Document:

ex4-1

 

Exhibit 4.1

CERTIFICATE OF DESIGNATIONS,

PREFERENCES AND RIGHTS

OF

SERIES J PREFERRED STOCK

OF

HEARX LTD.

(PURSUANT TO SECTION 151 OF THE

DELAWARE GENERAL CORPORATION LAW)

     HEARx Ltd., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the “Company”), hereby certifies that
the following resolutions were adopted by the Board of Directors of the Company
pursuant to authority of the Board of Directors as required by Section 151 of
the Delaware General Corporation Law.

     RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of the Company (the “Board of Directors” or the “Board”) in
accordance with the provisions of the Amended and Restated Certificate of
Incorporation of the Company, the Board of Directors hereby authorizes a series
of the Company’s previously authorized Preferred Stock, par value $1.00 per
share (the “Preferred Stock”), and hereby states the designations and number of
shares and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:

SERIES J PREFERRED STOCK:

     Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as Series J Preferred Stock (the “Preferred Stock”)
and the number of shares so designated shall be 233 (which shall not be subject
to increase or modification without the consent of the holders of the Preferred
Stock (each, a “Holder” and collectively, the “Holders”)). Each share of
Preferred Stock shall have a par value of $1.00 per share and a stated value
equal to the sum of $10,000 plus all unpaid and accrued dividends to the date
of determination to the extent not paid in cash in accordance with the terms
hereof (the “Stated Value”).

     Section 2. Dividends. Holders shall be entitled to receive, out of funds
legally available therefor, and the Company shall pay, cumulative dividends at
the rate per share (as a percentage of the Stated Value per share) of 6% per
annum, payable on the last day of each of the Company’s fiscal quarters (each,
a “Dividend Date”), in cash. Dividends on the Preferred Stock shall be
calculated on the basis of a 360-day year, shall accrue daily commencing on the
Original Issue Date (as defined in Section 7), and shall be deemed to accrue
from such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the
payment of dividends. Dividends earned but not paid on the applicable Dividend
Date shall bear simple interest calculated at a rate of 18% per annum (or the
maximum rate allowed by law, if lower) from such Dividend Date to the date on
which the

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dividends are actually paid; such interest shall be paid in cash unless the
Holders and the Company agree in writing to pay such amounts in Common Stock.

     Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights. So
long as any shares of Preferred Stock are outstanding, the Company shall not,
without the affirmative vote of the Holders of a majority of the shares of the
Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Preferred Stock or alter or amend this
Certificate of Designation, (b) authorize or create any class of stock ranking
as to dividends or distribution of assets upon a Liquidation (as defined in
Section 4) senior to or otherwise pari passu with the Preferred Stock, (c)
amend its certificate or articles of incorporation or other charter documents
so as to affect adversely any rights of the Holders, or (d) enter into any
agreement with respect to the foregoing.

     Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a “Liquidation”), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each share of Preferred Stock an amount
equal to the Stated Value per share (plus any accrued and unpaid dividends
thereon) before any distribution or payment shall be made to the holders of any
Junior Securities but after any payment or distribution to be made to the
holders of any Senior Securities (as defined in Section 7), and if the assets
of the Company shall be insufficient to pay in full such amounts and amounts
payable to the holders of shares pari passu with the Preferred Stock ( “Pari
Passu Securities”), then the entire assets to be distributed to the Holders and
holders of Pari Passu Securities, shall be distributed among the Holders and
holders of Pari Passu Securities, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon
were paid in full. A sale, conveyance or disposition of 50% or more of the
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than 50% of the voting power of
the Company is disposed of, or a consolidation or merger of the Company with or
into any other company or companies into one or more companies not wholly owned
by the Company shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 6. The Company shall mail written notice
of any Liquidation not less than 30 days prior to the payment date stated
therein to each record Holder.

     Section 5. Redemption at the Company’s Option. At any time and from time
to time, the Company shall have the right, exercisable at its sole option, to
redeem all or a portion of the Preferred Stock then held by a Holder for a
redemption price equal to the Optional Redemption Amount (as defined in Section
7). At least five (5) business days prior to the date on which the redemption
will take place (the “Redemption Date”), the Company shall mail or fax written
notice of such redemption to the Holder at the address set forth on the
Company’s records, which notice shall specify (i) the number of shares of
Preferred Stock to be redeemed, (ii) the date fixed for redemption, (iii) the
Optional Redemption Amount, and (iv) instructions for delivery of certificates
representing the Preferred Stock duly endorsed for transfer to the Company.
Promptly following receipt of the stock certificates, the Corporation shall
pay, by wire transfer to the person designated in writing to the Company by the
Holder, the Optional Redemption Amount for the

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shares subject to such redemption. The redemption of the Preferred Stock shall
be deemed to have occurred on the date that the applicable Optional Redemption
Amount is received by the Holder regardless of the date on which the stock
certificates are actually exchanged for the Optional Redemption Amount.

     Section 6. Redemption Upon Change of Control. Upon the occurrence of a
Change of Control Transaction, each Holder shall (in addition to all other
rights it may have hereunder or under applicable law), have the right,
exercisable at the sole option of such Holder, to require the Company to redeem
all or a portion of the Preferred Stock then held by such Holder for a
redemption price equal to the Change of Control Redemption Amount (as defined
in Section 7). The Change of Control Redemption Amount shall be due and
payable within ten trading days of the date on which the notice for the payment
therefor is provided by a Holder (the “Change of Control Redemption Date”). If
the Company fails to pay the Change of Control Redemption Amount hereunder in
full pursuant to this Section on the date such amount is due in accordance with
this Section, the Company will pay interest thereon at a rate of 18% per annum
(or such lesser rate permitted by applicable law), accruing daily from such
date until the Change of Control Redemption Amount, plus all such interest
thereon, is paid in full.

     Section 7. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

     “Change of Control Redemption Amount” for each share of Preferred Stock
means 120% of the Stated Value thereof plus accrued and unpaid dividends from
the Original Issue Date to the Change of Control Redemption Date.

     “Change of Control Transaction” means the occurrence, only upon or after
the approval thereof by the Board of Directors, of any of (i) an acquisition
after the date hereof by an individual or legal entity or “group” (as described
in Rule 13d-5(b)(1) promulgated under the Exchange Act) of control (whether
through legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of 50% of the voting securities of the
Company (provided, however, that in no event shall the transaction between the
Company and Helix Hearing Care of America Corp. be deemed a “Change of Control
Transaction”), (ii) the merger of the Company into another entity that is not
wholly owned by the Company, or pursuant to which the Company is not the
surviving entity, consolidation or sale of 50% or more of the assets of the
Company in one or a series of related transactions, or (iii) the execution by
the Company of an agreement to which the Company is a party or by which it is
bound, providing for any of the events set forth above in (i) or (ii).

     “Commission” means the Securities and Exchange Commission.

     “Common Stock” means the Company’s common stock, $.10 par value per share,
and stock of any other class into which such shares may hereafter have been
reclassified or changed.

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

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     “Junior Securities” means the Common Stock and all other equity securities
of the Company other than those securities that are outstanding on the Original
Issue Date and which are explicitly senior in rights or liquidation preference
to the Preferred Stock.

     “Optional Redemption Amount” for each share of Preferred Stock means the
Stated Value thereof plus accrued and unpaid dividends from the Original Issue
Date to the Redemption Date.

     “Original Issue Date” shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.

     “Person” means a corporation, an association, a partnership, an
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.

     “Exchange Agreement” means the Exchange Agreement, dated as of the
Original Issue Date, to which the Company and the original Holder are parties,
as amended, modified or supplemented from time to time in accordance with its
terms.

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

     “Senior Securities” means the shares of the Company’s 1998 Convertible
Preferred Stock issued by the Company and outstanding on the Original Issue
Date.

     “Transaction Documents” shall have the meaning set forth in the Exchange
Agreement.

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     IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Company on this December 4, 2001.

	 	 	 
	 	 	
HEARx LTD.
	 
	By:	 	
/s/ Paul A Brown

Paul A. Brown, M.D.

Chairman and Chief Executive Officer

5ex10-1

 

Exhibit 10.1

EXCHANGE AND REDEMPTION AGREEMENT

      This EXCHANGE AND REDEMPTION AGREEMENT (this “Agreement”) is made as of
December 4, 2001 (the “Execution Date”) by and between HEARx Ltd., a Delaware
corporation (the “Company”) and Advantage Fund II Ltd. (the “Investor”).

RECITALS

            A.      Pursuant to a Convertible Preferred Stock Purchase Agreement dated as
of May 9, 2000 (the “Original Purchase Agreement”), the Company issued and sold
to the Investor, and the Investor purchased from the Company, 500 shares of the
Company’s 7% Series I Convertible Preferred Stock, par value $1.00 per share
(the “Original Preferred Stock”), which are convertible into shares of the
Company’s common stock, par value $.10 per share (the “Common Stock”), and
warrants to purchase 203,390 shares of Common Stock (the “Original Warrants”).

            B.      Simultaneous with the execution of the Purchase Agreement, the Company
and the Investor entered into a Registration Rights Agreement dated as of May
9, 2000 (the “Original Registration Rights Agreement”).

            C.      The Investor currently holds 418 shares of the Original Preferred Stock
and all of the Original Warrants and 129,470 shares of Common Stock (the
“Existing Common Stock”) which were issued upon the exercise of certain shares
of the Original Preferred Stock (collectively, the “Existing Investor
Securities”).

            D.      The Investor and the Company desire that (i) the Investor exchange
certain of its Existing Investor Securities for shares of the Company’s newly
designated non-convertible preferred stock and shares of Common Stock (the
“Exchange”) and (ii) the Company redeem, for cash, certain other of the
Existing Investor Securities, all upon the terms and conditions set forth
herein.

            E.      The Exchange is intended to qualify as a private placement transaction
under Section 4(2) of the Securities Act of 1933, as amended (the “Securities
Act”).

AGREEMENT

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

 

 

ARTICLE I

THE EXCHANGE

            1.1      Closing. Subject to the terms and conditions set forth in this
Agreement, the Company and the Investor shall redeem 185 shares of Original
Preferred Stock and the Original Warrants for $1,951,136.36 in cash (the
“Cash”), and exchange 233 shares of Original Preferred Stock for (i) 233 shares
of preferred stock described in Section 1.4 below (the “Exchange Preferred
Stock”) and (ii) 470,530 shares of Common Stock (the “Exchange Common Stock”
and, together with the Exchange Preferred Stock, the “Exchange Securities”).
The closing of the Exchange (the “Closing”) shall take place at the offices of
Bryan Cave LLP, 700 Thirteenth Street, N.W., Washington, DC 20005, on December
14, 2001 or such earlier date as the parties shall agree (the “Closing Date”).

            1.2      Exchange. On the Execution Date, the Investor shall deliver to or as
directed by the Company an executed copy of this Agreement and the Company
shall deliver to the Investor an executed copy of this Agreement and shall pay
to the Investor $500,000 (“Partial Cash Payment”). At the Closing, (i) the
Investor shall (A) deliver to or as directed by the Company (1) an executed
copy of the escrow agreement in the form attached hereto as Exhibit A (the
“Escrow Agreement”), the release agreement in the form attached hereto as
Exhibit B (the “Release”) and the registration rights agreement in the form
attached hereto as Exhibit C (the “Registration Rights Agreement”), (2)
certificates representing 418 shares of the Original Preferred Stock, and (3)
the Original Warrants, and (B) deposit with the escrow agent pursuant to the
Escrow Agreement, by electronic delivery through DTC, the Existing Common
Stock, and (ii) the Company shall deliver to the Investor (1) an executed copy
of the Escrow Agreement, the Release and the Registration Rights Agreement, (2)
the legal opinion of Bryan Cave LLP in the form of Exhibit D, (3) the Cash less
the Partial Cash Payment, (4) stock certificates, registered in the name of the
Investor, representing the Exchange Preferred Stock, and (5) four stock
certificates in denominations of 100,000 each and one stock certificate in the
denomination of 70,530 evidencing the Exchange Common Stock (which shall be
delivered to the escrow agent pursuant to the terms of the Escrow Agreement).

            1.3      Delivery of Cash on Execution Date and at Closing. The Cash payable
by the Company on the Execution Date and at the Closing shall be paid in United
States dollars in immediately available funds in cash or by wire transfer to an
account designated in writing by the Investor for such purpose.

            1.4      Terms of Exchange Preferred Stock. The Exchange Preferred Stock shall
have the rights, preferences and privileges set forth in Exhibit E, and shall
be incorporated into a Certificate of Designation (the “Certificate of
Designation”) to be filed prior to the Closing by the Company with the
Secretary of State of Delaware, in form and substance mutually agreed to by the
parties.

            1.5      Original Agreements. Simultaneous with the Closing, the Original
Purchase Agreement and the Original Registration Rights Agreement shall be
automatically

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terminated in their entirety and shall be of no further force or effect.
Effective on the date of the Closing, all shares of Original Preferred Stock
and all Original Warrants shall be canceled.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

            2.1      The Investor hereby represents and warrants to the Company as follows
on the Execution Date and the Closing Date:

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

                       (b)      Ownership of Existing Investor Securities. The Investor is the sole
owner of all of the Existing Investor Securities free and clear of any and all
liens, claims and encumbrances of any kind.

                       (c)      Investment Intent. The Investor is acquiring the Exchange Preferred
Stock and the Exchange Common Stock as principal for its own account for
investment purposes only and not with a view to or for distributing or
reselling such Exchange Securities or any part thereof. The Investor does not
have any agreement or understanding, directly or indirectly, with any person or
entity to distribute Exchange Securities.

                       (d)      Investor Status. At the time the Investor was offered the Exchange
Securities, it was, and at the date hereof it is, an “accredited investor” as
defined in Rule 501(a) under the Securities Act. The Investor is not a
registered NASD broker-dealer.

                       (e)      Investor Experience. The Investor 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 Exchange
Securities, and has so evaluated the merits and risks of such investment.

                       (f)      Ability of Investor to Bear Risk of Investment. The Investor is able
to bear the economic risk of an investment in the Exchange Securities and, at
the present time, is able to afford a complete loss of such investment.

                       (g)      Access to Information. The Investor acknowledges that it has reviewed
the Disclosure Materials (as defined below) and has been afforded (i) the
opportunity to

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ask such questions as it has deemed necessary of, and to receive answers
from, representatives of the Company concerning the terms and conditions of the
offering of the Exchange Securities and the merits and risks of investing in
the Exchange Securities; (ii) access to information about the Company and the
Company’s financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment;
and (iii) the opportunity to obtain such additional information which the
Company possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment and to verify the accuracy and completeness of the information
contained in the Disclosure Materials. Neither such inquiries nor any other
investigation conducted by or on behalf of the Investor or its representatives
or counsel shall modify, amend or affect the Investor’s right to rely on the
truth, accuracy and completeness of the Disclosure Materials and the Company’s
representations and warranties contained herein.

                       (h)      General Solicitation. The Investor is not purchasing the Exchange
Securities as a result of or subsequent to any advertisement, article, notice
or other communication regarding the Exchange 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.

                       (i)      Ownership of Common Stock. The Investor does not have a short
position in the Common Stock.

                       (j)      Reliance. The Investor understands and acknowledges that (i) the
Exchange Securities are being offered and sold to it without registration under
the Securities Act in a transaction that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption
depends in part on, and the Company will rely upon the accuracy and
truthfulness of, the foregoing representations, and the Investor hereby
consents to such reliance.

            2.2      The Company hereby makes the following representations and warranties
to the Investor on the Execution Date and on the Closing Date:

                       (a)      Organization and Qualification. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
The Company has only those subsidiaries identified in Schedule 2.2 attached
hereto. The Company is duly qualified to do business and is in good standing
as a foreign corporation 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, (x) adversely affect the
legality, validity or enforceability of the Exchange Securities or any of the
Transaction Documents, (y) have or result in a material adverse effect on the
results of operations, assets or condition (financial or otherwise) of the
Company, or (z) adversely impair the Company’s ability to perform fully on a
timely basis its obligations under any of the Transaction Documents (any of
(x), (y) or (z), a “Material Adverse Effect”).

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                       (b)      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 thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company. Each of the Transaction Documents has been duly executed by the
Company and, when delivered (or filed, in the case of the Certificate of
Designation) 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.

                       (c)      Capitalization. The number of authorized, issued and outstanding
capital stock of the Company is set forth in Schedule 2.2. No shares of Common
Stock are entitled to preemptive or similar rights, nor is any holder of the
Common Stock entitled to preemptive or similar rights arising out of any
agreement or understanding with the Company by virtue of any of the Transaction
Documents. Except as a result of the purchase and sale of the Exchange
Securities and except as disclosed in Schedule 2.2, 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 or entity any right
to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of Common Stock, or securities or
rights convertible or exchangeable into shares of Common Stock.

                       (d)      Issuance of the Exchange Securities. The Exchange Securities are duly
authorized and, when issued at the Closing and paid for in accordance with the
terms hereof, will be duly and validly issued, fully paid and nonassessable.
The Exchange Preferred Stock, when issued at the Closing, will be duly
authorized, validly issued, fully paid and non-assessable.

                       (e)      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 certificate of incorporation or bylaws
(each as amended through the date hereof), or (ii) except as set forth on
Schedule 2.2, conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation (with
or without notice, lapse of time or both) of any agreement, credit facility,
debt or other instrument or other understanding to which the Company is a party
or by which any property or asset of the Company 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
to which the Company is subject, or by which any property or asset of the
Company is bound or affected; except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, reasonably be expected
to have or result in a Material Adverse Effect.

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                       (f)      No Registration. The offer, issuance, sale and delivery of the
Exchange Securities to the Investor as contemplated hereby are exempt from the
registration requirements of the Securities Act. Neither the Company nor any
person or entity acting on its behalf has taken or is, to the knowledge of the
Company, contemplating taking any action which could subject the offering,
issuance or sale of the Exchange Securities to the registration requirements of
the Securities Act including soliciting any offer to buy or sell the Exchange
Securities by means of any form of general solicitation or advertising.

                       (g)      SEC Documents; Financial Statements. The Company has filed all
reports required to be filed by it under the Exchange Act of 1934, as amended
(the “Exchange Act”), including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (the foregoing materials being
collectively referred to herein as the “SEC Documents” 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 Documents prior to the expiration of any such extension. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, 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. All material agreements to which the Company is a party or to
which the property or assets of the Company are subject have been filed as
exhibits to the SEC Documents as required. The financial statements of the
Company included in the SEC Documents 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 (“GAAP”) applied on a consistent basis during the periods
involved 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. Since December 31, 2000, except as specifically
disclosed in the SEC Documents, (a) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in a
Material Adverse Effect, (b) the Company has not incurred any liabilities
(contingent or otherwise) other than (x) liabilities incurred in the ordinary
course of business consistent with past practice and (y) 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, (c) the
Company has not altered its method of accounting or the identity of its
auditors and (d) the Company has not declared or made any payment or
distribution of cash or other property to its stockholders or officers or
directors (other than in compliance with existing Company stock option plans)
with respect to its capital stock, or purchased, redeemed (or made any
agreements to purchase or redeem) any shares of its capital stock.

                       (h)      Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or

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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 the filing of the Certificate of Designation with the Secretary of State
of Delaware, as set forth on Schedule 2.2 and applicable state Blue Sky filings
and, in all other cases where the failure to obtain such consent, waiver,
authorization or order, or to give such notice or make such filing or
registration could not reasonably be expected to have or result in,
individually or in the aggregate, a Material Adverse Effect (collectively, the
“Required Approvals”).

                       (i)      No Default or Violation. The Company (i) is not in default under or in
violation of (and no event has occurred which has not been waived which, with
notice or lapse of time or both, would result in a default by the Company
under), nor has the Company received notice of a claim that it is in default
under or that it is in violation of, any indenture, loan or credit agreement,
(ii) is in violation of any order of any court, arbitrator or governmental
body, or (iii) is in violation of any statute, rule or regulation of any
governmental authority, in each case of clause (i), (ii) or (iii) above, except
as could not individually or in the aggregate, be reasonably expected to have
or result in a Material Adverse Effect.

                       (j)      Certain Fees . Except for certain compensation payable to Kennebeck
Resources, Inc. by the Company, no fees or commissions 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. The Investor shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by this Agreement. The Company
shall indemnify and hold harmless the Investor, its employees, officers,
directors, agents, and partners, and their respective Affiliates, from and
against all claims, losses, damages, costs (including the costs of preparation
and attorney’s fees) and expenses suffered in respect of any such claimed or
existing fees, as such fees and expenses are incurred.

                       (k)      Form S-3 Eligibility . The Company is eligible to register securities
for resale with the Commission on Form S-3 promulgated under the Securities
Act.

                       (l)      Registration Rights; Rights of Participation. Except as set forth on
Schedule 2.2, 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
which has not been satisfied. No Person has any right of first refusal, right
of participation or any similar right to participate in the transactions
contemplated by this Agreement.

                       (m)      Disclosure. All disclosure provided to the Investor regarding the
Company, its business and the transactions contemplated hereby, including the
Schedules to this Agreement, furnished by or on behalf of the Company are true
and correct 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.

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ARTICLE III

OTHER AGREEMENTS

            3.1      Escrow Arrangement. The shares of Exchange Common Stock issued to the
Investor hereunder and the Existing Common Stock (together, the “Escrowed
Shares”) will be held by the Escrow Agent for so long as required pursuant to
and in accordance with the terms of the Escrow Agreement.

            3.2      Trading Restrictions of Escrowed Shares. Except as otherwise provided
in this Section 3.2 and subject to applicable securities laws, the Investor may
not sell, transfer, encumber or otherwise dispose of any Escrowed Shares. The
restrictions set forth in this Section 3.2 shall apply irrespective of the
status of the Escrowed Shares as restricted or unrestricted for purposes of
applicable securities laws.

                       (a)      If the closing price of the Company’s Common Stock as reported by The
Wall Street Journal (the “Closing Price”) for five consecutive trading days
equals or exceeds $2.46 per share (subject to equitable adjustment in the event
of any stock split, stock combination or similar event affecting the Common
Stock), the Investor may thereafter sell Escrowed Shares in any period of five
(5) consecutive trading days in an amount up to 15% of the average weekly
trading volume of the Company’s Common Stock over the previous four weeks as
reported by The Wall Street Journal; provided, however, that if at any time the
Closing Price falls below $2.46 (subject to equitable adjustment in the event
of any stock split, stock combination or similar event affecting the Common
Stock) for five consecutive trading days, the Investor shall no longer be
permitted to make sales under this Section 3.2(a); provided, further, however,
that if at any time following the five consecutive trading days when the
closing price of the common stock is less than $2.46 per share (subject to
equitable adjustment in the event of any stock split, stock combination or
similar event affecting the common stock) the closing price of the Company’s
common stock shall again equal or exceed $2.46 per share (subject to equitable
adjustment in the event of any stock split, stock combination or similar event
affecting the common stock) for any five consecutive trading days, the Investor
may again continue to sell the Escrowed Shares in accordance with the first
clause of this Section 3.2(a).

                       (b)      If the Investor holds 200,000 or more shares of Common Stock on
January 1, 2004, then commencing on January 1, 2004, the Investor may sell such
number of shares of Escrowed Shares in any five (5) consecutive trading day
period in an amount up to 15% of the average of the prior four weeks trading
volume as reported by the Wall Street Journal. At such time following January
1, 2004 as the Investor holds fewer than 200,000 shares, the restrictions set
forth in this Section 3.2 shall no longer apply.

                       (c)      For so long as the restrictions set forth in this Section 3.2 apply to
the Investor, the Investor will provide to the Company a monthly brokerage
statement in a form reasonably satisfactory to the Company relating to each
account from which the Investor sells the Company’s securities for each month
in which sales of the Company’s securities are made. Such statement may omit
information unrelated to sales of the Company’s securities.

8

 

            3.3      Securities Laws. The Investor acknowledges that the Exchange
Securities have not been registered under the Securities Act and may only be
disposed of pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. The Company
may require the transferor of any of the Exchange Securities 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
Exchange Securities under the Securities Act.

            3.4      Rule 144. With a view to making available to the Investor the
benefits of Rule 144 promulgated under the Securities Act, the Company agrees,
until such time as all of the Exchange Common Stock may be freely sold under
Rule 144(k), (i) to make and keep public information available, as those terms
are understood and defined in Rule 144, and (ii) to file with the Commission in
a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act so long as the Company remains subject
to such requirements.

            3.5      Restrictive Legend. The Investor agrees to the imprinting of the
following legend on the Exchange Securities:

		
	 	      THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION, AND, ACCORDINGLY, MAY NOT BE OFFERED
OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS 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.

When there is an effective registration statement covering the resale of the
Exchange Common Stock or if such shares may be resold without volume
restrictions under Rule 144(k), the Exchange Common Stock shall not contain
the legend set forth above nor any other legend. The Company shall cause its
counsel to issue a legal opinion to the Company’s transfer agent on the day
that the Registration Statement is declared effective by the Commission (the
“Effective Date”) stating that the Registration Statement covering the resale
of the Exchange Common Stock has been declared effective by the Commission and
the certificates representing the Exchange Common Stock may be issued or
reissued (as the case may be) without any restrictive legend. The Company
agrees that, it will, within three Business Days after request therefor by the
Investor, provide the Investor (or deliver to the Escrow Agent to be held in
accordance with the terms of the Escrow Agreement) with a certificate or
certificates representing such Exchange Common Stock, free from such legend at
such time as such legend would not have been required under this Section 3.5
had such issuance occurred on the date of such request. The Company

9

 

may not make any notation on its records or give instructions to any transfer
agent of the Company which enlarge the restrictions of transfer set forth in
this Section.

            3.6      Short Sales. For so long as it holds shares of Common Stock or
Exchange Securities, the Investor agrees that it will not at any time hold a
net short position in the Common Stock. For clarification, the foregoing shall
permit the Investor to hold a short position in the Common Stock so long as it
does not exceed the lesser of (i) the number of shares of Exchange Common Stock
registered for resale and then held by the Investor, and (ii) the volume
limitations set forth in Section 3.2(a).

            3.7      Disclosures of Confidential Information. After the Closing
contemplated by this Agreement, the Company shall not and shall cause each of
its officers, directors, employees and affiliates and other persons acting on
its behalf not to divulge to the Investor any information which the Company
believes to be material non-public information unless the Investor has agreed
in advance in writing to receive such information.

ARTICLE IV

MISCELLANEOUS

            4.1      Fees and Expenses. At the Closing, the Company shall reimburse the
Investor for legal fees and expenses actually and reasonably incurred by it in
connection with the review and negotiation of the Transaction Documents up to
$20,000. Other than this amount, 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 stamp and other taxes and duties levied in connection with the issuance of
the Exchange Securities.

            4.2      Entire Agreement; Amendments. 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.

            4.3      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 (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 8:00 p.m. (New York City time) on a business
day, against electronic confirmation thereof, (ii) the business day after the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Agreement later
than 8:00 p.m. (New York City time) on any date, against electronic
confirmation thereof, (iii) the business day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual

10

 

receipt by the party to whom such notice is required to be given. The
address for such notices and communications shall be as follows:

	 	 	 
	If to the Company:		
HEARx Ltd.
	
	
	
	

			
1250 Northpoint Parkway
	
	
	
	

			
West Palm Beach, FL 33407
	
	
	
	

			
Facsimile No.: (561) 688-8883
	
	
	
	

			
Attn: Chairman
	 
	With copies to:		
Bryan Cave LLP
	
	
	
	

			
700 Thirteenth Street, N.W.
	
	
	
	

			
Suite 700
	
	
	
	

			
Washington, DC 20005-3960
	
	
	
	

			
Facsimile No.: (202) 508-6200
	
	
	
	

			
Attn: LaDawn Naegle, Esq.
	 
	If to the Investor:		
c/o CITCO
	
	
	
	

			
Kaya Flamboyan 9
	
	
	
	

			
Curacao, Netherlands Antilles
	
	
	
	

			
Facsimile: 011-599-9732-2008
	
	
	
	

			
Attention: W.R. Weber
	 
	With copies to:		
Genesee International Inc.
	
	
	
	

			
10500 NE 8th Street
	
	
	
	

			
Suite 1920
	
	
	
	

			
Bellevue, WA 98004
	
	
	
	

			
Facsimile: (425) 462-4645
	
	
	
	

			
Attention: Howard Coleman
	 
			
Robinson Silverman Pearce Aronsohn & Berman LLP
	
	
	
	

			
1290 Avenue of the Americas
	
	
	
	

			
New York, NY 10104
	
	
	
	

			
Facsimile No.: (212) 541-4630 and (212) 541-1432
	
	
	
	

			
Attn: Eric L. Cohen, Esq.

or such other address as may be designated in writing hereafter, in the same
manner, by such person or entity.

            4.4      Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and the Investor 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 other
provision, condition or requirement hereof, nor shall any delay or omission

11

 

of either party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter.

            4.5      Headings. 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.

            4.6      Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
Neither party may assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other party.

            4.7      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 or entity.

            4.8      Governing Law. The corporate laws of Delaware shall govern all issues
concerning the relative rights of the Company and its stockholders. All other
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.

            4.9      Survival. The representations and warranties contained herein shall
survive until the expiration of the first anniversary following the Closing.
The agreements and covenants contained herein shall survive the Closing and the
delivery of the Exchange Securities until the expiration of the applicable
statute of limitations (if any) therefor.

            4.10     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) the same with the same force and effect as if such facsimile
signature page were an original thereof.

            4.11     Severability. In case any one or more of the provisions of this
Agreement shall 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 which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.

            4.12     Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each party
will be entitled to seek specific performance of the obligations of the other
party(s) under the Transaction Documents. The Company and the Investor agree
that monetary damages may not be adequate compensation

12

 

for any loss incurred by reason of any breach of its 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.

            4.13.     Replacement of Stock Certificate. If any stock certificate
representing Exchange Securities issued to an Investor pursuant to this
Agreement is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
hereof, or in lieu of and substitution for such stock certificate, a new stock
certificate, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and indemnity, if requested,
satisfactory to it. Any certificates lost by the Transfer Agent shall be
replaced immediately without such evidence or indemnity. Applicants for a new
stock certificate under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable charges as
the Company may prescribe.

            4.14     Further Assurances. The parties hereto agree that each shall execute
and deliver any and all further agreements, instruments, certificates and other
documents, and shall take any and all action, as any of the parties hereto may
reasonably deem necessary or desirable in order to carry out the intent of the
parties to this Agreement.

            4.15     Press Releases. The Company and the Investor shall consult with each
other in issuing any press releases or otherwise making public statements or
filings and other communications with the Commission or any regulatory agency
with respect to the transactions contemplated hereby, and neither party shall
issue any such press release or otherwise make any such public statement,
filing or other communication without the prior consent of the other, except if
such disclosure is required by law, in which case the disclosing party shall
promptly provide the other party with prior notice of such public statement,
filing or other communication.

            4.16     Attorneys’ Fees. If either party shall commence an action or
proceeding to enforce any provisions relating to the obligations to close the
transactions contemplated by this Agreement prior to the Closing, 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.

13

 

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

	 
	 
	HEARx LTD
	 
	 
	By:      /s/ Paul A. Brown, M.D.
	

	Paul A. Brown, M.D.

Chairman and Chief Executive Officer
	 
	 
	ADVANTAGE FUND II LTD.
	 
	 
	By:      Genesee International Inc.
	       as General Manager
	 
	/s/ Donald R. Morken
	

	Donald R. Morken

President

14

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