1
EXHIBIT 4.1
CERTIFICATE OF DESIGNATION
OF
5% SERIES A PREFERRED STOCK WITH CONVERSION FEATURES
OF
NEOTHERAPEUTICS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
-------------
NEOTHERAPEUTICS, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies, pursuant to the authority contained in the Certificate of
Incorporation and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware that the following resolution
was duly adopted by the Board of Directors of the Corporation on January 25,
1999, creating a series of its Preferred Stock designated as 5% Series A
Preferred Stock with Conversion Features:
RESOLVED, that pursuant to the authority expressly granted to and vested
in the Board of Directors of the Corporation (the "Board") by the provisions of
the Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), there hereby is created, out of the 5,000,000 shares of
Preferred Stock, par value $0.001 per share, of the Corporation authorized in
Article 4 of the Certificate of Incorporation (the "Preferred Stock"), a series
of the Preferred Stock of the Corporation consisting of 400 shares, which shall
be designated 5% Series A Preferred Stock with Conversion Features, which series
shall have the powers, designations, preferences and relative, participating,
optional and other rights, and the qualifications, limitations and restrictions
set forth below:
SECTION 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as 5% Series A Preferred Stock with Conversion
Features (the "Preferred Stock") and the number of shares so designated shall be
400 (which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "Holder" and collectively, the "Holders")); Each
share of Preferred Stock shall have a par value of $.001 and a stated value of
$10,000 (the "Stated Value").
SECTION 2. Dividends.
(a) Holders shall be entitled to receive, when and as declared by
the Board of Directors out of funds legally available therefor, and the Company
shall pay, cumulative dividends at the rate per share (as a percentage of the
Stated Value per share) equal to 5% per annum, payable, subject to the
provisions of this Section 2(a), on a quarterly basis on March 31, June 30,
September 30 and December 31 of each year while such share is outstanding (each
a "Dividend Payment Date") and on each Conversion Date (as defined herein) for
such share, commencing on the earlier to occur of the Conversion Date for such
share and March 31, 1999, in cash or shares of Common Stock (as defined in
Section 8). Subject to the terms and conditions herein, the decision whether to
pay
2
dividends hereunder in Common Stock or cash shall be at the discretion of the
Company. Dividends on the Preferred Stock shall be calculated on the basis of a
360-day year, shall accrue daily commencing on the Original Issue Date (as
defined in Section 8), and shall be deemed to accrue from such date whether or
not earned or declared and whether or not there are profits, surplus or other
funds of the Company legally available for the payment of dividends. A party
that holds shares of Preferred Stock on the record date with respect to a
Dividend Payment Date will be entitled to receive such dividend payment and any
other accrued and unpaid dividends which accrued prior to such Dividend Payment
Date, without regard to any sale or disposition of such Preferred Stock
subsequent to the applicable record date. Except as otherwise provided herein,
if at any time the Company pays less than the total amount of dividends then
accrued on account of the Preferred Stock, such payment shall be distributed
ratably among the Holders based upon the number of shares of Preferred Stock
held by each Holder. The Company shall provide the Holders notice of its
intention to pay dividends in cash or shares of Common Stock not less than 10
Trading Days (as defined in Section 8) prior to any Dividend Payment Date, it
being understood that a failure of the Company to timely provide such notice
shall be deemed an election (if permitted hereunder) to pay such dividends in
shares of Common Stock pursuant to the terms hereof. If the Company has properly
elected, and is permitted hereunder, to pay dividends in shares of Common Stock,
then such dividends will be due and payable on each Conversion Date for the
applicable shares of Preferred Stock (and not on each Dividend Payment Date) and
the number of shares of Common Stock issuable on account of such dividend shall
equal the cash amount of such dividend on such Conversion Date divided by the
Conversion Price (as defined below) on such date. Any dividends to be paid in
cash hereunder that are not paid on a Dividend Payment Date shall continue to
accrue and shall entail a late fee, which must be paid in cash, at the rate of
15% per annum or the maximum amount that is permitted by applicable law,
whichever is less (such fees to accrue daily, from the date such dividend is due
hereunder through and including the date of payment).
(b) Notwithstanding anything to the contrary contained herein,
the Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
(ii) after the Dividend Effectiveness Date (as defined
in Section 8), such shares (x) are not registered for resale pursuant to an
effective Underlying Securities Registration Statement (as defined in Section 8)
and (y) may not be sold without volume restrictions pursuant to Rule 144
promulgated under the Securities Act (as defined in Section 8), as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the applicable
Holder and such transfer agent (if the Company is permitted and elects to pay
dividends in shares of Common Stock under this clause (ii) prior to the Dividend
Effectiveness Date and thereafter an Underlying Securities Registration
Statement shall be declared effective by the Commission (as defined in Section
8), the Company shall, within three (3) Trading Days after the date of such
declaration of effectiveness, exchange such shares for shares of Common Stock
that are free of restrictive legends of any kind);
-2-
3
(iii) such shares are not then listed or quoted on the
Nasdaq National Market (the "NASDAQ"), or on the New York Stock Exchange,
American Stock Exchange or Nasdaq SmallCap Market (each, a "Subsequent Market");
(iv) the Company has failed to timely satisfy its
conversion obligations hereunder; or
(v) the issuance of such shares would result in a
violation of Section 5(a)(iii).
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 8), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5 or dividends due and paid in the ordinary course on
preference shares of the Company at such times when the Company is in compliance
with its payment and other obligations hereunder) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities.
SECTION 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the Holders of all of the shares of
the Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Preferred Stock or alter or amend this
Certificate of Designation , (b) authorize or create any class of stock ranking
as to dividends or distribution of assets upon a Liquidation (as defined in
Section 4) senior to or otherwise pari passu with the Preferred Stock, (c) amend
its certificate of incorporation or other charter documents so as to affect
adversely any rights of the Holders, (d) increase the authorized number of
shares of Preferred Stock, or (e) enter into any agreement with respect to the
foregoing.
SECTION 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the Stated Value plus all due but unpaid dividends per share, whether
declared or not, before any distribution or payment shall be made to the holders
of any Junior Securities, and if the assets of the Company shall be insufficient
to pay in full such amounts, then the entire assets to be distributed to the
Holders shall be distributed among the Holders ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. 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
33% of the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies shall not be
treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company
-3-
4
shall mail written notice of any such Liquidation, not less than 45 days prior
to the payment date stated therein, to each record Holder.
SECTION 5. Conversion.
(a)(i) Conversions at Option of Holder. Each share of Preferred
Stock shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as
defined in Section 8) at the option of the Holder, at any time and from time to
time, from and after the Original Issue Date; provided, that, (A) from and after
the Original Issue Date through the date which is the ninetieth (90th) day after
the Original Issue Date (such ninetieth (90) day, the "Record Date"), the
Conversion Price applicable to any conversion during such period shall be the
Initial Conversion Price (as defined herein), (B) from and after the Record Date
through the fourth (4th) month thereafter, any conversions of shares of
Preferred Stock shall be limited in each monthly period to 25% of the number of
shares of Preferred Stock outstanding on the Record Date, on a cumulative basis
(for example, during the first month following the Record Date, the Holder may
tender conversions of shares of Preferred Stock of up to 25% of the number of
shares of Preferred Stock outstanding on the Record Date and during the second
month following the Record Date, the Holder may tender conversions of shares of
Preferred Stock of up to 50% of the number of shares Preferred Stock outstanding
on the Record Date less such number of shares of Preferred Stock for which
conversions have previously been honored), provided, further, that the
restrictions on conversion set forth in this Section 5(a)(i) shall be null and
void ab initio from and after the earlier of (i) the date that the Company
delivers to the Holders an Optional Redemption Notice (as defined in Section
6(a)) and (ii) the date that the Company delivers to the Holders a Subsequent
Financing Notice (as defined in the Purchase Agreement). Holders shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as Exhibit A (a "Conversion Notice"). Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "Conversion Date"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered hereunder. If the Holder is converting less than all
shares of Preferred Stock represented by the certificate or certificates
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate representing the number of shares of Preferred Stock as have not
been converted.
(ii) Automatic Conversion. Subject to the provisions in
this paragraph, all outstanding shares of Preferred Stock for which conversion
notices have not previously been received or for which redemption has not been
made or required hereunder shall be automatically converted on the third
anniversary of the later to occur of (i) the Effectiveness Date (as defined in
the Registration Rights Agreement) or (ii) the date that the Commission declares
effective an Underlying Securities Registration Statement, at the Conversion
Price on such date. The conversion contemplated by this paragraph shall not
occur at such time as (a) (1) an Underlying Securities Registration Statement is
not then effective or (2) the Holder is not permitted to resell Underlying
Shares (as defined in Section 8) pursuant to Rule 144(k) promulgated under the
-4-
5
Securities Act, without volume restrictions, as evidenced by an opinion letter
of counsel acceptable to the Holder and the transfer agent for the Common Stock;
(b) there are not sufficient shares of Common Stock authorized and reserved for
issuance upon such conversion; or (c) the Company shall have defaulted on its
covenants and obligations hereunder or under the Purchase Agreement or
Registration Rights Agreement. Notwithstanding the foregoing, the three-year
period for conversion under this Section shall be extended (on a day-for-day
basis) for any Trading Days after the date that the Commission declares
effective an Underlying Securities Registration Statement that the Purchaser is
unable to resell Underlying Shares under an Underlying Securities Registration
Statement due to (a) the Common Stock not being listed for trading on the NASDAQ
or any Subsequent Market, (b) the failure of such Underlying Securities
Registration Statement to remain effective during the Effectiveness Period (as
defined in the Registration Rights Agreement) as to all Underlying Shares, or
(c) the suspension of the Holder's ability to resell Underlying Shares
thereunder.
(iii) Certain Conversion Restrictions.
(A)(1) A Holder may not convert shares of Preferred
Stock or receive shares of Common Stock as payment of dividends hereunder to the
extent such conversion or receipt of such dividend payment would result in the
Holder beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) in excess of 4.999% of the then
issued and outstanding shares of Common Stock, including shares issuable upon
conversion of, and payment of dividends on, the shares of Preferred Stock held
by such Holder after application of this Section. The Holder shall have the sole
authority and obligation to determine whether the restriction contained in this
Section applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which shares of
Preferred Stock are convertible shall be in the sole discretion of the Holder.
The provisions of this Section may be waived by a Holder (but only as to itself
and not to any other Holder) upon not less than 75 days prior notice to the
Company. Other Holders shall be unaffected by any such waiver.
(2) A Holder may not convert shares of Preferred
Stock or receive shares of Common Stock as payment of dividends hereunder to the
extent such conversion or receipt of such dividend payment would result in the
Holder beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act (as defined in Section 8) and the rules thereunder) in excess
of 9.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of, and payment of dividends on, the shares of
Preferred Stock held by such Holder after application of this Section. The
Holder shall have the sole authority and obligation to determine whether the
restriction contained in this Section applies and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which shares of Preferred Stock are convertible shall be in the
sole discretion of the Holder. The provisions of this Section may be waived by a
Holder (but only as to itself and not to any other Holder) upon not less than 75
days prior notice to the Company. Other Holders shall be unaffected by any such
waiver.
(B) If on any Conversion Date (A) the Common Stock is
listed for trading on the NASDAQ or the Nasdaq SmallCap Market, (B) the
Conversion Price then in effect is such that the aggregate number of shares of
Common Stock that would then be issuable upon conversion in full of all then
outstanding shares of Preferred Stock and as payment of dividends
-5-
6
thereon in shares of Common Stock, together with any shares of Common Stock
previously issued upon conversion of shares of Preferred Stock and as payment of
dividends thereon, would equal or exceed 20% of the number of shares of Common
Stock outstanding on the Series A Closing Date (as defined in the Purchase
Agreement) (such number of shares as would not equal or exceed such 20% limit,
the "Issuable Maximum"), and (C) the Company shall not have previously obtained
the vote of shareholders (the "Shareholder Approval"), if any, as may be
required by the applicable rules and regulations of the Nasdaq Stock Market (or
any successor entity) applicable to approve the issuance of shares of Common
Stock in excess of the Issuable Maximum pursuant to the terms hereof, then the
Company shall issue to the Holder so requesting a conversion a number of shares
of Common Stock equal to its pro rata share of the Issuable Maximum (determined
by reference to the number of shares of Preferred Stock issued to all Holders on
the Series A Closing Date) and, with respect to the remainder of the aggregate
Stated Value of the shares of Preferred Stock then held by such Holder for which
a conversion in accordance with the Conversion Price would result in an issuance
of shares of Common Stock in excess of the Issuable Maximum (the "Excess Stated
Value"), the converting Holder shall have the option to require the Company to
either (1) use its best efforts to obtain the Shareholder Approval applicable to
such issuance as soon as is possible, but in any event not later than the 75th
day after such request, or (2)(i) issue and deliver to such Holder a number of
shares of Common Stock as equals (x) the Excess Stated Value, plus accrued
dividends on all shares of Preferred Stock being converted, divided by (y) the
closing sales price of the Common Stock as reported by the NASDAQ on the Series
A Closing Date, and (ii) cash in an amount equal to the product of (x) the Per
Share Market Value on the Conversion Date and (y) the number of shares of Common
Stock in excess of such Holder's pro rata portion of the Issuable Maximum that
would have otherwise been issuable to the Holder in respect of such conversion
but for the provisions of this Section (such amount of cash being hereinafter
referred to as the "Discount Equivalent"), or (3) pay cash to the converting
Holder in an amount equal to the Mandatory Redemption Amount (as defined in
Section 8) for the Excess Stated Value. If the Company fails to pay the Discount
Equivalent or the Mandatory Redemption Amount, as the case may be, in full
pursuant to this Section within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 15% per annum (or the maximum
rate permitted by applicable law, whichever is less) to the converting Holder,
accruing daily from the Conversion Date until such amount, plus all such
interest thereon, is paid in full.
(C) Notwithstanding anything herein to the contrary,
the Company shall not be obligated to issue in excess of 1,450,000 Underlying
Shares upon conversion of shares of Preferred Stock and as payment of dividends
thereon.
(b)(i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of shares of
Preferred Stock (subject to the limitations set forth in Section 5(a)(iii)
hereof), (ii) one or more certificates representing the number of shares of
Preferred Stock not converted, (iii) a bank check in the amount of accrued and
unpaid dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay accrued
dividends in shares of Common Stock, certificates, which shall be free of
restrictive legends and trading restrictions (other than those required by
Section 3.1 (b) of the Purchase Agreement), representing such shares of Common
Stock; provided, however, that the
-6-
7
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are delivered for
conversion to the Company, or the Holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and provides
a bond (or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith. The
Company shall, upon request of the Holder, if available, use its best efforts to
deliver any certificate or certificates required to be delivered by the Company
under this Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions. If in the
case of any Conversion Notice such certificate or certificates, including for
purposes hereof, any shares of Common Stock to be issued on the Conversion Date
on account of accrued but unpaid dividends hereunder, are not delivered to or as
directed by the applicable Holder by the third (3rd) Trading Day after the
Conversion Date, the Holder shall be entitled by written notice to the Company
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Preferred Stock
tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, by the third (3rd) Trading
Day after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $5,000 for each Trading Day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Preferred Stock or as payment of dividends thereon by the third
(3rd) Trading Day after the Conversion Date, the Holder may, by notice to the
Company, require the Company to issue shares of Common Stock pursuant to Section
5(c), except that for such purpose the Conversion Price applicable thereto shall
be the lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such shares will be subject to the
provision of this Section.
(iii) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends hereunder, by the third (3rd) Trading Day after the
Conversion Date, and if after such third (3rd) Trading Day the Holder purchases
(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
was entitled to receive upon such conversion (a "Buy-In"), then the Company
shall (A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder was entitled to receive from the
-7-
8
conversion at issue multiplied by (2) the market price of the Common Stock at
the time of the sale giving rise to such purchase obligation and (B) at the
option of the Holder, either return the shares of Preferred Stock for which such
conversion was not honored or deliver to such Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with
its conversion and delivery obligations under Section 5(b)(i). For example, if
the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of shares of Preferred
Stock with respect to which the market price of the Underlying Shares on the
date of conversion was a total of $10,000 under clause (A) of the immediately
preceding sentence, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In. Notwithstanding anything contained
herein to the contrary, if a Holder requires the Company to make payment in
respect of a Buy-In for the failure to timely deliver certificates hereunder and
the Company timely pays in full such payment, the Company shall not be required
to pay such Holder liquidated damages under Section 5(b)(ii) in respect of the
certificates resulting in such Buy-In.
(c)(i) The conversion price for each share of Preferred Stock
(the "Conversion Price") in effect on any Conversion Date shall be the lesser of
(a) 125% of the average of the Per Share Market Values for the fifteen (15)
Trading Days immediately preceding the Original Issue Date (the "Initial
Conversion Price") and (b) 101% of the average of the ten (10) lowest Per Share
Market Values during the thirty (30) Trading Days immediately preceding the
applicable Conversion Date (which, at the Holder's option, may include Trading
Days prior to the 120th day following the Original Issue Date), provided, that
such thirty (30) Trading Day period shall be extended for the number of Trading
Days, if any, during such period in which (A) trading in the Common Stock is
suspended from the NASDAQ or a Subsequent Market on which it is listed for
trading prior to such suspension, or (B) after the date declared effective by
the Commission, the Underlying Securities Registration Statement is not
effective, or (C) after the date declared effective by the Commission, the
Prospectus included in the Underlying Securities Registration Statement may not
be used by the Holder for the resale of Underlying Shares, provided, further,
that during the period from the Original Issue Date until the 120th day
following the Original Issue Date, the Conversion Price shall be the Initial
Conversion Price.
If (a) the Underlying Securities Registration Statement is not
filed on or prior to the Filing Date (if the Company files such Underlying
Securities Registration Statement without affording the Holder the opportunity
to review and comment on the same as required by Section 3(a) of the
Registration Rights Agreement, the Company shall not be deemed to have satisfied
this clause (a)), or (b) after the earlier of March 31, 1999 and the date of
acceptance by the Commission of the Company's Annual Report on Form 10-K for the
annual period ended December 31, 1998 the Company is notified (orally or in
writing, whichever is earlier) by the Commission that an Underlying Securities
Registration Statement will not be "reviewed," or not subject to further review
or comment and the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the Securities
Exchange Act of 1934, as amended, within five (5) days of the date of such
notification, or (c) the Underlying Securities Registration Statement is not
declared effective by the Commission on or prior to the Effectiveness Date, or
(d) such Underlying Securities Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as defined in the Registration Rights Agreement) at any
time prior to the expiration of the Effectiveness Period
-8-
9
without being succeeded within ten (10) days by a subsequent Underlying
Securities Registration Statement filed with and declared effective by the
Commission, or (e) trading in the Common Stock shall be suspended from the
NASDAQ or a Subsequent Market for more than three (3) Business Days (which need
not be consecutive days) other than any halts in trading, which do not continue
for an entire Trading Day, to allow for the release of information by the
Company, (f) the conversion rights of the Holders are suspended for any reason
or (g) unless the Company is notified by the Commission that it is not eligible
to file the Underlying Securities Registration Statement on Form S-3, an
amendment to the Underlying Securities Registration Statement is not filed by
the Company with the Commission within fifteen (15) Business Days of the
Commission's notifying the Company that such amendment is required in order for
the Underlying Securities Registration Statement to be declared effective (if
the Company files such amendment without affording the Holder the opportunity to
review and comment on the same as required by Section 3(a) of the Registration
Rights Agreement, the Company shall not be deemed to have satisfied this clause
(g)) (any such failure or breach being referred to as an "Event," and for
purposes of clauses (a), (c), (f) the date on which such Event occurs, or for
purposes of clause (b) the date on which such five (5) day period is exceeded,
or for purposes of clause (d) the date which such 10 day-period is exceeded, for
purposes of clause (e) the date on which such three (3) Business Day-period is
exceeded, or for purposes of clause (g) the date which such 15 Business
Day-period is exceeded, being referred to as "Event Date"), then, on the Event
Date and each monthly anniversary thereof until the earlier to occur of the
second month after the Event Date and such time as the applicable Event is
cured, the Company shall pay to the Holder 1.0% of the aggregate Stated Value of
the shares of Preferred Stock then held by such Holder (which, for purposes
hereof shall include all shares of Preferred Stock tendered for conversion by
such Holder but for which Underlying Shares due in respect thereof shall not
have been received by such Holder) in cash, as liquidated damages and not as a
penalty. Commencing on the second month anniversary after the Event Date and on
each monthly anniversary thereof until such time as the applicable Event is
cured, the Company shall pay to the Holder 1.5% of the aggregate Stated Value of
the shares of Preferred Stock then held by such Holder (which, for purposes
hereof shall include all shares of Preferred Stock tendered for conversion by
such Holder but for which Underlying Shares due in respect thereof shall not
have been received by such Holder) in cash, as liquidated damages and not as a
penalty. The provisions of this Section are not exclusive and shall in no way
limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities or pari
passu securities payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine outstanding
shares of Common Stock into a smaller number of shares, or (d) issue by
reclassification and exchange of the Common Stock any shares of capital stock of
the Company, then the Initial Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to all
holders of Common Stock
-9-
10
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Value at the record date mentioned
below, then the Initial Conversion Price shall be multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, warrants or options, plus the
number of shares of Common Stock which the aggregate offering price of the total
number of shares so offered would purchase at such Per Share Market Value, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock offered for subscription or purchase. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right,
warrant or option to purchase shares of Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section
5(c)(iii), if any such right, warrant or option shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration
shall be recomputed and effective immediately upon such expiration shall be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 upon the issuance of other rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights, warrants, or options
been made on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such rights,
warrants or options actually exercised.
(iv) If the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), at any
time while any shares of Preferred Stock are outstanding, shall issue shares of
Common Stock or rights, warrants, options or other securities or debt that is
convertible into or exchangeable for shares of Common Stock, other than (i) the
granting of options or warrants to employees, officers, directors, consultants
and other service providers (but not Strategic Partners (as defined in the
Purchase Agreement)), and the issuance of shares of Common Stock upon exercise
of options granted, under any stock option plan heretofore or hereinafter duly
adopted by the Company and (ii) the issuance of shares of Common Stock issuable
pursuant to the Private Equity Line of Credit Agreement dated March 27, 1998
between the Company and Kingsbridge Capital Limited, as described in the
Company's Amendment No. 2 on Form SB-2, filed with the Commission on August 13,
1998 (but not pursuant to any amendment or modification thereto) ("Common Stock
Equivalents"), entitling any Person to acquire shares of Common Stock at a price
per share less than the Conversion Price, then the Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to the issuance of such Common
Stock or such Common Stock Equivalents plus the number of shares of Common Stock
which the offering price for such shares of Common Stock or Common Stock
Equivalents would purchase at the Conversion Price, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of Common Stock so issued or
issuable, provided, that for purposes hereof, all shares of Common Stock that
are issuable upon conversion, exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued.
(v) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its
-10-
11
indebtedness or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Sections 5(c)(ii)-(iv) above), then in
each such case the Initial Conversion Price at which each share of Preferred
Stock shall thereafter be convertible shall be determined by multiplying the
Initial Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value determined
as of the record date mentioned above, and of which the numerator shall be such
Per Share Market Value on such record date less the then fair market value at
such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding shares of Common Stock as determined
by the Board of Directors in good faith; provided, however, that in the event of
a distribution exceeding ten percent (10%) of the net assets of the Company, if
the Holders of a majority in interest of the Preferred Stock dispute such
valuation, such fair market value shall be determined by a nationally recognized
or major regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the Holders of a majority in interest of the shares of Preferred
Stock then outstanding; and provided, further, that the Company, after receipt
of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the Holders
of the portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail
to each Holder, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(viii) In case of any reclassification of the Common
Stock, or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property (other than compulsory share
exchanges which constitute Change of Control Transactions), the Holders of the
Preferred Stock then outstanding shall have the right thereafter to convert such
shares only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders of the Preferred Stock shall
be entitled upon such event to receive such amount of securities, cash or
property as a holder of the number of shares of Common Stock of the Company into
which such shares of Preferred Stock could have been converted immediately prior
to such reclassification or share exchange would have been entitled. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(ix) If (a) the Company shall declare a dividend (or
any other distribution) on the Common Stock, (b) the Company shall declare a
special nonrecurring cash dividend on or a redemption of the Common Stock, (c)
the Company shall authorize the granting to all holders of Common Stock rights
or warrants to subscribe for or purchase any shares of capital
-11-
12
stock of any class or of any rights, (d) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the Common
Stock, any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property, or (e) the Company shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company; then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall cause to
be mailed to the Holders at their last addresses as they shall appear upon the
stock books of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share
exchange. Holders are entitled to convert shares of Preferred Stock during the
20-day period commencing the date of such notice to the effective date of the
event triggering such notice.
(x) In case of any (1) merger or consolidation of the
Company with or into another Person that would constitute a Change of Control
Transaction, or (2) sale by the Company of more than one-half of the assets of
the Company (on an as valued basis) in one or a series of related transactions,
or (3) tender or other offer or exchange (whether by the Company or another
Person) pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, stock, cash or property of the
Company or another Person; then, if a Holder has not exercised its rights of
redemption, if any, under Section 7 hereof, such Holder shall have the right
thereafter to (A) if permitted under Section 7 hereof, exercise its rights of
redemption under Section 7 with respect to such event, (B) convert its shares of
Preferred Stock into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and such Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the shares of Common Stock into which such shares of Preferred Stock
could have been converted immediately prior to such merger, consolidation or
sales would have been entitled, (C) in the case of a merger or consolidation,
(x) require the surviving entity to issue shares of convertible preferred stock
or convertible debentures with such aggregate stated value or in such face
amount, as the case may be, equal to the Stated Value of the shares of Preferred
Stock then held by such Holder, plus all accrued and unpaid dividends and other
amounts owing thereon, which newly issued shares of preferred stock or
debentures shall have terms identical (including with respect to conversion) to
the terms of the Preferred Stock (except, in the case of debentures, as may be
required to reflect the differences between debt and equity) and shall be
entitled to all of the rights and privileges of a Holder of Preferred Stock set
forth herein and the agreements pursuant to which the Preferred Stock was issued
(including, without limitation, as such rights relate to the acquisition,
transferability, registration and listing of such shares of stock other
securities issuable upon conversion thereof), and (y) simultaneously with the
issuance of such convertible preferred stock or convertible debentures, shall
have the right to convert such instrument only into shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such
-12-
13
merger or consolidation, or (D) in the event of an exchange or tender offer or
other transaction contemplated by clause (3) of this Section, tender or exchange
its shares of Preferred Stock for such securities, stock, cash and other
property receivable upon or deemed to be held by holders of Common Stock that
have tendered or exchanged their shares of Common Stock following such tender or
exchange, and such Holder shall be entitled upon such exchange or tender to
receive such amount of securities, cash and property as the shares of Common
Stock into which such shares of Preferred Stock could have been converted
(taking into account all then accrued and unpaid dividends) immediately prior to
such tender or exchange would have been entitled as would have been issued. In
the case of clause (C), the conversion price applicable for the newly issued
shares of convertible preferred stock or convertible debentures shall be based
upon the amount of securities, cash and property that each share of Common Stock
would receive in such transaction, the Conversion Ratio immediately prior to the
effectiveness or closing date for such transaction and the Conversion Price
stated herein. The terms of any such merger, sale, consolidation, tender or
exchange shall include such terms so as continue to give the Holders of
Preferred Stock the right to receive the securities, cash and property set forth
in this Section upon any conversion or redemption following such event. This
provision shall similarly apply to successive such events.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of Common Stock solely
for the purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of Common Stock as shall (subject
to any additional requirements of the Company as to reservation of such shares
set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder (assuming all such dividends are paid in shares of Common Stock). The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and freely tradeable, subject to the legend requirements of
Section 3.1(b) of the Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the Holder of a
share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for Common Stock on conversion
of Preferred Stock and as payment of dividends in shares of Common Stock shall
be made without charge to the Holders thereof for any documentary stamp or
similar taxes that may be payable in respect of the issue or delivery of such
certificate, provided that the Company shall not be required to pay any tax that
may be payable in respect of any transfer involved in the issuance and delivery
of any such certificate upon conversion in a name other than that of the Holder
of such shares of Preferred Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or
redeemed in accordance with the terms hereof shall be canceled and may not be
reissued.
-13-
14
(h) Any and all notices or other communications or deliveries to
be provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Financial Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 8:00 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
SECTION 6. Optional Redemption.
(a) Subject to the provisions of this Section 6, the Company
shall have the right, exercisable upon five (5) Trading Days' notice (an
"Optional Redemption Notice") to the Holders of the Preferred Stock after any
date on which the closing sales price for the Common Stock as reported by
Bloomberg Information Services, Inc., or any successor to its function of
reporting prices, for the previous ten (10) consecutive Trading Days is either
(i) less than $5.00 or (ii) greater than $20.00 (such date, the "Optional
Redemption Qualifying Date"), to redeem all or any portion of the shares of
Preferred Stock which have not previously been converted or redeemed, at a price
equal to the Optional Redemption Price (as defined below), provided, that if the
Company shall not have provided a Holder with notice of its intent to redeem
shares of Preferred Stock pursuant to this Section 6 within twenty (20) Trading
Days from the Optional Redemption Qualifying Date, the Company shall be
precluded from redeeming shares of Preferred Stock pursuant to this Section
until the next Optional Redemption Qualifying Date, if any (the calculation for
one Optional Redemption Qualifying Date may not include any Trading Days used to
calculate a prior Optional Redemption Qualifying Date). The Company shall not be
entitled to deliver an Optional Redemption Notice to the Holders if: (i) the
number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes is insufficient to satisfy the Company's conversion obligations
of all shares of Preferred Stock then outstanding, or (ii) neither the
Underlying Shares then outstanding are registered for resale pursuant to an
effective Underlying Securities Registration Statement nor may such Underlying
Shares be sold without volume restrictions pursuant to Rule 144 promulgated
under the Securities Act, as determined by counsel to the Company pursuant to a
written opinion letter, addressed to the Company's transfer agent in the form
and substance acceptable to the Holders and such transfer agent, or (iii) the
Common Stock is not then listed for trading on the NASDAQ or on a Subsequent
Market. The entire Optional Redemption Price shall be paid in cash. Holders may
convert (and the Company shall honor such conversions in accordance with the
terms hereof) any shares of Preferred Stock, including shares subject to an
Optional Redemption Notice, during the
-14-
15
period from the date thereof through the 4th Trading Day after the receipt of an
Optional Redemption Notice, provided, that, notwithstanding anything herein to
the contrary, the Conversion Price applicable to such conversions shall be
subject to a floor of $5.00.
(b) If any portion of the Optional Redemption Price shall not be
paid by the Company by the 20th Trading Day after the delivery of an Optional
Redemption Notice, interest shall accrue thereon at the rate of 15% per annum
(or the maximum rate permitted by applicable law, whichever is less) until the
Optional Redemption Price plus all such interest is paid in full. In addition,
if any portion of the Optional Redemption Price remains unpaid after the date
due, the Holder of the Preferred Stock subject to such redemption may elect, by
written notice to the Company given at any time thereafter, to either (i) demand
conversion of all or any portion of the shares of Preferred Stock for which such
Optional Redemption Price, plus interest thereof, has not been paid in full (the
"Unpaid Redemption Shares"), in which event the Per Share Market Value for such
shares shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share Market Value
as of the Holder's written demand for conversion, or (ii) invalidate ab initio
such redemption, notwithstanding anything herein contained to the contrary. If
the Holder elects option (i) above, the Company shall within three (3) Trading
Days of its receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Shares subject to such
Holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
Holder's notice of such election, return to the Holder all of the Unpaid
Redemption Shares.
(c) The "Optional Redemption Price" shall equal the sum of (i)
the greater of (A) the Stated Value of the shares of Preferred Stock to be
redeemed and all accrued dividends thereon and (B)the product of (x) the number
of shares of Preferred Stock to be redeemed and (y) the product of (1) the
average Per Share Market Value for the five (5) Trading Days immediately
preceding (x) the date of the Optional Redemption Notice or (y) the date of
payment in full by the Company of the Optional Redemption Price, whichever is
greater, and (2) the Conversion Ratio calculated on the date of the Optional
Redemption Notice, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such shares of Preferred Stock.
SECTION 7. Redemption Upon Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder shall
(in addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
issued in respect of conversions or as payment of dividends hereunder and then
held by the Holder and (B) the Per Share Market Value on the date such
redemption is demanded or the date the redemption price hereunder is paid in
full, whichever is greater (such sum, the "Redemption Price"). The Redemption
Price shall be due and payable within (10) days of the date on which the notice
for the payment therefor is provided by a Holder. If the Company fails to pay
the redemption price hereunder in full pursuant to this Section on the date such
amount is due in accordance with this Section, the
-15-
16
Company will pay interest thereon at a rate of 15% (or the maximum amount
permitted under applicable law, whichever is less) per annum, accruing daily
from such date until the redemption price, plus all such interest thereon, is
paid in full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying Shares
upon a conversion (or attempted conversion) thereof that meets the requirements
hereof.
A "Triggering Event" means any one or more of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or order of
any court, or any order, rule or regulation of any administrative or
governmental body):
(i) the failure of an Underlying Securities
Registration Statement to be declared effective by the Commission on or prior to
the 180th day after the Original Issue Date;
(ii) if, during the Effectiveness Period, the
effectiveness of the Underlying Securities Registration Statement lapses for any
reason for more than an aggregate of three (3) Trading Days, or the Holder shall
not be permitted to resell Registrable Securities under the Underlying
Securities Registration Statement for more than an aggregate of three (3)
Trading Days (which need not be consecutive Trading Days);
(iii) the failure of the Common Stock to be listed for
trading on the NASDAQ or on a Subsequent Market or the suspension of the Common
Stock from trading on the NASDAQ or on a Subsequent Market, in either case, for
more than three (3) Trading Days (which need not be consecutive Trading Days);
(iv) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversion of any Preferred Stock in accordance with the terms
hereof;
(v) the Company shall be a party to any Change of
Control Transaction, shall agree to sell (in one or a series of related
transactions) all or substantially all of its assets (whether or not such sale
would constitute a Change of Control Transaction) or shall redeem more than a de
minimis number of Common Stock or other Junior Securities (other than
redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the
satisfaction of the Holders prior to the expiration of thirty (30) days from the
Event Date relating thereto;
(vii) the Company shall fail for any reason to pay
in full the amount of cash due pursuant to a Buy-In within seven (7) days after
notice therefor is delivered hereunder; or
(viii) the Company shall fail to have available a
sufficient number of authorized and unreserved shares of Common Stock to issue
to such Holder upon a conversion hereunder.
-16-
17
SECTION 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Change of Control Transaction" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger of the Company with or into
another entity, consolidation or sale of all or substantially all of the assets
of the Company in one or a series of related transactions, or (iv) the execution
by the Company of an agreement to which the Company is a party or by which it is
bound, providing for any of the events set forth above in (i), (ii) or (iii).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.001
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator
of which is Stated Value plus accrued but unpaid dividends but only to the
extent not paid in Common Stock in accordance with the terms hereof, and the
denominator of which is the Conversion Price at such time.
"Dividend Effectiveness Date" means the earlier to occur of (x)
the Effectiveness Date (as defined in the Registration Rights Agreement) and (y)
the date that an Underlying Securities Registration Statement is declared
effective by the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Junior Securities" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"Mandatory Redemption Amount" for each share of Preferred Stock
means the sum of (i) the greater of (A) the Stated Value and all accrued
dividends with respect to such share and (B) the product of (a) the Per Share
Market Value on the Trading Day immediately preceding (x) the date of the
Triggering Event or the Conversion Date, as the case may be, or (y) the date of
payment in full by the Company of the applicable redemption price, whichever is
greater, and (b) the Conversion Ratio calculated on the date of the Triggering
Event, or the Conversion Date, as the case may be, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such share of Preferred
Stock.
"Original Issue Date" shall mean the date of the first issuance
of any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
-17-
18
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of Common Stock on such date on the NASDAQ or on the
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or on a Subsequent
Market, the closing bid price for a shares of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock are not
then publicly traded the fair market value of a Common Share as determined by an
Appraiser selected in good faith by the Holders of a majority of the shares of
the Preferred Stock.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means (a) a day on which the Common Stock is traded
on the NASDAQ or on the Subsequent Market on which the Common Stock is then
listed or quoted, as the case may be, or (b) if the Common Stock s not listed on
the NASDAQ or on a Subsequent Market, a day on which the Common Stock is traded
in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if
the Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); provided, however, that in the
event that the Common Stock is not listed or quoted as set forth in (a), (b) and
(c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Underlying Securities Registration Statement" means a
registration statement that meets the requirements of the Registration Rights
Agreement and registers the resale of all Underlying Shares by the recipient
thereof, who shall be named as a "selling stockholder" thereunder.
"Underlying Shares" means, collectively, the shares of Common
Stock into which the Shares are convertible and the shares of Common Stock
issuable upon payment of dividends thereon in accordance with the terms hereof.
-18-
19
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Designation to be duly executed by its Chief Financial Officer this 28th day of
January, 1999.
NEOTHERAPEUTICS, INC.
By: /s/ SAMUEL GULKO
--------------------------------
Samuel Gulko, Chief Financial Officer
-19-
20
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of 5% Series A
Preferred Stock with Conversion Features indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of NeoTherapeutics, Inc.
(the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
Holder for any conversion, except for such transfer taxes, if any.
Conversion calculations: -----------------------------------------------
Date to Effect Conversion
-----------------------------------------------
Number of shares of Preferred Stock to be
Converted
-----------------------------------------------
Number of shares of Common Stock to be Issued
-----------------------------------------------
Applicable Conversion Price
-----------------------------------------------
Signature
-----------------------------------------------
Name
-----------------------------------------------
Address