Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated as of February
25, 2003, among Hollis-Eden Pharmaceuticals, Inc., a Delaware corporation (the
“Company”), and the purchasers identified on the signature pages hereto (each,
including its successors and assigns, a “Purchaser” and collectively the
“Purchasers”).

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:

 

ARTICLE I

DEFINITIONS

 

1.1     Definitions.     In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debenture (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:

 

“Actual Minimum” means, as of any date, the maximum aggregate number of shares
of Common Stock then issued or potentially issuable in the future pursuant to
the Transaction Documents, including any Underlying Shares issuable upon
exercise or conversion in full of all Warrants and Debentures, ignoring any
conversion or exercise limits set forth therein, and assuming that any
previously unconverted Debentures are held until the third anniversary of the
Closing Date or, if earlier, until maturity, and all interest thereon is paid in
shares of Common Stock assuming an Interest Conversion Rate equal to the
Interest Conversion Rate as of such date of determination.

 

“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144 under the
Securities Act. With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such Purchaser.

 

“Capital Shares” shall mean the Common Stock and any shares of any other class
of common stock whether now or hereafter authorized, having the right to
participate in the distribution of earnings and assets of the Company.

 

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“Capital Shares Equivalents” shall mean any securities, rights, or obligations
that are convertible into or exchangeable for or give any right to subscribe for
or purchase, directly or indirectly, any Capital Shares of the Company or any
warrants, options or other rights to subscribe for or purchase, directly or
indirectly, Capital Shares or any such convertible or exchangeable securities.

 

“Closing” means the closing of the purchase and sale of the Securities pursuant
to Section 2.1.

 

“Closing Date” means February 25, 2003.

 

“Closing Price” means $5.70.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock of the Company, par value $0.01 per share,
and any securities into which such common stock shall hereinafter been
reclassified into.

 

“Company Counsel” means Cooley Godward LLP, outside counsel to the Company, with
offices at 4401 Eastgate Mall, San Diego, California 92121.

 

“Debentures” means the 7.5% Convertible Debentures due 36 months from their date
of issuance, unless otherwise set forth therein, issued by the Company to the
Purchasers hereunder, in the form of Exhibit A.

 

“Disclosure Schedules” shall have the meaning ascribed to such term in Section
3.1.

 

“Effective Date” means the date that the Registration Statement is first
declared effective by the Commission.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Liens” shall have the meaning ascribed to such term in Section 3.1(a).

 

“Losses” means any and all losses, claims, damages, liabilities, settlement
costs and expenses, including without limitation costs of preparation and
reasonable attorneys’ fees.

 

“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).

 

“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

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“Principal Market” shall initially mean the NASDAQ National Market and shall
also include the American Stock Exchange, the New York Stock Exchange or the
NASDAQ Small-Cap Market, whichever is at the time the principal trading exchange
or market for the Common Stock, based upon share volume.

 

“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

 

“Purchasers’ Counsel” means, for convenience of reference only, Feldman
Weinstein LLP with offices at 420 Lexington Avenue, Suite 2620, New York, New
York 10170-0002, which has acted only as counsel to Midsummer Investment Ltd.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated
the Closing Date, among the Company and the Purchasers, in the form of Exhibit
B.

 

“Required Approvals” shall have the meaning ascribed to such term in Section
3.1(e).

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Securities” means the Debentures, the Warrants and the Underlying Shares.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Subscription Amount” means as to each Purchaser, the principal amount of
Debentures to be purchased at the Closing as indicated on the signature pages
hereto below such Purchaser’s address for notice.

 

“Subsidiary” means any subsidiary of the Company that is required to be listed
in Schedule 3.1(a).

 

“Trading Day” shall mean any day during which the Principal Market shall be open
for business.

 

“Transaction Documents” means this Agreement, the Debentures, the Warrants, the
Registration Rights Agreement and any other documents or agreements executed in
connection with the transactions contemplated hereunder.

 

“Underlying Shares” means the shares of Common Stock issuable upon conversion of
the Debentures and upon exercise of the Warrants and issued and issuable in lieu
of the cash payment of interest on the Debentures.

 

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“Underlying Shares Registration Statement” or “Registration Statement” means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering the resale of the Underlying Shares by the
Purchasers as provided for in the Registration Rights Agreement.

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Principal Market, the daily volume weighted average price of the Common Stock
for such date (or the nearest preceding date) on the Principal Market on which
the Common Stock is then listed or quoted as reported by Bloomberg Financial
L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern
Time); (b) if the Common Stock is not then listed or quoted on a Principal
Market and if prices for the Common Stock are then quoted on the OTC Bulletin
Board (or any successor market), the volume weighted average price of the Common
Stock for such date (or the nearest preceding date) on the OTC Bulletin Board
(or any successor market); (c) if the Common Stock is not then listed or quoted
on the OTC Bulletin Board (or any successor market) and if prices for the Common
Stock are then reported in the “Pink Sheets” published by the National Quotation
Bureau Incorporated (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value of a
share of Common Stock as determined by a nationally recognized-independent
appraiser selected in good faith by Purchasers holding a majority of the
principal amount of Debentures then outstanding and reasonably acceptable to the
Company.

 

“Warrants” means collectively the Common Stock purchase warrants, in the form of
Exhibit C delivered to the Purchasers at the Closing in accordance with Section
2.2.

 

ARTICLE II

PURCHASE AND SALE

 

2.1     Closing.     Subject to the terms and conditions set forth in this
Agreement, at the Closing the Company shall issue and sell to the Purchasers,
and the Purchasers shall, severally and not jointly, purchase from the Company,
an aggregate of up to $10,000,000 principal amount of Debentures, each equal to
the Subscription Amount, and Warrants as set forth in Section 2.2(b)(ii). The
Closing shall take place at the offices of Purchasers’ Counsel immediately
following the execution hereof, or at such other location or time as the parties
may agree and in no event later than 3 Trading Days following the date hereof.

 

2.2     Closing Conditions.

 

(a) Upon satisfaction or waiver by the party sought to be benefited thereby, of
the conditions set forth in this Section 2.2, the Closing shall occur.

 

(b) At or prior to the Closing, the Company shall deliver or cause to be
delivered to each Purchaser the following:

 

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(i) Debentures in the Subscription Amount indicated below such Purchaser’s name
on the signature page of this Agreement, registered in the name of such
Purchaser;

 

(ii) a Warrant to purchase up to a number of shares of Common Stock equal to 20%
of the shares underlying the Debentures purchased by such Investor with a term
of 4 years and an exercise price per Warrant Share equal to $6.17, subject to
adjustment therein; and a Warrant to purchase up to a number of shares of Common
Stock equal to 20% of the shares underlying the Debentures purchased by such
Investor with a term of 4 years and an exercise price per Warrant Share equal to
$6.71, subject to adjustment therein.

 

(iii) the legal opinion of Company Counsel, in the form of Exhibit D attached
hereto, addressed to the Purchasers;

 

(iv) the Registration Rights Agreement duly executed by the Company; and

 

(v) this Agreement duly executed by the Company.

 

(c) At or prior to the Closing, each Purchaser shall deliver or cause to be
delivered to the Company the following:

 

(i) the Subscription Amount in United States dollars and in immediately
available funds, by wire transfer to the account of the Company pursuant to the
instructions set forth on Annex 1 attached hereto;

 

(ii) the Registration Rights Agreement duly executed by such Purchaser; and

 

(iii) this Agreement duly executed by such Purchaser.

 

(d) All representations and warranties of the other party contained herein shall
remain true and correct as of the Closing Date;

 

(e) There shall have been no Material Adverse Effect (as defined in Section
3.1(b)) with respect to the Company since the date hereof; and

 

(f) From the date hereof to the Closing Date, trading in the Common Stock shall
not have been suspended by the Commission (except for any suspension of trading
of limited duration agreed to by the Company, which suspension shall be
terminated prior to the Closing), and, at any time prior to the Closing Date,
trading in securities generally as reported by Bloomberg Financial Markets shall
not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or on the
Principal Market, nor shall a banking moratorium have been declared either by
the United States or New York State authorities, nor shall there have occurred
any material outbreak or escalation of hostilities or other national or

 

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international calamity of such magnitude in its effect on, or any material
adverse change in, any financial market which, in each case, in the reasonable
judgment of the Purchaser, makes it impracticable or inadvisable to purchase the
Debentures at the Closing.

 

(g) The Company shall have received Purchase Agreements from Purchasers for an
aggregate of all $10,000,000 of Debentures.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

3.1     Representations and Warranties of the Company.     Except as set forth
under the corresponding section of the disclosure schedules delivered to each
Purchaser concurrently herewith (the “Disclosure Schedules”) or as expressly
disclosed as a readily identifiable item in one or more of the SEC Reports, the
Company hereby makes the representations and warranties set forth below to each
Purchaser.

 

(a) Subsidiaries. The Company has no direct or indirect subsidiaries. The
Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any lien, charge, security
interest, encumbrance, right of first refusal or other restriction
(collectively, “Liens”), and all the issued and outstanding shares of capital
stock of each Subsidiary are validly issued and are fully paid, non-assessable
and free of preemptive and similar rights. If the Company has no subsidiaries,
then references in the Transaction Documents to the Subsidiaries will be
disregarded.

 

(b) Organization and Qualification. Each of the Company and the Subsidiaries is
an entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing as a foreign corporation
or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate: (i) adversely affect the legality,
validity or enforceability of any Transaction Document, (ii) have or result in
or be reasonably likely to have or result in a material adverse effect on the
results of operations, assets, prospects, business or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii)
adversely impair the Company’s ability to perform fully on a timely basis its
obligations under any of the Transaction Documents (any of (i), (ii) or (iii), a
“Material Adverse Effect”).

 

(c) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
hereunder

 

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or thereunder. The execution and delivery of each of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated
hereby or thereby have been duly authorized by all necessary action on the part
of the Company and no further consent or action is required by the Company other
than Required Approvals. Each of the Transaction Documents has been (or upon
delivery will be) duly executed by the Company and, when delivered in accordance
with the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors’ rights and remedies generally
and general principles of equity. Neither the Company nor any Subsidiary is in
violation of any of the provisions of its respective certificate or articles of
incorporation, by-laws or other organizational or charter documents.

 

(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated thereby do not and will not: (i) conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii)
subject to obtaining the Required Approvals (as defined below), conflict with,
or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) or other understanding to
which the Company or any Subsidiary is a party or by which any property or asset
of the Company or any Subsidiary is bound or affected, or (iii) result, in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority as currently in effect
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not, individually or in the aggregate,
have or result in a Material Adverse Effect.

 

(e) Filings, Consents and Approvals. Neither the Company nor any Subsidiary is
required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filings required under Section 4.9, (ii) the
filing with the Commission of the Underlying Shares Registration Statement,
(iii) the notice and/or application(s) to each applicable Principal Market for
the issuance and sale of the Debentures and Warrants and the listing of the
Underlying Shares for trading thereon in the time and manner required thereby
(including, without limitation, any required Shareholder Approval as described
in Section 4(a)(ii)(B) of the Debenture), and (iv) the filing of Form D with the
Commission and applicable Blue Sky filings (collectively, the “Required
Approvals”).

 

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(f) Issuance of the Securities. The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and non-assessable, free and clear
of all Liens. The Company has reserved from its duly authorized capital stock a
number of shares of Common Stock for issuance of the Underlying Shares at least
equal to the Actual Minimum on the date hereof. The Company has not, and to the
knowledge of the Company, no Affiliate of the Company has sold, offered for sale
or solicited offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers, or
that would be integrated with the offer or sale of the Securities for purposes
of the rules and regulations of any Principal Market.

 

(g) Capitalization. The number of shares and type of all authorized, issued and
outstanding capital stock of the Company is set forth in the Disclosure
Schedules. No securities of the Company are entitled to preemptive or similar
rights, and no Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. Except as a result of the purchase
and sale of the Securities, there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. The issuance and sale of the
Securities will not obligate the Company to issue shares of Common Stock or
other securities to any Person (other than the Purchasers) and will not result
in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under such securities.

 

(h) SEC Reports; Financial Statements. The Company has filed all reports
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was required by
law to file such material) (the foregoing materials being collectively referred
to herein as the “SEC Reports” and, together with the Schedules to this
Agreement, the “Disclosure Materials”) on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. The Company has identified and made available
to the Purchasers a copy of all SEC Reports filed within the 10 days preceding
the date hereof. As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports

 

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comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (“GAAP”), except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.

 

(i) Material Changes. Since the date of the latest audited financial statements
included within the SEC Reports, except as specifically disclosed in the SEC
Reports: (i) there has been no event, occurrence or development that has had or
that could result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables
and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors, (iv) the Company has not declared or
made any dividend or distribution of cash or other property to its stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock, and (v) the Company has not issued any equity securities
to any officer, director or Affiliate, except pursuant to existing Company stock
option or similar plans.

 

(j) Litigation. There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which: (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision,
individually or in the aggregate, reasonably be expected to have or result in a
Material Adverse Effect. Neither the Company nor any Subsidiary is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws, and, to the knowledge of the Company, no
current director or officer of the Company or any Subsidiary is or has been the
subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty within
the previous five years. The Company does not have pending before the Commission
any request for confidential treatment of information. There has not been, and
to the knowledge of the Company, there is not pending or contemplated, any
investigation by the Commission involving the Company, and, to the knowledge of
the Company, there has not been within the previous five years, and there is not
pending or contemplated, any investigation by the Commission involving any
current director or officer of the Company.

 

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(k) Compliance. Neither the Company nor any Subsidiary: (i) is in default under
or in violation of (and no event has occurred that has not been waived that,
with notice or lapse of time or both, would result in a default by the Company
or any Subsidiary under), nor has the Company or any Subsidiary received notice
of a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether or
not such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has been in
violation of any statute, rule or regulation of any governmental authority,
except in the case of clause (i) and (ii) as could not, individually or in the
aggregate, have or result in a Material Adverse Effect; or in the case of clause
(iii), as could not reasonably be expected to have a Material Adverse Effect.

 

(l) Labor Relations. No material labor dispute exists or, to the knowledge of
the Company, is imminent with respect to any of the employees of the Company.

 

(m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not, individually or in the aggregate, reasonably
be expected to have or result in a Material Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.

 

(n) Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them that is material to the
business of the Company and the Subsidiaries and good and marketable title in
all personal property owned by them that is material to the business of the
Company and the Subsidiaries, in each case free and clear of all Liens, except
for Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and the Subsidiaries. Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Company and the Subsidiaries are
in compliance.

 

(o) Patents and Trademarks. The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could have a Material Adverse Effect (collectively, the “Intellectual
Property Rights”). Neither the Company nor any Subsidiary has received a written
notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the knowledge
of the Company, all such Intellectual Property Rights are enforceable and,
except as could not reasonably be expected to have or result in a Material
Adverse Effect,

 

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there is no existing infringement by another Person of any of the Intellectual
Property Rights.

 

(p) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged. A list of the Company’s insurance contracts and
policies are set forth on the Disclosure Schedules. To the best of Company’s
knowledge, such insurance contracts and policies are accurate and complete.
Neither the Company nor any Subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business without a significant increase in cost.

 

(q) Transactions With Affiliates and Employees. Except as set forth in SEC
Reports, none of the executive officers or directors of the Company and, to the
knowledge of the Company, none of the employees of the Company is presently a
party to any transaction with the Company or any Subsidiary (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.

 

(r) Internal Accounting Controls. The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. There are no disagreements of any kind
presently existing, or reasonably anticipated by the Company to arise, between
the accountants and lawyers formerly or presently employed by the Company, which
could reasonably be expected to delay the filing or processing of the Underlying
Shares Registration Statement, and the Company is current with respect to any
fees owed to its accountants and lawyers. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its Subsidiaries, is
made known to the certifying officers by others within those entities,
particularly during the period in which the Company’s Form 10-K or 10-Q, as the
case may be, is being prepared. The Company’s certifying officers have evaluated
the effectiveness of the Company’s controls and procedures as of a date within
90 days prior to the filing date of the Form 10-Q for the quarter ended
September 30, 2002 (such date, the “Evaluation Date”). The Company presented in
the Form 10-Q for

 

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the quarter ended September 30, 2002 the conclusions of the certifying officers
about the effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no significant changes in the Company’s internal controls (as such term is
defined in Item 307(b) of Regulation S-K under the Exchange Act) or, to the
Company’s knowledge, in other factors that could significantly affect the
Company’s internal controls.

 

(s) Solvency/Indebtedness. Based on the financial condition of the Company as of
the Closing Date: (i) the fair market value of the Company’s assets exceeds the
amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities) as
they mature; (ii) the Company’s assets do not constitute unreasonably small
capital to carry on its business for the current fiscal year as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof; and (iii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated uses of the cash, would be sufficient to pay all amounts on or
in respect of its debt when such amounts are required to be paid. The Company
does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on or
in respect of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. The SEC Reports set forth as of the dates
thereof all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments. For the
purposes of this Agreement, “Indebtedness” shall mean (a) any liabilities for
borrowed money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations, whether or not the same are or
should be reflected in the Company’s balance sheet or the notes thereto, except
guaranties by endorsement of negotiable instruments for deposit or collection in
the ordinary course of business, and (c) the present value of any lease payments
in excess of $50,000 due under leases required to be capitalized in accordance
with GAAP. Neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.

 

(t) Certain Fees. No brokerage or finder’s fees or commissions are or will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by this Agreement, and the Company has not taken any
action that would cause any Purchaser to be liable for any such fees or
commissions. The Company agrees that the Purchasers shall have no obligation
with respect to any fees or with respect to any claims made by or on behalf of
any Person for fees of the type contemplated by this Section with the
transactions contemplated by this Agreement.

 

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(u) Private Placement. Assuming the accuracy of the representations and
warranties of the Purchasers set forth in Sections 3.2(b)-(f), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act. The issuance
and sale of the Securities hereunder does not contravene the rules and
regulations of the Principal Market and no shareholder approval is required for
the Company to fulfill its obligations under the Transaction Documents.

 

(v) Listing and Maintenance Requirements. The Company has not, in the 12 months
preceding the date hereof, received notice from any Principal Market on which
the Common Stock is or has been listed or quoted to the effect that the Company
is not in compliance with the listing or maintenance requirements of such
Principal Market. The Company is, and has no reason to believe that it will not
in the foreseeable future continue to be, in compliance with all such listing
and maintenance requirements.

 

(w) Registration Rights. The Company has not granted or agreed to grant to any
Person any rights (including “piggy-back” registration rights) to have any
securities of the Company registered with the Commission or any other
governmental authority that have not been satisfied.

 

(x) Application of Takeover Protections. The Company and its Board of Directors
have taken all necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s Certificate of Incorporation (or similar charter documents)
or the laws of its state of incorporation that is or could become applicable to
any Purchaser or Purchasers as a result of the respective Purchasers and the
Company fulfilling their respective obligations or exercising their respective
rights under the Transaction Documents, including without limitation as a result
of the Company’s issuance of the Securities and the Purchasers’ several
ownership of the Securities.

 

(y) Seniority. As of the date of this Agreement, no indebtedness of the Company
is senior to the Debentures in right of payment, whether with respect to
interest or upon liquidation or dissolution, or otherwise, other than
indebtedness secured by purchase money security interests (which is senior only
as to underlying assets covered thereby) and capital lease obligations (which is
senior only as to the property covered thereby).

 

(z) Disclosure. The Company confirms that neither it nor any other Person acting
on its behalf has provided any of the Purchasers or their agents or counsel with
any information that constitutes or might constitute material, nonpublic
information. The Company understands and confirms that the Purchasers will rely
on the foregoing representations in effecting transactions in securities of the
Company. All disclosure provided to the Purchasers regarding the Company, its
business and the transactions contemplated hereby, including the Schedules to
this Agreement, furnished by or on behalf of the Company with respect to the
representations and warranties made herein are

 

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true and correct with respect to such representations and warranties and do not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any representations
or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in Section 3.2.

 

(aa) Form S-3 Eligibility. The Company is eligible to register the resale of the
Underlying Shares for resale by the Purchaser on Form S-3 promulgated under the
Securities Act.

 

(bb) Tax Status. The Company and each of its Subsidiaries has made or filed all
federal, state and foreign income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim. The Company has not executed a
waiver with respect to the statute of limitations relating to the assessment or
collection of any foreign, federal, statue or local tax. None of the Company’s
tax returns is presently being audited by any taxing authority.

 

3.2    Representations and Warranties of each Purchaser.    Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:

 

(a) Organization; Authority. Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations thereunder. The purchase by
such Purchaser of the Securities hereunder has been duly authorized by all
necessary action on the part of such Purchaser. Each of this Agreement, and the
Registration Rights Agreement has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with the terms hereof, will constitute
the valid and legally binding obligation of such Purchaser, enforceable against
it in accordance with its terms.

 

(b) Investment Intent. Such Purchaser is acquiring the Securities as principal
for its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser’s right, subject to the provisions of this
Agreement, at all times to sell

 

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or otherwise dispose of all or any part of such Securities pursuant to an
effective registration statement under the Securities Act or under an exemption
from such registration and in compliance with applicable federal and state
securities laws. Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any period of time. Such
Purchaser is acquiring the Securities hereunder in the ordinary course of its
business. Such Purchaser does not have any agreement or understanding, directly
or indirectly, with any Person to distribute any of the Securities.

 

(c) Purchaser Status. At the time such Purchaser was offered the Securities, it
was, and at the date hereof it is, and on each date on which it exercises any
Warrants or converts any Debentures, it will be an “accredited investor” as
defined in Rule 501(a) under the Securities Act. Such Purchaser has not been
formed solely for the purpose of acquiring the Securities. Such Purchaser is not
a registered broker-dealer under Section 15 of the Exchange Act.

 

(d) Experience of such Purchaser. Such Purchaser, either alone or together with
its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.

 

(f) General Solicitation. Such Purchaser is not purchasing the Securities as a
result of any advertisement, article, notice or other communication regarding
the Securities published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement.

 

(h) Company Information. Such Purchaser has read the SEC Reports and has had an
opportunity to discuss the Company’s business, management and financial affairs
with directors, officers and management of the Company and has had the
opportunity to review the Company’s operations and facilities. Such Purchaser
has also had the opportunity to ask questions of and receive answers from, the
Company and its management regarding the terms and conditions of this
investment.

 

(i) Residence. If such Purchaser is an individual, then such Purchaser resides
in the state or province identified in the address of such Purchaser set forth
on the signature page hereto; if such Purchaser is a partnership, corporation,
limited liability company or other entity, then the office or offices of such
Purchaser in which its investment decision was made is located at the address or
addresses of such Purchaser set forth on the signature page hereto.

 

(j) Rule 144. Such Purchaser acknowledges and agrees that the Securities are
“restricted securities” as defined in Rule 144 promulgated under the Securities
Act as in effect from time to time and must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available.

 

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Such Purchaser has been advised or is aware of the provisions of Rule 144, which
permits limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things: the
availability of certain current public information about the Company, the resale
occurring following the required holding period under Rule 144 and the number of
shares being sold during any three-month period not exceeding specified
limitations.

 

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

 

4.1     Transfer Restrictions.

 

(a) The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than
pursuant to an effective registration statement, to the Company or to an
Affiliate of a Purchaser, the Company may require the transferor thereof to
provide to the Company an opinion of counsel selected by the transferor, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act. As a condition of transfer, any
such transferee shall agree in writing to be bound by the terms of this
Agreement and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.

 

(b) Each Purchaser agrees to the imprinting, so long as is required by this
Section 4.1(b), of the following legend on any certificate evidencing
Securities:

 

[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON
EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

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The Company acknowledges and agrees that a Purchaser may from time to time
pledge pursuant to a bona fide margin agreement or grant a security interest in
some or all of the Securities and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. If required by the Company’s transfer agent in
order to effect a pledge, the Company shall cause its counsel, at no cost to the
Purchaser, to issue an opinion or letter of counsel to the Company’s transfer
agent. Further, no notice shall be required of such pledge. At the appropriate
Purchaser’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in connection with a pledge or transfer of the Securities, including the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) of the Securities Act or other applicable provision of the Securities
Act to appropriately amend the list of Selling Stockholders thereunder.

 

(c) Certificates evidencing Underlying Shares shall not contain any legend
(including the legend set forth in Section 4.1(b)): (i) while a registration
statement (including the Underlying Shares Registration Statement) covering the
resale of such security is effective under the Securities Act, or (ii) following
any sale of such Underlying Shares pursuant to Rule 144, or (iii) if such
Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such
legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the Staff of
the Commission); provided, however, in connection with the issuance of the
Underlying Shares, each Purchaser, severally and not jointly with the other
Purchasers, hereby agrees to adhere to and abide by all prospectus delivery
requirements under the Securities Act and Commission Regulations. If all or any
portion of a Debenture or Warrant is converted or exercised (as applicable) at a
time when there is an effective registration statement to cover the resale of
the Underlying Shares, or if such Underlying Shares may be sold under Rule
144(k) or if such legend is not otherwise required under applicable requirements
of the Securities Act (including judicial interpretations thereof) then such
Underlying Shares shall be issued free of all legends. The Company agrees that
following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c), it will, no later than three Trading Days
following the delivery by a Purchaser to the Company or the Company’s transfer
agent of a certificate representing Underlying Shares issued with a restrictive
legend, deliver or cause to be delivered to such Purchaser a certificate
representing such shares that is free from all restrictive and other legends.
The Company may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer set
forth in this Section.

 

(d) In addition to such Purchaser’s other available remedies, the Company shall
pay to a Purchaser, in cash, as liquidated damages and not as a penalty, for
each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Company’s transfer agent) delivered
for removal of the restrictive legend and subject to this Section 4.1(c), $10
per Trading Day (increasing to $20 per Trading Day 3 Trading Days after such
damages have begun to accrue) for each Trading Day after such third Trading Day
until such certificate is delivered without

 

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a legend. Notwithstanding anything herein to the contrary, in the event a
Purchaser is entitled to collect liquidated damages hereunder and liquidated
damages pursuant to Sections 4(b)(ii) and/or (iii) of the Debenture, the
Purchaser shall be limited to collect, at its option, of such remedies, only one
such remedy on any given occasion.

 

4.2    Acknowledgment of Dilution.    The Company acknowledges that the issuance
of the Securities may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim that the Company may
have against any Purchaser or Purchasers.

 

4.3    Furnishing of Information.    As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. Upon the request
of any Purchaser, the Company shall deliver to such Purchaser a written
certification of a duly authorized officer as to whether it has complied with
the preceding sentence. As long as any Purchaser owns Securities, if the Company
is not required to file reports pursuant to such laws, it will prepare and
furnish to each Purchaser and make publicly available in accordance with Rule
144(c) such information as is required for each Purchaser to sell the Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.

 

4.4    Integration.    The Company shall not, and shall use its best efforts to
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers, or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Principal Market.

 

4.5    Reservation and Listing of Securities.

 

(a) The Company shall maintain a reserve from its duly authorized shares of
Common Stock for issuance pursuant to the Transaction Documents in such amount
as may be required to fulfill its obligations in full under the Transaction
Documents.

 

(b) If, on any date, based on the Set Price on such date, the number of
authorized but unissued (and otherwise unreserved) shares of Common Stock is
less than 120% of (i) the Actual Minimum on such date, minus (ii) the number of
shares of Common Stock previously issued pursuant to the Transaction Documents,
then the Board of Directors of the Company shall use commercially reasonable
efforts to amend the Company’s certificate or articles of incorporation to
increase the number of authorized but unissued shares of Common Stock to at
least 120% of the Actual Minimum at such

 

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time (minus the number of shares of Common Stock previously issued pursuant to
the Transaction Documents), as soon as possible and in any event not later than
the 75th day after such date, provided that the Company shall not be required at
any time to authorize a number of shares of Common Stock greater than the
maximum remaining number of shares that could be issued after such term pursuant
to the Transaction Documents after giving effect to all potential anti-dilution
adjustments.

 

(c) The Company shall: (i) in the time and manner required by the Principal
Market, prepare and file with such Principal Market an additional shares listing
application covering a number of shares of Common Stock at least equal to the
Actual Minimum on the date of such application, (ii) take all steps necessary to
cause such shares of Common Stock to be approved for listing on the Principal
Market as soon as possible thereafter, (iii) provide to any Purchaser evidence
of such listing upon request from such Purchaser, and (iv) maintain the listing
of such Common Stock on such Principal Market or another Principal Market. In
addition, the Company shall, at its next regularly scheduled annual or special
meeting of shareholders, but in no event later than June 30, 2003, include a
proposal for shareholder approval which provides for soliciting Shareholder
Approval (as defined in the Debenture), with the recommendation of the Company’s
Board of Directors that such proposal be approved, and the Company shall solicit
proxies from its shareholders in connection therewith in the same manner as all
other management proposals in such proxy statement and all management-appointed
proxyholders shall vote their proxies in favor of such proposal. The Company
represents and warrants to each Purchaser, as a material inducement to each
Purchaser to purchase the Debentures and Warrants, that it has binding,
irrevocable agreements from each of Richard Hollis, Paul Bagley, Sal Zizza, Eric
Loumeau, Bob Marsella and Bob Weber to vote all shares of Common Stock over
which they have voting rights, respectively, in favor of such resolution.

 

4.6    Conversion and Exercise Procedures.    The form of Election to Purchase
included in the Warrants and the form of Conversion Notice included in the
Debentures set forth the totality of the procedures required of a Purchaser in
order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of a Purchaser to
exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

 

4.7    Future Financings.    From the date hereof until 30 days after the
Effective Date, other than as contemplated by this Agreement or as consented to
in writing by each Purchaser, neither the Company nor any Subsidiary (with
respect to Capital Shares Equivalents) shall (i) incur, issue, create,
guarantee, assume or otherwise become liable on account of any indebtedness,
except in the ordinary course of business, or (ii) increase any amounts owing or
to which such Person is liable under any existing obligations, except in the
ordinary course of business, or (iii) issue or sell any Capital Shares or
Capital Shares Equivalents or (iv) issue any Capital Shares or Capital Shares
Equivalents in connection with an investment in the Company by, or a joint
venture, merger, consolidation, acquisition, licensing arrangement or business

 

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partnership except to (a) another Person or Persons, which such other Person(s)
is commonly recognized to be a non-financial participant in the pharmaceutical
industry or any sub-aspect thereof, including, without limitation, the conduct
of clinical trials, or (b) to another Person, in any event where from the legal
documentation thereof or other publicly available information, it is manifest
that the primary purpose of such transaction from the perspective of such other
Person is other than to take an equity position in the Company. Notwithstanding
anything to the contrary herein, the Section 4.7 shall not preclude the Company
from the issuance of Capital Shares or Capital Shares Equivalents (a) in
connection with the granting or extension of existing options to employees,
officers and directors of the Company pursuant to any stock option plan duly
adopted by the Company or to the issuance of Common Stock upon exercise of such
options or (b) up to 150,000 shares of Common Stock or Capital Shares
Equivalents, in the aggregate, to consultants or advisors to the Company for
services to be rendered to the Company by such consultants or advisors, or (c)
upon the conversion or exercise of the Debentures or the Warrants or the Cowen
Warrants (as defined in the Registration Rights Agreement), or (d) upon the
exercise of or conversion of any Capital Share Equivalents, options or warrants
issued and outstanding on the Original Issue Date (including the Warrants issued
to the Holders and the Cowen Warrants), (e) in connection with a leasing
arrangement from a bank or similar financial institution approved by the
Company’s Board of Directors or (f) at a price, or conversion or exercise price
(as the case may be), that exceeds the initial Set Price of the Debentures. In
addition, until the earlier of the Maturity Date or the date that all of the
Debentures have been converted (and all shares of Common Stock issuable upon
such conversion have in fact been delivered to the persons then entitled
thereto), the Company shall not (I) issue or sell any Capital Shares Equivalents
for which the conversion or exercise price of such securities is determined by
the market price of the Company’s Common Stock at the time of such conversion or
exercise, or (II) grant or permit to be created nor allow or suffer any
Subsidiary to grant or permit to be created any security interest in any assets
of the Company or any Subsidiary in favor of any Person, other than (A) purchase
money security interests secured only by the assets purchased directly in
connection with the grant of such security interest, (B) security interests in
the Company’s accounts receivable and/or inventory, (C) security interests in
any or all of the assets of the Company in connection with a loan or line of
credit extended to the Company by a major national or international diversified
pharmaceutical company or pharmaceutical products distributor, or (D) if the
VWAP of the Common Stock has been at least 150% of the Set Price for at least 30
consecutive Trading Days and the Underlying Shares Registration Statement is
then effective, a security interest in the Company’s Intellectual Property
Rights; in each case except with the prior written consent of the then-holders
of any outstanding Debentures at the time such security interest is sought to be
created. In addition, unless Shareholder Approval has been sought and voted on
in accordance with Section 4.5(c), the Company shall not make any issuance
whatsoever of Capital Shares or Capital Shares Equivalents which would cause any
adjustment of the Set Price (other than pursuant to Section 4(c)(ii) of the
Debentures) or cause any adjustment of the Warrant Exercise Price pursuant to
Section 11(b) of the Warrants. For clarity, if a resolution for Shareholder
Approval is presented in accordance with Section 4.5(c), voted on and rejected
by the Company’s shareholders, then the Company shall thereafter be permitted to
make an issuance of Capital Shares or Capital Shares Equivalents which would
cause an adjustment of the Set Price or the Warrant Exercise Price without
causing a breach of this Agreement or, in and of itself, constituting an Event
of Default under any Debenture.

 

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4.8    Participation in Future Financing.    From the date hereof until the
earlier of one year from the Closing Date or the date Debentures held by a
Purchaser are no longer outstanding, if the Company intends to effect a private
placement of Capital Shares or Capital Shares Equivalents (a “Subsequent
Financing”) the Company shall deliver to each such Purchaser a written notice
(the “Subsequent Financing Notice”) of its intention to effect such Subsequent
Financing, which Subsequent Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Financing is
proposed to be effected, and attached to which shall be a term sheet or similar
document relating thereto. Such Purchaser shall have the right to participate in
such transaction pursuant to the terms set forth herein provided such Purchaser
shall notify the Company by 4:30 p.m. (New York City time) on the fifth (5th)
Trading Day after delivery to the Purchaser of the Subsequent Financing Notice
of its agreement to provide (or to cause its designee to provide), subject to
completion of mutually acceptable documentation substantially reflecting the
terms described in the Subsequent Financing Notice, all or part of such
Purchaser’s Pro-Rata Share (as defined below) of the Participation Amount
(defined below) on substantially the terms set forth in the Subsequent Financing
Notice and such term sheet or similar document. For purposes of the foregoing,
“Pro Rata Share” means a fraction, the numerator of which is the principal
amount of Debentures then owned by such Purchaser and the denominator of which
is the total principal amount of Debentures then outstanding. “Participation
Amount” means the lesser of (i) 25% of the dollar amount of such Subsequent
Financing or (ii) such lesser percentage of such Subsequent Financing as is
derived by multiplying 25% by a fraction the numerator of which is the principal
amount of Debentures then outstanding and the denominator of which is
$10,000,000. To the extent an eligible Purchaser shall fail to so notify the
Company of its agreement to participate in such Subsequent Financing as
aforesaid, the Company may effect the remaining portion of such Subsequent
Financing on the terms and to the Persons substantially as set forth in the
Subsequent Financing Notice; provided that the Company must provide the eligible
Purchasers with a second Subsequent Financing Notice, and each eligible
Purchaser will again have the right of first refusal set forth above in this
Section 4.8, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice with substantially the Persons identified in
the Subsequent Financing Notice. A “Subsequent Financing” shall not in any event
include any issuances of securities (a) pursuant to a primary offering on a
registration statement filed under the Securities Act (other than a primary
offering of registered securities off a shelf registration filed on Form S-3),
or (b) any issuance which is excepted from the restrictive provisions of Section
4.7 by its terms.

 

4.9    Securities Laws Disclosure; Publicity.    The Company shall, by 8:30 am
Eastern Time on the Trading Day after the Closing Date, file a Current Report on
Form 8-K disclosing all material terms of the transactions contemplated hereby
and attaching the Transaction Documents as exhibits. The Company will consult
with each Purchaser prior to issuing any press releases with respect to the
transactions contemplated hereby. Notwithstanding the foregoing, prior to the
filing of the registration statement filed pursuant to the Registration Rights
Agreement and filings related thereto, the Company shall not publicly disclose
the name of any Purchaser, or include the name of any Purchaser in any filing
with the Commission or any regulatory agency or Principal Market, without the
prior written consent of such Purchaser,

 

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except to the extent such disclosure is required by law or Principal Market
regulations, in which case the Company shall provide such Purchaser with prior
notice of such disclosure.

 

4.10    Non-Public Information.    The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.

 

4.11    Use of Proceeds.    The Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company’s debt (other than payment of trade
payables, capital lease obligations, and accrued expenses in the ordinary course
of the Company’s business and prior practices), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation. Prior to
the receipt of Shareholder Approval, the Company shall not declare or pay any
cash dividend on its shares of Common Stock while any Debenture remains
outstanding.

 

4.12    Reimbursement.    If any Purchaser becomes involved in any capacity in
any Proceeding by or against any Person who is a stockholder of the Company,
solely as a result of such Purchaser’s acquisition of the Securities under this
Agreement and without causation by any other activity, obligation, condition or
liability pertaining to such Purchaser and not to the transactions contemplated
by this Agreement, the Company will reimburse such Purchaser, to the extent such
reimbursement is not provided for in Section 4.13, for its reasonable legal and
other expenses (including the cost of any investigation, preparation and travel
in connection therewith) incurred in connection therewith, as such expenses are
incurred. The reimbursement obligations of the Company under this paragraph
shall be in addition to any liability which the Company may otherwise have,
shall extend upon the same terms and conditions to any Affiliates of any
Purchaser who are actually named in such action, proceeding or investigation,
and partners, directors, agents, employees and controlling persons (if any), as
the case may be, of such Purchaser and any such Affiliate, and shall be binding
upon and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, each Purchaser and any such Affiliate and any
such Person. The Company also agrees that neither any Purchaser nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement.

 

4.13    Indemnification of Purchasers.    Subject to the provisions of this
Section 4.13, the Company will indemnify and hold each Purchaser and their
respective directors, officers, shareholders, partners, employees and agents
(each, a “Purchaser Party”) harmless from any and all losses, liabilities,
obligations, claims, contingencies, damages, costs and expenses, including all
judgments, amounts paid in settlements, court costs and reasonable attorneys’
fees and costs of investigation that any such Purchaser Party may suffer or
incur as a result of or relating to any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents. If any action shall be brought against any
Purchaser Party in respect of which indemnity may be sought pursuant to this
Agreement,

 

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such Purchaser Party shall promptly notify the Company in writing, and the
Company shall have the right to assume the defense thereof with counsel of its
own choosing. Any Purchaser Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Purchaser Party
except to the extent that (i) the employment thereof has been specifically
authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Company and
the position of such Purchaser Party. The Company will not be liable to any
Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party
effected without the Company’s prior written consent, which shall not be
unreasonably withheld or delayed; or (ii) to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to any Purchaser Party’s
breach of any of the representations, warranties, covenants or agreements made
by the Purchasers in this Agreement or in the other Transaction Documents.

 

4.14    Shareholders Rights Plan.    No claim will be made or enforced by the
Company or any other Person that any Purchaser is an “Acquiring Person” under
the Company’s Shareholder Rights Plan as presently in effect or as it may be
amended or replaced in the future or in any way could be deemed to trigger the
provisions of such plan solely by virtue of receiving Securities under the
Transaction Documents.

 

ARTICLE V

MISCELLANEOUS

 

5.1    Termination.    This Agreement may be terminated by the Company or any
Purchaser, by written notice to the other parties, if the Closing has not been
consummated by the tenth business day following the date of this Agreement;
provided that no such termination will affect the right of any party to sue for
any breach by the other party (or parties).

 

5.2    Fees and Expenses.    The Company has agreed to reimburse up to $30,000
to Midsummer Investment Ltd. (of which $15,000 has been received and the balance
incurred will be paid by the Company as directed by Midsummer Investment Ltd. at
Closing) as reimbursement for its legal, administrative and due diligence fees
and expenses incurred as lead investor in the transactions contemplated by the
Transaction Documents. Except as expressly set forth in the Transaction
Documents to the contrary, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement. The Company shall pay all transfer
agent fees, stamp taxes and other taxes and duties levied in connection with the
issuance of any Securities.

 

5.3    Entire Agreement.    The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

 

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5.4    Notices.    Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified on the signature pages hereto prior to 4:00 p.m. (New York City time)
on a Trading Day, (b) the next Trading Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than 4:00
p.m. (New York City time) on any Trading Day, or (c) the Trading Day following
the date of mailing, if sent by U.S. nationally recognized overnight courier
service. The addresses for such notices and communications are those set forth
on the signature pages hereof, or such other address as may be designated in
writing hereafter, in the same manner, by such Person.

 

5.5    Amendments; Waivers.    No provision of this Agreement may be waived or
amended as to any Purchaser except in a written instrument signed, in the case
of an amendment, by the Company and such Purchaser or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.

 

5.6    Construction.    The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by each party to express their mutual intent, and no
rules of strict construction will be applied against any party.

 

5.7    Successors and Assigns.    This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser. Any Purchaser may assign
its rights under this Agreement and the Registration Rights Agreement to any
Person to whom such Purchaser assigns or transfers any Securities.

 

5.8    No Third-Party Beneficiaries.    This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Sections 4.13.

 

5.9    Governing Law; Venue; Waiver of Jury Trial.    All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of conflicts of
law thereof. Each party hereby irrevocably submits to the exclusive jurisdiction
of the state and federal courts sitting in the City of New York, borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to

 

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the jurisdiction of any such court, that such suit, action or proceeding is
improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law. The parties
hereby waive all rights to a trial by jury. If either party shall commence an
action or proceeding to enforce any provisions of this Agreement, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

 

5.10    Survival.    The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery, exercise and/or
conversion of the Securities, as applicable.

 

5.11    Execution.    This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

 

5.12    Severability.    If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

 

5.13    Rescission and Withdrawal Right.    Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights, provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such conversion or exercise notice.

 

5.14    Replacement of Securities.    If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably

 

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satisfactory to the Company of such loss, theft or destruction and customary and
reasonable indemnity, if requested. The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement Securities.

 

5.15    Remedies.    In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate. Without limiting the generality of the
foregoing, the Company expressly agrees that its breach of the next-to-last last
sentence of Section 4.7 would cause each Purchaser irreparable harm, and
consents to the granting of injunctive relief by any court having jurisdiction
to preclude any such issuance of securities.

 

5.16    Payment Set Aside.    To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

 

5.17    Usury.    To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the “Maximum Rate”),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate of interest applicable to the
Transaction Documents from the effective date forward, unless such application
is precluded by applicable law. If under any circumstances whatsoever, interest
in excess of the Maximum Rate is paid by the Company to any Purchaser with
respect to indebtedness evidenced by the Transaction Documents, such excess
shall be applied by such Purchaser to the unpaid

 

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principal balance of any such indebtedness or be refunded to the Company, the
manner of handling such excess to be at such Purchaser’s election.

 

5.18    Independent Nature of Purchasers’ Obligations and Rights.    The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser was introduced to the Company by SG Cowen Securities
Corporation, which has acted solely as agent for the Company and not for any
Purchaser. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through Purchaser’s Counsel. Purchaser’s
Counsel does not represent all of the Purchasers but only Midsummer Investment,
Ltd. The Company has elected to provide all Purchasers with the same terms and
Transaction Documents for the convenience of the Company and not because it was
required or requested to do so by the Purchasers.

 

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5.19    Liquidated Damages.    The Company’s obligations to pay any liquidated
damages or other amounts owing under the Transaction Documents is a continuing
obligation of the Company and shall not terminate until all unpaid liquidated
damages and other amounts have been paid notwithstanding the fact that the
instrument or security pursuant to which such liquidated damages or other
amounts are due and payable shall have been canceled.

 

***********************

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

 

 

 

   

HOLLIS-EDEN PHARMACEUTICALS, INC.

   

By:

 

/s/    Eric J. Loumeau            

--------------------------------------------------------------------------------

       

Name: Eric J. Loumeau

       

Title: Vice President, General Counsel

                           

Address for Notice:

4435 Eastgate Mall, Suite 400

San Diego, CA 92121

Attn: Daniel Burgess, C.F.O. and

Eric Loumeau, V.P. and General Counsel

Tel: (858) 587-9333

Fax: (858) 558-6470

                   

With a copy to:

     

Cooley Godward LLP

       

4401 Eastgate Mall

       

San Diego, California 92121

       

Attn: Thomas A. Coll, Esq.

Tel: (858) 550-6013

Fax: (858) 550-6420

         

Wire Instructions:

     

attached as Annex A

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

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