any other
covenant or provision unless so expressed herein.
11. ENTIRE AGREEMENT; MODIFICATION
This Agreement contains the entire agreement of the parties relating to
the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
which are not set forth herein. No modification, amendment or supplement to this
Agreement shall be valid unless made in writing and signed by both parties.
12. BINDING EFFECT
The rights, benefits, duties and obligations under this Agreement shall
inure to, and be binding upon, the Corporation, its successors and assigns, and
upon the CEO and his legal representatives. This Agreement constitutes a
personal service agreement, and the performance of the CEO's obligations
hereunder may not be transferred or assigned by the CEO.
13. NON-WAIVER
The failure of either party to insist upon the strict performance of any
of the terms, conditions and provisions of this Agreement shall not be construed
as a waiver or relinquishment of future compliance therewith, and said terms,
conditions and provisions shall remain in full force and effect. No waiver of
any term or condition of this Agreement on the part of either party shall be
effective for any purpose whatsoever unless such waiver is in writing and signed
by such party.
14. GOVERNING LAW
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<PAGE> 8
This Agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Connecticut without regard to
principles of conflict of laws.
15. HEADINGS
The headings of Sections are inserted for convenience we and shall not
affect any interpretation of this Agreement.
16. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original but all of which shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
VION PHARMACEUTICALS, INC.
By: /s/ William R. Miller
Chairman of the Board
/s/ John A Spears
8
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